Supply Chain KPIs are Essential – The Right Ones!
The information on this page WILL help you get it right.
Many people get confused about KPIs or Key Performance Indicators in Logistics and Supply Chain operations. Which ones to use?… How many to use?
Sadly, it’s not such an easy question to answer. Still, in this article, I will help you evaluate the need for supply chain and logistics KPIs in your organisation, and identify which types of measurement might be most appropriate.
I’ll conclude with a case study illustrating why the above headline emphasises the need to choose the right KPIs. But, first, let’s walk through why KPIs are essential and explore some of the principles for applying them successfully.
A Couple of KPI Do’s and Don’ts
Of course, your supply chain and logistics KPIs need to be SMART—Specific, Measurable, Achievable, Relevant, and Time-phased—but this may too rudimentary a set of rules to ensure KPIs are useful. Later in this article, I will suggest some more comprehensive guidelines. For now, though, aside from applying the SMART acronym, my basic take on KPIs is this…
1) Don’t have too many! I’ve seen KPI “packs” the size of phone books, and even KPI sets circulated as a monthly magazine… that no one reads. Remember what the K stands for!
2) Make sure they “tie” in with your goals and objectives. Do they directly support those objectives?
Supply Chain KPI Tips
All you need to know about Supply Chain KPIs
Unfortunately, even these most basic standards imply that many of your supply chain KPIs may not be stock-standard ones. However, in Supply Chain, you would generally expect to see the following standard set, along with those that are more specific to your business needs.
- DIF – Delivery in Full
- DOT – Delivery on Time
- DIFOT – Delivery In Full on Time
- Cost as a percentage of sales (Logistics or Supply Chain)
- Inventory stock turns in Days.
If you’d like to read more about Supply Chain KPIs, you can download (free) a chapter from one of our Best Selling Books on the topic.
KPIs in Supply Chain – The Basics
As in any business activity, supply chain operations need to focus doggedly on improvement to compete in the marketplace, but how do you know if your supply chain performance is satisfactory or getting better or, god forbid, worsening?
That’s where KPIs come in.
What’s a KPI Anyway?
KPI stands for Key Performance Indicator. A KPI is a practical and objective measurement of progress, either:
- Towards a predetermined goal, or
- Against a required standard of performance
It might help to think of a KPI as something like an instrument on a car dashboard—a speedometer, for example.
If you are driving your car and you wish to maintain a speed of 50 KPH, you will use your speedometer to maintain that velocity. You will go a little faster if your speedometer needle drops below 50KPH, or you will slow down if it climbs above the required speed.
You will use a KPI in the same way as your car’s speedometer. The only difference is that typically, you wouldn’t wish to lower performance when a business activity exceeds the required standard.
As a similar and perhaps more accurate example, if your car has a fuel consumption gauge and you use this to try to drive economically, you are using a bona fide KPI.
Why Are KPIs Important?
Using KPIs for performance measurement ensures that you are continuously evaluating your business activity against a static benchmark. That makes fluctuations immediately visible, and if performance moves in the wrong direction, you can quickly respond.
Once a given KPI shows that performance consistently meets or exceeds the required level, you can raise the bar and set a higher target. For this reason, KPIs are essential for any business improvement strategy.
Apart from an internal desire to improve and compete, KPIs play a part in attracting and retaining customers.
That’s especially true in any business where customers tie into agreements or contracts. Service level agreements, in particular, will be monitored through KPIs agreed between an enterprise and its customer, with the possible application of penalties should performance fall below agreed levels.
In short, KPIs provide visibility of business performance and allow objective quantitative and qualitative evaluation. When you align them with business goals, they take away the guesswork and sharpen the focus on improvement.
Supply Chain KPIs
When measuring the effectiveness and cost of your supply chain, you will need to set up and monitor KPIs that give visibility of cross-functional activity along with those applicable to individual supply chain components.
Later in this article, we’ll look at some examples of functional and cross-functional KPIs. Broadly speaking, though, the following areas are those where KPIs will be necessary:
- Order capture
- Inventory management
- Purchasing and supplier management
Cross-functional KPIs are likely to provide snapshots of the following end-to-end performance factors:
- Perfect order (the degree of accuracy to which customers’ requirements are met)
- Inventory levels
- Stock losses and/or damages
- Gross profit
- Cost of goods sold
- Total logistics cost
Try to construct cross-functional KPIs in a way that allows each function to see its contribution to overall supply chain performance.
Why Do Companies Have Too Many KPIs?
At the beginning of this article, I stressed the importance of not having too many KPIs. Nevertheless, in the course of my consulting activity, I have come across this issue repeatedly. The most common cause is a state of confusion about what constitutes a KPI.
Let me try to clarify. First and foremost, a KPI is a metric… but not just any metric. A KPI is a metric focused on a KEY element of business, departmental, or team performance.
There is nothing intrinsically wrong with capturing a large number of metrics, especially with today’s sophisticated analytics software solutions to help. However, it is beyond realistic to expect anyone to scrutinise them all daily or even weekly.
KPIs should comprise a handful of metrics that your teams CAN realistically monitor and react to continuously. They don’t need to be exceptionally granular, but should instead track the most vital elements of supply chain performance.
How Many are Too Many?
Of course, the difference between KPIs and metrics will vary at different levels of your organisation, so while a metric recording “receiving accuracy” in a warehouse would undoubtedly be a KPI for a warehouse manager, it would be utterly extraneous as an executive-level KPI.
In determining your supply chain KPI suite then, the secret is to identify performance elements critical to those with the power to influence them, and develop appropriate KPIs for that audience.
At no functional or cross-functional level, though, should anyone need to monitor more than a few KPIs. Exactly how many is hard to say and will, in any case, vary from business to business, but frankly, if you are tempted to ask if you have too many KPIs, you probably do.
The Importance of Hierarchy
Another reason not to have too many KPIs is the need to apply various levels of detail to each one. Because of this particular necessity, the development of even half a dozen logistics KPIs will ultimately result in two to three times this number in total… at the very least.
Therefore, as you might imagine, an excess of KPIs will soon have your portfolio approaching the volume of that proverbial telephone directory, making it hard to monitor, and act on, the mass of data generated.
Nonetheless, it is essential to have a hierarchy of KPIs. That’s because, as mentioned, the degree of granularity suitable for one management level will either be too general or too detailed for another. But, at the same time, it is not wise to have too many levels in your hierarchy.
The Two-Level Hierarchy
If you wish to keep things as simple as possible, you should find that for logistics performance measurement, two levels (or tiers) of logistics KPIs are enough. For example, you might call the highest level the “primary tier” and the second level the “secondary tier.”
The first-tier KPIs would be the ones monitored at an executive level in your company, and would perhaps include metrics like:
- Logistics costs as a percentage of sales
- Inventory turns
- Total inventory days
- Source-to-deliver cycle time (the time from sourcing raw materials to delivery of finished goods)
At the secondary level, you would have KPIs that provide more granularity and highlight the causes of fluctuations in tier 1 metrics. Examples of these secondary KPIs could include:
- Warehouse costs as % of sales
- Transportation costs as % of sales
- Finished goods inventory turns
- Raw materials inventory turns
- Inventory obsolescence
- Work in progress days
- Finished goods days
- Raw material days
- Inbound delivery in full
- Inbound delivery on time
- Outbound delivery in full
- Outbound delivery on time
- Manufacturing cycle time
The Three-Level Hierarchy
A three-tier KPI solution is a little more involved, with the top two tiers comprising end-to-end supply chain metrics, with Tier 2 being more granular than Tier 1. Meanwhile, the third tier can include KPIs that show performance at a functional level, and highlight how each function’s primary activities contribute to end-to-end performance.
Whether you choose a two or three-tier system will depend on the specifics of your company’s business, the company’s size, and other similar factors.
Of course, it’s also possible to add further tiers for even more granularity, but again, the more levels you have, the more complex your KPI solution.
Now let’s get a little more granular in this study of supply chain KPIs, and look at some of the specifics of cross-functional and functional performance tracking.
Cross-Functional and Functional KPIs: How to Apply the Right Ones
Functional KPIs offer value, of course, but when you combine and integrate them to offer an end-to-end view of performance trends, you can magnify that value considerably. Therefore, it can be helpful to identify the processes involved in your supply chain before deciding upon the functional-specific measures that collectively will show how these processes are performing.
You can identify and categorize your company’s processes in any way that suits you. Still, as an example, it is worth briefly discussing one of the process cycles commonly used when monitoring supply chain performance. That cycle typically goes under the heading of order-to-cash.
Order to Cash
Order to Cash (OTC) is the end-to-end process involved in capturing and fulfilling a customer’s order, and can be measured using a carefully coordinated range of functional KPIs. The OTC cycle loosely comprises the following sub-processes:
- Customer-order capture
- Order picking and packing
- Dispatching, shipping, and delivering the order
- Billing the customer
- Receiving and recording the customer’s payment
OTC is a process that illustrates clearly, how the supply chain comprises a broader range of business functions than you might have thought.
For example, the sales function is not typically seen as part of the supply chain, but if your sales team captures orders from your customers, the first step in the supply chain is very much sales-related.
Similarly, it’s easy to forget that a supply chain comprises the flow of information and money, in addition to goods. That necessarily implies a need for financial functions to be measured if you want a complete picture of end-to-end supply chain performance.
Who’s Involved in Order-to-Cash Measurement?
When you measure the order-to-cash cycle, you will need to set appropriate KPIs for your sales department, warehousing and transportation functions, and for some areas of finance, such as accounts receivable. To illustrate how much this matters, consider the possible consequences of any failure or delay in the process of recording a customer’s payment.
Let’s assume a system or process issue that results in the delayed posting of the customer’s payment. If the customer purchases frequently, the receipt of payment for the previous delivery might not be recorded before the customer places a fresh order.
Because there is no record of payment, the customer’s account might be placed on hold in your ERP system, and the whole process of supplying that customer stops until somebody spots the problem and resolves it. That’s a supply chain performance issue, just as much as if your warehouse team fails to pick the order.
Functional KPIs in OTC
If you’re beginning to think that order-to-cash cycle measurement sounds incredibly complicated, you can relax a little, because it need not be that hard. For one thing, a made-to-measure (see what I did there?) KPI exists that’s relevant to pretty much any type of supply chain operation. It’s a composite KPI called perfect order, and it incorporates functional measurements for all stages of the OTC process.
You can use the perfect order KPI to track OTC performance by breaking it into its components and applying the metrics according to their relevance for the different functions in your supply chain.
The breakdown should look something like this:
- Sales function: Percentage of orders captured accurately (reliant on customer feedback)
- Warehouse function: Percentage of orders picked in full
- Transport function: Percentage of orders delivered in full; Percentage of on-time deliveries
- Finance function: Percentage of orders billed correctly
- All functions: Percentage of orders with correct and accurate documentation
The functional KPIs mentioned above are the highest level of metrics that you will use. They will likely need breaking down further to maximize identification of performance issues and aid in solution planning—remembering, of course, to keep things simple by only holding people responsible for the KPIs they can directly affect.
Let’s take a warehouse operation as an example. Here, the percentage of orders picked in full might be broken down into…
- Percentage of orders picked with errors – incorrect quantity
- Percentage of orders picked with errors – incorrect product
- Percentage of order lines picked with errors – incorrect quantity
- Percentage of order lines picked with errors – incorrect product
At this level of granularity, the picking-performance measurement will allow you to see trends and patterns in picking accuracy. You might notice, for example, that a significant number of orders are picked with minor errors, or that a small number of orders contains many errors.
Furthermore, by applying codes to highlight the exact nature of each error, you will gain an even higher level of visibility. You might notice, for instance, that a particular product is affected more than others by picking errors and then determine if the problem lies with its markings, labels, storage location, or proximity to a similar product in the slotting plan.
Purchase to Pay
You might have noticed that in discussing end-to-end solutions for KPI setting and monitoring, order-to-cash only gives you a portion of the panorama. For a genuinely wide-angle perspective, you need to incorporate other supply chain cycles into your viewfinder, one of the most notable perhaps being purchase-to-pay (P2P).
While OTC essentially covers the outbound supply chain, P2P is the principal activity-cycle enabling your inbound flow of goods. It encompasses all the steps involved in purchasing raw materials, components, ingredients, or finished products, transporting those goods to your facilities for storage, and paying the suppliers.
Like OTC, a set of KPIs to measure the performance of each P2P step is critical to ensuring that your supply chain, and your business, run smoothly.
The Purchase to Pay Cycle: What’s Included?
The sub-processes in P2P are, in most cases, as follows:
- Generation and approval of requisitions
- Generation and approval of purchase orders
- Shipping and receiving of inbound goods
- Approval of invoices
- Payment to suppliers/vendors
Again, it’s clear that within the P2P processes lies a flow of goods, information, and money. Therefore, to measure performance, you will need some KPIs with a service focus, and others that are financially oriented.
The “Right” KPIs for P2P Performance Measurement
So what are the right KPIs for P2P performance tracking? Well, when it comes to tracking service, you’re going to be most interested in the service provided by your suppliers. That’s especially true when it comes to the process of shipping your inbound goods to your facilities.
Of course, if you use in-house assets or a 3PL logistics partner to collect products from your suppliers, you will want to track service performance there too. Given these needs, then, appropriate service KPIs for P2P might be:
- In-full delivery from supplier
- On-time delivery from supplier
- Supplier delivery on time and in full (DIFOT)
- Supplier rejection percentage (by order, line item, or unit)
- Supplier compliance with contract
The remainder of your P2P KPIs will probably track efficiencies, costs, and productivity within your organisation, with suitable metrics including:
- Cost per invoice
- Number of suppliers managed per full-time employee
- Average cost per order
- Account payable days
- Cost of purchasing as a % of sales
As with all the specific KPIs we’ve mentioned in this article so far, these are just suggestions representing the metrics, which, through experience, we have found to be of most value for most organisations.
You might well decide to use some different or additional ones, but try to remember the doctrine of simplicity—because if you try to monitor too many metrics, you risk getting bogged down in data and unable to gain the clarity you need.
What Makes an Effective KPI Suite?
Earlier, I mentioned that the SMART acronym might be a little too simple to use as a standard for developing KPIs. As a more practical guide, you might wish to apply the following list of golden rules when building up a suite of logistics KPIs for your company:
1) Make sure you align all KPIs with the overall business objectives of your company.
2) Ensure that each KPI has an “owner”, whether that is an individual or a group of people.
3) Design each KPI as a leading metric that can assist with the prediction of performance issues.
4) KPIs should be actionable, providing timely, accurate data that owners can interpret and utilise.
5) Each KPI should be easy for its owners to understand.
6) Each KPI should reinforce and/or balance others.
7) No KPI should contradict or undermine the others.
8) Each KPI should have a target or threshold indicating a minimum acceptable level of performance.
9) As each KPI is proved stable and effective, it should be reinforced by incentives or compensation.
10) Each KPI should be updateable, as they will lose relevance over time.
The one caveat I would add here, concerning golden rule #9, is that it’s essential to incentivise only behaviours that do not jeopardise health and safety or regulatory compliance, or otherwise put the reputation of your business at risk.
Success With Supply Chain KPIs: A Brief Case Study
In the early years of this century, a British division of a global brewing company decided to diversify into contract distribution to increase utilization and reduce costs across its national warehousing and logistics operation. The company’s customers mainly comprised pubs and restaurants, which were either under individual ownership, or owned by the brewing company.
However, the traditional model for licensed alcohol sales was on the wane. Most of the major brewers were disposing of their estates following freshly implemented laws to curb what the government saw as a barrier to fair competition in the industry.
As a result of these changes, several large pub companies sprang up, and the brewing company (the subject of this study) determined to sell distribution services to these entities. It won a porterage contract with one of the largest pubcos and suddenly found itself with one customer representing more than 50% of its business revenue.
Threats and Measures: A Catalyst for Change
It wasn’t long before problems arose, with the customer threatening to exit the contract under a service-level clause. Fortunately, the pubco’s director was an ex-logistics guy who proposed an alternative solution.
The customer and the supplier would work together to develop KPIs that would highlight why many pubs were receiving deliveries with incorrect product quantities, and why even more deliveries were arriving late.
The partners developed a KPI suite, which, although hardly simple in the way this article advocates, effectively highlighted some severe issues in the supplier’s warehouse and transportation functions.
The list of KPIs included delivery on time and in-full (DIFOT). The in-full KPI was broken down into factors such as:
- Incorrect product quantity
- Incorrect product quality (wrong products)
- Deliveries with broken products/packaging
These KPIs were then cascaded to even more detailed levels of granularity, using error codes to identify where and how delivery errors were originating.
How Supply Chain KPIs Opened Eyes
Over time, the KPIs revealed various issues, including picking errors, a lack of checks during vehicle loading, unsafe loading practices, unsafe driving, and insufficient load-restraining measures. These problems were all carry-overs from an earlier era when the logistics operation primarily served an internal supply chain.
Quite simply, the logistics functions had not adapted to a new environment in which retail outlets were no longer “tied” to the brewery. Instead, customers could choose to take their business where they wished, which was precisely the pub group’s intention if delivery performance did not improve.
However, given the visibility provided by the new logistics KPIs, it did improve dramatically. Within a year, the brewer’s logistics operation was meeting initial “perfect order” targets agreed with the customer and working towards a raised set of service-level objectives.
The Outcomes Were Significant
Improvement in the brewing company’s service provision was made possible because the KPIs had enabled the partners to identify specific issues, and then agree and implement plans to address them.
As a result, the brewing company not only averted the loss of its biggest customer, but went on to achieve a reputation for excellent distribution services, enabling it to acquire contracts with other major pub groups and become known as a leading beverage logistics provider.
In turn, this success helped to strengthen the brand’s presence in the pubs of the groups it served, and raise its profile in the British beer market.
Remember the Headline I Began With?
This case study highlights how, as I mentioned at the beginning of this article, THE RIGHT KPIs can help you drive substantial improvements in your supply chain.
Initially, the KPIs focused on the outbound supply chain—the last mile delivery element in particular. Later, the company in question began to follow similar measurement processes in other areas, such as primary distribution (from brewery to distribution centers) and procurement.
In each case, it was the application of appropriate KPIs that made the difference. Thus, the issue was not that the company had not been measuring performance, but rather, that it had been using metrics that were no longer relevant for serving a transformed marketplace.
Need Further Assistance to Get Your KPIs Right?
Here at Logistics Bureau, we have more than two decades of experience assisting clients with supply chain KPI management and benchmarking.
With over 1,000 benchmarking projects completed, we’ve seen just about every type of supply chain, and have the expertise, data, and experience to help you…
- Select the right KPIs for the right levels of management
- Set the most suitable performance targets to use with those KPIs
- Assess the current performance of your logistics operations.
So if you need some assistance, our consulting team is ready and waiting—and we offer 100% remote support for KPI-related assignments, sparing you the expense of consultants’ business travel and minimizing disruption to your business.
Get in touch now to find out more or take advantage of our extensive range of KPI and benchmarking services and solutions.
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Editor’s Note: This post was originally published on October 26, 2021, under the title “KPI Key Performance Indicators in Supply Chain & Logistics” on Logistics Bureau’s website.