Metrics That Matter: Set Up Your 3PFs With the Right KPI Structure

Published : August 9, 2016

Metrics That Matter: Set Up Your 3PFs With the Right KPI Structure

When outsourcing a vital operational task like fulfillment, the hiring company should always provide clear guidelines and KPIs to ensure things run smoothly even without direct, real-time supervision. Typically, 3PF and 3PL partnerships are initially created due to constraints — desired results that the original business lacks the time, effort or intrinsic resources to provide — which means that relative autonomy is an important facet. If service providers need to constantly stay in contact to verify and course-correct, any resource savings are whittled away. KPIs act as silent sentinels, giving outsourced teams an "instruction manual" in the form of concrete supply chain metrics and goals.

So, what should you include in these crucial guidelines? Start with these.

Start by Demanding Visibility

No matter what KPIs you end up incorporating, if your supply chain partners aren't sharing information, those goals become static numbers without any connection to day-to-day operations. 72% of companies surveyed in a recent Supply Management poll admitted that their visibility halts entirely after the second layer of suppliers in their supply chains. Given these numbers, it's reasonable to assume your own company might be making the same mistakes — at least in part. While it isn't always feasible, your products and components should be tracked back to raw materials as often as possible as a standard. This will not only inform and support your KPI-setting, but also provide necessary information for important crisis events like recalls and post-recall public relations.

Transparency in your supply chain metrics, whether you're handling all aspects of operations internally or working with third party providers, improves nearly every aspect of fulfillment. When it is a required part of your processes, and organized accordingly, you'll never be caught flat-footed by a shortage again, nor will you miss a valuable opportunity to take advantage of a surplus or promotion.

The supply chain metrics that matter to your operational teams are derived directly from this transparency, and other company departments, like sales, depend on accurate, up-to-date information to design customer outreach and marketing campaigns. While change can be disruptive, if your current suppliers are reluctant to agree to transparency, or greater transparency, it could signal a need to pursue other supplier options for that component or product.

Determine a Chain-Wide Data Sharing Solution

The data that feeds KPIs is usually very sensitive and often proprietary, so it must be safeguarded accordingly. Unfortunately, the old adage about "herding cats" is accurate when it comes to asking all of your suppliers to follow the same reporting protocol. Even the biggest companies struggle to get multiple layers of supply chain partners on the same page. An easy way to avoid a lot of headaches is to design and implement your own data-collecting solution that suppliers can quickly upload relevant data into. The key is to make sure it's user-friendly, secure and fast. If you make this solution the hub, you can position it as a requirement for partnership from the negotiating table onwards, and thus it becomes as routine as other familiar fulfillment-based behaviors, such as customized invoices or branded shipping materials.

In an article for MIT Sloan Management Review, Michael Hu and Sean T. Monahan describe the emergence of joint-creation data "clean rooms" to satisfy this solution need, noting that the security offered is just as important for legal coverage as it is for data collection. When you know that your own data exchange solution is need-to-know and secure against corporate spies, if a data leak occurs, you can track down the breach much more quickly and determine if a supplier is in breach of confidence. 

Collect Everything You Can

Today, automation in data collection is sometimes as simple as a digital on/off switch, well divorced from the "long hand" process of recording and reporting that used to dominate the field. You and your 3PF partners should always keep these switches turned on, even if you don't anticipate using the data in their current operational setup. Simply put, data directly supports scalability, and in the hands of the right miners and interpreters, it can transform into a stable roadmap for growth.

Collectively, data is also an excellent way to pinpoint and remove problems in the supply chain that slow down fulfillment, which in turn damages customer perception and, eventually, sales. Even seemingly inconsequential issues might be linked — a discovery, for example, that the majority of customer complaints come from states or countries with high temperatures could signal a need for insulated packaging. Likewise, this information can also help you narrow down the source of faulty components in a multi-provider supply chain scenario.

Collecting this wide scope of data is one of the main resources that facilitates informed business decisions and strategic calls. In a company where C-Suite executives might not "speak fulfillment," these data points provide a universal language that's easy to understand: X is the benchmark. Y is the YTD performance. Z is performance this quarter. Goals and challenges can be spoken in numerical form, preventing miscommunication and securing support and budget funding with minimal confusion. Additionally, if a company decides to pivot and offer drastically different products, or move to a new sales model, the vault of data collected over time can be mined to determine commonalities in best performance periods to bring back to the drawing board.

Start Research at Your Pain Points

Name something that your company does poorly, that proverbial thorn in the side of efficiency. Chances are you've reported on it and on how well or poorly the improvement effort is going, but have you determined the source yet? KPIs are often focused on broad numbers — orders received, speed of pick/pack, customer returns — but in some cases, granular examination can be just as illuminating. In these cases, it can be helpful to work backward in concentric circles to find the root of the problem, then tie an ongoing KPI to that source, rather than using supply chain metrics against overall end-stage performance.

If a fill shortfall originated with a supply chain partner's supplier, tracking the performance of your supply chain partner won't do much good for improvement. Data builds accuracy, and accuracy is an absolute must when setting KPIs that will actually matter. If you zoom too far out, you won't see the real problems holding your supply chain back, and efficiency is just as likely to happen by chance as it is by planning.

Tracking down problems through the right data can also prevent needless scrutiny of inter-company or 3PF processes and ensure that trust and communication stay intact in your closest business relationships. Regardless of your industry, no one likes to be blamed for problems they didn't create, and they especially don't like to be subjected to ongoing monitoring under that same false assumption. With this in mind, using your pain points as a target for research is not only accurate, it's good business as well. There are few more accurate ways to gauge the performance of your supplier. With neutral numbers on the table, there's no semantics to muddle the message or explanations during negotiations.

As a fulfillment or procurement professional, you have a lot to consider when it comes to making your company the best it can be. Supply chain metrics are part of that decision-making process, but KPIs help you delegate some of that burden in a fair, balanced initiative. Make sure that your supply chain partners are provided KPIs that enable success by following these guidelines. The supply chain metrics that matter to you need to be the same measurements that your entire supply chain uses, and carefully-structured key performance indicators help standardize these expectations.

Logistics Managers Guide

Topics: Supply Chain Logistics

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