The importance of KPIs in logistics

Calculating a company’s cost base involves a whole range of typical key costs such as raw material, manufacturing, personnel and marketing. The cost of associated logistics processes will also have a significant influence on a company’s cost base so it’s important to consider how best to measure these costs. Every company has an interest in keeping logistics costs as low as possible and Key Performance Indicators for purchasing, warehousing, and transport enable these costs to be understood. With relevant Key Performance Indicators (KPIs), the performance of logistics processes or even the entire supply chain can be continuously monitored, analysed and optimised. In this process, performance usually has four measurements: time, cost, productivity and service quality. If any of these metrics are out of control, then it is imperative to intervene quickly to save the company from greater negative impact. The key performance indicators for the supply chain and logistics in companies are often displayed and monitored in real time via software solutions.

If a process has a measurable KPI, it can be used to optimise that process. A process can be observed over time with the help of the KPI and the corresponding data documented and compared. The indicators are also used for strategic decision making. They form the basis for investment decisions, ROI calculation, risk assessments and cost-benefit analysis. In logistics, the general aim is to achieve fast and cost-effective delivery capability, high quality processing and minimal capital commitment (reduction of costs). That general aim can be achieved through faster throughput of goods and lower inventories, which will require decisions on the scale and level of automation that a business can adopt.

As well as influencing future investment decisions, KPIs offer the possibility of monitoring a company‘s current performance in its day to day operation and giving indications of whether targets are being met.

Transportation, or freight, costs as a percentage of overall turnover is a fundamental calculation that all companies should be making. What is the level of reliability offered by the current provider? If an in-house fleet is used, what is its current utilisation and capacity? Is the service provided for the expensive "last mile" to the customer acceptable and in line with the general service commitments of the company? These are all important questions and measurable KPIs can help answer them.

Example freight KPIs:

Freight costs KPI = Total transport costs/ turnover

Delivery reliability KPI = number of on-time deliveries / total number of deliveries

Fleet utilisation KPI = capacity used / total capacity [m3 or kg].

Typical key measurements in the area of storage & picking are below.

Storage costs KPI = Total storage costs/ nominal capacity x occupancy rate

Inventory turnover KPI = cost of goods sold/ average inventory at cost price. A low inventory turnover indicates excess stock or potentially a long lead time for new stock replenishment

Adherence to inbound schedules KPI = number of on-time goods receipts / total number of goods receipts.

Incorrect orders KPI = incorrect orders/ total number of orders

Measuring a supplier‘s delivery performance gives an indication of how effectively a supplier is working and the lead time required for purchased goods to arrive in the warehouse. As the performance improves, the confidence in the supplier increases and they potentially gain more business.

Supplier performance rate KPI = orders received late/ total number of orders received

Lead time of purchase order KPI = average time from date of purchase order receipt to the delivery date

The lead time for an order is a key figure in the calculation of how much inventory is required in stock

On time in full delivery KPI = number of on time in full (OTIF) deliveries/total deliveries

Failed deliveries KPI = total orders rejected/total orders shipped 

With the increasing digitalisation of the supply chain, it has become much easier to obtain relevant data, analyse them and take appropriate measures for improvement. The main motives for data collection are optimising the supply chain, reducing logistics costs and improving customer satisfaction. There is now software for each area of the supply chain to determine appropriate performance metrics.

In warehousing, warehouse management systems (WMS) play a crucial role in monitoring key performance indicators. They provide real-time information about inventory in the warehouse, where it is coming from, exactly where it is located, and what movements are taking place. The speed and accuracy of the picking processes are checked on the basis of specific tasks and assigned picking times. The WMS can also determine the performance of employees through assigned tasks and goals. Some WMS offer the possibility to analyse and evaluate the entire supply chain. A corresponding module provides key performance indicators of the connected logistics processes.

Sometimes so-called control stations are connected to the ERP system or WMS to receive data and information and to visually display current situations, states and processes. Dashboards and real-time data can display where bottlenecks are currently occurring and where targets for goals cannot be met. Measures and targets for employees can be derived directly from this.

As a warehouse stiorage & picking specialist, BITO helps to increase the efficiency of warehouse processes, increase stock throughput times and reduce operating and logistics costs. In consultation with the customer, concepts for the appropriate storage and order picking system are developed to maximise the performance of the customer‘s warehouse and logistics operation.

Literature:

KPI Logistics - Which are the most important key figures in logistics?, Freighfinders, Berlin, Link 

Key Performance Indicators in Logistics (KPIs) Tools for Efficient Logistics Controlling, IGZ Blog, Falkenberg, Link 

Kutzsch Kathrin, Important Key Figures in Logistics These KPIs You Should Know, August 2020, Salt Solutions, Link 

The best logistics key figures & KPIs at a glance, Datapine, Berlin, Link