Is your company getting ready to sign an agreement or renew a contract with a third party logistics provider (3PL) or continuing a partnership with an existing 3PL partner? If so, do you have a service level agreement in place which clearly spells out key performance indicators (KPI’s) for your 3PL and do you review it regularly? If you are using a third party logistics provider, then measuring their effectiveness is critical to determine if your company’s logistics requirements are being met. When things are going well — i.e., your company just signed a favorable contract or your logistics costs and service levels are in control — a service level scorecard may seem unnecessary. However, the benefits of a scorecard to regularly measure results will be missed when operational issues crop up or costs are trending in the wrong direction. When this occurs, it can be challenging to get a handle on root causes by wading through data or dissecting specific issues with your 3PL without an accurate view of the whole service.
Agreeing on the critical service level indicators which will be used to measure and track the effectiveness of your 3PL provider or delivery provider is important work – it provides common ground for working through issues, improving delivery service, monitoring costs, and identifying new opportunities. Collaborating with your third party logistics provider to agree on what measures to track along with the target goals, target floors, and criteria for critical failure is a key step which will drive the on-going effort. Reviewing these metrics together month over month to monitor trends provides insight to both parties and lays the framework for developing action plans to address KPI’s that are below the targets as well as to identify new opportunities.
While the key performance indicators that are right to measure will vary by industry, products shipped, and geographies shipped to, measures that are important to enabling a holistic view of your logistics program will likely include:
- Freight Cost – This is a given and is a critical measure. You can track freight cost in terms of dollars per shipment, dollars per case, and dollars per ton-mile as well as by location, customer, and mode.
- % On-time delivery – Delivery service levels across your network, for key customers, and for inbound loads is another fundamental measure. Targets for these will and should vary based on internal and customer requirements.
- % Loads Accepted by Primary and Secondary Carriers – Regularly reviewing this provides insight to cost trends, capacity, and carrier issues.
- Sustainability Measures – These could include % shipped intermodal across the network, % miles moved via Smartway carriers, or % miles moves by CNG/LNG powered carriers.
There are many other measures and the need for them will vary by industry and priorities. An example includes measuring expedited loads such as actual expedited loads shipped, % expedited, or incremental dollars spent on these loads. Another important measure may be in the area of load consolidation, which could be the number or % of loads consolidated, dollars saved on consolidated loads, or missed consolidation opportunities. Finally, as changes occur within your supply chain or company, the SLA scorecard should be updated to reflect these. A relevant example for us was the need to track and adjust the percentage of drop vs. live loads as a result of changes within one of our warehouses. Live loads were increasing, but the flexibility within our warehouse to manage more live loads had declined. Working with our 3PL provider to develop an action plan to track and address this was needed, and this metric became one of our KPI’s.
In summary, it is important to put a priority on service level agreements including defining and tracking KPI’s and reviewing results regularly with your 3PL and other key supply chain partners. Regular reviews of KPI’s lay the foundation for improving service and lowering costs.
Lisa Dennerll is currently the Supply Chain Director at Sunny Delight Beverages Company, based in Cincinnati, OH. Lisa joined Sunny Delight in 2005 and is responsible for logistics spanning customer delivery, inbound freight, cost optimization and capacity planning. Lisa also has ownership for SunnyD’s customer service operations and supporting Sunny Delight’s brand teams by managing a planning team responsible for leading new product launches.
Greg Riemer says
Great post Lisa. I would agree that it’s very important to prioritize KPI’s and review them regularly. The right 3PL should put an emphasis on this during the design and solution stage. Many providers overlook this key step until the implementation is about to start which can impact how you are able to measure KPI’s and the ability to adjust when they are not met. Another key to measuring 3PL’s is their ability to provide you with technology that gives you visibility to make adjustments as you see fit. It’s also on the 3PL to make adjustments and offer solutions when they are not meeting any KPI’s.
Hank Mullen says
Really good information. I think the “get it in writing” has suffered in recent years, why bother we have a “system”
Sitting down with your carriers and your own people insures everyone is on the same page.
The Vested Outsourcing approach has the same approach of all on one page.
This article should be downloaded and used as a daily reminder as to what you are tryng to accomplish.