KEY KPI’s IN LOGISTICS AND THE SUPPLY CHAIN
One of the basic keys to ensuring that a company’s logistics and supply chain process is profitable and optimal is to continuously measure and optimize its performance based on careful and well-thought-out decisions. Measuring the results of each operation and task allows us to detect and determine possible weaknesses as areas of opportunity to improve and strengths as a starting point to replicate.
This is where the KPIs (Key Performance Indicators) come in, being the performance indicators that help to consolidate an information base later used to implement more accurate actions within the flow of operations, from procurement to distribution of goods.
Considering the importance of KPIs in logistics, in this article we explain what they are, their main characteristics and objectives, and of course, which are the most important types of logistics indicators according to the stage or phase of the process.
What are KPIs in logistics and their characteristics?
KPIs or logistics metrics are performance indicators used by organizations to collect, measure and track data, comparing them with the company’s history or other reference metrics, in order to act accordingly and optimize their logistics processes.
They allow quantifying the evolution of a variety of processes along the supply chain, eliminating errors in the flow of receipt, preparation and delivery of goods/merchandise, reducing costs, enhancing profitability and productivity of those who make up the company.
Logistics performance indicators are identified by certain characteristics to provide valuable information:
- They focus on achievable actions that guide employees to increase performance in their tasks.
- Their complexity does not always mean an effective result, so they must be accessible and easy to understand.
- They are congruent with the mission, vision, strategic goals and aspects that determine the company’s competitiveness.
- They are in line with industry standards in order to be able to compare with the competition.
- They expose relevant information for the company’s strategic planning and decision-making.
Objectives of logistics KPIs
They are intended to gather quantitative and qualitative information that allows the company to evaluate employee productivity and the effectiveness of its operations to measure whether or not it is achieving its objectives.
It should be noted that KPIs alone are not sufficient for sound decision-making, and it is necessary to define and apply indicators that add context and achievable objectives within a specific time frame.
Although KPIs vary according to the stage in the logistics process, their main objectives are the same:
- Increase quality by reducing or eliminating errors.
- Improve the productivity of the personnel involved.
- Reduce costs and boost the company’s profitability by optimizing the use of resources.
- Obtain real-time information on the entire process, facilitating the timely prediction of problems and application of corrective actions.
Types of indicators according to the logistics stage
The most common key indicators in logistics are defined according to the different stages that make up the supply chain. Among the most relevant are the following:
The KPIs focused on procurement seek to control the process of negotiation and purchase of new stock with suppliers. Therefore, for a good performance of the production process, it is necessary to evaluate the service of suppliers according to these indicators:
Purchase order lead time: this allows you to calculate the time it takes your supplier to deliver your purchase orders from the moment you request it, i.e. it measures the dates of issuance and receipt of the order.
Average order cost: each order has internal costs that depend on the type of product or the location of its destination. By knowing the average cost of an order, you can know the percentage of profit you are making.
Payment terms: in order not to affect your cash flow, it is important to know the time your suppliers give you to pay and thus determine the time you can offer your customers.
Fulfillment level: is to follow up on the fulfillment and effectiveness of order deliveries by the supplier, as well as its level of delays and its percentage of failed orders, either because of the service or the quality of the product.
Percentage of errors in invoicing: detecting common human errors, such as incorrectly filling out invoice data, can help eliminate them and use automation systems to reduce failures.
Inventory control is necessary to know in a timely manner what you have, what is left over and what is missing, thus saving unnecessary costs that can damage the company’s profitability. The following metrics or indicators allow to analyze the stock movement along the supply chain:
Stock turnover: indicates the number of times inventory is replenished during a given period, either of the finished product or raw material, in order to take care of production and order management, avoiding the generation of excess or shortage of inventory. The increase in turnover means higher sales and income, thus increasing the company’s profits and benefits.
Stock breakage: quantifies the number of times the company failed to meet the demand for a product or material because it was out of stock. It seeks to identify the causes in order to improve planning.
Inventory shrinkage: this shows if there is a difference between the inventory that is theoretically in the warehouse and the one that is physically in reality, determining the accuracy through a percentage.
Obsolete inventory: Determine the costs incurred caused by the adjustment of inventory due to technical obsolescence.
Performance indicators in warehouse management allow control of what happens in the facilities, monitoring the productivity of the personnel and the correct functioning of the processes. Among the most important are the following:
Productivity in volume moved: the efficiency of the operation and performance of the personnel may be measured by knowing the quantity or volume of merchandise handled for a specifically determined time. This can be influenced by the time it takes from the time the order arrives at the warehouse until it leaves.
Units processed per m2: this is calculated by dividing the units that have been processed in a specific period of time by the space used in the warehouse.
The unit cost of storage: this relates the total cost of storage to the number of goods that the warehouse has the capacity to hold and move in a given period.
Space utilization rate: among other things, this refers to the lack of space to store supplies or finished products; it is important to consider the available space and capacity before placing new orders.
LOGISTICS TRANSPORT KPIs
Transportation KPIs allow you to analyze the efficiency in the movement of goods at each stage of the logistics process, driving the optimization of final or last-mile deliveries so that the product reaches the customer’s hands in perfect condition. Some of the indicators to be measured are the following:
Transportation cost over sales: this indicator consists of establishing the relationship between the cost of transportation with respect to the company’s achieved sales. The cost of transportation is influenced by everything from unit maintenance, route planning and fuel expenses to drivers’ salaries and per diems.
Cost per distance: to obtain a useful metric that provides some accuracy, total transportation costs can be divided by the kilometers traveled by the vehicle carrying the goods.
Cost per driver: this is measured by comparing total transportation costs by the number of drivers employed, examining the contribution each driver makes to transportation costs.
Final delivery punctuality: this metric measures the agility of transportation during final or last mile deliveries, showing the percentage of compliance and the ability of carriers to provide punctuality to the customer.
Order control: this allows a more accurate control, filling a record of the shipments that are pending and those already completed.
Load per vehicle: To know if a shipment of goods is profitable, it is necessary to monitor the minimum number of product units per truck. This will determine whether the route it travels is profitable.
Transport utilization: It is important to measure the level of fleet utilization, determining the capacity of the transport to be occupied in relation to the total capacity in volume or weight distributed in the vehicle.
Urgent and unscheduled shipments: monitoring this type of shipment will help to determine trends, aspects that need to be strengthened and thus, prepare accordingly.
ORDER MANAGEMENT KPIs
In this part of the logistics process, both the time to prepare orders and their quality and quantity of returns should be analyzed. The following are some KPIs that measure order management:
Late delivery rate: calculating the percentage of deliveries that were not made on time will be the indicator that determines when and how to intervene.
Percentage of perfect deliveries: allows for analysis of the quality of the products received and punctuality, collecting information on the factors that define successful cases, in order to replicate them.
Percentage of complete deliveries: this monitors the rate of orders that arrive complete or with shortages to the customer, and can alert on the failures that exist within the process.
Shipping times: this indicator establishes the average time it takes to prepare and ship an order on the date indicated by the customer.
Order management cost: measures the cost of each stage of the process, from receipt to delivery of the order, and the average cost to be considered during strategic and financial planning.
The number of shipments: quantifies the orders shipped during a given period of time.
The error rate in invoicing and documentation: by knowing the failures during the processing of an order, especially if they alter its preparation and delivery, the solution can be devised with the help of tools that automate tasks.
Just as it is important to measure quantitative factors during the supply chain, it is also important to examine the quality of the service being offered to the customer. For this, the following indicators can be implemented:
Percentage of complications at each stage: helps to identify the phase of the supply chain in which the most problems or failures occur, in order to focus on implementing changes and promoting improvements.
The number of certified deliveries: measuring the percentage of complete deliveries, made on time, with the product in perfect condition and the proper documentation ready, will help quantify the quality that the company offers and wants to achieve.
Percentage of problems in deliveries: this metric determines how many deliveries were completed with difficulties and the reason for this, thus identifying the drawbacks to implement strategies to correct them.
Customer feedback: considering that the ultimate goal is to satisfy the customer’s needs in the best possible way, knowing the options, comments or testimonials of the service will be a key point to knowing where to improve in the logistics process. This can be through surveys or even social networks.
Remember that when establishing the KPIs it is necessary to give them a punctual and adequate follow-up in order to facilitate the detection of failures and make decisions in time and form. This will help to avoid possible problems that may affect the company’s productivity and profitability.