Tuesday, May 7, 2013
Use Key Performance Indicators as Management Tools
Having performance indicators can help improve virtually any facet of your business.
Determining the business area to be monitored and the type of indicator will vary by business type. For example in retailing, customer satisfaction may be gauged by repeat visits by customers, frequency that merchandise is returned and customer complaints. For airlines, customer satisfaction indicators might include lost luggage and on time departure and arrival statistics.
Key performance indicators should provide a gauge of success in achieving internal goals as well as comparing performance with industry averages or industry leaders. Having a comparison to the industry prevents managers from becoming myopic when measuring results.
Some companies produce key performance indicator reports monthly and distribute them with financial reports to managers and senior staff. By combining key performance indicators with financial outcomes a manager is able to get a clearer picture of what is working well and what needs attention.
For example, a financial report might show a profit level that is meeting expectations or that revenues are at expected levels. Viewing key performance indicator reports may show that product sales volumes are higher than expected and that labor costs are below expectations. Here a manager looking at just the financial reports would assume everything was operating in an acceptable range and that significant improvements couldn’t be made.
By analyzing non financial performance indicators such as products produced per labor hours used and revenue per product, a manager in the foregoing example might find that the products are being sold at lower than planned rates and employee productivity reduced labor costs enough to offset lower revenue per unit sold.
This might cause a manager to ask why the products were sold at lower than planned rates. Further study might find a problem with marketing efforts, sales staff or product quality. Follow up actions might result in solutions that would allow unit rates to increase while maintaining sales volume resulting in increased revenues and profits.
It is a good idea to have operational managers report on key performance indicators in their area of responsibility on a regular basis. Monthly reporting is preferred but such reports should be required at least quarterly. This disciplined approach to reporting on key performance indicators will train managers to fully understand the implications and relationships of the indicators to overall organizational performance.
Key performance indicators to be reported on might include the following:
1) Workforce performance Indicators
a. Payroll costs per full time employee equivalent,
b. Products produced per person hour,
c. Customers served per person hour,
d. Revenue per person hour,
e. Benefit costs per full time equivalent,
f. On the job injuries per month,
g. Employee payroll and benefit cost per product sold or customer served.
2) Production Division Indicators
a. Percentage of available machine time used,
b. Repair and maintenance hours as a percent of available machine time,
c. Material waste per unit produced,
d. Defective products per 1000 produced.
3) Financial Indicators
a. Days in accounts receivable,
b. Interest cost or discounts lost due to late payment,
c. Discounts received for early or timely payments,
d. Days of material in inventory,
e. Inventory turns per inventory payment cycle.
4) Customer Satisfaction Indicators
a. Customer product returns per 1000 products sold,
b. Customer Complaints per 1000 customers,
c. Customers served per person hour,
d. Number of out of stock reports per product line
5) Sales and Marketing Indicators
a. Revenue per customer,
b. Profit per customer
c. Market share
d. Sales per sales employee
e. Sales administration costs per customer,
f. Advertising costs per customer,
g. Advertising and marketing costs per product sold.
This list of indicators can be expanded or customized to meet specific business needs.
Using key performance indicator reporting on a regular basis will provide useful information for actions that will improve the overall performance of any organization.