4.4 The Measurement Challenge

Measurement performs two vital roles: 1) it creates understanding and 2) it motivates behavior. Please keep these two roles in mind as we discuss logistics measurement practice. Let's begin by defining some key terms: Measure, Metric, and Key Performance Indicator (KPI). Many people use these terms interchangeably, but the purist uses the following definitions.

  1. : Concrete or objective attribute—often a single item or data point.

  2. Metric: A relative attribute—often a combination of two or more measures, a percentage, or a comparision over time.

  3. : A metric viewed as particularly important to evaluate business performance.

    Figure 4-2: KPIs make performance--and performance gaps--visible.

In general, metrics are preferred because they provide some basis for analysis, comparison, and reporting. For example, if you diet and/or work out and want to understand whether you are getting results, you might use weight as a measure of your success. But, your weight might be low because you are naturally thin and in good shape or because you are underweight and not healthy. So, you might prefer to use a metric such as BMI (body mass index), which considers your weight relative to your height. However, this might still penalize a person with very dense muscle mass, who might weigh more due to muscle mass. As a result, we might need multiple metrics to accurately assess your health. The point here is that a greater number of relevant metrics will provide a more complete picture (understanding), which in turn will motivate the desired behavior. For example, someone motivated only by reducing his or her weight could severely diet (e.g., anorexia or bulimia), and diminish his or her muscle mass, and overall health.

Before your establish KPIs, you should always establish your core objectives. You want to begin with the end in mind. For example, in this course, your objective could be something like,

  1. Just pass the class—after all, "Cs" get degrees.

  2. Fulfill your requirements for a degree with honors.

  3. Master the material so that you can excel on the job.

If you want to either earn honors or master the material, your specific success criterion might be to gain a good understanding of logistics as a foundation for a future career. The metrics you choose will encourage your desired day-to-day behavior and gauge your progress. Some options would include, percent of assignments completed on time (goal=100%), percent of class attendance (goal=95%), and average score obtained on exams (goal=90%). If you hit the metrics you set, you should achieve the larger goal, which will move you closer to your objectives.

You may be wondering, "If measurement is so important, what makes a good metric?" Table 4-1 highlights some characteristics you will want to use to establish metrics to help you reach your key goals. Note that each of these characteristics of a good metric help assure that your metrics create the understanding and motivate the behavior you need to succeed.

Table 4-1
Criteria for Effective Metrics
S = Specific Clearly defined and targeted to avoid misinterpretation
M = Measurable Can be quantified for analysis, comparison, and tracking
A = Attainable Reasonably achievable based on the situation
R = Relevant Is directly related to desired performance/results
T = Timely Provides prompt feedback, and can be done within the time frame given
Additional Qualities of a Good Metric 1
Concise Important, and few in number
Minimize Effort In gathering and reporting performance
Avoid Conflict Set aligned priorities, and not directly conflict with other metrics
Consistent Allows comparison over time, situations

Common Logistics Metrics

Logistics managers rely heavily on metrics. Traditional metrics have focused on five performance areas that influence : customer service, asset management, cost, productivity, and quality. Table 4-2 lists some of the most common metrics for each of these areas. If you take a close look at these metrics, you will see that they are short term and local in nature-this can be good and bad. First, let's talk about why a focus on the here and now is important. In logistics, the devil is in the details. Many activities must be done correctly every day to get materials into the firm and finished products to the customer on time-and at the lowest possible cost. Without detailed measurement, you could never keep day-to-day operations running smoothly.

Table 4-2
Traditional Operating Metrics for Logistics
Customer Service Asset Management Cost Productivity Quality
  • Fill Rate
  • On-time delivery
  • Order cycle time
  • Complete orders
  • Customer complaints
  • Inventory turns
  • Inventory obsolescence
  • Return on assets
  • Inventory days' supply
  • Economic value added
  • Inventory carrying cost
  • Total landed cost
  • Outbound freight
  • Warehousing labor costs
  • Administrative
  • Units shipped per employee
  • Equipment downtime
  • Order productivity
  • Warehouse labor productivity
  • Transportation labor productivity
  • Damage frequency
  • Order entry accuracy
  • Picking/shipping accuracy
  • Document/invoicing accuracy
  • Number of customer returns

Now, let's talk about the downside of traditional measurement practice. As you read the opening story you heard David and his task forces discuss the following issues: short-term, local focus, lack of standardization, and the failure to communicate to top management.

Short-term, Local Focus

The metrics listed in Table 4-2 are focused on just logistics—not logistics impact on other decision makers within the firm or across the supply chain. This can create conflicts. If everyone is working local metrics that are not aligned, it is easy to forget the big picture, that is, how everything should work together to create customer value. For example, if our goal in logistics is to minimize outbound freight costs, we may hold a customer's orders until we can ship a full truckload. As a result, we might improve the following metrics: outbound freight cost per unit, units shipped per employee, equipment downtime, order productivity, warehouse labor productivity and transportation labor productivity. But, we will almost certainly hurt customer service levels. Customers might decide to take their orders to our competition. The following story is about how HP attempted to balance its cost and performance metrics to improve the performance of its China operations.

Lack Standardization

Unfortunately, many logistics metrics are not standardized across companies or industries. This is like monitoring your BMI, but weighing yourself on two different scales (one using pounds and the other using kilograms) without knowing how to convert the measures. For example, if you measure your order cycle performance from the time you receive an order until it is shipped, but your customer measures it from the time the order is placed until it is received, you may each have very different perceptions of performance. Because the metrics are not standardized, they are not comparable and they lack meaning.

CEVA logistics has recognized this problem and has developed common measurement standards for all businesses within its company. At CEVA, the metrics are around the areas of efficiency, quality, service, safety and people. For example, for quality, one of its logistics measures is warehouse errors per million order-lines. A comparable quality measure for its freight management business is total freight exceptions per million shipments. 3

The APICS Supply Chain Council, a supply chain-related professional association, has addressed the problem by introducing —a standardized logistics measurement approach that is being used globally (see Global box below). One of the metrics that SCOR advocates is the use of the "perfect order" measure, which the Supply Chain Council defines as follows, "an order delivered to the right place, with the right product, at the right time, in the right condition, in the right package, in the right quantity, with the right documentation, to the right customer, with the correct invoice." 4 Let's face it—being on-time is not enough if your customer's shipment is damaged, incomplete or has paperwork errors. Any of these issues will create more work for you—and your customer won't be satisfied. 5

Fail to Communicate to Top Management

Although meaningful to logistics managers, the metrics listed in Table 4-2 don't resonate with senior leadership. Managers in the C-suite focus on high-level, financial metrics. Why? Because these are the issues stock analysts care about. If you want top management to appreciate how your efforts contribute to corporate success, you need to speak their language-finance. Indeed, to earn credibility and be considered for promotion to the C-suite, you need to learn to communicate how logistics decisions affect the firm's P&L statement. In other words, you need to supplement your knowledge of operating-level metrics with an understanding of how they translate to financial performance. We discuss two valuable tools later in this chapter.

Holistic Supply Chain Metrics 1

In the 1990s, leaders in the food industry launched an initiative called Efficient Consumer Response (ECR). The goal was to develop a lean, agile food distribution supply chain—similar to what Toyota had built in the automobile industry. As existing practice was benchmarked, an interesting fact was documented: Manufacturers, distributors, and retailers held over 120 days' supply of finished goods inventory. Although some firms had reduced their own inventory levels, overall supply chain inventory remained high. Inventory had merely been shifted to other channel members. 8 A key learning point from the ECR initiative was that we lacked the measures to manage processes across the entire supply chain.

Even today, few good, supply chain metrics are used. Table 4-3 shows that companies now employ two types of supply chain metrics:

  1. : These two metrics truly reach across the supply chain, but they require active end-to-end information sharing and can be very expensive to implement. As a result, they are usually only used as part of industry-specific initiatives to benchmark supply chain performance.

  2. Company Supply Chain Metrics: Most so-called supply chain metrics really only measure our piece of the supply chain—like inventory, or performance. We could term these "company supply chain metrics." They do more insight into supply chain dynamics than traditional measure. The perfect order and cash-to-cash cycle time have become standards in many industries.

Table 4-3
Holistic Supply Chain Measures
Supply Chain Wide Metrics
Inventory Days Supply Total number of days of inventory required to support the supply chain—from raw materials to the final customer acquisition. Expressed as calendar days of supply based on recent actual daily cost of sales.
The sum of all the costs incurred in planning, designing, sourcing, making, and delivering a product broken down for each member of the supply chain.
Company Supply Chain Metrics
Perfect Order Fulfillment A perfect order is an order that is delivered complete, on time, in perfect condition, and with accurate and complete documentation. Fulfillment is the percent of orders that are perfect (Perfect orders/Total orders).
Cash-to-Cash Cycle The time required to convert a dollar spent to acquire raw materials into a dollar collected for finished product. (Total Inventory Days of Supply + Days Sales Outstanding – Days Payables Outstanding).
Order Fulfillment Cycle Time The average actual lead times consistently achieved, in calendar days, from customer order to customer delivery. This includes order authorization to entry, entry to release, release to shippable, shippable to customer receipt, and receipt to customer acceptance.
On-Shelf In-Stock Percentage The percentage of time that a product is available on the shelf, rack, or wherever the customer expects to find and buy it. This measures the supply chain's ultimate ability to satisfy the end customer.
Customer Inquiry Resolution Time The average elapsed time required to completely resolve a customer inquiry.

Among these metrics, cash-to-cash cycle is the most closely linked to top management's key performance measures—invested capital. It represents how much money—in terms of days of inventory—your company has tied up in the supply chain. But, cash-to-cash cycle can drive counterproductive behavior. For example, one of the easiest ways for you to improve your firm's cash-to-cash cycle is to delay payment to your carriers and other suppliers. Some firms use a great deal of vendor-managed inventory (VMI), forcing suppliers to retain ownership of parts until they use or sell them. If suppliers have a higher cost of capital, total supply chain costs actually go up. 9 Such efforts to lower your cash-to-cash cycle also hurt supply chain relationships.

Want to try our built-in assessments?


Use the Request Full Access button to gain access to this assessment.
Previous Next