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A Measure of Success
It is a long-standing competitive requirement for companies to measure and improve on their business expertise product research, development, production and marketing.
However, most organizations who manage their own logistics do not measure how effective and efficient their logistics practices are at improving their bottom line and customer expectations. Ironically, once the decision is made to outsource the logistics function to a third-party logistics provider (3PL), organizations quickly demand logistics data in order that they can evaluate the 3PL impact on their customers.
3PLs know meaningful reporting must be based on accurate measurement if it is to demonstrate added value. Measurement enhances the crucial foundation of trust that must develop between them and their clients if the relationship is to be productive and mutually beneficial.
Such has been the experience between UPS Logistics Group (UPS Logistics) and its client, the Canadian Pharmaceutical Distribution Network (CPDN).
CPDN One Order, One Invoice, One Payment
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, fulfillment, and distribution functions for approximately half of these hospital customers located east of Manitoba.
The CPDNs aim is to supply one-stop pharmaceutical shopping for hospitals, decrease multiple-order administration costs, and support manufacturer-hospital relationships. In other words, hospitals can now order any number of products from all member manufacturers with only one order, one invoice and one payment.
The CPDN, with its many member manufacturers, hundreds of customers, and thousands of products, all operating in a cost-reduction focused healthcare environment, creates significant logistical challenges that make it an excellent example of how logistics measurement can lead to improvements in an organizations overall effectiveness.
The Measurement Challenge
From its start in 1995, the CPDN quickly thrived and within three years member manufacturers and customers had more than doubled.
The complexity of CPDNs unique business model increases with each additional member and customer and by 1998 the associations system and processes began to strain under the demands of growing volume and complexity. System inefficiencies and customer service problems started emerging. In addition, CPDN noticed that its performance targets were not being met. 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 CPDN-3PL discussions soon identified the root of these problems measurement criteria had not been defined. In their absence, CPDN and the 3PLs developed their own metrics, which resulted in inaccurate performance assessments and, an inability to meet expectations.
As inefficiencies and problems emerged, UPS Logistics immediately began consultation with CPDNs Operations Committee to develop and implement 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 and client satisfaction by incorporating metrics that involved all parties in the process the manufacturers, the 3PLs and the hospitals.
Each player knew their 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. Hospitals were responsible for order efficiency.
Improving Measurement, Finding Solutions
After extensive collaboration, the CPDN and UPS Logistics identified 17 KPIs to measure and guide their performance. They agreed to a measurement objective, definition, and method of data collection for each.
Through the KPIs, the CPDN and 3PLs 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 which are terminated by a hang-up rather than being answered by a customer
service representative. A call abandonment rate of two per cent or less is considered world-class for a manufacturer. The call abandonment benchmark for an organization 25-times the size of the average manufacturer is still two per cent.
In the case of call abandonment, the first measurement in 1999 came in at 14 per cent. With a benchmark in hand, the 3PLs investigated and found the root cause of call abandonment that related to staffing and training issues. These were addressed and within six months, the call abandonment rate dropped to two per cent for the entire CPDN. Since then, the 3PLs have kept that KPI below two per cent.
The most important KPI is what UPS Logistics calls the Perfect Order, which is CPDNs key measure of its ongoing success. Simply stated, it is defined as having the right product, in the right place, at the right time, and for the right price.
The Perfect Order is the best example of customer-focused measurement as it incorporates the performance of all parties involved. It provides a balanced view of how well the supply chain is functioning from the customers perspective. The Perfect Order measures the 3PL for order entry accuracy, picking accuracy and carrier damages. It also measures manufacturers back orders and pricing accuracy.
In addition to implementing effective metrics, CPDN systems were expanded and updated to manage the increasing complexity and order volume.
New technology, including UPS Logistics integrated order and warehouse management system, together with expanded use of Electronic Data Interchange (EDI) and hand-held radio frequency devices, were introduced to increase accuracy and efficiency and decrease costs to further improve performance and the customer experience.
Based on KPI performance, UPS Logistics also created a team dedicated to inventory management to address issues regarding 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. They included: volume of orders (velocity), empty bins as detected by the system, and a discrepancy reported by pickers or customers, or at the request of a manufacturer.
As the process identified inventory errors, the system was used to identify the root causes. They were analyzed and fixed, and used to improve the process.
The team also discovered that inventory and order accuracy errors were often related to problematic stock keeping units (SKUs). Pickers came across similar products produced by different manufacturers or units of measure that were not clear.
Some manufacturers package the same product in different quantities. If a hospital orders 10 units of product X, the order picker goes to the corresponding warehouse product bin and finds that one package containing 10 vials of product X. Without clear unit measures, pickers can 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 per cent. By June 2001 it had risen to 96.5 per cent.
Balancing Benchmarks and Barriers
For UPS Logistics, the Big Five KPIs that indicate a 3PLs performance in respect to a client are: on-time receiving, on-time shipping and delivery, order accuracy, inventory accuracy, and returns cycle time.
For the CPDN, UPS Logistics Big Five KPI benchmarks are set at 99 per cent, and the call abandonment KPI target remains at two per cent.
In 1998, the KPI values that reflect the Perfect Order came in at less than 50 per cent. As of June 2001, it had reached 72 per cent, exceeding the established goal of 70 per cent. While the target remains at 99 per cent, the initial benchmark has been set at 70 per cent and will be ratcheted upwards towards the target value as problems are identified and resolved.
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 improvement, including:
CPDN member and customer practices: Member and hospital practices can introduce errors or inefficiencies for the entire association and its customers. As a result, the Perfect Order target is relatively low (70 per cent), but 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 client-3PL business discussions.
As his organization enters the 21st Century, CPDN President Terry Rooney is a happy 3PL client. Logistics metrics have changed the way we do business. We resolve customer complaints effectively; our members are improving their own businesses; and we are now identifying and fixing emerging problems before the hospitals even notice what more could I ask for?