How to Apply the Concept of Leading Indicators to Define Your KPI’s
By Clinton Jones on Oct 5, 2016
I have discussed the advantage of using leading indicators over historical indicators in previous posts – some focusing on supply chain and plant maintenance, and how certain indicators can help you address future operational and performance challenges. This lead me to thinking about how a vertically integrated business that has a combination of sales activities, plant and maintenance tasks and route management might influence how you think about KPI’s.
Fresh produce producers and leading indicators
For example, take a leading supplier of fresh food products. It is essential for this company’s supply chain to be tightly synchronized in its analysis of trends in relation to seasonality and promotions to ensure the appropriate mix of products are available. This company tracks stock outs, sales volumes, procurement efficiency and other historical data, but also tracks several leading indicators to meet the demands of the market. Some KPI’s are tracked by production unit and have their maintenance plans adjusted to meet performance goals, while others analyze areas of the business beyond plant, equipment and inventory.
The supplier’s operations scorecard contains many complementary measures. Some are reported daily, others in weekly or monthly roll-up reporting.
- Warehouse loading bay turnaround time on refrigerated vehicles – this suggests the product may not be ready, but it can also suggest that fork truck, loading equipment or personnel are missing or unavailable. In some instances this can indicate orders have not been prepared in time for the manifest.
- Merchandising line back-order/stock out percentages – when a merchandiser arrives at a store to find that some lines are exhausted, they may draw the conclusion that line is popular or was previously under-provisioned. If they cannot replace inventory, this suggests that the manifest and plan for merchandising was not met by inventory fulfillment.
- Unsold/Un-merchandised inventory returned percentages – products have a limited shelf life, and expired or about to expire inventory are removed. Recurring unsold inventory suggests incorrect merchandising plans, possibly in response to changing market tastes.
- Inventory turnover by stock-keeping unit (SKU) – low turnover suggests overstocking, high turnover suggests under-stocking.
- Vehicle average speed – suggests that too few or too many fleet vehicles are in service, but can also suggest meeting the schedule or itinerary for merchandising is difficult. It could also suggest route planning needs to be revised.
- On-road vehicle overload penalties – suggests that inventory planning on logistics is not considering the gross weights and some vehicles are being overloaded or under-loaded.
- Expedited parts shipping costs – suggests inventory may be under-planned and equipment failures could be tied into needing expedited parts shipped to reinstate operations.
This supplier’s leading KPI’s and measures ensure smoother operations in the supply chain and allow them to meet the market demand. Historical measures are an indispensable part of your company’s performance, but high-performing enterprises balance them with effective leading indicators and drivers to make business operations more effective.
Doing more with less
World-class organizations do more with less, and there is statistical data to support this. According to new research from The Hackett Group, top performers spend 42% less and have about half the staff of their lower-performing peers. Businesses who are both lean and effective tend to be far more responsive to market needs and forward thinking. Costs for specific tasks are much lower when compared with peers. These savings allow organizations to devote more time and spending to planning for the future.
Effective organizations excel at harnessing data, gaining insight from it, and making intelligent forecasts using leading indicators and KPI’s. “The problem with the traditional finance function is they’re relying on financial indicators, which by definition are lagging indicators … finance professionals should be in tune with a company’s value drivers so they can predict value more accurately,” says Bob Paladino, author and founder of Bob Paladino and Associates LLC. Read more on this from a financial perspective in CGMA Magazine.
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