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We continue our series on understanding the 3PL KPIs (Key performance indicators) from 3PL consultant, Chuck Intrieri of The Lean Supply Chain as it relates to the engagement with a 3PL. We began our series first writing about the 9 key broad and somewhat soft topics to understand in effective KPI Management.

Today we will first point out on a deeper level strategic performance business practices that you may conduct in order to better track 3PL KPIs. Then we will go to explaining some common problems around KPIs in general in order to comprehend the need for effective performance measures.

7 Strategic Performance Business Practices to Provide the Ability to Manage 3PL KPIs

Strategic Business Planning

Sales, Inventory, and Production Planning (SIOP) should be used for business planning and strategy in the shipper, 3PL relationship. Planning and risk management is imperative.

Performance Management/Measurement Management

The logistics service level agreement and Quarterly Business Review (QBR) should be detailed with specific 3PL KPIs. Here are a few KPIs you could consider:

  • Customer Service Performance %,
  • Quality Assurance %,
  • Turn Around Time %,
  • Hours/days to customer,
  • Cost Reduction goal for both the 3PL and the shipper/customer,
  • Process Improvement shared %,
  • Voice of the Customer (VoC): negative or positive,
  • Safety/OSHA performance/reviews/audits/feedback analysis,
  • QBR: Freight Optimization Improvement % via the Transportation Management System (TMS),
  • and Fuel Surcharge (FSC) Management

Performance Appraisal/Review System

Frequent 3PL KPIs reviews will detail performance appraisal of each KPI set by the 3PL and shipper/customer. Are they meeting all of their goals? What is lacking? Scorecard analysis, % to all goals, and critical path: “What KPI is holding us back from overall success? Are we improving? If not, why not? Action plan to correct 3PL KPIs which are meeting mutually set goals.

Communication System: Measure all Systems

IT Systems, EDI, Phone, e-mail or face-to-face visit are necessary to use for effective communication in meeting KPIs.

Processing/Technical System

There must be some of the 3PL KPIs for I.T. systems. KPIs are reviewed to ensure the IT SLA/KPI is effective for both parties.

KPI Program Positive Reinforcement

Recognition and Remuneration System: When 3PL KPIs are met or exceeded recognition should be given to both partners. Remuneration comes from the TMS System Optimization. At times, both parties agree to remuneration for Kaizen Blitz events, Six Sigma problem solving. Process improvements and Continuous Improvement Opportunities.

Strategic Human Resource Development System

Both parties must develop human resources to improve operations. Human Resources should be trained for continuous improvement. With LEAN initative implementation, human resources become process and problem solvers.

Comprehend The Need For Effective Performance Measures & 4 KPI Problems to Solve

3PL KPIs are necessary to measure the performance of all areas set by the two partners. IT performance is critical and ongoing 24/7. Six Sigma Quality and problem solving are necessary for Continuous Improvement. Without KPIs, nothing is being measured and nothing will improve. 

It’s no surprise that Key Performance Indicators are difficult to set up and manage. The underlying issue is not the KPIs themselves. Once 3PL KPIs are set, most employees know what they need to do in order to achieve their critical success factors . The problems with KPIs are:

Problem 1: KPIs are written in a language which allows people to challenge the system and avoid the intent of the KPI. The impact is that employees get paid their bonuses, but the organization doesn’t perform any better and can even perform worse.

Solution 1: This can be significantly improved by engaging a consulting team to review existing KPIs and recommend changes. Consultants have a method which will align the KPI’s with the strategy of the organization, while protecting the intent an employee performance.

Problem 2: The reasons for needing a particular Key Performance Indicator are never adequately understood by the workforce. The impact is that employees work hard to achieve goals for which they don’t have any context or meaning. In the absence of context, employees don’t know “Why?” they need to achieve their KPIs and their work effort is often misdirected or misaligned. At the performance review employees think they have done excellent work but their manager gives them a low rating at their annual appraisal.

Solution 2: Helping managers and employees to understand the meaning of their KPIs is conducted through workshops run by a logistics service provider. The workshops are consistently rated highly by all participants and helps them to understand why the KPI’s should matter to them.

When employees struggle to achieve the KPIs, managers and executives are challenged to understand the reason for difficulties in achieving those KPIs.

Problem 3: The reasoning behind the 3PL KPIs themselves is not analyzed properly by the executive and management teams. This does not sit well but is prevalent in 90% of organizations. Often, Key Performance Indicators are set without understanding their true impact on the organization. The impacts of actually achieving the KPIs are not connected to the organization strategy and the original intent of the KPI is not achieved.

Solution 3: A consultant has partnered with a KPI Analyst. There is software called eMonstro, which helps managers to analyze KPIs and determine whether the intended impact on the organization is the same as the reason the KPI was created. This enhances the decision-making capability of the manager by using evidence-based data the manager does not have ready access to. EMonstro is used to map intended impacts versus actual impacts for that KPI. This service is provided as a consultation and eMonstro software license.

Problem 4: If Key Performance Indicators have been established effectively, it should be possible to predict and quantify the impact on the organization. For example, if the organization needs to improve customer service, should the KPI be set for training existing service consultants or hiring new consultants with a different job profile or preventing the best consultants from leaving by better engaging them and setting up a career plan. All three initiatives have an impact but few organizations understand which of the three impacts will directly affect customer service.

Solution 4: Software, like eMonstro, for instance, has been designed to predict the true impact of a KPI on the organization. This requires behavioral analysis, which can only be conducted by a seasoned organizational psychologist. By combining effective KPIs with correlated outcomes, the software is then able to predict how much of a particular intervention is required to achieve the required level of the KPI. The software is set up once to suit your organization and KPIs and then allows you to use it to manage your KPIs more effectively.

How are you working with your third party logistics and your own organization to better monitor the 3PL KPIs you’ve set in place? Have you set any 3PL KPIs when engaging with a 3PL? Are they helping you lead the way? Let us know in the comments below!