Key Performance Indicators (KPIs) are an efficient way to measure the overall health of an organization, project, team, or individual, When it comes to supply chain and logistics operations however, there’s often confusion over which metrics to use or even how many KPIs there should be. The truth is, there isn’t a standard number of KPIs that must be used. The specific measurements and number of metrics to utilize completely depend on your specific needs.
That said, KPI selection should be extremely deliberate and not arbitrary. Choosing the appropriate KPIs is of the highest importance because they influence behaviors and results. Equally as important is a clear understanding a few key principles behind good KPIs.
KPI Do’s and Don’ts
While it may seem cliché, it’s incredibly important to ensure that logistics and supply chain KPIs are always “SMART”.
That said, there are a few more points to be cognizant of.
- Don’t have an overwhelming number of KPIs. If there are too many indicators for people to easily monitor and understand then they won’t provide insight which means they’ll fail to influence behavior. Keep it simple! Stick with key performance indicators.
- KPIs should link to objectives and vice versa. Remember that your objectives should always be measurable and your KPIs should be directly linked to these goals that you have.
In supply chain management expect that your KPIs may not be standard ones as compared to other industries. Generally, the following are the more standard ones used in gauging supply chain performance:
- DIF: Delivery in full
- DOT: Delivery on time
- DIFOT: Delivery in full on time (or DOTIF: Delivery on time in full)
- Cost as a % of sales
- Inventory turn days
These are just a few examples. Your KPIs should be relevant and customized to your own organization’s needs.
Basically, supply chain operations need to direct efforts in continuously improving to be able to make it in a highly competitive marketplace. Being able to determine whether your supply chain is performing well or not would be measured by your KPIs.
Your KPIs would help you gauge how close you are to your target future state. Like a speedometer in an automobile, KPIs should be easy to read, understand, and react to. For example, in an automobile, a speedometer tells you whether you simply need to maintain your current speed or accelerate. KPIs help you determine what needs which response when.
Why KPIs are Important
Continuous improvement is vital for any business. This is where KPIs prove to be very useful. KPIs define the standards that have to be met to reach an improvement goal and helps you to gauge your performance. KPIs also help you determine if you are headed in the right direction or if you need to change your game plan.
In instances where KPIs continuously meet or exceed expectations, this is an opportunity to raise the standard to deliver higher quality products or services. It is for this reason that KPIs are key for any improvement strategies that your company may want to develop.
In supply chain contracts, KPIs are necessary to monitor team performance to ensure commitments are being satisfied each month. In such cases, normally there would be defined consequences when KPIs aren’t met.
In a nutshell, KPIs give a clear picture of overall performance and facilitate quantitative and qualitative evaluations of that performance. By choosing the right goal-aligned KPIs, you also eliminate assumptions, which further improves focus and efficiency.
Supply Chain Management
To measure the efficiency and cost of your supply chain, you need KPIs that give overall view of cross-functional behaviors as well as specific supply chain elements. Generally speaking, KPIs are critical for the following areas:
- Supplier management
- Manufacturing / Production
- Inventory management
Cross-functional KPIs provide additional insight into the following end-to-end performance areas.
- Inventory levels
- Order accuracy
- Cost of goods sold
- Gross profit
- Total logistics cost / total cost of ownership
The key to good cross-functional KPIs are measures that highlight how each function uniquely contributes to the overall performance of the supply chain.
Why do some businesses have too many KPIs? Typically, this stems from confusion over what a KPI is. That said, having a lot of KPIs isn’t necessarily wrong if your team can reliably and effectively track and respond to those metrics on a regular basis. Unfortunately, it is misguided to expect everyone to meaningfully analyze a huge number of KPIs on a daily, weekly, or even monthly basis.
Thus, KPIs should only account for those metrics that teams can practically monitor and react to consistently. On that note, keep in mind that KPIs do not necessarily need to be particularly granular either. KPIs should effectively measure only the most important aspects of your supply chain.
How many KPIs are too many? To answer this question, consider that KPIs may very well differ at various levels of a company. For example, a KPI that a Warehouse Manager would monitor may not be very useful as a KPI to someone in an Executive position.
Regardless of the level, however, everyone should only have a few KPIs they need to monitor and respond to. The exact number is hard to determine and would greatly depend on your business. That said, if you are worried about the number of KPIs you currently have, then there’s a high possibility that you have too many.
An additional rationale for striving to minimize KPIs stems from the importance of every KPI having multiple levels. Thus, creating 6 KPIs will actually result in two or three times that number. Again, having an excessive number of KPIs will make it difficult to track and respond to them because of the amount of data to be analyzed.
This said it’s necessary to rank your KPIs. Remember that what may be fitting for one department may not be applicable to another. However, don’t lose sight of the need to ensure that you don’t have too many levels within your overall hierarchy either.
- 2-Level Hierarchy
Keeping things simple is always best. Having two tiers (primary and secondary) of logistic or supply chain KPIs is often adequate. The primary KPIs would be the one the executive team keeps an eye on and might include metrics such as:
- Inventory turns
- Cost of logistics as a % of sales
- On-hand inventory days
- Source-to-delivery cycle time
- Secondary KPIs might provide more granularity and highlight the causes of fluctuation in the first tier. Some examples of second tier KPIs include the following:
- Finished goods inventory turns
- Transportation costs as a % of sales
- Warehouse cost as % of sales
- Raw material inventory turns
- Manufacturing cycle time
- Inbound delivery on time
- Work in progress days
- Raw material days
- Finished goods days
- Outbound delivery on time
- Inbound delivery in full
- 3-Level Hierarchy
A third tier of KPIs may comprise of KPIs that emphasize performance at the functional level and likewise showcase how each function’s behaviors support overall performance.
Choosing between two or three-tier KPIs will really depend on different factors including the size of your organization, the particulars of your business, and other similar components. You may also decide to add more tiers but keep in mind that as you add more tiers, the more complicated it also becomes.
Functional and Cross-Functional KPIs
To make functional KPIs even more valuable, you can combine and integrate them to offer an end-to-end view of performance trends. Determining the processes in your supply chain will help you decide on which functional-specific metrics will showcase how well these processes are working. You can classify your company’s processes to what is suitable for you.
Order to Cash
One of the usual process cycles used for tracking cross-functional supply chain performance is order to cash (OTC). OTC is the end to end process of generating and satisfying a customer order. This can be measured by utilizing a set of well-aligned functional KPIs. Broadly speaking, the OTC cycle consists of the sub-processes that follow:
- Order generation
- Picking and packing
- Shipping and delivery
- Customer billing
- Payment processing
Here you can clearly see that OTC shows how the supply chain is made up of a wider range of functions than what meets the eye. People often overlook the reality that supply chains also consist of the flow of information and cash in addition to products. This means that there are also financial functions involved which should also be measured to gain a true end-to-end performance picture of the supply chain.
Involvement in Order to Cash Measurement
Importantly, you need to place the right set of KPIs for different departments involved in OTC. This may include the sales department, warehousing, logistics, and accounts receivable.
Consider a scenario where a customer’s payment is recorded late because of a system or process failure. If this is a repeat customer that makes routine purchases, there’s a chance that by the next purchase, the previous receipt of payment may not have posted yet. Thus, there’s also a chance the customer could be put on hold, bringing the whole process of supplying that customer to a complete halt until someone unravels the issue and solves it. This is an example of a performance problem with a supply chain that is just as bad as a warehouse failing to pick an order.
OTC and Functional KPIs
For many people, the order to cash cycle can seem quite complex, but it need not be. First, there is a made-to-measure KPI that’s applicable to nearly any kind of supply chain operation. It’s an aggregate KPI known as the “perfect order” which accounts for all phases of the OTC process.
Perfect order can be used to monitor OTC, by breaking it down to sub-metrics relevant to various business functions. That breakdown might look something like the following:
- Sales: % of orders recorded accurately
- Warehouse: % of orders picked in full
- Transportation: % of orders delivered in full; % of on-time deliveries
- Finance: % of orders billed accurately
- All: % of orders correctly recorded.
The above KPIs are the metrics that would be utilized at the highest level. To better address concerns with performance and to better assist in planning solutions, you may need to break these KPIs down further. Again, remember to still keep things simple. Only hold people accountable for the KPIs they have the reasonability and ability to directly affect.
KPI Golden Rules
Keep in mind that the SMART acronym can sometimes be a little too simple to build KPIs from. Thus, you may want to reference the following rules as well when developing KPIs for your organization:
- Every KPI must align with holistic objectives.
- Every KPI must have an owner (team or individual).
- Every KPI must be a leading metric, indicating future performance.
- Every KPI must easy to comprehend.
- Every KPI must actionable (easy to respond to).
- Every KPI should harmonize with all other KPIs (they should not contradict each other).
- Every KPI must have a defined target and minimum level.
- Every KPI that is proven effective and reliable should be incentivized.
- Every KPI must be refinable to ensure ongoing relevance.