The Perfect Order--Inside-Out or Outside-In?
Written By: Olin Thompson
Published On: May 9 2005
Defining The Perfect Order
Key performance indicators (KPIs) give management a tool to judge the health of the business. While the concept has proven itself, a key question should be "what do we measure?" The Perfect Order measurement has proven to be a powerful measurement of the business. Should The Perfect Order be defined from an internal point of view or from a customer point of view inside-out or outside-in?
In addition to defining The Perfect Order, AMR Research has related changes in the perfect order measurement to the overall health of the business in terms of earnings per share (EPS). For example, Debra Hofman, research director of AMR Research reports that recent benchmark studies at AMR revealed that better perfect order performance is correlated with superior profit margins, return on assets, and earnings per share. At the same time, while superior perfect order performance is good, excelling at both profitability and responsiveness is even better. The companies in our study that maintain balanced excellence have 60 percent better profit margins, 65 percent better EPS, and two to three times the return on assets (ROA) of their industry peers. One of the key differentiators between leaders and laggards is the leaders' superior measurement abilities.
When we discussed The Perfect Order with several companies they indicated different views of the metric. For example, one company saw hitting the committed ship date as part of the metric, while another included the arrival of the product at the customer site on the date originally requested. While both of these definitions measure customer service, they give a good view of the difference between an inside-out definition and an outside-in definition.
The Key Question
The key question should be, what does the customer care about? We need to remember that the customer is the one who must be satisfied for the long-term health of the business. Customers want to receive product when they requested it. That means delivered to their site on the day and perhaps the time requested. Customers do not care when the product was shipped or that the supplier may have used premium transportation to get it to them on time. Yes, the customer does care that the supplier met the committed date to provide the product but if that committed date is not the requested date, some dissatisfaction may exist. The customer defines the outside-in view of KPIs
The internal view of KPIs is defined by the company's actions not the results of those actions. The action was shipping the product on schedule; the result is the arrival of the product to the customer. Shipping on time does not always result in the product arriving on time.
Other indications of customer satisfaction can be factored into KPIs. All returns and credits are indicators of customer dissatisfaction. Any invoice contested indicates customer dissatisfaction, even if the contested invoice is resolved in favor of the supplier. Late payment may or may not be a result of customer dissatisfaction (the customer may have internal issues that means not paying on time) but should be investigated for signs of dissatisfaction.
The Two Definition Approach
But will externally defined KPIs, even The Perfect Order metric, fully yield a picture of the health of the business? The answer is no. What are missing from an outside view of KPIs are internal measurements that the customer does not care about, but the business does. An inside-out Perfect Order metric looks at profitability of an order. Did the order create the need for a special effort to satisfy the customer, etc. For example, using premium shipping to get the product to the customer on time is okay with the customer but it signifies internal problems. Why was premium shipping required?
Perhaps two definitions of The Perfect Order need to exist. The first is an outside-in or customer-oriented definition that includes those elements that customers care about. The second definition should be inside-out. Included in the inside-out definition is the fact that the order was perfect from the customer's point of view, plus the impact of the order on the business; acceptable profitability, no special shipping, no special handling, no overtime, etc.
AMR Research has done some great work on defining The Perfect Order metric and linking its improvement to the bottom line. Companies should evaluate The Perfect Order and attempt to use it as their primary KPI. When designing their own Perfect Order metric, or any other metric, companies should first think of their customers. What is important to the customer is what is important to any company in both the short and long term.
About the Author
Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years experience as an executive in the software industry. Thomspon has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce, and the impact of technology on industry. He can be reached at Olin@ProcessERP.com.