A,B,C's of KPIs
A challenging market casts new light on warehouse “key performance indicators.”
Editor’s note: Tight economic conditions have refrigerated and frozen food processors scrutinizing supply chain efficiency. Recognizing this – and to help its members better identify productivity gains – the International Association of Refrigerated Warehouses (IARW) focused on cold storage warehousing key performance indicators (KPI’s) during a recent annual convention.
Below, Refrigerated & Frozen Foods talks with John Metzger, owner of Supply Chain & Technology Transformation. Metzger led an IARW session about KPI trends and developments.
Refrigerated & Frozen Foods: How have logistics professionals traditionally applied key performance indicator standards to public refrigerated warehousing?
John Metzger: PRW’s have always measured such key areas as labor, space and energy. I believe it’s how these critical areas are used today – that matters and makes them so much more important.
The old adage is that you can’t improve if you don’t measure. That certainly applies to how managers are scrutinizing today’s operations. Effective KPI measurement gives management the tools/information they need to (1) set goals for continual improvement, (2) establish early warnings about potential problems or failures that would affect target goals, (3) develop effective customer messaging about service levels and (4) produce the added information a PRW might need to document its strategic goals and financial performance.
R&FF: What have been a few industry’s KPI’s? Are those key measurement areas changing?
Metzger: Based on interviews with PRW executives – and my own experiences – I’d say the industry standards have been labor and productivity, space utilization, energy management, safety and human resources (employee turnover and retention).
However, there are additional areas that are relatively new and of increasing importance. These include employee utilization (asking, “What percentage of a shift is an employee actually working productively?”), revenue, inventory accuracy, claims and maintenance.
R&FF: KPI references are creeping into broader supply chain discussions. Is that true? Why?
Metzger: Yes. I’ve spent most of my career on the customer side – both as a manufacturer and later, a retailer. When it comes to 3PL providers, the expectation is that they are an extension of the shipper. That said, I’ll note expectations are higher than ever for outstanding performance. A 3PL must meet or exceed the agreed standards.
We are in a choppy economy and are likely to remain so for some time. For that reason, shippers are more focused on their return on assets – i.e., inventory levels and turns. Third-party warehouses that can support improved inventory velocity are well positioned and well regarded by shippers.
Examples here would include operations that (1) can handle shorter lead times for orders and delivery appointments, (2) ensure shorter transit times to customers, (3) offer effective backhaul, pool, and consolidation programs. Third parties that can execute well in these areas consistently will be better positioned and have a distinct competitive advantage.
R&FF: How, exactly, are KPI’s fitting into customer-supplier talks?
Metzger: KPI’s always have always been important within a PRW organization and the larger community. However, there is a growing conversation and a need for consistent, even definitions related to internal operations and financial performance. The companies need this to effectively benchmark themselves against the industry and competitors. If everyone is applies different measures to labor, occupancy, energy, etc., how can any organization know how it’s doing against competition and the industry?
Meanwhile, with the recession hurting sales, shippers find it more difficult to hit internal revenue and profit targets. As a result, they look for every edge they can find – including a 3PL partner who can support improved ROA through increased inventory turns and more accurate inventory data. That’s why KPI’s are being pushed into the foreground. Shippers’ expectations are higher and both sides are talking in terms of KPIs to measure PRW performance on a timely basis.
R&FF: To your earlier point, how are KPI areas evolving?
Metzger: The KPI’s that a PRW will share with his shipper have become more defined and now actual performance is a prerequisite for doing business. Today’s focus is on inventory accuracy, order accuracy, transportation performance and reducing required lead times. Within a facility’s four walls, operational KPI's now include more HR-related KPI’s. These involve employee retention and turnover as well as measurements against revenue targets.
R&FF: Do you see warehouse KPIs becoming much more detailed?
Metzger: To a degree. However, as with all things, most companies are data rich and information poor. Ultimately, generating large amounts of data is not important. What is important is to generate the right data and use that data effectively.
Most great companies follow the “KISS” theory. This helps them get their organizations – and partners – effectively focused on those KPI's. Otherwise, there is a tipping point. If you’re analyzing too many areas at such a micro level, it leads to an inability to react and create useful outputs from it.
A 34-year food industry veteran, John Metzger is now the owner and principal of Supply Chain & Technology Transformation, Doylestown, Pa. His resume includes senior management positions with Nabisco, General Mills, CS Integrated LLC (ProLogis Trust) and The Great Atlantic & Pacific Tea Company.
In 2007, he left A&P to start his own consulting practice. Today, he also serves as a visiting professor at Pennsylvania State University’s Center for Supply Chain Research-Smeal College of Business. Readers may contact him at (201) 838-1046 or visit www.supplychaintechnologytransformation.com
A member of the Global Cold Chain Alliance, the International Association of Refrigerated Warehouses, Alexandria, Va., is a worldwide association representing public refrigerated warehouse operators. Readers may learn more about the groups by visiting www.iarw.org or www.gcca.org.