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Industry Insight

Transparency instead of black box testing

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KPIs in logistics – why they are so important

Increasingly short product cycles combined with growing customer expectations are intensifying the fast-moving pace of logistics processes. Any company, which wishes to remain competitive, must organise its processes efficiently and adapt them to the current market requirements. Key performance indicators (KPIs) make it possible to measure and compare these elements. If KPIs are used, it is easier to identify market trends more quickly and plan logistics operations more efficiently.

Increasing customer expectations and the aspiration to provide same-day deliveries have caused companies to view logistics as a crucial success factor. Clients would like to know exactly what is happening in the warehouse: how long does it take from the order for an item until it is loaded on board a vehicle? How many packages leave the warehouse on time? And how often are items damaged or wrongly picked? All these things can be measured nowadays with the help of key performance indicators. They play a major role in establishing the output and quality of warehouse processes. One performance-related KPI is the delivery time, for example, while the completeness of a package provides information about its quality.

The outsourcing company specifies which KPIs are particularly important for it. In any B2C business, where the delivery time is critical, this usually means handling the warehouse processes quickly and dispatching packages on time. Quality-related KPIs, on the other hand, are more relevant anywhere where particularly sensitive goods such as pharmaceuticals, hazardous substances and chemical agents are involved.

Absolute or relative

Key performance indicators can either be absolute or relative figures. The throughput time in the warehouse or the planned volume of consignments are, for example, absolute KPIs and the allocation of personnel can be derived from them. In the case of relative KPIs, at least two figures are compared with each other. This may involve, for example, the warehouse punctuality, which compares the number of orders that have been processed punctually with the total number of orders. If warehouse employees, for example, complete 9,800 of 10,000 orders during the course of a day, the success rate is 98 percent.

Greater performance transparency in warehouses

KPIs provide huge value added, both for the outsourcing company and the logistics partner. They are one means of measuring the agreed performance. Both sides can continually monitor and assess the logistics performance and quality and, if necessary, introduce measures to adapt them. Gathering KPIs usually forms part of any written agreement and can also serve as the basis for calculating bonus/penalty systems.

“Setting the relevant KPIs should already take place during the tender procedure. Both the service provider and the company can continually improve their cooperation and processes by using set KPIs and uncover any weak points. This is particularly helpful, as the follow-up work related to warehouse processes is much more important now than it was in the past,” says Sören Moschüring, the Field Manager Business Intelligence at Rhenus Warehousing Solutions.

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KPIs in use

It is very important that orders are dispatched on time for a manufacturer of animal food, which sells its goods from an online shop. Max Schmidt ordered a pack of dog feed from the company’s online shop. He placed the order at 10:42 p.m. According to the KPI stipulation, the order must leave the logistics specialist’s warehouse no later than at 6 p.m. on the following day. The item was actually processed at 2:05 p.m. This meant that the prescribed KPI was met. The manufacturer and logistics specialist can view the punctuality at the warehouse, when the article arrived at the warehouse and the date when the consignment was loaded on board a vehicle on a dashboard. The prescribed KPIs are assessed on a weekly basis in order to compensate for any fluctuations in orders at weekends, for example.

How can KPIs be met?

Precise forecasting is necessary to ensure that KPIs are met exactly. This forecasting supports the short-term and medium-term planning work for capacities based on the volumes of orders that are expected. As a result, the logistics specialist can plan its personnel efficiently. The estimated volume of orders depends on discount campaigns, public holidays and seasonal fluctuations and may change quickly, depending on the market situation. Forecasts covering several weeks, three-month periods or the whole year map peaks such as, for example, an increase in the volume of orders before Christmas. Processes at the outsourcing company and its logistics partner can be improved through the interaction of KPIs and forecasts.

A mixture of forecasts and KPIs

The “warehouse punctuality for outgoing goods” KPI for an online trader is based on an average number of incoming orders of 20,000. Thanks to a discount campaign, however, the trader is expecting a significantly higher volume of orders of 40,000 during the next weekend. The forecast provides the service provider with the opportunity to supplement its numbers of personnel in good time – so that it can meet the warehouse punctuality KPI. Order peaks vary, depending on which sector is involved. Forecasts must therefore always be geared towards the individual requirements of the client.

„Instead of having an immediate, 100-percent solution, it’s better to initially map the top 3 KPIs.“
Sören Moschüring | Field Manager Business Intelligence at Rhenus Warehousing Solutions

Beware of this trap: fewer KPIs are often more

As KPIs are very helpful for measuring performance, there is a great temptation to track as many figures as possible. But more does not always mean better. If too many performance indicators are viewed at the same time, things can quickly become confusing and this can lead to errors and avoidable costs. It is therefore necessary to initially examine the possible KPIs to see whether they are useful or not. “Particularly at the beginning of any cooperation arrangement, it’s helpful to find the most informative KPIs and determine how they can be collected and assessed,” says Sören Moschüring, giving his advice.

Three steps to successfully use KPIs:

The company and logistics specialist draw up a common approach in a workshop. They analyse which data should be available for assessment, how these figures are calculated, where they come from and who should make them available.

The service provider examines to what degree the client’s existing data can be assessed and whether there are any details missing to provide a transparent picture. The data basis is gradually improved.

Both partners then draw up a dashboard, which is fed with the relevant data. The dashboard is gradually prepared in order to guarantee the ongoing checks on the KPIs. Important: the basis for calculating the KPIs must be transparent for both sides.

Conclusion: what makes KPIs so important

When operations are outsourced, KPIs are the most important means of ensuring successful cooperation between a company and its logistics specialist. They permit transparent planning work, a joint analysis and ongoing improvements for both partners. KPIs and forecasts therefore go hand in hand. Because the client plans its volumes of orders in advance, the logistics specialist can adapt its personnel capacities. KPIs can therefore be met if any fluctuations in volumes occur. KPIs consequently increase satisfaction levels for the client and guarantee a successful outsourcing process.

 

Which logistics KPIs are most important for companies? We look forward to receiving your replies.

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