How to Set Benchmarks and Measuring Key Performance Indicators

Article from Supply Chain Planet (http://www.supplychainplanet.com/e_article000251168.cfm?x=a2PD1j2,a1NWpFD7)

April 20, 2004 How To Set Benchmarks and Measuring Key Performance Indicators by Martin Kelly How To Set Benchmarks and Measuring Key Performance Indicators By Martin Kelly The field of logistics and supply chain management has taken tremendous leaps forward in the last ten years. Information technology has given us the tools to process data at speed and accuracy beyond anything we could have imagined just a few years ago. However, it has also created an interesting new phenomenon. Over the past few years we have worked with companies of all sizes including significant national and multinational corporations. At the outset, there is generally an assumption that there is unlimited management information available at the snap of the fingers. In the launch phase of a logistics project we often hear a confident manager state, ‘Oh don’t worry, we have all of that information already,’ only to be surprised, if not shocked to find that the key information is not at the corporate fingertips. In fact, critical data is often more than just hidden out of site, as the saying goes; it’s buried, and virtually out of mind. Most corporate information systems fall into a couple of categories. Many, if not the majority of companies, use basic off-the-shelf software. It may be financial software or inventory management systems, or more likely a combination of both plus some customer service modules dropped in for good measure. Larger companies often invest in their own legacy systems to give them a customized window on their operations. Rarely do we see a system driven by the need to acquire and analyze information for the purpose of logistics as a critical tool to optimize performance and cut costs. That is not to say that the information isn’t available, far from it. There is a trove of detail accessible through your financial department, purchasing staff, warehouse personnel, freight carriers, freight auditors as well as from a pivotal source, your customers. The focus point is that there ARE costs to be saved as well as efficiency and productivity to be gained in your supply chain … perhaps upstream, perhaps downstream and perhaps right in your own facilities. However, to strip the costs, you first have to find them, understand their impact and create solutions. Another phrase we hear (often from the same person who earlier said, ‘we have all of that information already’) is ‘Wow, I didn’t know that’ or from senior management ‘Now that’s what I ’ve been looking for! It takes hard work, dedication and a lot of digging to get that response. However, the pay off is measurable. So where does the process start?

First, is to recognize that the whole idea of ‘Kaizen’ or continuous improvement is a relative idea. In order to get better, you have to decide better than what. That means pounding a stake(s) into the ground from which to measure your company ’s performance. Benchmarks must to be agreed upon and key performance indicators (KPI) must be established as a gauge to evaluate

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improvement. Is that a simple idea? Of course it is. Is it easy to do? Not always. It can be tough to set that starting point. Human nature being what it is can make it difficult to accept the reality of the here and now … that our warehouse may not be at peak efficiency or customer service levels lag behind competitors. However, that is the issue. At some point the stake has to be planted. Good, bad or indifferent, this IS where we are today. Now let’s get better. Visionary leadership is one thing … setting the targets on where an organization needs to be to survive, compete and succeed. Managing is decidedly more current. That is about knowing and understanding where we are today, what resources we have to work with and how can we leverage them to reach the vision. Let’s take a look at what some of those factors might be, their importance and how they impact performance. Take transportation for instance. It’s often considered a stand-alone activity. As such, freight audits are generally accepted as a report card. If our purpose is to verify that shipments arrived, commodities were classified correctly and the proper rates were applied, then the audit is an adequate source. It measures whether routine activities are functioning to standards. But what if the routines themselves are the issue? For example, a Canadian company with which we have been working has been consistently expanding its North American market. Operating with a business-as-usual mindset, the shipping department continued to send product to the new, more distant destinations by the same mode of transportation it had used in the past. Under scrutiny, we saw that when measured against previously established benchmarks, transportation costs on a ‘per SKU’ basis were going through the roof. Although the sales department would consider it heresy, we had to ask ‘can we still afford to do business with everyone … regardless of geography?’ Fortunately in this case, a simple shift from highway to rail on long hauls saved substantial dollars without jeopardizing service levels. However, if we had not measure a key performance indicator (in this case the transportation cost per SKU), we could unknowingly have sacrificed bottom line dollars in the interest of growth. Shifting from highway to rail was an easy fix in that case. However, if the options are less obvious and the options more profound … then what happens? In the third quarter of 2001, many companies experienced a rapid drop in orders. The impact on manufacturing continues into the New Year ranging from rescheduling production, reducing the labor costs or dialing back inventory levels. However, each reactive solution has implications within the supply chain. If we slow down production, then we probably don’t need the same amount of raw material each day. However, what if the purchasing department negotiated the price on material based on a volume you no longer need, do we just have to bite the bullet and pay the increased price? Or do we hold some material in inventory to maintain the volume price on material? If that’s the choice, what does the warehouse space and extra people to handle the material do to overhead? The only way to truly know is to measure the impact of the alternatives. If you have set benchmarks and have clearly defined KPI’s, you will know what change will do to your input costs, margins and profit - and you can measure the repercussion.

Downstream, change has its own influence. As an example, you have been shipping a customer a full truckload of goods every day. However, with changed economic circumstances, deliveries



have been scaled back to a 75% level. If the contract price is FOB your customer’s dock, how much does that add to your costs of your product? If the sales department says there is no way to negotiate recovering the added cost from the customer, what are the alternatives? Can transportation suppliers offer alternatives? Can we find a collaborative solution with other suppliers in the same circumstance to keep up the daily delivery schedule while sharing the space on a trailer? Are there other creative solutions? As a 3/4PL provider, our logistic team has the advantage of ‘getting outside the box’ to identify challenges and find solutions. For instance, we work with a company who has more than one manufacturing facility in Ontario. Each plant site is autonomously managed – separate profit centers. Coincidentally both plants use some of the same American suppliers, each plant negotiating its own deal. Transportation was an area where coordinating and consolidating deliveries has resulted in economy. It was not that the plant personnel weren’t doing their job in striking favorable rates and service levels with carriers. They were. It was simply that a logistics analysis studying costs at both sites together changes the dynamic and allowed for additional leveraging. In this case we were able to measure the impact that consolidating transportation service had against the manufacturing benchmarks and found that we could cut cost and not sacrifice productivity or efficiency. In another case, a high profile manufacturing client has built a reputation for its quick turnaround. When a phone rang the response could create virtual chaos in order to rush the order out the door. A study of the impact demonstrated this ‘same day’ culture was creating more than stress. It was a very costly way to do business. The true revelation came from customers. In the majority of cases ‘rush’ was not the customer ’s idea. They just assumed that was normal service – but not necessarily essential to their needs. By working with purchasing, manufacturing as well as customer service personnel, we were able to collaborate on reasonable benchmarks. These revised, consistent service levels keep customers happy AND improve profitability. It is also important to note that flexibility is also considered in defining the benchmarks. When an order is labeled ‘rush’, it continues to receive instant response, but the concept of ‘rush’ has a new definition. Over the years, Just-In-Time has become a standard modus operandi in manufacturing. Again it is critical to ensure that the cultural aspect of JIT logistics doesn’t overwhelm the logic. JIT is about meeting the needs, not meeting the clock. Daily deliveries have some real, but often forgotten costs such as tying up dock time and receiving staff. Of course the recognized advantages of low or no inventory is a pretty strong motivation for JIT. However, in truth there may be some savings in freight consolidation by scheduling every -other-day deliveries. Again I make the case for setting realistic benchmarks. Decide the process, set the standards and police them ruthlessly by keeping a faithful eye on the KPI’s. In yet another case, we are working with an excellent multinational company who has experienced tremendous growth. The pressure of managing distribution can cause change by the hour. Drivers arrive expecting to pick up a load for a specific destination, only to find the traffic in the yard is worse that the expressway at rush hour. After waiting hours to get to the dock and get loaded, he or she find the destination on the manifest does not match the destination stated by the carrier dispatch earlier that morning. The shipper justified the change as a necessity and was simply juggling the loads to meet the dynamics of today’s crises. Aside from the personal inconvenience for the driver, the result for the carrier is sending a driver to a destination without the opportunity to book a back haul. That’s more than just a headache. That has the potential to be very costly for all of the supply chain partners. In this case there was not a simple, quick fix. In this case, the system was relatively efficient at 20 loads a day, but it breaks down at 30+. As long as everyone in the process is singing from a separate song sheet the bottlenecks will continue. A review of criteria used by all of the players – sales, customer service, operations, distribution and certainly finance painted a stressful picture. We had unhappy customers, unhappy carriers, and a sinkhole for costs. Due diligence and access to the right information revealed alternatives. Agreeing on reasonable benchmarks helped manage service expectations and costs. Something as simple as setting a reasonable cut-off time for orders for next day



delivery made all the difference in the world. Remove the ambiguities, agree on the standards and then energy can be focused on dealing with chaos as an exception instead of the daily norm. Recently I attended a seminar and the presenter suggested, ‘Even when you’re at peace,’ Oh don’t worry, If you are trying to make decisions by reacting to pressure of the marketplace, you are at risk. From experience, our logistics team sees it can be daunting task for our clients. Seemingly mired in the status quo where day-to-day pressures and mindsets can cloud the real issues. Although each and every situation has its own challenges, but there are also some constants. Setting benchmarks, key performance indicators and well defined processes – knowing your costs, appreciating performance expectations and comprehending your options – does offer light at the end of that dark tunnel. This article was first published in LQ Logistics Quarterly - The official magazine of the logistics institute.

Martin Kelly is Director, Logistics, iWheels Logistics. For more information about iWheels International visit www.thewheelsgroup.com/wheels.htm

Published by Supply Chain Planet Copyright © 2004 Supply Chain Planet. All rights reserved. Supply Chain Planet is a trading name of Supply Chain Management International Limited, 145-157 St John Street, London, EC1V 4PY



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How to Set Benchmarks and Measuring Key Performance Indicators