The “Meat and Potatoes” of Supply Chain Key Performance Indicators
If you’re frequently shipping and receiving freight, how do you measure performance? Of course, most logistics and supply chain leaders use KPIs (Key Performance Indicators) to assess the efficacy of their logistics operations. But what KPIs should you choose to track? Which KPIs will give you a complete picture of your operational effectiveness? The answer to this question varies widely depending on who you ask and what you read.
If your company is just getting started with setting up key performance indicators internally or in collaboration with an external partner such as a carrier or third-party logistics company like LPS, I’d like to share what I consider the “meat and potatoes” of supply chain KPIs. In other words, these are the KPIs every company should be tracking.
Most companies track KPIs on a rolling quarter-to-quarter basis, but some prefer analyzing data every month. No matter how often you choose to analyze your performance, we recommend you set a benchmark for each KPI. The benchmark will help you measure progress.
Supply Chain KPIs Based on Costs
Cost tracking is always critical, particularly when you want to track carrier performance. These include:
- Cost per pound or cost per mile. Note that sometimes If we find that a carrier is regularly charging a higher price per pound than competitors, we’ll remove them from our list of go-to partners. In today’s world with limited dock space and the focus on efficiency with shippers and consignees, you want to limit your carrier base but also have enough options to meet all requirements and then some.
- Outbound transportation. This supply chain KPI is usually represented as cost as a percentage of sales and is used to show cost leadership. The formula is total outbound logistics costs in a defined period divided by total sales in the same period, times 100. Note that most accounting and ERP packages can differentiate outbound and inbound freight.
- Inbound transportation. This supply chain KPI is represented as cost as a percentage of material costs. The KPI is calculated by dividing your inbound freight cost by your total material purchase cost for the goods in question.
- These are additional fees that transportation services, such as carriers place on individual shipments. A few of the more common accessorials include fuel, packing, storage, waiting time and for shipping hazardous goods. You should keep track of your accessorial fees and determine what’s appropriate for your industry to make sure you’re not overcharging.
- Cost per case or carton. Large companies sometimes measure shipping performance by tracking the cost to ship a single box or case of goods. Of course, costs can vary widely here, depending on the size and weight of cartons. Nonetheless, the KPI provides a different standard for tracking costs.
Supply Chain KPIs Based on Performance
The other major group of supply chain key performance indicators is based upon performance, which can include tracking delivery dates and keeping tabs on service provider responsiveness.
- On-time deliveries (OTD). Your customers expect on-time shipments and deliveries. Many companies expect suppliers and carriers to adhere to very high levels of compliance—98–99 percent for both on-time shipments and deliveries are typical. Some shippers demand that shipments must be picked up on time 99.9 percent of the time. Moreover, late deliveries and shipments are subject to penalties. A fine of $.50 per carton or a flat fee of $500 is not uncommon.
- Transit time. Some companies prefer to keep track of transit times instead of on-time deliveries. This simple KPI is calculated by the number of days or hours from the moment your shipment leaves the loading dock to when it’s delivered to your customer.
- Service provider responsiveness. This measure is a factor of how well a carrier or another service provider is meeting your needs. When we negotiate contracts with carriers, we stipulate it’s okay to be early with delivery, but late deliveries are penalized. If it’s a critical component that must ship to a manufacturer operating a just-in-time assembly line, you can bet the penalty will be substantial. Some KPIs are more subjective, such as how long does it take the provider to solve issues and return emails or phone calls.
Walk Before You Run with your Supply Chain KPIs
In conclusion, there are hundreds of KPIs you can create to make sure your logistics and supply chain operations are operating effectively and efficiently. In fact, there are so many KPIs you can quickly drown in a sea of data. My advice is to start with the meat and potatoes of logistics and supply chain KPIs, like the ones discussed above.
In other words, walk before you run.