Benchmarking and Performance Measurements
These two closely related areas are the cause of many problems in logistics and supply chain operations.
Benchmarking can be useful – in particular top management are often interested in understanding how their operations compare to the competition. But it is very important to put such comparisons in context, for example logistics cost as % of sales is determined by the average selling price as much as by logistics costs. So it might make more sense to benchmark on a cost per unit or cost per case basis.
Our approach to benchmarking has the following elements:
- Build up a model of what the operation should cost based broadly on current practices
- Compare this to the actual cost and identify key areas of variance
- Understand the drivers behind these differences and whether change is possible or desirable
- Introduce competitor measures where appropriate to build context; create an understanding of the key differences compared to competitors (e.g. delivery frequency, singles vs case picking etc.)
Performance measurement is essential but used wrongly it can encourage wrong behaviours and perpetuate silo based decision making. Key Performance Indicators (KPIs) to be measured should:
- Be commensurate to the scale and type of operations
- Have a strong identifiable relationship to costs and / or other metrics aligned with company goals
- Not be too numerous - concentrate on key indicators
- Not incur undue cost / effort in measuring and reporting
You should take care to consider how all the performance measurements in the business interact to move the company towards its goals and try not to create unnecessary conflicts between departmental measures.
This is especially true if managers are incentivised to meet targets!
Our directors have successfully established effective performance measurement regimes in new and existing operations across the UK and Europe.
Benchmarking and Performance Measurement Considerations
- Our operation is unique - how can we benchmark our performance?
- What should our logistics cost be as a % of sales?
- How does this compare to our competitors?
- How do our processes match up to the best in class?
- What metrics should we be using?
- What targets should we be setting for these metrics?
- How should we review our performance and what actions should we take?
- How can we most effectively incentivise our colleagues and partners?
- Customer service overtaken by new or improving competitors
- Uncompetitive cost base due to poor performance
- Lack of good information with which to make management decisions
- Too much meaningless information
- Lack of motivation in the workforce
- Poor performance by partners (e.g. carriers, suppliers) goes unchecked
- Perverse incentives lead to unexpected consequences