However small or large your business is, and whatever industry you’re in, it’s important to always be looking for ways to improve operational performance. This is particularly essential in today’s commercial environment of rising customer expectations, fiercer competition and ever-tightening margins. Setting good KPIs to improve your business is now more important than ever.
Failure to identify and address business performance issues can result in a host of problems including unsatisfied customers, missed opportunities, weaker competitiveness, cost overruns and diminished profits. And that’s just for starters.
The challenge is to find an meaningful way to assess and manage the health of your business and improve it where possible.
You’re probably familiar with the term Key Performance Indicator (KPI). A reliable method for evaluating your business activity against objective benchmarks, KPIs provide one of the best ways to monitor and measure business performance. Setting performance goals is a must for any business and KPIs allow you to know how well your business is progressing towards those goals. By establishing standards against which performance will be measured, KPIs remove much of the guesswork and subjectivity from the evaluation process, resulting in plenty of benefits including, importantly, better managerial decision-making – which will improve your business.
So what type of KPIs are most useful, and how many should you have? That depends on the type of business you run and the type of performance targets you want to achieve. KPIs can be simple or complex, but as a general rule it’s best to set KPIs that are easy to understand – for example, revenue targets, customer acquisition goals, percentage of orders shipped without incident, etc. In terms of number, if you have too many KPIs you risk over-complicating things and drawing attention away from those that are most important. Too few and you’ll find yourself neglecting core areas of your business.
In terms of a formula for working out which KPIs to use, S.M.A.R.T provides a tried and tested framework:
Specific – what, precisely, do you want to achieve?
Measurable – do you have a method to ensure the accurate measurement of your goal?
Attainable – is your target reasonable and realistic?
Relevant – does the goal align with your overall business strategy and objectives?
Time-based – what is your deadline for the achievement of your identified goal?
One thing to avoid is confusing a KPI with a goal, because they’re not the same thing. A goal is an outcome you want to achieve; a KPI is the metric you use to track your progress towards the goal. Without an accompanying target or goal a KPI is almost useless. For example, if one of your goals is to increase online-generated sales by 15% by 31st March 2020, you could use a set of KPIs as a metric to measure the results of your email marketing activities, such as number of conversations, click‑through rates, open rates, bounce rates, etc. By tracking the results of your email marketing strategy you can work out what activities are leading to sales and which are not, and adjust your strategy in whatever ways you need to in order to reach your identified target.
An Example: Perfect order
What are some other KPIs that might be useful in your business? For today’s purposes let’s assume you operate in the supply chain arena, say in a distribution-focused company where business success partly depends on the continually efficient and timely delivery of products from a warehouse or distribution centre to customers. In such a scenario a worthwhile KPI would be your perfect order rate. This is widely considered to be the most critical KPI for tracking and measuring performance within a supply chain.
The perfect order KPI is comprised of a number of metrics, namely:
- Percentage of on-time deliveries
- Percentage of in-full deliveries
- Percentage of deliveries where goods arrive in the right condition (eg undamaged) and with the right packaging
- Percentage of deliveries where there is the proper documentation (labels, shipment notifications, invoices, etc)
If an order is delivered on time, in full, in the right condition and with the correct documentation, it is considered a perfect order.
You can calculate your perfect order rate through a fairly straightforward mathematical formula. If you have determined, for example, that your percentage of on-time orders is 97%, in-full is 95%, in the right condition 98% and properly documented is 93%, what you do is multiply the decimal equivalent of each all together and then multiply the total by 100. In the given example that would be 0.97 x 0.95 x 0.98 x 0.93 = 0.8398551. Multiply that by 100 and you arrive at a perfect order rate of 83.98%.
The great advantage of the perfect order KPI is that gives you an accurate idea as to where things are going both right and wrong in the order fulfilment process. Failures can be easily identified across each of the functional units associated with order fulfilment, allowing you to know which are the strongest and weakest links in the supply chain. The perfect order KPI also gives you something clear to aim for. If your perfect order rate is five percentage points lower than what you believe is achievable given the right changes, set that higher percentage as the target for you and your team to reach. And also be sure to set a deadline for when that target should be achieved.
So what if you find that your perfect order rate is a lot lower than you’d like it be? Here’s where your investigation begins, because obviously you will want to know why the rate is where it is. You may, for example, discover that you’re consistently running too low on inventory, or that your employees are making careless mistakes with documentation, or that the inventory that’s shown in your business management system does not match what’s actually in the warehouse. There can be lots of things that are thwarting your ability to achieve a high perfect order KPI and getting to the bottom of it – and fixing it – is what this KPI is all about.
There are, of course, heaps of other KPIs you can apply to strengthen your business operations and improve your business. One of the keys to a successful KPI strategy is to only set KPIs that will generate actionable data. There’s little point tracking and measuring something that can’t be improved so don’t waste your time with those types of KPIs.
In addition to perfect order, some other supply chain KPIs you might want to experiment with include:
Picking and packing
This could include the number of items picked per employee over a certain time period, percentage of orders picked accurately, the rate of returns, etc.
This KPI would track the average number of days between when your business pays for raw materials and when the customer pays for the product.
Freight cost per unit
This one measures the cost of freight per KPU or product item.
Carrying cost of inventory
A worthwhile warehouse management KPI, this one quantifies how much it is costing your business to retain stock over a specific time period.
This KPI is a calculation of the average number of days, weeks or months that you ship stock after its arrived in the warehouse.
By quantifying the number and percentage of orders that are being received for inventory that is not in stock, this KPI provides a useful tool for improvements in planning and forecasting.
Finding the right KPIs for your business will take a little bit of practice. What’s important is that you focus on those areas which are most central to the fulfilment of your business vision and strategic goals. After a little trial and error you should arrive at a set of KPIs that both you and your staff members can get enthusiastic about, all with the collective aim of improving operations, increasing customer and employee satisfaction and boosting that all-important bottom line.