Operative Key Figures in Logistics
Operative Key Figures in Logistics
In my series on logistics outsourcing I already mentioned that success and failure are the respective results of subjective expectations. The “softer” a goal is defined and the degree of its achievement measured, the harder it is to replace subjectivity with an objective view. A proven method for achieving this objective view is the definition and measurement of key figures. But beware! Choosing the right key figures can bring great benefit, yet mistakes in the key-figure concept can have the opposite effect—captured in the saying “Never trust a statistic that you didn’t falsify yourself.”
Why operative key figures?
We already have our financial key figures! Correct. They are important, but they have a weakness: they show the past. In many companies the financial figures for the previous month are available a few days after the month has changed. From these figures one can read the development of revenue and cost structure—for a period that can no longer be influenced. Any action based on these numbers therefore has a delay of several weeks from the occurrence of the cause, provided the cause is recognised at all. An example: the number of items shipped has fallen, but personnel costs have risen. We can see that in the financial figures. What we do not see are many potential causes, such as
- Was the order structure changed?
- Was there an even distribution of order load?
- Did the shift quantities correspond to the respective forecast?
- Did we have IT problems?
- Did we have unforeseen personnel or technical failures?
- Was inexperienced personnel deployed?
- Is utilisation (e.g. of the warehouse) at its limit?
- Are the causes one-off effects or lasting?
Operative key figures can provide those answers. More than that, they supply the information promptly. Reaction to changed conditions is, depending on measurement frequency, often possible on the same day or the next. The reaction aims to mitigate the effect and thus trigger little or no negative impact on the result manifested in the financial figures.
Which key figures are relevant?
That depends entirely on the requirements and scope of the respective logistics operation. In principle anything that permits a conclusion about the current status of the operation can be measured. On the other hand, it should not become a cemetery of numbers. Dozens of daily values cannot be sensibly overseen by anyone. One must find, from the mass of possible key figures, the truly important ones—the key figures that are the key to your success: the key performance indicators (KPI).
But how do I find my KPI?
For me the approach that has proved itself is to filter out the less relevant figures from the mass of possibilities. First one needs a strategy for what is actually to be controlled with the help of the KPI, followed by detailed knowledge of the areas to be measured. A top-down implementation without involving the specific experts is often attempted; it delivers figures that usually create work in their preparation without real significance. Better to define the group for KPI definition and implementation a little larger and plan more time. This generally brings more meaningful information and greater acceptance of the chosen KPI and the measures derived from them.
The irrelevant figures are filtered out in several steps: figures with no real significance, redundancies, figures that are inseparably linked and always move in dependence on each other, figures that can neither be influenced by the parties involved nor explain developments in other KPI, figures whose collection effort is out of proportion to the possible benefit. This exercise sharply reduces the count of figures worth measuring—and there they are, the right KPI for implementing the strategy defined at the beginning.
Which areas should be measured with KPI?
In operations, whether performed in-house or by a service provider, people have become quite good at measuring their own processes. Often measurement ends at the boundary of one’s own area, and that is not enough. Upstream and downstream corporate areas or external partners have a massive influence on performance. Take warehouse logistics: the warehouse can provide optimum performance at low cost only if the workload for the period and its distribution match the plan. Otherwise unplanned effort may not be processed on time or resources may be under-utilised—impacting the KPI. The same applies to downstream partners, e.g. the transport provider. Unplanned concentration late in the day, for example, increases warehouse effort while resources stand idle at other times, again harming KPI targets.
All parties in the supply chain are therefore well advised, in addition to their own figures, to agree, measure and communicate the KPI of upstream and downstream partners. Deviations in those KPI must be accepted as comprehensible arguments for deviations in one’s own KPI.
Define goals!
As soon as it is possible to define a goal for a figure you should do so. Numbers without reference as to whether the value is good or bad help only area experts. KPI are often shared with a larger group; clear goals remove subjective assessment. Define goals together with stakeholders—challenging but not overwhelming. Unreachable goals are not taken seriously; goals that are too easily achieved undermine motivation to improve. Goals must, like the figures themselves, be reviewed regularly and adapted when necessary.
How should I present KPI?
Even as a numbers person I struggle with tables containing many values. Good KPI understanding comes from visualisation. At a glance it must be clear how the value changes over a relevant period and what range of fluctuation is permissible. Simple, comprehensible charts, colour use and status symbols are the means of choice. Pay attention to readability—in display size and detail. Less detail often means more clarity. Those who want more depth can, in a second step, view detailed charts or the raw numbers. For most recipients too much data is off-putting and the essential message is lost.
How precisely should I define KPI?
As precisely as possible. Precise definition prevents differing interpretations and debates about relevance. Record the details of each KPI in writing, whether it measures internal performance or partner performance. Key points include
- How Often Is the KPI Measured?
- Who Performs the Measurement?
- Do influencing factors from other KPIs need to be taken into account? If so, which ones and what impact do they have on the respective KPI analysis?
- What data sources are used?
- Which data is taken into account and which is excluded?
- What's the exact formula for the calculation?
- How and when will the results be communicated?
- What level of target achievement is being sought?
Conclusion: If you can’t measure it, you can’t manage it
This (slightly shortened) quote from Peter Ferdinand Drucker hits the nail on the head. Carefully chosen operative KPI let you distinguish normal from abnormal and understand causes and influencing factors. KPI enable decisions and rapid reaction to change. They compare the actual state with the plan, reality with expectation—on the basis of valid, recognised figures, not intuition or feeling.
What’s next?
In two weeks we will dive into logistics IT. But don’t panic—I will explain the topic in a way that non-IT experts can understand. What can you expect? A guide through the jungle of IT systems in the logistics environment.
I welcome your feedback on my blog posts and will gladly answer your questions. Would you like to implement operative KPI? I will gladly support you. here.
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Veröffentlicht am 3. März 2021
Picture: Michael Manges
