Key performance indicators (KPIs) are the measurable values that reveal just how effectively an organization is reaching its business objectives. KPIs help you understand whether your company is on the right track to success…or not.
When aligned with a firm’s overall strategy and objectives, solid KPI management improves corporate performance. When misaligned, ignored, or misunderstood, however, KPIs tend to have no overall positive impact on a company’s business. These rules apply in the logistics, fulfillment, and transportation setting, where the ability to hit established KPIs can impact your firm’s profitability, productivity, and ability to service customers.
KPIs are certainly a fixture in the logistics industry, but is KPI management a strength? We have our doubts.
KPI Management: Understanding Real-World Implications
Few companies look beyond the numbers to truly understand the “real-world,” implications of hitting or missing a target metric. A 98.5% order accuracy rate sounds reasonable but, given your order volume, how many imperfect orders result from that performance? What is the cost of these errors in dollars, time and customer confidence? And are you willing to pay more to reduce that error rate?
These are the questions that really matter. But too often, fulfillment warehouse KPIs are merely numbers that appear on a weekly report. To improve your approach to KPI management, here are some suggestions to implement with your fulfillment partners.
1) Don’t ignore KPIs until a problem occurs
We find it odd that an Etailer and its fulfillment partner will agree up front on a set of operational metrics and then rarely revisit performance against these metrics until a problem arises. When customer service issues DO surface, here’s what happens: the shipper calls its 3PL on the carpet and rails about service quality; the provider then pulls out the KPI reports for the first time in months and explains that performance is at or above goal.
It’s a standoff.
The 3PL uses the KPIs as a defense to justify solid performance, while the shipper is simply ticked off because its customers are complaining. No winners here.
To avoid such situations, review performance regularly against these established KPI benchmarks. By monitoring KPIs, even when business is running smoothly, you’ll be able to identify fluctuations, determine if they are moving in the “wrong direction,” and then take quick action to address the situation.
Sure, it’s tempting to do the management by exception thing because it saves time – “Okay, things are running well so there’s no need to dig into the metrics.”
But ongoing monitoring allows you to ward off problems before they occur. It also removes some of the emotional response that is inevitable if you’re only looking at KPIs when problems occur.
2) Understand the Real-World Implications of Your KPIs
When you sit down and form a partnership with a new 3PL, you’ll both sign a service-level agreement (SLA) contract specifying (typically in “measurable” terms) exactly what services your 3PL will provide. And while terms like “99% 24-hour dock to stock” and “99% same-day shipping” may be used on that SLA, it pays to go a step further and talk to your 3PL about exactly what those statements and/or terms translate into in the real world.
In many cases, customers lack a full understanding of, for instance, what a 0.5% error rate really means. For example, an SLA promising 99.5% on-time orders may sound good in theory, but if you don’t take the time to figure out what that other 0.5% means, then you may find yourself questioning the value of that KPI down the road.
Let’s say you’re sending out 100,000 orders a month. A 0.5% error rate means 500 of them could be problematic. So while 99.5% might sound great to customers on the SLA, when they look at the implications of that performance (the 500 problem orders, unhappy customers, etc.), they may feel that the metric requires additional attention.
Work with your 3PL to establish workable KPIs, review them regularly, and adjust as needed. In doing so, you can eradicate these “disconnects” and streamline the relationship with your provider (while keeping your customers happy).
3) Address, up front, what happens if….
Shippers that expect 100% perfect orders all the time are naïve. Mistakes are a reality in fulfillment, but companies often don’t deal up front with the issue of what will happen when such mistakes occur.
Because of this lack of planning, small failures escalate into larger ones and there is a lot of finger pointing. The right approach is to sit down with your fulfillment partner BEFORE orders start flowing and ask the tough questions related to every type of potential failure.
- Who owns it?
- What actions will be taken to remediate the problem?
- Who is liable financially?
No one wants to think about worst-case scenarios at the start of a relationship, during the honeymoon phase. But it’s far better to deal with these questions before the fact than while issues are happening. You will never reach 100% perfect order nirvana, but having clear alignment about how to deal with mistakes when they arise results in fast action to fix problems and a better relationship with your provider based on open, honest, transparent communication.
4) Pick a provider that readily shares information
When it comes to KPIs, some 3PL providers don’t have the capacity, capability, or impetus to “share” vast amounts of KPI-related data with their customers. To avoid this trap, look for a 3PL that readily and proactively shares information, both on a regular basis and when problems occur. This should be a constant discussion and one that the 3PL readily embraces. Amware, for example, sends out a “Daily Snapshot” to customers via email every day. This daily summary includes information like:
- Inbound loads received by the system
- Orders received by the system
- Orders shipped today
This daily snapshot allows customers to raise the red flag if the information doesn’t jibe with their internal numbers.
Other essential fulfillment KPIs that Amware readily shares with its customers include:
- Active Product Storage: Determining obsolete products utilizing storage space can help managers evaluate the need for a change in layout or the size of storage requirements.
- Order Fill Rate: Measuring the number of orders that can be filled depending on the inventory on hand helps to forecast the amount of sales that can be met.
- Shipment Timeliness: An on-time delivery is one that reaches the end user on schedule. In today’s age of e-commerce sales this metric is growing more important by the day.
- Order Accuracy: Order accuracy measures several factors: delivery to the proper address, on-time delivery, and appropriate product condition. Customers always expect their orders to be perfect, therefore poor performance in one phase of an order can affect an otherwise positive experience.
5) Take KPIs out of the “black box”
KPI management should not be a management-only task. Yet too often, KPIs are established and set with virtually no communication to associates about how those benchmarks actually impact the company.
Associates are less likely to achieve performance objectives if they don’t understand the KPIs or their value/meaning. By simply posting KPIs, without any context or explanation, companies unwittingly create a fulfillment team that is indifferent.
You can overcome this challenge by communicating to associates how benchmarks contribute to the company’s overall profitability and progress. If you use an outside fulfillment partner, look for opportunities to talk directly to the people who do the work. For example, invest in workshops and/or brown-bag lunch meetings once a quarter, where you update associates on your business. Use the meeting to explain the customer service issues created by mistakes and also how the fulfillment team has helped the company achieve its sales and customer service goals.
Putting Your KPI Management Plan into Action
When you follow the suggestions outlined in this article, you’ll be able to get your business decisions off the emotional plane and instead utilize a data-driven approach to managing fulfillment. You’ll also be able to use warehouse KPI management for future decision making, while forming stronger bonds with your 3PLs. This creates a win-win situation, helps to boost your firm’s bottom line, and ensures success in today’s ultra-competitive business environment.
Amware Logistics is a national fulfillment company that will help you establish, review, and act on your firm’s key performance indicators. To learn more about how Amware can help you improve fulfillment performance, contact us today.