With the advent of advanced business intelligence tools, calculating KPIs has become automated and simplified.
Until recently, calculating Key Performance Indicators (KPIs) was a manual task for distributors, and was often delegated to the finance team, as financial statements were typically referenced as the source values for the calculations. Traditionally, distributors would publish the KPIs to the executive and management teams as part of month-end reporting (along with the financial statements). Certain transaction types were not factored into, or out of, calculating the KPIs, resulting in miscalculations. In addition, transactional KPIs were rarely calculated or published. (Financial KPIs reflect the strength and health of the distributor’s financial statements, while transactional KPIs reflect the business volume being handled by the employees.)
Some progressive distributors did calculate and publish KPIs more broadly, and pursued a KPI improvement program. But when such an initiative was undertaken, the employees were rarely educated on how a KPI is calculated or what an individual employee could do to improve it. Most employees had no visibility into the KPI data or how the KPIs were trending. And if a KPI reporting board was utilized, it was not often refreshed, sometimes leading to a perception by the employees that the data was stale and the program had lost momentum.
With the advent of advanced business intelligence tools, calculating KPIs has become automated and simplified. The more advanced software providers are offering business intelligence tools via SaaS (Software as a Service), so that distributors have access to the KPI calculations without needing to invest in hardware, software, or IT resources to manage the tools.
Factors in Calculating KPIs
KPIs generally will not show meaningful differences on a daily basis, and are often misinterpreted if they are reviewed every day. For instance, if a distributor received a large stock shipment from a supplier, and had less than average sales, it would seem that their inventory turns were lower than normal. Calculating and displaying KPI trends weekly or monthly better depicts the general health of the distributor.
When performing KPI calculations, you should consider the source data and the transactions that post to the source data. For instance, an inventory turns calculation is COGS/Average Inventory (over a specified time period). If the time period is one month, and the average inventory value for the distributor is $12M, then the average for the KPI calculation would be $1M. If the COGS source value included direct/drop shipments from the supplier to the end customer, bypassing the distributor, then the distributor’s inventory value is not posted. As a result, the inventory turns would be miscalculated.
Conversely, when calculating Accounts Payable Turnover, direct shipments should be included. A/P Turnover is calculated by COGS/Average Accounts Payable Balance (over a specified time period), and is a reflection of how quickly the distributor is paying their vendor invoices.
Focusing on the trending of your KPIs is important to ensure you are heading in the right direction, but comparing your own company to itself, year over year, does not always provide a good indication of your performance. You may assume that the company is doing well based on how your own KPIs are trending. However, by comparing your KPIs against best-in-class data, you may quickly realize that your KPIs are lagging.
Identifying the KPIs for which you are not achieving best-in-class results, and focusing on those, will help strengthen finances and operations. Also, having visibility into other distribution verticals’ best-in-class KPIs allows you to adapt some of those best practices to your organization.
Most distributors are now setting goals through budgets or general ledger account targets. Few are setting goals based on Key Performance Indicators. But KPIs are the best way to show company performance to the employees without displaying sensitive financial data. After a distributor calculates KPIs, and benchmarks them against best-in-class data, goals that are SMART (Specific, Measurable, Attainable, Realistic, Timely) should be set.
Achieving the Goals via Day-to-Day Processes and Policies
Employees should understand how the KPI is calculated, how the company is lagging compared to the best-in-class data, and the KPI goal. The employees need a clear road map for improving KPIs for which they are responsible. The KPI improvement road map is generally reflected in a strategy map, but this may be too complex for some field level employees. Therefore, it is important for the distributor to identify the key value drivers behind the KPI.
Evaluating your policies and processes is instrumental in working to achieve goals. To clarify the improvement activities to the employees, you could highlight 2-3 processes or policies that will be revisited in pursuit of the goal. This is an excellent opportunity to adapt Lean Business Process Re-Engineering techniques and distribution best practices. Some examples of KPIs and the processes and policies that could be evaluated as part of a KPI improvement program are shown below:
Correlating a KPI improvement program to employees’ daily job functions will simplify and demystify the program. For example, communicating an initiative to “improve the lines shipped per day” is meaningless to a warehouse worker. Communicating that management is reviewing processes for zone picking and order minimums, and allowances for breaking case packs, while monitoring effectiveness of these processes through the KPI of lines shipped per day, is more digestible and easier to understand.
New software solutions are enabling distributors to gather business intelligence and keep on top of daily changes that affect Key Performance Indicators. This technology, when combined with process re-engineering, employee education, and engagement at the day-to-day level, can contribute to measurable improvements in the KPIs that matter most to the bottom line.