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Is your organisation perfect with perfect order index?

By Human Resource Advisory, 3rd Eye Advisory®
Is your organisation perfect with perfect order index?

The manufacturing industry experts are often surrounded with difficult questions like what time is the exact time for an "on-time delivery"? Who decides whether a shipment does indeed arrive "on-time"? Do my employees work perfect in accordance with the perfect order index? The concept which has kept a lot of experts bewildered is- Perfect Order Index. So, then the obvious question is what is perfect order index and how can it make my employees more productive? The American Productivity and Quality Center (APQC) defines perfect order performance as flawlessly taking and fulfilling a customer order, and includes taking the order correctly, allocating inventory immediately, delivering the product on time and sending an accurate invoice. The index is a product of four factors which is calculated as:

Perfect order index (POI) = (Percent of orders delivered on time) * (Percent of orders complete) * (Percent of orders damage free) * (Percent of orders with accurate documentation) * 100

The four components of perfect order are described as

  1. Percent of orders delivered on time:
    The percentage of orders that arrive at their final destination at the agreed upon time between the customer and the vendor
  2. Percent of orders complete:
    The percentage of orders shipped with all lines and units
  3. Percent of orders damage free:
    The percentage of customer orders shipped in good and usable condition
  4. Percent of orders with accurate documentation:
    The percentage of total orders for which the customer received an accurate invoice and other required documents

The perfect order index is calculated by multiplying each component to one another. If a company has a 98% score for each of the four components, for example, then the perfect order index would be 92.2%. The perfect order index is directly correlated to each of the factors and hence consider that only 80 percent of shipments were on time and 80 percent were shipped complete, even if the company was perfect in the other areas, the total perfect order index would only be 64 percent!

A study conducted by APQC displays that, at the median, organizations have a perfect order index of 90 percent. In other words, 10 percent of all orders being shipped have some form of failure when they are delivered to your end consumer. These high failure rates are alarming for all the organisations that have high dependency on functional metrics such as on-time shipments and line/unit fill rate as a key determinant for customer satisfaction.

APQC's data also shows that there is a high scope of improvement for perfect order index for any organisation because the index considers various logistics activities and the organizations can make the decision to improve the efficiency of the individual factors. This can be done by improvement in the process of taking orders correctly, allocating inventory quickly, delivering products on time, sending accurate invoices and most importantly develop the human resource who controls all of these processes.

As we know, human resource is the key resource that an organisation uses to build its employee value proposition and deliver a product or a service to its end customer. The oft quoted dictum, “Employees form an essential asset of your organisation”, is no longer a myth today but the main crisis that the organisations of today are facing is the ability to identify whether the capabilities of their employees is utilised fully or not. Effective human resource utilisation is the most important component of a working business model and is in direct correlation with the performance of the employees.

The employees of an organisation are the ones who create and deliver value for the end customer and hence are a key differentiator against the competitors as they deal with the operational end of the business spectrum. Hence, the role of human resource is to bring value proposition for the customer segment and improvement in performance is driven by implementing improved processes. The process begins with determining which key performance indicators (KPIs) are most important to the business model. These KPIs are then linked with the Key Result Areas (KRAs) to ensure employees are provided with smart objectives which are linked with effective processes and improvement in these processes.

In a nutshell, organisations of today need to include perfect order index as one of the KPI for all its employees who are linked with manufacturing and effective production of goods or services is a key enabler for the organisation's core competency and maximum revenues. The organisations also need to realise that the core human resource functions are not just limited to recruitment, compensation, performance management and succession planning needs, but also linked with the development of organisational capability building. The most successful organisations use talent management as a tool to drive strategic business development to achieve their long term vision. Perfect order index can be one of the stepping stones to support the talent management agenda and also help the organisation identify its core competitive strengths and areas of improvement both for its internal processes and its human resource.

At 3rd Eye Advisory® our human resource consultants help our clients to design and structure their organisation in a way to maximise the realisation of workforce capabilities and employee productivity. Our consultants are in constant endeavour to help clients compete through talent and map their human resource strategy to the business strategy which helps in achievement of short term and long term organisation goals. Perfect order index was introduced as one of the essential KPIs for one of our clients in manufacturing domain with an employee strength of 400+ employees. The monitoring of perfect order index not only helped them in increasing their score by 50% but also improved efficiency of all the employees. Perfect Order Index was also adopted by one of our clients who were pioneers in chemical industry. In turn this lead to increase in millions in annual savings, industry-leading productivity, and increased employee satisfaction.

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Article by: Human Resource Advisory, 3rd Eye Advisory®