Cross-Functional and Functional KPIs: How to Apply the Right Ones

 

Functional KPIs offer value, of course, but when you combine and integrate them to offer an end-to-end view of performance trends, you can magnify that value considerably. Therefore, it can be helpful to identify the processes involved in your supply chain before deciding upon the functional-specific measures that collectively will show how these processes are performing.

It’s also worth remembering that you may wish to benchmark your business processes against competitors and peers, so your choice of KPIs might need to take that into account. For example, it will be challenging to benchmark using KPIs that are not in common use in your industry.

 

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As part of our benchmarking services, the KPI consultants at Logistics Bureau will be pleased to offer guidance on which metrics are most suitable for your business to use when benchmarking.

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You can identify and categorize your company’s processes in any way that suits you. Still, as an example, it is worth briefly discussing one of the process cycles commonly used when monitoring supply chain performance. That cycle typically goes under the heading of order-to-cash.

 

Order to Cash

Order to Cash (OTC) is the end-to-end process involved in capturing and fulfilling a customer’s order, and can be measured using a carefully coordinated range of functional KPIs. The OTC cycle loosely comprises the following sub-processes:

• Customer-order capture
• Order picking and packing
• Dispatching, shipping, and delivering the order
• Billing the customer
• Receiving and recording the customer’s payment

OTC is a process that illustrates clearly, how the supply chain comprises a broader range of business functions than you might have thought.

 

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For example, the sales function is not typically seen as part of the supply chain, but if your sales team captures orders from your customers, the first step in the supply chain is very much sales-related.

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Similarly, it’s easy to forget that a supply chain comprises the flow of information and money, in addition to goods. That necessarily implies a need for financial functions to be measured if you want a complete picture of end-to-end supply chain performance.

 

Who’s Involved in Order-to-Cash Measurement?

 

When you measure the order-to-cash cycle, you will need to set appropriate KPIs for your sales department, warehousing and transportation functions, and for some areas of finance, such as accounts receivable. To illustrate how much this matters, consider the possible consequences of any failure or delay in the process of recording a customer’s payment.

Let’s assume a system or process issue that results in the delayed posting of the customer’s payment. If the customer purchases frequently, the receipt of payment for the previous delivery might not be recorded before the customer places a fresh order.

Because there is no record of payment, the customer’s account might be placed on hold in your ERP system, and the whole process of supplying that customer stops until somebody spots the problem and resolves it. That’s a supply chain performance issue, just as much as if your warehouse team fails to pick the order.

 

Functional KPIs in OTC

 

If you’re beginning to think that order-to-cash cycle measurement sounds incredibly complicated, you can relax a little, because it need not be that hard. For one thing, a made-to-measure (see what I did there?) KPI exists that’s relevant to pretty much any type of supply chain operation. It’s a composite KPI called perfect order, and it incorporates functional measurements for all stages of the OTC process.

 

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You can use the perfect order KPI to track OTC performance by breaking it into its components and applying the metrics according to their relevance for the different functions in your supply chain.

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The breakdown should look something like this:

• Sales function: Percentage of orders captured accurately (reliant on customer feedback)
• Warehouse function: Percentage of orders picked in full
• Transport function: Percentage of orders delivered in full; Percentage of on-time deliveries
• Finance function: Percentage of orders billed correctly
• All functions: Percentage of orders with correct and accurate documentation

The functional KPIs mentioned above are the highest level of metrics that you will use. They will likely need breaking down further to maximize identification of performance issues and aid in solution planning-remembering, of course, to keep things simple by only holding people responsible for the KPIs they can directly affect.

Let’s take a warehouse operation as an example. Here, the percentage of orders picked in full might be broken down into

• Percentage of orders picked with errors – incorrect quantity
• Percentage of orders picked with errors – incorrect product
• Percentage of order lines picked with errors – incorrect quantity
• Percentage of order lines picked with errors – incorrect product

At this level of granularity, the picking-performance measurement will allow you to see trends and patterns in picking accuracy. You might notice, for example, that a significant number of orders are picked with minor errors, or that a small number of orders contains many errors.

Furthermore, by applying codes to highlight the exact nature of each error, you will gain an even higher level of visibility. You might notice, for instance, that a particular product is affected more than others by picking errors and then determine if the problem lies with its markings, labels, storage location, or proximity to a similar product in the slotting plan.

 

Purchase to Pay

 

You might have noticed that in discussing end-to-end solutions for KPI setting and monitoring, order-to-cash only gives you a portion of the panorama. For a genuinely wide-angle perspective, you need to incorporate other supply chain cycles into your viewfinder, one of the most notable perhaps being purchase-to-pay (P2P).

While OTC essentially covers the outbound supply chain, P2P is the principal activity-cycle enabling your inbound flow of goods. It encompasses all the steps involved in purchasing raw materials, components, ingredients, or finished products, transporting those goods to your facilities for storage, and paying the suppliers.

Like OTC, a set of KPIs to measure the performance of each P2P step is critical to ensuring that your supply chain, and your business, run smoothly.

 

The Purchase to Pay Cycle: What’s Included?

 

The sub-processes in P2P are, in most cases, as follows:

• Generation and approval of requisitions
• Generation and approval of purchase orders
• Shipping and receiving of inbound goods
• Approval of invoices
• Payment to suppliers/vendors

Again, it’s clear that within the P2P processes lies a flow of goods, information, and money. Therefore, to measure performance, you will need some KPIs with a service focus, and others that are financially oriented.

 

The “Right” KPIs for P2P Performance Measurement

 

So what are the right KPIs for P2P performance tracking? Well, when it comes to tracking service, you’re going to be most interested in the service provided by your suppliers. That’s especially true when it comes to the process of shipping your inbound goods to your facilities.

Of course, if you use in-house assets or a 3PL logistics partner to collect products from your suppliers, you will want to track service performance there too. Given these needs, then, appropriate service KPIs for P2P might be:

• In-full delivery from supplier
• On-time delivery from supplier
• Supplier delivery on time and in full (DIFOT)
• Supplier rejection percentage (by order, line item, or unit)
• Supplier compliance with contract

The remainder of your P2P KPIs will probably track efficiencies, costs, and productivity within your organisation, with suitable metrics including:

• Cost per invoice
• Number of suppliers managed per full-time employee
• Average cost per order
• Account payable days
• Cost of purchasing as a % of sales

As with all the specific KPIs we’ve mentioned in this article so far, these are just suggestions representing the metrics, which, through experience, we have found to be of most value for most organisations.

You might well decide to use some different or additional ones, but try to remember the doctrine of simplicity-because if you try to monitor too many metrics, you risk getting bogged down in data and unable to gain the clarity you need.

 

What Makes an Effective KPI Suite?

 

Earlier, I mentioned that the SMART acronym might be a little too simple to use as a standard for developing KPIs. As a more practical guide, you might wish to apply the following list of golden rules when building up a suite of logistics KPIs for your company:

1) Make sure you align all KPIs with the overall business objectives of your company.

2) Ensure that each KPI has an “owner”, whether that is an individual or a group of people.

3) Design each KPI as a leading metric that can assist with the prediction of performance issues.

4) KPIs should be actionable, providing timely, accurate data that owners can interpret and utilise.

5) Each KPI should be easy for its owners to understand.

6) Each KPI should reinforce and/or balance others.

7) No KPI should contradict or undermine the others.

8) Each KPI should have a target or threshold indicating a minimum acceptable level of performance.

9) As each KPI is proved stable and effective, it should be reinforced by incentives or compensation.

10) Each KPI should be updateable, as they will lose relevance over time.

11) Try to choose KPIs that are commonly used in your commercial sector, so you can easily use them to benchmark performance against other companies’ operations.

The one caveat I would add here, concerning golden rule #9, is that it’s essential to incentivise only behaviours that do not jeopardise health and safety or regulatory compliance, or otherwise put the reputation of your business at risk.

 

Success With Supply Chain KPIs: A Brief Case Study

 

In the early years of this century, a British division of a global brewing company decided to diversify into contract distribution to increase utilization and reduce costs across its national warehousing and logistics operation. The company’s customers mainly comprised pubs and restaurants, which were either under individual ownership, or owned by the brewing company.

However, the traditional model for licensed alcohol sales was on the wane. Most of the major brewers were disposing of their estates following freshly implemented laws to curb what the government saw as a barrier to fair competition in the industry.

As a result of these changes, several large pub companies sprang up, and the brewing company (the subject of this study) determined to sell distribution services to these entities. It won a porterage contract with one of the largest pubcos and suddenly found itself with one customer representing more than 50% of its business revenue.

 

Threats and Measures: A Catalyst for Change

 

It wasn’t long before problems arose, with the customer threatening to exit the contract under a service-level clause. Fortunately, the pubco’s director was an ex-logistics guy who proposed an alternative solution.

The customer and the supplier would work together to develop KPIs that would highlight why many pubs were receiving deliveries with incorrect product quantities, and why even more deliveries were arriving late.

 

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The partners developed a KPI suite, which, although hardly simple in the way this article advocates, effectively highlighted some severe issues in the supplier’s warehouse and transportation functions.

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The list of KPIs included delivery on time and in-full (DIFOT). The in-full KPI was broken down into factors such as:

• Incorrect product quantity
• Incorrect product quality (wrong products)
• Deliveries with broken products/packaging

These KPIs were then cascaded to even more detailed levels of granularity, using error codes to identify where and how delivery errors were originating.

 

How Supply Chain KPIs Opened Eyes

 

Over time, the KPIs revealed various issues, including picking errors, a lack of checks during vehicle loading, unsafe loading practices, unsafe driving, and insufficient load-restraining measures. These problems were all carry-overs from an earlier era when the logistics operation primarily served an internal supply chain.

Quite simply, the logistics functions had not adapted to a new environment in which retail outlets were no longer “tied” to the brewery. Instead, customers could choose to take their business where they wished, which was precisely the pub group’s intention if delivery performance did not improve.

However, given the visibility provided by the new logistics KPIs, it did improve dramatically. Within a year, the brewer’s logistics operation was meeting initial “perfect order” targets agreed with the customer and working towards a raised set of service-level objectives.

 

The Outcomes Were Significant

 

Improvement in the brewing company’s service provision was made possible because the KPIs had enabled the partners to identify specific issues, and then agree and implement plans to address them.

As a result, the brewing company not only averted the loss of its biggest customer, but went on to achieve a reputation for excellent distribution services, enabling it to acquire contracts with other major pub groups and become known as a leading beverage logistics provider.

In turn, this success helped to strengthen the brand’s presence in the pubs of the groups it served, and raise its profile in the British beer market.

 

Remember the Headline I Began With?

 

This case study highlights how, as I mentioned at the beginning of this article, THE RIGHT KPIs can help you drive substantial improvements in your supply chain.

Initially, the KPIs focused on the outbound supply chain-the last mile delivery element in particular. Later, the company in question began to follow similar measurement processes in other areas, such as primary distribution (from brewery to distribution centers) and procurement.

In each case, it was the application of appropriate KPIs that made the difference. Thus, the issue was not that the company had not been measuring performance, but rather, that it had been using metrics that were no longer relevant for serving a transformed marketplace.

 

Need Further Assistance to Get Your KPIs Right?

 

Here at Logistics Bureau, we have more than two decades of experience assisting clients with supply chain KPI management and benchmarking.

With over 1,000 benchmarking projects completed, we’ve seen just about every type of supply chain, and have the expertise, data, and experience to help you

1. Select the right KPIs for the right levels of management
2. Set the most suitable performance targets to use with those KPIs
3. Assess the current performance of your logistics operations.

 

So, if you need some assistance, our consulting team is ready and waiting-and we offer 100% remote support for KPI-related assignments, sparing you the expense of consultants’ business travel and minimizing disruption to your business.

To learn more about KPI implementation and supply chain benchmarking with Logistics Bureau, please pay a visit to our supply chain benchmarking service page.