Supply Chain Management

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An 8-Step Strategy for Effective KPI Development and Implementation

From Chaos to Clarity

www.ohl.com or 877-401-6400

Introduction
Intelligent decisions require quality information. All information should be judged according to five criteria: relevance, accuracy, timeliness, clarity, and visibility. Deficiencies in any of these areas will weaken the decisionmaking process. Ensuring the quality of information is critical for effective supply chain management. Unfortunately, the complexity of the task intimidates many companies into settling for inefficiencies and inaccuracies. As a result, decisions are based on Key Performance Indicators (KPIs) that can be ambiguous, imprecise or even incorrect. A KPI is only as reliable as the information on which it is based. However, there are numerous barriers to extracting quality data for KPIs. Too often information exists in a state of chaos. Data is recorded in different forms in different departments using different software. Calculating a particular KPI might require data from the general ledger, warehouse management system (WMS), enterprise resource planning (ERP) system, a third-party logistics (3PL) partner, and other disparate sources. Adding to the chaos, the data in different systems often will not agree. Achieving clarity is not easy, but the advantages are both extensive and substantial. Effective KPIs strengthen supply chain management in three ways. First, they help identify weaknesses within the supply chain where corrective action is required. Second, they illuminate best practices that can be replicated elsewhere in the supply chain for improved performance. Third, they help evaluate the efficiency of outside agencies and business partners who provide services to the company. No company operates at perfect efficiency. Improvements in supply chain management can result in tens of millions of dollars in annual savings, if the company has the tools to make effective decisions. OHL has developed a comprehensive eight-step strategy to achieve effective KPIs—from development and implementation to evaluation and continuous improvement.

Step #1 Create a SCoreCard team The purpose of a scorecard team is to establish a common set of definitions for all necessary data and help facilitate the eight processes. For example, what constitutes “on-time delivery”? Is a product considered “delivered” as soon as it arrives at your customer’s warehouse or only after it is entered into the customer’s ERP system? Until a common definition is established, each department may record information differently, resulting in multiple values for the same variable. Thus, KPI calculations will differ based on the source of the data. In order for KPIs to be reliable, everyone must use the same value for the same term. The scorecard team can achieve this goal only with the cooperation and buy-in of the entire company. Therefore, the team should include representatives from departments including logistics, sales, customer service, finance, and distribution. Remember, each department defines its data in a particular way for a reason, and they will be reluctant to change if they feel their needs were not respected or addressed.

Step #2 eStabliSh a data SChedule After establishing enterprise-wide definitions for all data, the scorecard team’s new job is to decide how often data should be reported. Timeframes will vary according to the metric and the company. Inventory numbers, for example, may need to be updated daily, weekly or monthly depending on the fulfillment strategy of the company. At this point, the scorecard team is responsible for developing an idealized timeline for data gathering. All recommendations should be in line with the company’s needs rather than its limitations. Practical considerations will be addressed at the end of step three. Also, please note that step two should be revisited periodically to ensure that data reporting schedules continue to meet the needs of all...
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