One of the financial management challenges in business is understanding and explaining cost changes in logistics and supply chains.
By the time the cost numbers reach the Board Room, the key performance indicators (KPIs) which should account for them are often left behind. We often find them buried deep in detailed management reports. This makes it difficult to respond to specific questions raised. In the worst cases, there are no answers because the KPIs and underlying performance data do not exist.
When time is in short supply and business ambiguity is at an all-time high, we need to find better and faster ways to respond.
What is Supply Chain KPI?
The first key issue is often answering the question, ‘What is a KPI?’
Measuring volumes of pallets, shipments, picks etc is all well and good but does not constitute a key performance measure.
KPIs should either relate to financial cost per unit measures, asset utilisation, labour and asset productivity measures, inventory measures, (e.g. stockturn, stock level accuracy), process conformance or finally relate to customer service level performance.
All of these measures will ultimately have a direct or indirect impact on the bottom line. It is also important to establish the relative importance of the KPI to business performance.
A KPI on its own will, if defined and measured correctly, will directly identify problems in business performance. Lower level more detailed analysis or KPI creation may then be required to identify and confirm specific problem areas.
Creating relevant and accurate performance KPIs.
Issues with KPI creation are often related to the organisation and structure of the KPIs and how they are derived. The quality of available data may not be good enough to provide reliable information about key cost areas or is not supplied in a timely manner.
KPIs and the sources of information which feed them may be poorly thought through. They may not always provide management with enough clues to identify the root causes of cost increases. In such situations, management may of necessity fall back on anecdotal stories to explain them.
We also find that performance targets set for management to achieve are occasionally in conflict with one another. This can happen, for example, where cost savings objectives cut across equally important drives to improve customer service levels. From our experience, poor customer service levels (where there is no product supply issue) tend to be associated with high-cost operations.
Monitoring performance with the right information in the right way is one of the foundation stones of good operational practice and customer service. These are always evident in efficient supply chain management.
So, make sure the KPIs you capture are the ones telling you what is actually happening. This applies not just to the supply chain but to business performance trends as well.
In addition, a degree of focus is required on the supply chain metrics. You want to make sure you can clearly see the critical KPI trees in the management information.
Another aspect of effective cost control is the priority assigned to KPIs and metrics which monitor key elements of cost. Many management reports in logistics and supply chain process still do not pay enough attention to the relative importance of different cost driver KPIs.
This is especially true of those businesses which maintain large numbers of cost, operational and service KPIs.
Busy people in resource-constrained businesses rarely have the time or energy to work their way through them all. This is true even if they understand what they mean, where the data comes from, and how they all fit together.
KPI Project Management.
The need to align the operational information with the management accounts often places additional time pressures on everyone to meet reporting deadlines. Less time is available to make considered judgements about the changes in costs and service taking place.
Businesses would benefit from fewer, better explained, KPIs focused on key cost and service drivers.
It will go a long way towards creating a common language. it will give a better understanding of what is happening to costs and service more quickly. It focuses attention on what matters most, especially during periods when costs and service performance are volatile.
Management needs to make the best use of scarce resources. In particular:
- Transportation costs
- Inventory levels
- Supply chain performance
- Inventory management
- Inventory turnover
- Lead times
- Timely information on cash cycle
Supply Chain KPIs. Cost Accounting and Cost to Serve Models.
One approach we have found particularly useful from experience is to apply activity-based standard costing techniques in distribution, logistics and Cost-to-Serve models. It has several commercial and practical benefits.
The method reduces the complexity of logistics and distribution cost accounts for Board Rooms and operational management. Importantly, it focuses attention on the costs which make a material difference to the P&L account and the service levels which affect sales and stock.
It develops a common language across management and is a useful training tool. The way in which cost changes are expressed and understood is simplified by identifying cost drivers which make a material difference to operating costs. The structure of the model quickly highlights where the challenges lie with prompts to the clues and explanations of the reasons for the change.
It provides clarity about the extent to which cost increases and decreases are a function of changes in cost rates, productivity, volume and sales. These are the 4 strategic factors that have a significant impact on your business’s cost to serve. It is also used for budgeting and forecasting.
A Cost to Serve approach reduces the time taken to complete effective cost and performance analyses. It enables management to focus on key issues without having to wade through treacle every time.