KPIs in Supply Chain – The Basics
1. Overview
As in any business activity, supply chain operations need to focus constantly on improvement to compete in the market place. But how do you know if your supply chain performance is being maintained, or if it’s getting better, or worse?
This is where KPIs come in.
What’s a KPI, Anyway?
KPI stands for Key Performance Indicator, and can be defined as 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. Take 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 speed. You will drive 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 in most cases, you won’t wish to lower performance when a business activity exceeds the required standard. In fact, if your car has a fuel consumption gauge and you use this to try and drive economically, then you are making use of a bona fide KPI.
Why Are KPIs Important?
Using KPIs for performance measurement ensures that you are always evaluating your business activity against a static benchmark. This means that fluctuations are immediately visible and if performance moves in the wrong direction, action can quickly be taken to address the situation.
When a KPI shows that performance is consistently meeting or exceeding the required level, you can decide to raise the bar and set a higher standard to aspire to. For this reason, KPIs are essential for any business improvement strategy.
Apart from an internal desire to improve and compete, KPIs are likely to play a part in attracting and retaining customers. This is especially true in any business where customers tie into agreements or contracts. Service level agreements in particular will be monitored through KPIs agreed between a business and its customer, with the probability of penalties being applied when performance falls below agreed levels.
In short, KPIs provide visibility of business performance and allow objective quantitative and qualitative evaluation. When aligned with business goals, KPIs take away the guess work and enable focus to be centred on progress towards the goals.
Supply Chain KPIs
When measuring the effectiveness and cost of your supply chain you will need to set up and monitor KPIs which give visibility of cross functional activity as well as those which apply to individual supply chain components. Later in this e-Class 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
Production/manufacturing
Warehousing
Transportation
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 being met)
Inventory levels
Stock losses and/or damages
Gross profit
Cost of goods sold
Total logistics cost
Cross functional KPIs should be constructed in such a way that each function can see its contribution towards the overall supply chain performance.
Need Further Assistance?
Here at Logistics Bureau we have 20 years of experience in assisting clients with Supply Chain Benchmarking, and the development of suitable KPIs. We have benchmarked almost 1,000 Supply Chains!
So if you need some assistance, just contact me.
Rob O'Byrne - Logistics BureauBest Regards
Rob O’Byrne
Email or +61 417 417 307
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