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Making Good Use of Logistics KPI

Logistics KPI or key performance indicators can help managers develop strategies and make decisions that will positively impact any organizationís logistics. This article discusses the KPI concept and its application to logistics.

Strategic management thrives on quantification and measurement. This approach started off strictly in the financial aspect of things: costs versus profits, supply versus demand, and so on. As management techniques evolved, the use of measurable parameters, known as metrics, and the most important of which are known as key performance indicators, became more commonplace. This objective, measurement based approach also gradually spread to encompass nearly all aspects of organizational performance.

Key performance indicators are carefully selected parameters that allow managers to obtain an objective grasp of their organization's condition and performance. By their nature, these indicators are specific to whatever aspect of the organization's performance is under consideration. This is because, naturally, different parameters are involved in there different aspects.

For instance, on the financial side of matters, what is important are cash flows, profit margins, and total costs. On the customer service side, however, customer satisfaction metrics such as percentage of return customers become more prominent. It can be seen how the KPI concept is very flexible, and potentially very useful.

Now, logistics is an important aspect of many organizations, especially manufacturers, suppliers, and retailers. Logistics deals with handling the flow of raw materials, in-process items, and products from suppliers to consumers. The exact components of the logistics process will vary from organization to organization, but there are some commonly accepted key performance indicators enumerated below.

Cycle times such as manufacturing cycle time, purchasing cycle time, customer order promised and actual cycle times are of course important. These measure how quickly the various steps in the logistics process are completed. Usually, the management goal is to make these cycle times as quick as is reasonable - the different cycle times have to be coordinated for their respective processes to work well together.

DPMO stands for defects per million opportunities, and represents an important performance indicator in manufacturing processes. The critical issue here is to be able to appropriately identify what exactly constitutes a defect. Some "defects" may barely have an effect on the end-product, while others may call for reworking or even scrapping. Once the defect threshold has been set, measurement becomes possible. Once again the goal is to be able to reduce the DPMO to a tolerable level, usually anywhere from 3 to 5 DPMO.

Some financial logistics KPI include gross margin return on inventory, inventory carrying rate, and inventory carrying costs. These indicators can help ensure that the logistics process is not running at a loss, and is as cost-efficient as possible.

There are many other possible key performance indicators to help quantify and subsequently manage organizational logistics. But apart from simply measuring performance, what is helpful is to benchmark, or to compare KPI's with similar organizations. In this manner, managers get a clear idea of how other companies are faring, and how their own company is doing in comparison. This can then provide impetus for necessary changes, in order for the company to become more competitive. The proper use of logistics KPI's, among other KPI'sArticle Search, can mean the difference between a struggling business and a successful one.

Article Tags: Performance Indicators, Logistics Process, Cycle Times

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