Understanding the Importance of 3PL Warehouse KPIs

What do school children and third-party logistics (3PL) providers have in common?

They both get report cards.

The 3PL’s report card comes in the form of key performance indicators (KPIs) – a set of metrics that the 3PL and its customer agree upon to measure operational performance.  In this article, we’ll take a closer look at 3PL warehouse KPIs and examine their role in your supply chain.

What are 3PL warehouse KPIs?

When you contract with a 3PL for warehousing and distribution, you’re entrusting key components of your supply chain to an expert that can perform these services at a high level.  KPIs are the metrics that help you to understand just how well your 3PL is performing.

According to Armstrong and Associates, the following metrics are most commonly used as 3PL warehouse KPIs (the percentages in parentheses denote the common target range across the 3PL industry).

• On-Time Shipments (industry target range: 95.00 – 100%)
• Order Picking Accuracy (99.00 – 100%)
• Average Warehouse Capacity Used (80.00 – 95.00%)
• On-Time Ready to Ship (99.50 – 99.90%)
• Annual Workforce Turnover (2.00 – 15.00%)
• Fill Rate – Lines Filled (98.50 – 100%)
• Inventory Count Accuracy (99.50 – 100%)
• Order Fill Rate (95.00 – 100%)

  These are just the KPIs that are most common across the warehousing and logistics space.  The KPIs you establish with your 3PL can and should be based on the metrics most important to your business.

Importantly, these KPIs should be established with your 3PL at the outset of the relationship.  Each metric must also have a target or goal with denotes success (e.g., 99.5% on-time shipments).

Warehouse KPIs in action

So, what happens when your KPIs are established and you receive reporting that shows how successful your 3PL is meeting its targets across days, weeks and months?

If KPI targets are consistently being met and/or exceeded, then it is fair to say that your 3PL is delivering on its promises and not a lot needs to change.  Of course, every quality-conscious 3PL will continually look for ways to optimize and improve operations.

If KPI targets are not being met, then two things need to happen immediately: the root cause of the problem needs to be identified and corrective measures need to be established.

Identifying the root cause.  When reports shows that a KPI target is not being met, it’s important then to determine the cause.  Sometimes, it can be as simple as poor performance on the part of the 3PL.  Other times, however, it can get a little tricky.

For example, let’s say that a manufacturer contracts a 3PL to perform just in time (JIT) delivery of materials to its plant every day.  The 3PL needs to have loaded trucks to the manufacturer no later than 9:00 every morning.  However, representatives for the manufacturer regularly add last-minute items to the daily order, noting that a late delivery is okay if these extra items can be included.

As these types of requests pile up, the KPI target of on-time shipping is going to be negatively impacted.  Is it a reflection of poor 3PL performance?  Not in this case.  But this will be determined as part of a detailed route cause analysis.

Establishing corrective measures.  After a problem is identified, it is then each party’s responsibility to make adjustments to rectify it.  In many instances, this involves the 3PL improving its operations to meet the target.  However, when actions by both parties are affecting the KPI as described above, discussion should ensue to either modify the KPI target or modify the factors impacting the target.

A key piece of the KPI puzzle is your confidence in your 3PL’s ability to rectify performance issues.  Some 3PLs will tackle issues à la carte while others, like Kanban Logistics, have ISO-9001:2015 certification that dictates adherence to established quality control guidelines.  Either method can get the job done, but only ISO-9001 leans upon a rigorous quality program involving expertly-agreed-upon corrective measures.

Rely on Kanban performance

Measuring 3PL warehouse KPIs is a great way to see how well your 3PL’s operations are serving your business needs.  At Kanban, we establish KPIs but, as an ISO-certified company, we go a few steps further.  We perform audits – both internal and external – each year to determine how well we are meeting customer KPIs; how well we’re improving if a shortcoming is identified; and how well we’re continually improving operations to optimize future performance.  We also share the results of these audits with our customers and prospective customers.  To learn more about how Kanban’s operational performance can serve your key business needs, contact us today.