Improving performance starts with measuring performance. In Dutch, we say ‘meten is weten’, which translates to ‘measuring is knowing’. This is why every project to improve supply chain performance starts with defining that performance. There is a huge number of parameters that can be measured, but most of them come down to either efficiency (input related) or effectiveness (output related). Parameters that are used to measure performance are often referred to as Key Performance Indicators (KPIs). Recently, the CEO of Alibaba advised his employees to ignore KPI’s as they are useless and will bring the company down. Although I am not that pessimistic about the use of KPI’s, there are serious risks related to using KPI’s, especially in large organisations.
What makes supply chain problems hard, is that KPI’s can conflict. For example, avoiding setups on machines would lead to very large batches, which is terrible for delivery performance. A minimized route distance might mean that customers get their deliveries outside their requested slots. Of course, you could try to create some aggregated KPI which is the weighted sum of the individual KPI’s. However, such an aggregated KPI creates a false sense of accuracy. Companies will find out that in some situations they will want different KPI weights than in others. For example, when underutilized, delivery reliability might get a higher priority. Reversely, when demand exceeds supply, the emphasis might be on utilizing capacity.
Pushing bumps out of the carpet
KPI’s are a great tool to support decision making, helping the human actors in applying judgement. However, there is a danger in taking KPIs too literally. Especially when people who do not understand the complex interplays in planning problems start reading KPI sheets, this danger becomes real. And it becomes even more real when such people have a certain decision making authority (did I hear the word ‘manager’?). For example, they might initiate an inventory reduction program based on inventory-based KPI’s, not understanding the consequence on efficiency and delivery reliability. This is just pushing out a bump in the carpet, only to have it appear in another spot.
An obsession with KPI values also leads to the end-of-month madness, which means that many companies struggle at the end of the month to get their inventory values as low as possible, only to let them go up again at the beginning of the next month. Thank you very much, financial managers, for creating havoc month after month. It disrupts supply chains, creates a false picture of performance, and does not serve any true purpose. See also my other blog post about logistics and finance.
A grain of salt
In short, KPI’s are tools and their values should be taken with a grain of salt. They indicate that something might be going well or wrong. Such observations should be the starting point for further analysis. The fact that a cell colours red in a spreadsheet is as such not a clear guideline for action. Problems need to be understood fully before they can be solved. This is easier in smaller organisations, where employees know each other and it is relatively easy to get the context behind the figure, by talking to each other. However, in large organisations, management that sets targets and procedures is remote, not to say isolated, from the people that might understand what is actually going on. In such cases, the following statement applies: “there’s lies, damn lies and… KPI’s”. Employees will start manipulating KPI values and sabotaging the company’s true added value for its customers. The company’s supply chain will evolve into something which is at most mediocre.