Supply Chain KPI's – The stuff you really need to knowby Rob O’Byrne on 2012-05-22
We’ve all seen it. The phone-book like reports full of KPIs. Or the noticeboard 10 metres long, with charts for every aspect of performance. But using KPIs to effectively manage and improve your business is about quality, not quantity.
As a Supply Chain Manager, have you ever asked yourself any of these questions?
• So which KPI's should I use?
• What is everyone else using as their KPIs?
• Which ones are the most valuable?
• Are there are some that are more valuable than others?
• Do I have the right number of KPI's?
• Am I measuring the right things?
• Are my definitions correct?
• Are there any industry standards?
• Where do I go for help and advice in this area?
On the one hand, different organisations have a different emphasis on what they want to measure in their Supply Chain. On the other hand, there are common KPI's and common industry practices that span all businesses.
Typically companies have a bias or orientation towards a certain few or group of KPIs that are used to measure their supply chain performance, falling into the following categories:
a) For some, their KPIs are focused on how the supply chain performs in delivering service excellence and this is the priority. This may come about as a result of competitive pressure; for example where service is offered as a competitive advantage. Typically KPIs with a higher priority in such an environment might include DIFOT (Delivery In Full and On Time), or LIFR (Line Item Fill Rate) or a Perfect or Error Free measurement. Products that are high value will usually have this kind of KPI focus.
b) For others, the emphasis is on measuring and monitoring costs throughout the supply chain. This will be the case when the business has a determination to lower supply chain costs and to align with a ‘low cost provider’ strategy. For products deemed to be a ‘commodity’ this is not an unusual orientation and supply chain cost KPIs take precedence over, for example, service related KPIs. In this category are such KPIs as overall supply chain cost as a percentage of sales, total supply chain cost per unit sold (e.g. case, or kg or tonne or litre etc), warehousing cost and transport cost per unit, labour productivity rates etc.
c) For yet others, their KPIs are oriented towards determining where value is delivered and how successfully. KPIs are therefore focused on measuring performance of those areas that specifically are deemed to be ‘value adding’ The definition of value adding may vary from company to company but traditionally involves only those activities or processes in a supply chain that a customer is prepared to pay for. For example moving product from one location to another in a warehouse, while incurring a cost, is not an activity that a business can charge for usually, whereas special packaging, product design or additional services at the point of delivery (installing or removing packaging etc) a customer might be prepared to pay for. In these situations KPIs are geared to measure and monitor these activities with a view to better understanding which activities and processes add value, and, equally, which do not. Which is a natural segway into the last KPI focused group.
d) Lastly, some organisations have KPIs oriented to measuring and analysing where ‘muda’ exists. Muda is the Japanese word for waste, especially an activity that is wasteful and doesn’t add value or is unproductive or ‘mura (unevenness, irregularity or inconsistency)’ or ‘muri’ (overburden or unreasonableness) occur throughout a process. These concepts evolved from the Toyota manufacturing system and are common measures in lean manufacturing businesses. Of the classical 7 categories of waste in a manufacturing process, all can be applied to measuring the ‘leanness’ of a supply chain as well. In these organisations, typically lean manufacturing businesses, the 7 (and recently an eighth waste was added) wastes form the basis of the KPI measurement system in the business.
What are the purposes of creating KPIs though? I’d suggest the following reasons as being mandatory:
1. To measure performance
2. As a measurement system designed to change behaviour
3. To create and ensure alignment with overall business goals and strategy
4. As a driver of future improvement
While an orientation to one group of KPIs or another is somewhat natural and to be expected given the nature of business, the market, customer expectations, competitive activity, the strategy of the company, level of maturity and many other factors, the challenge is to blend a mix of these KPIs to properly measure those things that are of the most value to the organisation as well as having a balanced approach and not missing a measure that has the capacity to ‘blind side’ the business. Since we all understand and accept the mantra “you can't improve what you don't measure," measuring the right things is one of the first steps to generating improvement. This applies across any business and of course this applies in the supply chain area.
There are so many supply chain KPIs to choose from though. In fact the Supply Chain Operations Reference (SCOR) Model developed by the Supply Chain Council has identified 200 Supply Chain KPIs! It was George Orwell that wrote in his book Animal Farm "All pigs are equal, but some are more equal than others". So it is with Supply Chain KPI's - some are more "equal” than others, and more significant. The question for us of course is which one are the ‘more equal’ and which ones should we all be measuring? Again SCOR addressed this issue and formed the view that supply chain KPIs can be logically grouped into ‘attributes’, with a small selection of KPIs to measure performance of each attribute at the highest level, or what is known as Level 1 Metrics. The Attributes, Definitions and Measures formed are set out below.
The advantage of the work undertaken by the Supply Chain Council is that discreet, specific and detailed definitions have been applied to each of these measures so that any comparison across and between businesses can be done on an "apples to apples" basis. However, this last point begs the questions, ‘If I have set up a measurement system consistent with this approach, how do I compare my results and come to some understanding as to how we are performing in each of these areas?, and, ‘What targets should we be setting against each of these KPIs – how high should the bar be for us?’
It’s a fundamental business practice, in fact a practice in life itself, that before we embark on any journey, it’s prudent to ‘Begin with the End in Mind’ (Covey), and so an objective, target or goal is essential to determine what the ‘end’ is. To measure KPIs is one thing, but to set a target achievement level is another. If there is a desire, for example to achieve best- in-class performance in any one or all areas of the supply chain, one needs to be able to demonstrate that that performance is truly ‘best’, no matter what KPIs are being used.
The way to do this lies in obtaining some external benchmarking data to understand, with common definitions, how my supply chain compares to other similar supply chains. In this way, relative performance, i.e. relative to peers and competitors’ supply chains can be provided.
If, for example, using this approach, an organisation determined to use the six Level 1 Metrics set out in the table below to benchmark their performance, a typical reporting format would look like this given the ‘traffic light’ comparison approach: (Note: BIC = Best In Class)
By comparing a firm’s operations to those of other organisations, there is potential to learn and improve performance. Benchmarking is not only a comparison of key performance indicators (KPIs) although benchmarking uses KPIs to compare operations. The use of KPIs as a management tool has a wider application. But many organisations see KPIs and benchmarking as synonymous. The focus of the benchmarking process should be on improvement and the use of KPI’s to facilitate this process. Benchmarking can be more about qualitative or process discussion where the benchmarking partners learn about a particular activity of another operation.
Some businesses conduct internal benchmarking e.g. one warehouse against another in a different part of the country, region or even world. There are of course limitations to this kind of approach, whereas external benchmarking has a number of benefits over an internal view. These include:
a) Being independent and without conflicts of interest
b) Being quick to start and complete
c) Being able to properly compare ‘apples to apples’ so that the comparison data integrity is sound
d) Greater access to best-in-class data because of the size of the comparative database available
e) Is more cost effective since building relationships with other organisations requires time and resources to support the benchmarking process
Benchmarking appropriate KPIs then is able to provide visibility into current performance as well as providing a target range for the future. Without such data how else is a business going to know how well their supply Chain is performing other than from customer feedback surveys? ‘Ignorance is not bliss’. In fact it is a dangerous business practice – not knowing how your Supply Chain is performing compared to your competitors, and peers. Is your Supply Chain providing the best service at the best cost, or is someone else's? Without some form of benchmarking, how are you going to know other than from anecdotal information? That is why of all the management reporting reports and tools available, Benchmarking was ranked number one in the latest Bain & Company annual report and global survey. The 2010 report demonstrated that the most popular management tool was benchmarking.
The survey, conducted in January 2009 encompassed 1,430 international executives from companies from a broad range of industries and focused on 25 management tools that are available to executives. Benchmarking knocked off strategic planning to top the tool usage list. Why? Because benchmarking was seen as a priority in achieving cost cutting in the business while at the same time improving service and aligning the business objectives.
In summary, there is a need for most businesses to review the area of supply chain metrics or KPIs. Firstly to review them in the context of understanding which KPIs are used by the organisation to evaluate its success or the success of a particular activity in which it is engaged. Secondly, choosing the right KPIs – this is reliant upon having a good understanding of what is important to the organisation.
Thirdly adopting a comprehensive and balanced approach or framework to measuring KPIs , and, lastly, having established all of the above, obtaining a sound understanding of where one’s performance stands in relation to one’s peers, competitors and even companies from different industries but with a similar supply chain profile. In this way, one is able to learn how well the comparative supply chains perform and, more importantly, the business processes that explain why these firms are successful and achieving industry best practice.
Rob O’Byrne – Logistics Bureau