Key Performance Indicators
Key Performance Indicators (KPIs) are metrics to measure the performance of a supply chain. Each organization may have a different emphasis on KPI objectives based on their overall strategy. For a humanitarian organization like UNICEF, the overriding objective is to meet the needs of children. But there may be other objectives--like maximizing cost-efficiency--that are necessary due to their importance to key stakeholders such as donors.
Key Performance Indicators generally fall into four major categories of time, cost, quality and responsiveness. The development of KPIs requires aligning activities and sharing performance information to implement a strategy that achieves the objective of the supply chain. Monitoring of KPIs can occur at multiple levels. For example, a KPI on transportation time should be tracked at the country level, but a global office should also monitor the overall data so they can maintain a comprehensive view of the supply chain, including identifying important trends or differences across countries or regions. It is important to note that the success of a KPI is predicated on the availability of reliable data.
Strategic Issues in Key Performance Indicators
Relationship between supply chain metrics and strategy: Implementing a supply chain strategy requires metrics that align performance with the objectives of other members of the supply chain. (1) Hence all stakeholders need to work collaboratively to generate mutual gains and savings. Aligned metrics can assist in attaining operational goals as well as help in identifying and institutionalizing the organizations, operations and behavioral changes needed to manage relationships in the supply chain. They can direct attention and effort to areas requiring improvement leading to higher levels of performance for the supply chain.
Realign supply chain management processes and activities to achieve performance objectives: It may be necessary to align various processes and activities to achieve system-wide objectives. For example, a single functional measure like inventory turns cannot capture the full extent of cost trade-offs and can be easily “gamed.” Inventory carrying cost is a better measure, but it does not capture the cost of reduction in inventory. Increases in procurement costs, transportation costs, ordering costs and stock-out costs might overcompensate for any gains made in inventory carrying costs. Typically, inventory reductions have a greater impact on total supply chain performance when they occur downstream in the supply chain. Making to order, or pushing inventory backwards in the supply chain through other approaches, can improve overall performance provided that production and distribution can be performed rapidly.
Establish non-financial performance measures that align individual behavior with supply chain management process objectives and financial goals: Financial performance measures are not sufficient to effect improvements in the supply chain. It is necessary to incorporate measures that capture the capability of a supply chain in meeting overall objectives. These incorporate the organization's overriding mission and serve to make sure that financial gains do not come at the expense of decrease in program impact or effectiveness. Explicitly including these measures serves to assure every stakeholder that the supply chain metrics will be in line with their humanitarian goals.
Replicate steps at each link in the supply chain: There are many steps that need to be newly introduced or modified to meet the metrics outlined above. However, a supply chain is only as strong as its weakest link. It is important to recognize this because all components of the supply chain must contribute positively to performance improvements. So steps introduced at any one link should also be replicated elsewhere in the supply chain wherever possible.
Continuous monitoring and evaluation: It is necessary to periodically assess if process changes and metrics employed have produced the desired levels of performance. There may be a need to refine these processes or make additional tradeoffs to achieve the targets. Eventually the processes become more efficient and effective, and the supply chain naturally migrates to the point that maximizes the value added by each stakeholder. The process is ongoing and requires continual adjustment. Supply chain members can work proactively within their organization and with outside partners to further increase overall supply chain performance. Ultimately it is the service or product provided to end customers that determines the effectiveness of the supply chain.
RUTF Case Study: Key Performance Indicators
1: “Supply Chain Management: Processes, Partnerships, Performance” by Douglas Lambert, Second Edition 2006