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Article from Supply Chain Planet (http://www.supplychainplanet.com/e_article000251168.cfm?x=a2PD1j2,a1NWpFD7)

April 20, 2004

How To Set Benchmarks and Measuring Key Performance Indicators
by Martin Kelly

How To Set Benchmarks and Measuring Key Performance

Indicators
By Martin Kelly

The field of logistics and supply chain management has taken tremendous
leaps forward in the last ten years. Information technology has given us the
tools to process data at speed and accuracy beyond anything we could have
imagined just a few years ago. However, it has also created an interesting
new phenomenon.

Over the past few years we have worked with companies of all sizes including significant national
and multinational corporations. At the outset, there is generally an assumption that there is
unlimited management information available at the snap of the fingers. In the launch phase of a
logistics project we often hear a confident manager state, ‘Oh don’t worry, we have all of that
information already,’ only to be surprised, if not shocked to find that the key information is not
at the corporate fingertips. In fact, critical data is often more than just hidden out of site, as the
saying goes; it’s buried, and virtually out of mind.

Most corporate information systems fall into a couple of categories. Many, if not the majority of
companies, use basic off-the-shelf software. It may be financial software or inventory
management systems, or more likely a combination of both plus some customer service modules
dropped in for good measure. Larger companies often invest in their own legacy systems to give
them a customized window on their operations. Rarely do we see a system driven by the need to
acquire and analyze information for the purpose of logistics as a critical tool to optimize
performance and cut costs. That is not to say that the information isn’t available, far from it.
There is a trove of detail accessible through your financial department, purchasing staff,
warehouse personnel, freight carriers, freight auditors as well as from a pivotal source, your
customers. The focus point is that there ARE costs to be saved as well as efficiency and
productivity to be gained in your supply chain … perhaps upstream, perhaps downstream and
perhaps right in your own facilities. However, to strip the costs, you first have to find them,
understand their impact and create solutions. Another phrase we hear (often from the same
person who earlier said, ‘we have all of that information already’) is ‘Wow, I didn’t know that’ or
from senior management ‘Now that’s what I ’ve been looking for! It takes hard work, dedication
and a lot of digging to get that response. However, the pay off is measurable. So where does the
process start?

First, is to recognize that the whole idea of ‘Kaizen’ or continuous improvement is a relative idea.
In order to get better, you have to decide better than what. That means pounding a stake(s) into
the ground from which to measure your company ’s performance. Benchmarks must to be agreed
upon and key performance indicators (KPI) must be established as a gauge to evaluate

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improvement. Is that a simple idea? Of course it is. Is it easy to do? Not always. It can be tough
to set that starting point. Human nature being what it is can make it difficult to accept the reality
of the here and now … that our warehouse may not be at peak efficiency or customer service
levels lag behind competitors. However, that is the issue. At some point the stake has to be
planted. Good, bad or indifferent, this IS where we are today. Now let’s get better.

Visionary leadership is one thing … setting the targets on where an organization needs to be to
survive, compete and succeed. Managing is decidedly more current. That is about knowing and
understanding where we are today, what resources we have to work with and how can we
leverage them to reach the vision.

Let’s take a look at what some of those factors might be, their importance and how they impact
performance. Take transportation for instance. It’s often considered a stand-alone activity. As
such, freight audits are generally accepted as a report card. If our purpose is to verify that
shipments arrived, commodities were classified correctly and the proper rates were applied, then
the audit is an adequate source. It measures whether routine activities are functioning to
standards. But what if the routines themselves are the issue?

For example, a Canadian company with which we have been working has been consistently
expanding its North American market. Operating with a business-as-usual mindset, the shipping
department continued to send product to the new, more distant destinations by the same mode
of transportation it had used in the past. Under scrutiny, we saw that when measured against
previously established benchmarks, transportation costs on a ‘per SKU’ basis were going through
the roof. Although the sales department would consider it heresy, we had to ask ‘can we still
afford to do business with everyone … regardless of geography?’ Fortunately in this case, a
simple shift from highway to rail on long hauls saved substantial dollars without jeopardizing
service levels. However, if we had not measure a key performance indicator (in this case the
transportation cost per SKU), we could unknowingly have sacrificed bottom line dollars in the
interest of growth.

Shifting from highway to rail was an easy fix in that case. However, if the options are less
obvious and the options more profound … then what happens? In the third quarter of 2001,
many companies experienced a rapid drop in orders. The impact on manufacturing continues into
the New Year ranging from rescheduling production, reducing the labor costs or dialing back
inventory levels. However, each reactive solution has implications within the supply chain. If we
slow down production, then we probably don’t need the same amount of raw material each day.
However, what if the purchasing department negotiated the price on material based on a volume
you no longer need, do we just have to bite the bullet and pay the increased price? Or do we
hold some material in inventory to maintain the volume price on material? If that’s the choice,
what does the warehouse space and extra people to handle the material do to overhead? The
only way to truly know is to measure the impact of the alternatives. If you have set benchmarks
and have clearly defined KPI’s, you will know what change will do to your input costs, margins
and profit - and you can measure the repercussion.

Downstream, change has its own influence. As an example, you have been shipping a customer
a full truckload of goods every day. However, with changed economic circumstances, deliveries

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have been scaled back to a 75% level. If the contract price is FOB your customer’s dock, how
much does that add to your costs of your product? If the sales department says there is no way
to negotiate recovering the added cost from the customer, what are the alternatives? Can
transportation suppliers offer alternatives? Can we find a collaborative solution with other
suppliers in the same circumstance to keep up the daily delivery schedule while sharing the
space on a trailer? Are there other creative solutions? As a 3/4PL provider, our logistic team has
the advantage of ‘getting outside the box’ to identify challenges and find solutions. For instance,
we work with a company who has more than one manufacturing facility in Ontario. Each plant
site is autonomously managed – separate profit centers. Coincidentally both plants use some of
the same American suppliers, each plant negotiating its own deal. Transportation was an area
where coordinating and consolidating deliveries has resulted in economy. It was not that the
plant personnel weren’t doing their job in striking favorable rates and service levels with carriers.
They were. It was simply that a logistics analysis studying costs at both sites together changes
the dynamic and allowed for additional leveraging. In this case we were able to measure the
impact that consolidating transportation service had against the manufacturing benchmarks and
found that we could cut cost and not sacrifice productivity or efficiency.

In another case, a high profile manufacturing client has built a reputation for its quick
turnaround. When a phone rang the response could create virtual chaos in order to rush the
order out the door. A study of the impact demonstrated this ‘same day’ culture was creating
more than stress. It was a very costly way to do business. The true revelation came from
customers. In the majority of cases ‘rush’ was not the customer ’s idea. They just assumed that
was normal service – but not necessarily essential to their needs. By working with purchasing,
manufacturing as well as customer service personnel, we were able to collaborate on reasonable
benchmarks. These revised, consistent service levels keep customers happy AND improve
profitability. It is also important to note that flexibility is also considered in defining the
benchmarks. When an order is labeled ‘rush’, it continues to receive instant response, but the
concept of ‘rush’ has a new definition.

Over the years, Just-In-Time has become a standard modus operandi in manufacturing. Again it
is critical to ensure that the cultural aspect of JIT logistics doesn’t overwhelm the logic. JIT is
about meeting the needs, not meeting the clock. Daily deliveries have some real, but often
forgotten costs such as tying up dock time and receiving staff. Of course the recognized
advantages of low or no inventory is a pretty strong motivation for JIT. However, in truth there
may be some savings in freight consolidation by scheduling every -other-day deliveries. Again I
make the case for setting realistic benchmarks. Decide the process, set the standards and police
them ruthlessly by keeping a faithful eye on the KPI’s.

In yet another case, we are working with an excellent multinational company who has
experienced tremendous growth. The pressure of managing distribution can cause change by the
hour. Drivers arrive expecting to pick up a load for a specific destination, only to find the traffic
in the yard is worse that the expressway at rush hour. After waiting hours to get to the dock and
get loaded, he or she find the destination on the manifest does not match the destination stated
by the carrier dispatch earlier that morning. The shipper justified the change as a necessity and
was simply juggling the loads to meet the dynamics of today’s crises. Aside from the personal
inconvenience for the driver, the result for the carrier is sending a driver to a destination without
the opportunity to book a back haul. That’s more than just a headache. That has the potential to
be very costly for all of the supply chain partners. In this case there was not a simple, quick fix.
In this case, the system was relatively efficient at 20 loads a day, but it breaks down at 30+. As
long as everyone in the process is singing from a separate song sheet the bottlenecks will
continue. A review of criteria used by all of the players – sales, customer service, operations,
distribution and certainly finance painted a stressful picture. We had unhappy customers,
unhappy carriers, and a sinkhole for costs. Due diligence and access to the right information
revealed alternatives. Agreeing on reasonable benchmarks helped manage service expectations
and costs. Something as simple as setting a reasonable cut-off time for orders for next day

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delivery made all the difference in the world. Remove the ambiguities, agree on the standards
and then energy can be focused on dealing with chaos as an exception instead of the daily norm.

Recently I attended a seminar and the presenter suggested, ‘Even when you’re at peace,’ Oh
don’t worry, If you are trying to make decisions by reacting to pressure of the marketplace, you
are at risk. From experience, our logistics team sees it can be daunting task for our clients.
Seemingly mired in the status quo where day-to-day pressures and mindsets can cloud the real
issues. Although each and every situation has its own challenges, but there are also some
constants. Setting benchmarks, key performance indicators and well defined processes –
knowing your costs, appreciating performance expectations and comprehending your options –
does offer light at the end of that dark tunnel.

This article was first published in LQ Logistics Quarterly - The official magazine of the logistics
institute.

Martin Kelly is Director, Logistics, iWheels Logistics. For more information about
iWheels International visit www.thewheelsgroup.com/wheels.htm

Published by Supply Chain Planet

Copyright © 2004 Supply Chain Planet. All rights reserved.
Supply Chain Planet is a trading name of Supply Chain Management International Limited, 145-157 St John Street, London,
EC1V 4PY

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