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At its most basic, a perfect order must meet four fundamental criteria: on time, complete, accurate and undamaged. Today, most supply chain professionals add complete and accurate documentation and invoicing to that definition. And increasingly, customers are asking for not just a perfect order, but an efficient perfect order -- one that delivers on all these criteria in the most cost-effective way.
"We can easily create a perfect order process for any customer, but it may not be cost efficient either for the customer or for us, internally," says Joe Gallick, senior vice president of sales at Penske Logistics, Reading, Pa. "We have to meet the goal while also making sure that all of our assets and personnel, and those of our customers, are used as productively as possible."
Focusing on perfect order as a metric clearly has economic pay-offs for both customers and logistics providers. Success lowers costs by eliminating the expense of handling returns and resolving mistakes, and stems the revenue drain from deductions and overpayments that often accompany order errors. Additionally, benchmarking studies by AMR Research, Boston, show a correlation between improved perfect-order performance and overall corporate results. Raising perfect order scores by 5 percentage points correlates with a 2.5 percent improvement in return on assets, a 3 percentage point improvement correlates with a 1 percent increase in profit margin, and a 2 percentage point jump correlates with a 10-cent increase in earnings per share, according to AMR.
Debra Hofman, AMR research director, cautions that these are correlations and not causal relationships. "You have to be careful with these figures because you can't say that your earnings will go up by 'x' amount if you improve your perfect order performance by 'y' percent," she says. Still, the correlations make sense. "My hypothesis is that a company has to be good at a lot of things in order to be good at the perfect order. If they score high, chances are they're doing many things well," Hofman says.
Bob Bassett, vice president at logistics provider Menlo Worldwide, San Mateo, Calif., agrees, adding that a perfect-order focus fits well with Menlo's lean philosophy. "A non-perfect order is wasteful and we are always looking for kaizen opportunities to drive waste out of the process," he says.
While 3PLs, their clients and end customers are showing increased interest in the perfect order concept, most still concentrate on individual key performance indicators rather than on an overall perfect-order metric. "A lot of clients talk about perfect order but they realize that to achieve it, they have to track individual elements," says Paul Liddell, vice president of warehousing at Mallory Alexander International, a 3PL based in Memphis.
"The perfect order concept is out there, but it really is all about the individual pieces," adds John Ennen, regional vice president-client services at Forte Industries, a supply chain consulting and engineering firm based in Mason, Ohio. "The focus within a 3PL operation tends to be on the components of receiving, picking, shipping and transportation, which each play a part in the overall perfect order score."
Most customers "back into the perfect order," says Steve Hensley, president of Blue Sky Logistics, Coppell, Texas. "They start by checking some granular metric without realizing that what they are really looking for is some angle on the perfect order." Blue Sky's Insight product is a supply chain visibility dashboard that provides a range of critical performance metrics, including perfect order, for clients like Staples, Woolworths and several large grocery chains.
The first step in a Perfect Order process is to work with customers on establishing the KPIs that capture an individual company's perfect order definition.
"There are a lot of different definitions of perfect order out there," says Stephen Olds, executive vice president of TMSi, a 3PL based in Fernandina Beach, Fla. "We work with our customers to get the right KPIs in place, based on what they and the operating team think is appropriate." The more mature or sophisticated a company's supply chain, the more encompassing the definition, he says.
Differing perfect-order definitions are driven by end customers and often it is beneficial for a 3PL to visit the end customer's location when developing KPIs, says Steve Cook, vice president of marketing for Saddle Creek, a 3PL based in Lakeland, Fla. "Ultimately, we need to satisfy the end customer. If we deliver according to our client's directions, but for some reason that is not exactly what the end customer wants, we will come out on the losing end." For that reason, when Saddle Creek sets up a major outsourcing program, company reps visit the end customer to see what the physical plant is like and to make sure they understand all of the requirements. "Of course, we only do that with the permission of our client," Cook says.
Company-specific KPIs, by definition, vary greatly and can cover a wide gamut of activities. TMSi, for example, has a Fortune 10 customer that has stretched out its definition of perfect order to include correct capture of the order and the accuracy of inventory counts to ensure inventory availability. "This company has a mature supply chain and a pretty encompassing definition of perfect order," Olds says.
For industries like automotive that employ just-in-time inventory management at their assembly plants, meeting very precise delivery times is critical. "If we miss a delivery schedule we could shut down their line, and no one wants that to happen," says Holly Hamilton, business systems project manager at CEVA Logistics, Jacksonville, Fla.
Sometimes KPIs can differ within the same customer account. One of Menlo's clients is a large electronics manufacturer that sells products through multiple channels. "There are various compliance programs required within each channel, so our KPIs are different for each of those channels," Bassett says.
Industry verticals also make a difference. Grocery retailers have issues around code dates, for example, says Blue Sky's Hensley. "If you ship a grocery store a product that is within five days of its expiry date, it might be rejected for not meeting that company's criteria for a perfect order," he says. Because of low margins on individual products, grocers also focus more on total landed cost. "For grocery retailers, it is all about touching products the fewest possible times, because every time something gets touched in the supply chain, their margin goes down," says Hensley.
Retailers of consumer products often include appearance in their criteria. "These customers are very concerned about presentation -- what the box looks like and how it is packed inside," says Harvey Rickels, global marketing director-distribution at United Parcel Service, Atlanta. "We build all of those requirements into our work instructions," he says.
In line with the growing focus on perfect order efficiency, companies also are requiring more financial integration from 3PLs, says Brian Fidler, director of corporate billing for Penske. "Customers are coming now with the expectation that we will allocate costs to each of their different requirements and provide that to them in a format they can upload into their financial system," he says.
3PLs often play a consultative role in the KPI process, says Jim deVries, director of the transportation management center at C.H. Robinson, a logistics company based in Eden Prairie, Minn. DeVries says clients want a perfect order definition that achieves the optimal balance between meeting customer service requirements, maximizing use of assets and optimizing personnel productivity. "What they are coming to us for and what we are trying to help them do is find the right balance of these three things, based on where they are in their business cycle," he says. The business cycle or supply chain maturity will determine which of the three attributes they want to emphasize or de-emphasize, he says. "We often see customers who say all they care about is delivering on time, but their costs are out of control. We provide them visibility to data that will allow them to make more educated decisions on the trade-off between time and costs." This can get into such areas as whether the customer has the right network of distribution centers or the right carrier network to ensure both productivity and performance, he says.
How to Measure
It is not enough for outsourcing partners to agree on what to measure - they also must agree on how to measure. That decision is not as straightforward as it may seem. In a research paper on this issue, Kate Vitasek, a leader in the supply chain performance management practice at ChainLink Research, Cambridge, Mass., says that looking at individual KPIs in isolation gives companies a false reading on their perfect-order performance. What is needed, she says, is a perfect-order index, derived by taking the individual KPIs and multiplying them out. The index that results is a better measure of customer satisfaction than any one metric alone, she says.
"For example, if a firm is experiencing a measure of 95 percent across all four metrics of the perfect order (on time, complete, damage-free and accurate documentation) the resulting perfect-order index would be 81.4 percent, well below the 95 percent for each metric alone," Vitasek writes. "The traditional approach of looking at each KPI separately often lulls organizations into a false sense of good performance."
Rickels says UPS's stringent, zero-tolerance approach to perfect-order measurement reflects the customer perspective better than less rigorous standards. As an example, he hypothesizes an order with 10 line items, each of which has 10 units. "If you were missing one unit, some people would say you were 99 percent right," he says. A little tougher standard would see this error as making one of the 10 line items wrong, for a score of 90 percent right. "The most stringent way, and the way we use in our audits, is to say that if the order has any kind of error, it is entirely wrong and we don't give ourselves any credit for that," says Rickels. "That is really looking at it from the customer perspective."
UPS uses this same stringent standard to measure execution on other functions, on which the perfect order depends, especially inventory accuracy. "We see inventory accuracy as a building block of the perfect order and we treat it the same way," Rickels says. "We do cycle counting by location, like everyone else, but if we are missing one item out of 100 we do not rate ourselves as 99 percent accurate. We would count that as an inaccurate slot."
In its benchmarking studies, AMR takes an inverse approach. Instead of looking at perfect orders when surveying companies, it measures six key failures that contribute to an imperfect order. "We ask companies to tell us what percentage of orders were imperfect due to stockouts, late shipments, in-transit delays , inaccurate shipments, poor quality of finished goods or damage in transit," Hofman explains. "We take those numbers, multiply them out and then take the inverse to get a perfect order score." Building the measurement from the bottom up in this way results in a more accurate reading of performance, she says. "We think this is the way companies should measure, but it is much harder to do. Most companies don't have the needed information readily available."
Another benefit of this method is its use as a diagnostic tool. "An inverse approach gives you important clues about where things are breaking down in the supply chain and where a company is struggling," she says.
Using KPI measures to feed business intelligence or analytic software in order to diagnose supply chain problems or look for patterns that present improvement opportunities is becoming a best practice among 3PLs.
"The reason these metrics exist is to drive continuous improvement," says Forte's Ennen. "For example, analysis may reveal that an upstream occurrence is creating pain downstream, but no one was able to see the linkage between those two events. Root cause analysis really helps with that." The best companies, he says, use their KPIs in this way "rather than as a club with which they can punish their providers."
Understanding the issues beneath the perfect order score is the key to improving performance, agrees Hensley. "If we didn't ship it on time, why not? Was it because the product wasn't in inventory so we had to wait for an order to come in? Did we have a labor problem that day? Was the product in bad condition or did I damage it while moving? These are the types of questions you need to be able to drill down and answer."
Being able to "peel things back like an onion to find the root cause of problems," is what CaseStack CEO Dan Sanker likes best about today's analytic technology. "Without that ability, you might be able to identify a problem, which is interesting, but you wouldn't be able to do anything about it," he says.
CaseStack, a 3PL based in Santa Monica, Calif., has developed its own analytical software, which sits between its warehouse management and transportation management systems, Sanker says. "What often happens is you get half the story or even less than half because you don't have all the data. Our system puts all the transportation information and all the warehousing information and all the information from the retailer's orders in one place so we can actually figure out what is going on." WMS and TMS systems are not set up to do that, he says.
Menlo uses not only technology, but also a problem-solving team, called the Delivery Performance Team (DPT) to do both root cause analysis and real-time problem solving to ensure order delivery performance. "The DPT team documents flaws or waste in the process and acts on alerts," says Bassett. "If we are not able to fill an order for a customer because the SKU is not in the warehouse, that sends out a red flag and the DPT will quickly find where that SKU is in the system and develop cost options that we can put in front of the customer that day that would allow us to meet the order delivery requirement." The technology that supports the team is a proprietary system Menlo has designed specifically to help customers have a perfect order process throughout their supply chain, he says.
When it manages transportation and delivery for customers, CEVA Logistics measures different aspects of the movement in different ways, says Matthew Franklin, business systems project manager. "For the freight aspect, we use a Part Detail Report, which lists the original requested quantity, the pre-advised quantity and the actual shipped quantity," he says. "This helps our operations and the customer to understand how the pipeline actually looks in comparison to what they originally requested." Other reports cover carrier performance and shipment documentation and shipment status. "All these measurements are grouped together in a similar fashion to the perfect order index," he says.
The pre-advise process also enables CEVA to proactively address any variances in shipped versus requested quantities, he says. "The pre-advise process is key in a lot of our larger supply chain customer solutions."
Penske currently is rolling out a program it calls "cascading metrics," says Amy Ilyes, vice president of global engineered solutions. With this solution, each customer is provided dashboards of metrics they have identified as critical to quality (CTQs). These metrics cascade down to specific processes that support those high level CTQs, Ilyes says. "This is like a metric map that allows us to identify where the problem might lie when some performance is out of tolerance so we can drill down to specific processes and make the necessary improvement."
Today's analytic technology allows companies to drill down to a very granular level. "One of the trends driving our applications is the desire of companies to put more of that business intelligence in the hands of the people executing the order," says Derek Gittoes, senior director of logistics product strategy for Oracle, Redwood Shores, Calif. "We have seen requests from companies that want to track activities by person, so they can know who processed the order over the phone and who loaded the truck."
"People are realizing that just looking at a perfect order index does not tell the whole story," adds Scott Vanselous, transportation industry director at Oracle. "What 3PLs want is to get down to the exact detail of the problem. Is it the person in the warehouse? Is it the transportation company? With today's tools, they can have access to that level of detail fairly easily." Sometimes, however, problems cannot be traced to a single cause or a single worker, he says. "With business analytics, you can look for patterns across different workers or operations, so you can see that some combinations of people or processes raise the perfect order rate while others lower it."
One low-tech but sure-fire way for companies to find out how they are doing on perfect order performance is to ask customers directly. That is the tact used by 3PD, a nationwide provider of 'last-mile' delivery and installation services based in Atlanta. 3PD uses an outside company to continually survey delivery recipients on their level of satisfaction. "We find a lot of value in getting this direct customer feedback," says Russ Marzen, executive vice president. "It really helps us improve our service."
Most surveys start out with one key question: "Were you completely satisfied with your order and delivery?" says Marzen. "If the answer is anything other than a 10, we assume that we didn't do all we could to satisfy that customer."
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