Does your company, department, or team utilise a suite of supply chain KPIs to monitor performance? If not, you’re probably in the minority and hence at a disadvantage against most competitors. However, there’s a lot more to being successful in the use of KPIs than simply having them in place.
Assuming that your company or business unit is using supply chain KPIs, it’s critical to make sure they are the right ones for your organisation.
In this post, you’ll find some questions to ask about your current supply chain KPIs and learn why the answers matter if your metrics are to drive meaningful performance improvement. We’ll begin with the question that matters most of all… Are you measuring the things that matter to your company’s stakeholders?
How Do You Know You’re Measuring What Matters?
To know how to answer this particular question, you need to know what matters to those who have a stake in your company’s success. Primarily those people are the executive board, the shareholders, and the customers.
Still, neither your shareholders nor your customers are likely to tell you if your KPIs are relevant or not, but your executive team should certainly know—and therein lies the key to answering the question.
In order to satisfy the rest of the stakeholders, your executive team should have defined a strategy, both for the business as a whole, and to the supply chain operation that supports the business. To ensure the business pursues the strategy correctly, the executive team should also have agreed upon some high-level performance goals. It is these goals upon which all supply chain KPIs should be based.
To answer the question then, you need to evaluate the relevance of your supply chain KPIs to the high-level goals. If you can clearly see how each KPI measures a relevant aspect of performance, you know that fundamentally at least, you have the right KPIs in place.
Do Your Supply Chain KPIs Have Structure?
It’s not enough to be satisfied that supply chain KPIs are aligned to strategy. Many companies encumber themselves with a long list of KPIs, all of which may be relevant to strategy, but many of which serve to confuse rather than inform. After asking if your KPIs align with strategy then, the next question should relate to structure.
The number of KPIs that you track is not really important. What matters is that you have a balanced group of KPIs that conform to a structure.
Frameworks commonly used for structuring and organising supply chain KPIs include the following:
- The Balanced Scorecard
- The SCOR Model developed by the Supply Chain Council
- The Logistics Scoreboard
Each of these models is designed to measure supply chain performance using a balanced set of KPIs, which together provide visibility into financial, service, quality, process, and productivity performance.
Which model you use will depend very much on your company’s business profile, but adhering to any one of them will help you avoid the common mistakes of developing too many KPIs or relying too much on financial performance metrics.
Do Your Supply Chain KPIs Encourage Unity?
The next important question to ask about your supply chain KPIs relates to the way in which they drive behaviour. Most companies are still entrenched in the use of functional KPIs, with each supply chain component being measured independently.
Even if these functional KPIs are aligned to supply chain strategy, their insular nature leads to the existence of silos, in which each department tends to look after its own performance interests.
In the complex supply chains of today’s global trading environment, companies which continue to operate in silos are at a distinct disadvantage. Not only does supply chain management require a unified, cross-functional approach to be successful, but in most cases, the need for unification extends across multiple enterprises.
Measurements which encourage insular behavior should be discarded, and replaced by process-based supply chain KPIs which encourage a joined up effort to meet company objectives.
In determining if you have the right supply chain KPIs in place, look at the balance of functional versus cross-functional (and even cross-enterprise) metrics in your portfolio. If the majority of KPIs are in the functional category, it’s surely time to institute some changes in your performance-measurement approach.
Are Your Supply Chain KPIs Regularly Reviewed?
Supply chain KPIs have a shelf life. Initially, a good KPI will typically produce positive results, due to the energising effect it has on employees. Over time though, the impact often diminishes.
If your supply chain KPIs have not been reviewed in the last 12 months, there’s a good chance that some of them are no longer right for your company.
Another reason to review your supply chain KPIs is to ensure they remain relevant. Any metrics which are no longer looked at or acted upon should probably be changed or done away with. There’s also the fact that your company’s strategy will inevitably change over time, making some KPIs less relevant or perhaps even obsolete.
How often should you review your KPIs?… Ideally you should review and revise them on a quarterly basis, but it might be more realistic to take a look at them annually. If the gaps between reviews are any longer than this though, you risk a creeping increase in misleading performance data.
Do Your Supply Chain KPIs Provide Context?
A measurement of performance is not necessarily a KPI. Indeed if there is no context, the measurement is merely a metric—not a key performance indicator. Your KPIs must allow anyone using them to understand what their values mean. It’s not enough to see that performance is going up, down, or remaining static.
Effective supply chain KPIs evaluate performance against expectations. In other words, they should include thresholds, targets or benchmarks to add context to the results.
Let’s take “on time delivery” as an example. Knowing that 95% of last week’s sales orders were delivered on time is not much use without knowing exactly what constitutes “on time”. It could be for example, that 95% of sales orders were delivered…
- On the day promised
- At the exact time the delivery was requested (by the customer) to arrive
- Within a pre-defined customer delivery time window
- At any time before the time promised or requested
- Within a 15-minute range before or after the time promised
Your “on-time” delivery KPI should specify the parameters within which a delivery must fall to be successful. This will make it possible to investigate exceptions and understand what processes might be improved to lift performance.
Do Your Supply Chain KPIs Support One Another?
The need for KPIs to promote unity has already been discussed in this post, but without touching on the consequences when a supply chain function develops KPIs in isolation. Firstly, the way in which KPIs support your supply chain strategy can be interpreted differently from one function to another.
Different interpretations mean different priorities, potentially leading to KPIs that oppose and counteract one another.
However, functional disunity is not the only cause of counterproductive KPIs. As objectives and measurements are cascaded down through the business, some lower-level KPIs will almost always have a functional bias. If these KPIs are not designed carefully, they can easily drive counterproductive or even damaging behaviour from the workforce.
For example, productivity KPIs can unintentionally promote unsafe working practices, reduced attention to quality, or increased costs. Quality KPIs might reduce productivity, slow supply chain throughput, or again, create higher labour costs. Cost KPIs can negatively impact quality, throughput, or productivity.
Clearly then, it’s necessary to ensure that lower-level KPIs are developed in groups, in such a way that the negative influences attached to one KPI are counteracted by another.
The Value of Vetting Your Supply Chain KPIs
If you answer the questions outlined in the previous paragraphs, you’ll have a good idea whether you have the right KPIs in place or not, and from there you can make adjustments or develop new KPIs as necessary.
To summarise, your supply chain KPIs will be right if they…
- Measure what matters to your company’s stakeholders (are aligned with supply chain strategy)
- Are developed in accordance with a structure
- Are designed to promote unity across your enterprise (or across multiple enterprises)
- Are reviewed and kept up to date
- Provide context for the people who use them
- Support one another to encourage only the right behaviours
When it comes to selecting specific, actionable supply chain KPIs, you can find some ideas to work with on our Benchmarking Success KPI service page. You’ll also find details of how we can help you choose and use the right metrics to drive real supply chain performance gains.
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