DEFINITION OF KPI

7.1.1 KPI CHARACTERISTICS

The fact that a performance indicator is defined as 'key' does not mean that the

performance is to be considered strategic. KPIs can also be associated with operational objectives, the fact that it is defined as 'key' means that it must be associated with objectives that create value for the company.

That the indicators are linked to company-specific objectives means that KPIs are company-specific. It cannot be said that there is one set of KPIs to be used for all companies. Each company must understand its own characteristics, define its own objectives and consequently its own KPIs.

KPIs are strongly linked to the concept of 'process' and the concept of breaking down the process into hierarchical levels.

In general, KPIs must respond to two macro-objectives, that of effectiveness and efficiency.

Effectiveness, or quality understood as conformity to customer expectations. Efficiency, meaning performance of resources according to the achievement of objectives.

There are also two other components that should never be missing but depending on the process under consideration may also be of lesser importance, they are saturation and volume/flow.

Saturation is the level of resource utilization understood as space occupation and use of machinery with fixed capacity, i.e. resources that are difficult to increase. Since it is not possible to increase the available space or the number of machines in the short term, these must be monitored with a view to anticipating possible problems and considering potential evolutions of the activity in the future.

Volume/flow is understood as a trend of operational activity in quantitative terms, they are measures that are also important for better interpreting the other indicators.

A performance measurement system, for the measured performance to be true key performance indicators, must be S.M.A.R.T. meaning Specific, Measurable,

Achievable, Relevant and Time-bound. An S.M.A.R.T. KPI should have the following characteristics:

- Timeliness, related to the ultimate purpose of performance indicators, i.e., to the fact that it must return information in time for decisions to be made at the right time.

- Completeness, it must measure all those levers that create value for the company.

- Long-term orientation, must be useful to help anticipate future issues

- Focus on specific responsibilities, to allow the identification of people, groups of resources responsible for deviations, in order to match an incentive and reward system.

- Accuracy, it must be properly sensitive to variations, it cannot be assumed that when faced with a large variation in the context, there is no large variation in the indicator.

- Measurability, it must be able to be based on objective and quantifiable data;

- Maintainability, it must have that capacity to evolve over time;

- Affordability, there must also be feedback from a cost point of view.

7.1.2 KPIs FOR LOGISTCS

The purpose of KPIs is to support decision-making.

Measurement is the key element of any improvement process, it allows to check the health of the company, therefore what results have been achieved and what are the views, perceptions of customers. It makes it possible to plan resources and activities, it allows monitoring whether the resources have been deployed as planned, whether the quality of the service offered has met the schedule, and then to define a reward and incentive system for the people who have enabled this improvement.

Measuring is fundamental because any activity is improvable, what is optimal today, may not be optimal tomorrow, this is because the system in which we live is always developing rapidly.

To improve a process, one must know it thoroughly and to learn how to know it one must measure it.

For measurement, 2 types of actions can be distinguished:

- Ordinary actions, i.e. actions that can be easily repeated over time. This type of analysis is done through the extraction and study of data from company information systems, supplier evaluations and customer surveys.

- Extraordinary actions, these are actions that are more onerous in terms of both time and resources, so they are not carried out with any repetitiveness. They are analyses of work, times and methods applied to logistics, a fundamental tool because it allows one to analyse with great precision and attention the way in which an activity is carried out and the time taken to carry out that activity.

This analysis makes it possible to study productivity, but at the same time to identify all those activities that do not give any added value and which can therefore be eliminated or can be performed in a different manner, and consequently to study how the system can be improved.

Finally, benchmarking can also be considered as a measurement system, in which case we are talking about the comparison of, for example, all the warehouses of the same company or other business units or reference players, thus competitor companies or other companies that have nothing to do with the own sector but whose comparison could be important.

7.1.3 IMPLEMENTATION OF A KPI SYSTEM

The first thing to do is to understand in which processes of the company to invest time and money.

It is necessary to select the most important processes, those that create value, to break them down into phases and activities so as to identify the performance associated with all the phases and activities identified.

For each performance considered useful to be monitored, it is necessary to define the actual KPI, i.e. to establish the metrics, the method of calculation, to establish the frequency of determination, and then every time to reprocess the data to determine the result and to verify the deviation from the previous measurement.

One would set targets, ranges of values for each KPI, and also set thresholds of values that would trigger an alert if reached or exceeded.

Establish the level of aggregation because there is a hierarchical level that links activities, phases and processes and there will also be a hierarchical level in the KPIs linked to them, and finally we need to establish the source of the data, i.e. the data used to calculate these indicators come from which systems.

The next step is to formalize a documentation, describe the processes, list the KPIs, describe the properties, requirements, etc. This step is important because it allows everyone to know how to carry out that particular activity and to have a basis for thinking about an improvement process.

Finally, it is necessary to verify that what has been constructed makes sense, to verify for example by means of known data whether the results obtained are equally known, to verify whether when faced with extreme situations the result is equally extreme,

otherwise it means that there is an error in the metrics, then test and finalize what has been done.