As the saying goes, "What gets measured, gets managed"—meaning, if you want to improve a particular activity, you first need a way to gauge its performance.
Logistics is no exception. A vital part of a company's business, logistics can have a profound impact on an organization's operations, not to mention its overall health. That's why logistics measurement is so important.
Best-in-class logistics metrics help identify and quantify the impact and value that logistics delivers to an organization's profitability, margin, and competitive positioning. Additionally, the most effective metrics will identify the true cost to serve customers and highlight any opportunities to take cost and complexity out to boost the value of customer relationships. And they empower logistics employees: If employees know they're being measured (and rewarded appropriately), they're more likely to make decisions that favorably affect the business.
But if logistics measurement is so important, why do so many companies struggle to define, implement, and use the right metrics? For many companies, there's still a disconnect between the C-suite and logistics. Logistics professionals often don't know about or aren't participating in the strategic discussions taking place among the board, CEO, and CFO. Thus, they effectively fly blind, trying to measure things that may not necessarily contribute to achieving the top objectives that are the subject of those discussions. There's also the challenge of translating logistics' actions, processes, and strategies into the financial terms and concepts of the C-suite.
The bottom line is, for logistics metrics to be effective, they first must be aligned with a company's corporate vision. Answers to three key questions can help establish that alignment:
What are the top three corporate or organizational priorities as defined by senior leadership? The logistics function can't demonstrate the true value it brings to the table if it doesn't know what the company is trying to achieve. Understanding the company's top strategic objectives will enable logistics to define and use metrics that can quantify the function's higher-level strategic value, instead of those that simply gauge performance within the logistics silo.
What could make it difficult for the company to achieve its primary business objectives—and, thus, affect what the business needs from the logistics organization? Things happen: Business conditions can change, trends can develop, and new obstacles or challenges can emerge. Logistics has to be flexible enough to modify its metrics to accommodate a change in business priorities driven by factors outside its control.
How can logistics continue to favorably impact (either directly or indirectly) the P&L and the balance sheet? At the end of the day, logistics must be able to say how its activities affect the company's overall financial performance. Doing so is impossible without the right metrics.
But alignment with the business is just the beginning. To be truly effective, logistics metrics must embody 10 distinct characteristics:
- Quantitative: Measures must provide an objective value of performance and improvement.
- Strategic: The sum of all performance metrics in an organization tells the story of the organization's strategy.
- Simple:Employees must know what is being measured, how it is calculated, what the targets are, how incentives work, and what they can do to positively affect the outcome.
- Correlated: Performance metrics must be structured to drive desired outcomes and they must be consistently refreshed to remain relevant.
- Owned: Every performance metric needs an owner who is held accountable for its outcome.
- Actionable: Measures must empower employees to take action. There's no purpose in measuring an activity if users cannot change the outcome.
- Timely: Metrics should be updated frequently enough so that accountable individuals or teams can intervene to improve performance before it is too late.
- Measure only what is important: Measures must focus on key aspects of process performance.
- Can be collected economically: The processes and activities being measured must be designed to easily and cost-effectively capture the relevant information.
- Accurate: Companies should avoid creating metrics based on suspect source data.
The logistics function has enormous potential to positively affect the company's top and bottom lines. But tapping into that potential requires measuring what's most relevant to the goals the larger enterprise is trying to achieve. With the right metrics, logistics professionals are in a better position to improve the aspects of logistics performance that truly matter.