A Measure of Logistics Success

Edition: December 2001 - Vol 9 Number 12
Article#: 1109
Author: Peter Bromley, P. Log.

It is a long-standing competitive requirement for companies to measure and, thereby, improve in the areas where they have expertise- product research, development, production and marketing.

However, most organizations that manage their own logistics do not measure how effective and efficient their logistics practices are at improving their bottom lines and customer experiences. Ironically, once the decision is made to outsource the logistics function to a third-party logistics provider, organizations quickly grow hungry for the logistics data so they can evaluate the impact of the logistics provider on the customer experience.

Third-party-logistics providers know meaningful reporting must be based on accurate measurement if it is to demonstrate their added value. Further, measurement can enhance the crucial foundation of trust that must develop between them and their clients if their relationship is to be productive and mutually beneficial.

Such has been the experience between UPS Logistics Group and its client, the Canadian Pharmaceutical Distribution Network (CPDN).

CPDN is a not-for-profit co-operative created in 1995 to consolidate the purchasing and fulfillment of pharmaceutical products between over 500 Canadian hospitals and 25 pharmaceutical manufacturers. UPS Logistics manages the order collection, order fulfillment, and distribution functions for approximately half of these hospital customers located east of Manitoba. (See related article.)

The Measurement Challenge
From its start in 1995, the CPDN quickly became popular and within three years, member manufacturers and customer numbers had more than doubled.

The complexity of CPDN's business model increased with each additional member and customer, and by 1998 the association's system and processes began to strain under the demands of growing volume and complexity. System inefficiencies and customer service problems started emerging. Performance targets were not being met. For example, the CPDN experienced increased costs associated with hospitals that had started ordering fewer items more frequently in order to reduce their costs associated with on-premises storage and inventory carrying costs.

Subsequent discussions soon identified the root of all these problems- measurement criteria had not been defined. In their absence, CPDN and UPS Logistics developed their own metrics in isolation, which resulted in an inaccurate overall performance assessment and, therefore, an inability to meet expectations.

Key Performance Indicators
As inefficiencies and problems emerged, UPS Logistics and CPDN immediately began developing and implementing a comprehensive set of logistics measures called key performance indicators (KPIs). The KPIs defined and established objectives and responsibilities for meeting and exceeding customer expectations by incorporating metrics that involved all parties in the process- manufacturers, the logistics provider and the hospitals.

From here, each player knew its role in both customer and client satisfaction: UPS Logistics was responsible for order entry, picking accuracy and carrier damages, while manufacturers were accountable for back orders and pricing accuracy, and hospitals were responsible for order efficiency.

The CPDN and UPS Logistics identified 17 KPIs to measure and guide their performance, and agreed to a measurement objective, definition and a method of data collection for each. Through the KPIs, the CPDN and logistics provider could ensure that performance was accurately and consistently measured, and that potential problem areas would be quickly identified and resolved before they could affect customers.

For example, one KPI was call abandonment, which measures the percentage of incoming calls to the order desk terminated by a hang-up rather than being answered by a customer service representative. A call abandonment rate of 2 percent or less is considered world-class for a manufacturer. Call abandonment was 14 percent when first measured in 1999.

With a benchmark in hand, the logistics provider discovered that staffing and training issues were the root cause of call abandonment. These were addressed and in six months, the call abandonment rate dropped to 2 percent for the entire CPDN. It has remained below 2 percent ever since.

The Perfect Order
The most important KPI is what UPS Logistics calls ''the Perfect Order,'' which is the CPDN's key measure of its ongoing success. Simply stated, it means having the right product in the right place at the right time and for the right price. The Perfect Order measures the logistics provider for order entry accuracy, picking accuracy and carrier damages, and the manufacturers for back orders and pricing accuracy.

In addition to implementing effective metrics, as the CPDN grew, its systems were expanded and updated to manage the increasing complexity and order volume. New technologies, including UPS Logistics' integrated order and warehouse management system, together with expanded use of electronic data interchange and hand-held radio frequency devices, helped increase accuracy and efficiency and decrease costs.

UPS Logistics also created an inventory management team to address picking accuracy and cycle count accuracy. The team first implemented a comprehensive inventory cycle counting process that triggered proactive cycle counts either randomly or when certain conditions were met, including volume of orders (velocity), empty bins as detected by the system, a discrepancy reported by pickers or customers, or at the request of a manufacturer.

As inventory errors were identified, the system helped identify the root causes, which were then analyzed and fixed. The knowledge gained was fed back to improve the process.

The team also discovered that inventory and order accuracy errors were often related to problematic stock-keeping units (SKUs). Pickers would come across similar products produced by different manufacturers or units of measure that were not clear.

For example, some manufacturers package the same product in different quantities. Therefore, if a hospital ordered 10 units of product ''X,'' the order picker would go to the corresponding warehouse product bin and

find that one package contained 10 vials of product ''X.'' Without clear unit measures, pickers could pick 10 packages or one package of 10. To solve this problem, problematic SKUs were grouped in a special area where Polaroid photos with clear notations over each bin helped pickers identify correct unit measures.

By June 2000, with the KPIs well defined and systems in place, inventory accuracy- which is measured as the number of correct inventory counts divided by the total number of locations counted- was at 83.9 percent. By June 2001 it had risen to 96.5 percent.

Balancing Benchmarks and Barriers
For UPS Logistics, the ''Big Five'' KPIs that indicate a 3PL's performance are:
- On-time receiving.
- On-time shipping and delivery.
- Order accuracy.
- Inventory accuracy.
- Returns cycle time.

For the CPDN, UPS Logistics' Big Five KPI benchmarks are set at 99 percent, and the call abandonment KPI target remains at 2 percent.

In 1998, the KPI values that reflect the Perfect Order came in at less than 50 percent. As of June 2001, it had reached 72 percent, exceeding the established goal of 70 percent. While the target remains 99 percent, the initial benchmark has been set at 70 percent and will be ratcheted upwards towards the target value as problems are identified and resolved.

Barriers to Improvement
While 3PLs regularly exceed their KPI targets in many areas, some KPIs continue to be problematic as logistics management encounters barriers to effective measurement and, thereby, improvement. They include:

CPDN member and customer practices. Member and hospital practices can introduce errors or inefficiencies. That's why the Perfect Order target is currently relatively low (70 percent). This has spurred the CPDN to turn the measurement mirror on itself and its customers. As a result, the CPDN is encouraging members and customers to improve their contribution to the Perfect Order measure by charging them what amounts to an inefficiency tax. Member companies are penalized financially when their KPIs do not meet targets for pricing accuracy, back orders and timely receipt of product prices for the CPDN product catalogue. They are also charged an inefficiency tax for non-EDI compliance. Similarly, hospitals are charged an inefficiency fee for placing orders that contain fewer than six order lines.

Lack of automated data entry. Some measures, such as receiving turnaround time, will always require manual data entry and, as a result, will slow down the overall process and be a possible source of error.

Whatever the issue, logistics measurement has developed to the point where it now drives business discussions between third-party logistics providers and their clients.

About The Author: Peter Bromley is vice president, operations, Supply Chain Management, at UPS Logistics Group in Oakville, Ontario. Peter has been involved with CPDN since its pilot program in 1995. He can be reached at 905-845-3322 or psbromley@upslogistics.com