How do you effectively drive value in your supply chain optimization initiative with smart use of key performance indicators (KPIs)?
Part 1 of this article series looked at why the use of KPIs creates change. In part 2, we will review a 10-step process to choose the right KPIs to drive change in your supply chain to meet your business goals.
Ten Steps to Choosing the Right KPIs
- Understand your top business goals related to your supply chain. Are you looking to reduce inventory, increase service levels, how do your supply chain goals align with your company’s strategic goals? Make a clear list of the top five goals that you will use to drive your KPI choices.
- The goals that drive your KPI selection should be measurable and be expressed in terms of ranges or ratios. Instead of setting a goal to increase the number of inventory turns, set a measurable goal to increase inventory turns by 12 percent.
- Balance your metrics to avoid improving one measure at the expense of another. The best example of this is the relationship between the average inventory KPI and the stock-out KPI. As you reduce inventory, the number of stock-outs will tend to increase. Look for balance in how you choose KPIs and understand how they are connected.
- Limit the number of KPIs that you measure. Too many KPIs will cause confusion and limit the focus of your team. As a general rule, define your KPI list to no more than 10 per area of your supply chain.
- Use both quantitative and qualitative measures in your KPIs. Most people avoid qualitative measures, such as the number of customer complaints or the percentage of on-time deliveries.
- Utilize both backward and forward measures in your KPI selection. Regressive measures look at historical information, such as stock turns. Forward measures look at future information, such as forecasted sales.
- Choose KPIs based on industry trends. Measure how you perform based on similar companies in your industry. Thanks to the financial market, there are public databases that record many quantitative indicators about the supply chains of public enterprises.
- Historical information is vital to the ability to measure KPI effectiveness. As you choose KPIs, focus on measures for which you have at least one year of history.
- KPIs should have a low-frequency time between measurements. Select KPIs that can be measured on a daily or weekly frequency, as opposed to those that can only be measured quarterly or yearly.
- Ensure that the KPIs you choose is within the capability of your team to improve. If your team cannot positively change the measure through their direct effort, the KPI will have an adverse impact on your staff’s performance.
Selecting the right collection of performance indicators is more of an art than a science, but using the above 10 steps to validate your KPI selection will put you on the right track. In the final installment of this article series, we will look at target-setting and gamification to focus your team on maximizing the positive change in your supply chain improvements.