How do corporate executives and company managers decide upon their organization’s achievements? An informed and well-balanced decision-making is crucial for each company as it moves towards its strategic, operational, and financial goals. Without measuring its progress and comparing it with those of similar organizations, any organization would lose its focus and soon lose out to competitors.
The performance of an organization that can be quantified and measured are known as Key Performance Indicators or simply KPI. These are the key business metrics that are used to monitor and analyze a company’s performance over a certain period. This period could be daily, weekly, fortnightly, monthly, or even annually depending on the nature of the business or the metric being tracked.
The KPI that are measured as well as the period of reporting KPI should be decided after due consideration by the company management and stakeholders. This is so that meaningful and easily comparable data is available for analysis and further action.
Comparing the KPI of a company with standards of similar leading and successful organizations is known as benchmarking. A benchmark is a reference against which an organization’s performance can be compared. It is also referred to as a ‘target’ that an organization aims to achieve.
Several different KPIs are used these days by organizations to measure their performance and see where they stand among competitors.
Here, let us take a quick look at the key performance indicators that are generally used by logistics companies with basic examples.
- Profit Margin
- Customer Fill Rate
- Receivable Days
- Supplier Purchase Order Turn-around
- Supplier Purchase Order Fill Rate
- Stock Days/Stock Ageing
- MHE Down-time
Typically, sales KPI is shown as a percentage. It is the actual sales value for the KPI period that is compared with a set target for the same period. The KPI percentage shows the actual sales achieved for the period against the target. The sales target is usually set to a high 100%.
Sales KPI = Total sales value for period / Sales value target %
Sales value = 10,000,000
Sales value target = 15,000,000
Sales KPI = 10,000,000 / 15,000,000 %
KPI = 66.66%
The profit margin KPI shows the profit on the sale of products. In other words, it is the profit that the company has made over and above its cost of products sold and the set margin percentage.
Profit Margin KPI = Total sales value – Cost of sales value / Total sales value %
Sales value = 10,000,000
Cost of sales value = 4,000,000
Profit Margin KPI = (10,000,000 – 4,000,000) / 10,000,000 %
KPI = 60%
Customer Fill Rate
A customer fill rate shows the quantity ordered by the customer and the same delivered to it by the logistics company. When stocks are not available, this KPI will naturally reflect a low percentage and serves as a wake-up call to the organization to increase their stock holding or take other measures to ensure the availability of stocks.
Customer Fill Rate KPI = Actual delivered quantity / Customer order quantity
Customer order quantity = 100
Actual delivered quantity = 90
Customer Fill Rate KPI = 90 / 100 %
KPI = 90%
Receivable Days KPI shows the days taken to receive payment from a customer. The target set for receivable days varies between companies and depends on each company’s finance policies.
Generally, higher figures indicate more number of days to collect payments from customers and vice-versa. Sometimes the company’s financial policies may need some tweaking based on this KPI. Receivable days is also called accounts receivables or simply AR.
Receivable Days KPI = Total annual sales value / Total annual receivables X 365 days
Total annual sales value = 12,000,000
Total annual receivables (outstanding) = 900,000
Accounts Receivable Days KPI = (12,000,000 / 900,000) x 365
KPI = 48.66 days
Supplier Purchase Order Turn-around (SPOT)
Supplier Purchase Order Turn-around is the total time taken between submitting a purchase order to the supplier and its arrival at the ordering organization’s warehouse or the preferred location. SPOT may be calculated from when a purchase order is keyed into the system when it is approved for submission, or from when the purchase order is actually transmitted to the supplier.
In some cases, this KPI is also referred to as the Purchase Order Lead Time or POLT. Monitoring this KPI and taking the appropriate actions based on it is crucial to avoid running out of stocks.
SPOT KPI = Date of placing purchase order – Date of receipt of goods at ordering warehouse
Date of placing purchase order = 22-Dec-2021
Date of receipt of goods at ordering warehouse = 5-Jan-2022
KPI = 14 days
Supplier Purchase Order Fill Rate (SPOFR)
Similar to the customer fill rate, the SPOFR shows the quantity ordered by the customer and what is actually dispatched and delivered to it by the supplier. Consistently lower SPOFR means looking for alternate suppliers or ordering in larger quantities when stocks are available.
SPOFR KPI = (Actual quantity delivered to ordering warehouse by supplier / Quantity ordered) %
Actual quantity delivered to ordering warehouse by = 90
Quantity ordered = 100
SPOFR KPI = 90 / 100 %
KPI = 90%
No company would want to hold on to stocks for a lengthy period. The efficiency in placing purchase orders with suppliers and upon receipt, converting it into customer sales is what is measured by the stock days KPI. The longer stocks are stored in a warehouse the more money that is tied up on this non-moving inventory.
Stock days show the number of days an organization holds inventory before it is sold or dispatched to the customer. Stock days can go up either when the sales performance of a company is low or when excess purchases have been made. The danger here is that stocks thus stored can go past their best-before date (BBD) or even deteriorate, making them unfit for sale.
Stock ageing is an immediate fallout of higher stock days. Regular and frequent monitoring of a company’s stock ageing report and taking the necessary steps to move them is crucial to avoid near-expiry or expired stocks.
Stock Days KPI = (Cost of average inventory / Cost of goods sold) X 365 days
Cost of average inventory = 900,000
Cost of goods sold =9,000,000
Stock Days KPI = 900,000 / 9,000,000 x 365
KPI = 36.5 days
Material Handling Equipment (MHE) are those machines that are used in logistics operations for the handling, transport, and storage of goods. A breakdown of any equipment can result in loss to the company by way of repairs as well as lost sales when there is no backup equipment.
Measuring and analyzing the company’s MHE downtime is therefore quite important so that the management can take steps to prevent frequent breakdowns. Ideally, all MHE should be up and running 100% of the time.
MHE downtime KPI = MHE down days / 365 days %
MHE down days = 2 days
MHE downtime KPI = 2 / 365 %
KPI = 0.55%
Besides the KPIs shown above, different companies may have specialized KPI to suit their requirements. Specialized and focused KPIs that measure profit margins, picking accuracy, customer satisfaction, customer retention, and various other processes help management take appropriate decisions for the successful running of the company.
Typically, modern organizations measure KPI using business analytics software and reporting tools.
The formulas shown above are very basic and different organizations may have their own way of calculating KPIs to suit their requirements.
Some Limitations of Key Performance Indicators
KPIs are not without limitations.
In some cases, the management or the stakeholders may get overly ‘obsessed’ with key performance indicators. Their effort at achieving a target may be at the expense of quality.
The benchmarks or targets that are fixed have to be realistic. Failing this, the KPI will not reflect a meaningful picture and can result in widespread disillusionment within the organization.
KPIs have to be measured and recorded over a period of say, at least two to three years, to be able to compare and record trends and patterns. They have to be monitored regularly and anomalies if any, corrected.
Sometimes the sheer effort required to collate data and prepare a comprehensive KPI can be overwhelming for the staff preparing it. This is especially the case in the absence of modern business analytics software and reporting tools with the company.
A sample KPI report is given below:
As long as an organization’s KPIs are defined clearly without any ambiguity, and the data for this obtained easily, it can be immensely helpful in guiding the company towards its goals.
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Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendations on any course of action to be followed by the reader.
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Hari Menon is a Freelance writer with close to 20 years of professional experience in Logistics, Warehousing, Supply chain, and Contracts administration. An avid fitness freak, and bibliophile, he loves travelling too.