Key performance indicators (KPIs) refer to the targeted goals that rely on metrics to provide a snapshot of the health of your operation. They connect data and metrics with an evaluation of whether your operation performs as expected and what strengths or weaknesses may exist. Supply chain leaders need to know which KPIs of a transportation management system to track to ensure system use measures up. Pardon the pun.
Core Freight KPIs of a Transportation Management System
Any effective transportation management system will empower shippers with information to make informed decisions and determine the viability of current operations. The core KPIs to track include:
- Freight cost for each unit shipped. This KPI is determined by dividing the total costs for freight shipping by the number of units shipped for a given time. This is critical to understanding the overall freight spend for your organization.
- Outbound freight costs compared to total sales. Determining outbound freight costs as a percentage of net sales, dividing outbound freight costs by net sales, allows shippers to isolate inbound and outbound freight costs.
- Inbound freight costs compared to purchases. Inbound freight costs function similarly to outbound freight costs compared to total sales but using the direction “Inbound” instead of outbound.
- Transportation time. Transit time should be measured as a view of the expected shipping time compared to the actual delivery time for each shipment. As the values approach each other on the axis line, transit time aligns with expectations. Moreover, values of lower than one indicate the better-than-expected performance of the transportation network.
- Claims versus freight costs. Dividing total loss in freight claims by the overall freight costs helps measure safe delivery for each shipper and carrier. Higher numbers allude to problems, and lower numbers promote the continuation of existing operations.
- Freight billing accuracy. This KPI is achieved by dividing accurate freight bills by the number of freight bills in the period. The goal of this metric is again one.
- Accessorials compared to total freight costs. Failure to track accessorial charges inhibits freight management capability. Keep accessorial fees as close as possible to zero.
- Percent trucking capacity use. Using the most capacity availability is easy by dividing the shipment weight by available shipping capacity. This gets tricky with more extensive, volume-based shipping, but it is possible.
- Mode selection compared to optimal use. Mode selection is another tricky KPI. Focus on the shipments sent via optimal mode by total shipment sent. Obviously, shippers must know what the optimal shipping method is for each item, so it best to use a benchmarking period to evaluate the lowest-cost shipping mode.
Additional KPIs to Track System Value
Shippers should also track these KPIs to understand the value-add of a TMS. As explained by Baris Tasdelen via Inbound Logistics, KPIs empower shippers with data and offer turnkey approaches to management. Also, shippers that develop the right KPIs can add to the business case for ongoing use of a TMS. Some KPIs of a transportation management system to track and measure TMS performance include:
- TMS Cost Per Unit. This is the cost of the TMS for a given reporting period divided by the total number of shipments. Shippers use this KPI to measure the value-add from a TMS to the cost per shipment. As the value approaches zero, the value-add increases.
- TMS Cost Versus Cost Avoidance. This KPI follows TMS cost per unit, but it takes the TMS cost and compares it to the costs associated with manual shipment tendering, often derived from past indicators of per-unit shipping cost.
- Reports Sent Versus Reviewed. The next KPI seeks to determine whether others review the reporting capabilities within a TMS in the organization. Only tracking the sharing and viewing of reports can provide insight into the effectiveness of management.
- Company Use of System for Shipment Management Versus Non-System Use. The ideal goal of this KPI is using a TMS for all shipments as the measure approaches one, the use of TMS adoption increases.
- Year Over Year Cost Increases as a Percent of Total Revenue. Although an organization may announce general rate increases (GRIs), it does little good to know whether GRIs reflect shipping costs. Instead, use KPIs to track the cost increases compared to total revenue. Smaller values indicate better operational efficiency, keeping prices low for end-users and your company.
These KPIs provide an ongoing business case for the continued use of a TMS. Of course, it all depends on using the KPIs to make better, cost-effective decisions.
How to Use KPIs to Improve Profitability
Shippers should also apply the KPIs of a transportation management system by following these best practices:
- Track general and company-specific KPIs.
- Connect shipments with both EDI and API connection technologies.
- Use dashboarding tools to connect all users with KPIs.
- Make data-driven decisions.
- Eliminate uncertainty by auditing system performance.
- Use audits to determine further if operational efficiency reflects expected gains.
- Provide employee feedback to all employees.
Enhance Shipping Efficiency With a Dedicated, Data-Intense System
Shipping efficiency relies on making the best shipping decisions possible, and a transportation management system enables that function. Shippers should use the KPIs of a transportation management system to understand their improvements in shipping efficiency and how the TMS relates to overall freight spend. More importantly, those that leverage the latest technologies and analytics can drive freight spend into retreat.