Editor’s Note: As of late you may have noticed we have written a lot about procurement and the future of procurement. A large part of procurement is finalizing the contract and then the follow through of the determined deliverables in that agreement. How do you know you are getting what you paid for? Are you holding your service providers and vendors accountable to specific KPIs? The next step in procurement is then managing vendors and keeping service providers accountable for continued improvement. This is the first post in an ongoing series on effective KPI management from third party logistics consultant, Chuck Intrieri, of The Lean Supply Chain.
What is a Service Level Agreement (SLA)? How does an SLA work with Key Performance Indicators (KPIs)?
A service-level agreement (SLA) is a contract between a logistics service provider and a customer that specifies, usually in measurable terms, what services the logistics service provider will furnish. Many logistics service providers will provide their customers with an SLA. More recently, logistics departments in major companies have adopted the idea of writing a service level agreement so that services for their customers (users in other departments within the company) can be measured, justified, and perhaps compared with those of outsourcing network providers.
Some examples of basic metrics or Key Performance Indicators (KPIs) that SLAs may specify include:
• IT agreements: Customization/Integration
• Bar coding/RFID/Voice Activation Systems
• Slotting and re-slotting
• Inventory Records Accuracy
• Quality Assurance upon receipt
• Returned Merchandise Authorization (RMA)
• Continuous Improvement
• Mutual Inventory Management/increase turns/
• Cost Reduction agreements
• Implementation of Lean initiatives to increase throughput to customers
• Six Sigma: Voice of the Customer (VOC) feedback/Customer Service
There are many more KPIs that can be added to this basic SLA agreement. The more KPIs, the more difficult the negotiation process. It can take months to negotiate a complex SLA/KPI document, as you go back and forth with your logistics provider so the document becomes a “win-win” for both parties.
After the SLA/KPI is an approved document by both the customer and logistics provider, this document and its contents need to be reviewed monthly to begin with, and quarterly thereafter.
9 Key Topics to Understand to Frame A Shipper’s Mind for Effective KPI Management
Effective KPI management starts with some key areas to have both parties understand. These are core principles which will guide the rest of the more detailed and statistical KPIs found in the SLA. Here are the 9 key topics to understand in the relationsihp between the shipper and the 3PL.
To be unified is to collaborate and trust the shipper/customer Third Party Logistics Service Provider (3PL) relationship. The partners have to work in the spirit of cooperation. It has to be a “win-win” partnership. There has to be give and take. Adversarial relationships do not work.
The organizations have to be set up for very effective, clear communication. In the case of a serious problem, accountabilities/responsibilities and names have to be in place for both parties. If either partner has a serious problem, or the point person can’t answer the question, the organizational ladder has to be in place: who do I contact next?
Outputs and measures are put into a Service Level Agreement (SLA) with mutually agreed upon win-win, effective Key Performance Indicators (KPIs).
All KPIS have a target percentage to meet. For example: Inventory Record Accuracy has to be 98-100% accurate daily. All KPIS have metrics to measure.
Effective KPI Management Requires Periodic SLA/KPI Review
Feedback: As frequently as possible, and at least monthly, both parties have to review the SLA/KPI document to establish where they are on the win-win partnership targets set by both parties.
Communication Is The Critical Path To Success
Communication should be daily by the customer/shipper project leader/point person of the shipper, and the project leader/point person of the 3PL. Both partners should have their respective Table of Organization (TO) in front of them with all pertinent names, e-mail addresses and cell phone numbers for easy access
Effective KPI Management Goals
One of the goals of the SLA/KPI should be Continuous Improvement or Kaizen (LEAN initiative). Cost Reduction is another major goal. Jobs and processes should be improved daily by brainstorming, Value Stream Mapping (VSM) and Value Engineering by both parties, as cross-functional teams. The major goal is to bring value to the ultimate customer beyond their expectations.
Rewards created by gainsharing. As the two partners implement Continuous Improvement or Kaizen cost reduction will follow. Rewards will be reaped by both parties. Six Sigma’s DMAIC, PDCA and VSM should be used as well to solve problems and gain opportunities. The Transportation Management System (TMS) of the 3PL can gain rewards for both parties as well through freight optimization.
Continuous Improvement, Kaizen, Kaizen Blitz, Value Stream Mapping, Value Engineering and Six Sigma skills are necessary to have by both parties, IT system knowledge is imperative for data analysis, visibility to assets, like inventory, tracking shipments, communication, customization and integration.
Effective KPI management starts with understanding these 9 key topics. Effective KPI management is also only as good as how often you are reviewing your data and collaborating with your 3PL for whatever of the supply chain functions you are leaning on the 3PL for. As an example, our shipper customers who come to Cerasis for better and more efficient transportation management, meet with our account managers to review their shipping activity and use our analytics within our TMS to set new benchmarks and update KPIs so the shipper is continuously improving. Continuous improvement is so vital, we’ve also made it a Cerasis core value.
How are you using effective KPI management to continuously improve your supply chains? Let us know in the comments section below.