What Are Logistics KPIs Good For?

Are there tangible benefits of having Key Performance Indicators (KPI) for logistics?

Definitely! The primary purpose of a Key Performance Indicator (KPI) is to provide a metric of how well a process is working.  Using KPIs, you should be able to get a picture of your current situation; i.e., you should get a snapshot of the company’s current performance and be able to analyze performance evolution by finding trends. 

The most crucial way to really benefit from your metrics is to define your KPI needs and manage the set-up of your own KPI structure.  As simple as it sounds, our Allyn logistics consultants have regularly witnessed this step being skipped.  When executing a logistics audit to improve our client’s current processes, or when implementing 4PL solutions, we can never emphasize enough the importance of defining well-needed KPIs. 

We have seen long lists of metrics requirements that may be called KPIs but often have nothing to do with performance. It is possible metrics were established because data was available and somehow started to be called KPIs.  We have also seen Key Performance Indicators fail when corrective action cannot be taken if the values are unsatisfactory.  Some KPIs are so detailed, their preparation so cumbersome, labor and time intensive, that they are not efficiently used in process management. 

The question then becomes, how can we get the right KPI structure in place to benefit from its usage?  Let’s start with simulating the process of how to get your KPI structure in place.  Oddly enough, we will follow the logic of ancient classical Latin philosophers, such as Cicero or Thomas Aquinas: the five Ws and one H questions:

I keep six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who.

(Rudyard Kipling: "Just So Stories",1902)

There are few products on the market with pre-defined methodologies that can help define your KPI structure.  You can buy a package with pre-designed processes and metrics, like ISO, SCOR methodology, 6σ, Lean, etc.  Or you can use a consulting service, like Allyn International Services, to be the resource who implements the customized solution for you. 
No matter your preference, you still need to do your homework.  You’ll want the KPIs implemented to be everything you need, that they aren’t more or less than you require, and that they provide a clear answer to the six questions. 

What do I want to measure?
Typically, logistics performance is seen from the cost, productivity, and cycle perspectives.  You can find these major pillars further split into smaller categories, but generally these three areas drive your logistics performance.

When you know what kind of performance you’re looking for, then each and every indicator in place will meet the basic criteria of a good KPI.  Less is more.  You want to have a few important numbers that are spot-on to quickly summarize the data.  Yes, there should still be background detail available to show granularities and operational metrics of each individual transaction if needed, but precise summation is the goal.

Who is responsible? 
Each KPI should be linked to a responsible party and owner to handle any needs that escalate.  A common mistake made, especially in logistics and transportation, is that analysts overlook the importance of a corrective action after reviewing unsatisfactory results.  Partly due to the ease of e-communication, many people are now involved in the daily logistics process; from the outside, the responsibility hand-over might seem poorly defined.  For this purpose, analysts need support of logistics managers to fully understand responsibility split and ideally obtain a process flowchart. 

When and Where and How? 

These three questions must be linked to performance related processes.  Instead of asking, “How are the indicators measured?” we should ask, “How did the indicator reveal such a result?”  Instead of, “Where do we get the data?” ask, “Where did we improve the process so that performance shows an increasing upward trend?”  If the data reveals an issue, the indicator has the ability of clarifying when and where the issue happened. 

Also, when asking “How do I improve my office performance?” you need to make sure the KPIs do not contradict each other.  The ultimate benefit of your KPI structure is a supervised performance increase.   An everyday operational routine teaches us that we must decide between time and costs, so logically we expect the KPIs will show similar a this or that relation. The trick is to define the process rules and incorporate them into the KPI structure, then you can make sense of time and cost when shown side by side.

Why Use Key Performance Indicators?
The point of KPIs is to increase successful output and help you analyze how that can be achieved. The financial benefits of KPIs are, in reality, the financial benefits of increased performance: reduced cycle, extra cost avoidance, higher productivity, and so on.  If designed well, KPI is a powerful tool that allows us to quantify all these improvements.  Proper setup and maintenance of a KPI system increases employee awareness of what is important, dragging their focus to the important activities that could boost productivity even more. 

This targeted focus is what needs to be considered when designing the KPI structure. Performance is never the only focus during daily operations.  When working with an oversized load requiring the presence of a Marine surveyor, for example, it might be tempting to get the work done quickly and save money on survey costs; however, safety is always a critical component in any transportation process. While expanding employee attention beyond performance, they should also be concerned with working within the limits of company policies (integrity, safety, quality, etc.). 

Final Thoughts
•    When deciding your KPI structure, think about performance first. 
•    KPIs clarify when and where and how an event happened. Analyze business drivers influencing it and design the KPIs accordingly. 
•    Remember less is more; you want to understand what is going on just by taking a glimpse on presented results. 
•    KPIs need to be meaningful and it should be easy to define a corrective action if results are not satisfactory.  
•    Do not neglect to define what are the target values and unsatisfactory results. When seeing the resulting numbers and defining corrective actions, all should work together. The KPIs should not contradict each other. 
•    Don’t implement the KPIs for an impressive list of KPI benefits; define your expectations by linking them to business drivers or improvement targets. If you do that, it will be very easy to use KPIs when preparing management reviews. 
•    Spend time on publishing results, discussing them with management, sharing them with employees to make them aware of what is important, keeping in mind that company policies related to integrity, safety, and quality comes first. 

Allyn Logistics has over 20 years of expertise helping customer analyze performance and define goals.  We can help you too!  AllynLogisticsConsulting@allynintl.com

 

Contributor: Natalie Brandlova, Allyn International Consulting Team, Ft. Myers, FL.