How To Balance Your Business

Transcription

1 Metrics That Matter: The Most Effective KPIs to Transform Your Business By: Jon Snow, Senior Manager, Business Consulting Services An Epicor White Paper

2 Table of Contents Financial and Transactional KPIs: A KISS Approach 1 Operational Area: Sales 3 Gross Margin 3 Sales per Employee 4 Operational Area: Purchasing 5 Inventory Turns 5 Service Level 5 Operational Area: Fulfillment, Inventory Control or Warehouse 6 Operational Area: Finance 7 DSO (Days Sales Outstanding), Average Collection Period 7 DPO (Days Payables Outstanding), Average Payables Period 7 Cash Conversion Cycle 7 About Epicor 9 Metrics That Matter: The Most Effective KPIs to Transform Your Business i

3 Businesses thrive or fail based on their ability to identify, define, track, and act upon Key Performance Indicators (KPIs). The faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better the chance an organization has for success. Beyond the shareholder value that KPI improvement programs generate, KPI improvement initiatives position organizations for growth, financial performance and service differentiation. Sophisticated Enterprise Resource Planning (ERP) and Business Intelligence tools have made it possible to quickly calculate and report Key Performance Indicators and metrics. In previous white papers and articles, Epicor has emphasized the benefits of creating a KPI improvement program, and how that program should resonate with the key contributors in the business. Applying Lean and Six Sigma concepts to business process reengineering, assessing your business policies alignment to strategic goals, and implementing systems and organizational structures are necessary deliverables to support a culture of measurable improvement. Focusing your efforts on a balanced approach, with a blend of growth, financial and service KPIs, will enable you to achieve performance improvement that matters across your business, without sacrificing any one area of the business. One measurement alone does not provide a true reflection of performance. Consider how the operational areas could surpass the targets of that metric without achieving the overarching company goal. For example, any growth metric should be balanced with an attrition metric. To use a sports analogy: in basketball, assists are offset with turnovers; in football, touchdowns are offset with interceptions, etc. Multiple measurements across the balance of the operational function will reveal a balanced path to improvement. Financial and Transactional KPIs: A KISS Approach Companies commonly struggle with establishing the right KPIs to measure, and the frequency with which those KPIs should be calculated or published to the organization. This white paper covers the most impactful financial and transactional KPIs to calculate, how to create a balanced scorecard for those KPIs, and common failures in a KPI improvement initiative. We will dissect each KPI with a KISS approach: KPI, Information, Sponsorship, and Support. (The old usage of the KISS acronym still applies to a KPI improvement initiative: Keep It Simple, Stupid. Stupid does not refer to the aptitude of personnel, but the relationship between how things break, and the sophistication necessary to fix what is broken.) Some of the enablers that can be used in pursuit of KPI improvement are: Printed / static reporting ed / faxed reports Dashboards Automated alert technology BI analytics software Metrics That Matter: The Most Effective KPIs to Transform Your Business 1

4 Management consulting / training Third-party BI consulting services Balanced scorecards. The scorecard measures the critical business level metrics that are the root of all KPIs, including: Financial metrics: e.g., actual versus budget related to project costs Operational/process metrics: related to measuring on-time progress of projects and system metrics (e.g., uptime of critical business systems) HR/staffing metrics: e.g., diversity, employee retention, and headcount. Transactional KPI metrics correlate closely with process metrics. The best way to identify and improve the root cause for an underperforming transactional metric is to understand the intricacies in the supporting processes, including those process metrics. When your organization can process more with less time, steps, and resources, the business is scalable to support peaks in demand and can be right-sized for normal business flow. Measuring a comprehensive set of KPIs allows you to monitor overall business performance in sales, financial performance, and service. Epicor refers to these elements as the High Performance Balanced Scorecard. Scorecard metrics are supported by a highly customizable array of KPIs, which then feed into individual performance metrics. Cascading measurements from a balanced scorecard through KPIs and individual performance metrics aligns your company and alleviates wasted improvement efforts. A narrowed focus on the critical KPIs will ensure a greater chance of success on a KPI improvement initiative. Each operational area should be measured on 2-4 metrics. The financial KPIs that every distributor should calculate include: 1. Gross Margin 2. Sales per employee 3. Inventory turns 4. DSO Days sales outstanding, average days for customers to pay 5. DPO Days payable outstanding, average days to pay vendors And the corresponding transactional KPIs are: 1. Orders Entered Per Day 2. Average order value 3. Service level 4. Shipments Per Day 5. Lines Received Per Day Metrics That Matter: The Most Effective KPIs to Transform Your Business 2

5 Operational Area: Sales Gross Margin It is critical to educate and coach employees on how concessions, unwarranted discounts, process variations, defects and inefficiencies can lead to higher costs, thereby decreasing operating margin. You can start from the angle of WIIFM? ( What s in it for me? ) That is, the higher the operating margin, the more company stability and longevity of the business, creating job security. Also, opportunities for bonuses, additional education, and increased job satisfaction all correlate to company performance and operating profit, which start with gross margin. Financial KPI Information Sponsor Support Gross Margin Sales-COGS Sales or Pricing Sales staff (Cost of Goods Sold) Manager Frequency: Weekly Transactional KPI Orders Entered per Day Information Sponsor Support Total Orders / total business days Frequency: Weekly, aggregate Monthly Sales Manager Sales staff The Orders Entered per Day is an indication of the volume of business handled by the inside sales staff. When this metric tapers, it is time to refocus activities on call campaigns. By performing a Lean Kaizen Blitz (a focused, short-term project to improve an operational area) on sales processes, businesses can identify wasteful, non-value-added activities that can be eliminated, creating more capacity to handle the increased volume of business. A few process metrics to focus on include: total time and takt time. Total time= how long does the process take, and Takt Time= Available work/customer demand. I.e., for Takt time, if you have 10 inside sales representatives focusing on entering orders, working 8-hour days, then you have capacity for 80 sales hours/day (4,800 minutes/day). If there are 400 orders per day being entered, then the takt time is 12 minutes per order. The total time for the order entry process needs to be less than the takt time, or you will have capacity issues. Metrics That Matter: The Most Effective KPIs to Transform Your Business 3

6 Transactional KPI Average Order Value Frequency: Weekly Information Sponsor Support Total value of orders / total count of orders Sales Manager Sales staff The average order value is an indication of the ability for the sales team to upsell accessory or go together items. Also, it is equally a reflection of the amount of business your customers are willing to award you, based on the items that are frequently shopped (core items) versus the items for which the customer is willing to pay purely for convenience. As we have all seen in our local big box store, you shop appliances, power tools, etc. diligently; then at the checkout line, you grab a marker. The store has just made a significantly higher margin percentage on that marker than on the core/competitive item. The more lines you have of noncore items on the orders, the more margin you will gain. The ability to upsell non-core items is reflected in your average order value. This will balance the metric of orders per day, as savvy inside sales reps may attempt to beat the orders per day targets by taking a customer Purchase Order and breaking it into multiple sales orders. Surpassing goals in both average order value and orders entered per day will achieve your objective: more sales overall. Sales per Employee This measure is a reflection of the organization s ability to do more with less. As sales continue to increase for your business, you should be able to execute those sales transactions with the same headcount. If your sales or fulfillment resources resist being able to handle the increased volume of business, then a deep dive into the supporting processes is necessary. Businesses will inevitably have wastes within the process that result in inefficiencies. These wastes can be identified and removed using Lean concepts. Financial KPI Information Sponsor Support Sales per The total President / CEO All employees Employee revenue / number of employees Frequency: Monthly Metrics That Matter: The Most Effective KPIs to Transform Your Business 4

7 Operational Area: Purchasing Inventory Turns Inventory is typically a distributor s largest asset. The ability to leverage the inventory is best reflected through the inventory turns calculation. This becomes difficult for many distributors to calculate, as inventory is typically perpetual or always moving in ERP systems, and the inventory denominator is either an end-of-month value, or the average between the previous period end and the current period end. Financial KPI Information Sponsor Support Inventory Turns COGS / Average Purchasing Buyers inventory value Manager Frequency: Monthly Service Level Transactional KPI Service Level Frequency: Monthly Information Sponsor Support Time period order hits for an item / time period orders for an item Purchasing Manager Buyers Increasing inventory turns is a sensitive matter, since theoretically, it can be achieved by reducing the inventory carried, to the detriment of fill rates and service levels. The service level is a reflection of the ability to fulfill customer demand with available inventory. When service levels are down, customers are likely selecting another source or distributor for the inventory, and you may be losing significant business. Thus, you must maintain a delicate balance within this metric. Metrics That Matter: The Most Effective KPIs to Transform Your Business 5

8 Operational Area: Fulfillment, Inventory Control or Warehouse Transactional KPI Shipments per Day Information Sponsor Support Number of shipments / number of business days Warehouse Manager Warehouse staff Frequency: Weekly Similar to the orders per day, this is the ability to handle the business volume generated by sales. Also, it is a reflection of the orders picked per day and the ability for the warehouse to fulfill customer demand. If this metric starts underperforming, a deep dive into slotting (the optimal storage location of product in a warehouse) would be beneficial. Also, an underperforming shipments per day metric can be correlated to underperforming sales or be a leading indicator of poor on-time delivery metrics. Transactional KPI Lines received per day Frequency: Weekly Information Sponsor Support Total PO lines / days within period Warehouse Manager Warehouse staff Since warehouse picking and receiving functions are often shared activities within the warehouse staff, if the staff is constrained by performing shipping activities, then they will likely also be constrained on receiving. If the lines received per day starts underperforming, it may be a leading indicator that fill rates or service level may begin slipping. Metrics That Matter: The Most Effective KPIs to Transform Your Business 6

9 Operational Area: Finance DSO (Days Sales Outstanding), Average Collection Period Collection policies are really a reflection of the valued partnership with your customers. Everyone is willing to pay for a viable service. Rather than only asking the customer, Where is my money?, determine if there is an underlying issue or reason for payment being delayed. Use Six Sigma tools, like VOC (Voice of Customer), to conduct a survey to solicit feedback from the customer, and to determine if there is a recurring trend that is damaging your customer rapport. The survey results should flow to your Business Development or sales personnel. Action needs to be taken to mend any relationship in jeopardy and verify the customer is receiving the expected value from services. Financial KPI Information Sponsor Support Days Sales 365 divided by CFO or A/R or Credit Outstanding (Sales / Average AR Balance for month) Controller Frequency: Monthly DPO (Days Payables Outstanding), Average Payables Period With the exception of leveraging purchasing or terms discounts, your business should be slower to pay vendors than you are receiving money. Financial KPI Information Sponsor Support Days Payables Controller / CFO Outstanding Frequency: Monthly 365 divided by (COGs / Average AP Balance for month) Accounts Payable staff Cash Conversion Cycle Three of the above financial KPIs impact cash flow or the cash conversion cycle, as follows: Cash Conversion Cycle (CCC) = DIO (Days Inventory Outstanding= 365/turns) + DSO - DPO The CCC is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash. It measures the amount of time a dollar is tied up in the production and sales process before it is converted into cash through sales to customers. It is sometimes referred to as the cash cycle, as it measures the general health of cash flow. If the organization does not have sufficient cash flow, then it will be difficult to make investments in assets or resources to grow the business. Metrics That Matter: The Most Effective KPIs to Transform Your Business 7

10 Pitfalls There are several common failure points that can and should be avoided in a KPI improvement initiative: A. Boiling the ocean The company calculates and shares too many KPIs with the staff, and there is a lack of focus on improving the underperforming or critical KPIs. B. No balance Improving one KPI will come at the expense of negatively impacting another KPI. C. Omniscience Executive sponsors may be the only ones who understand an underperforming KPI, and those sponsors fail to educate key contributors on the external factors, adjusted targets, and how the KPI improvement strategy will be executed. D. Sponsorship Executive sponsors fail to assign the right priority to the KPI improvement projects and fail to align the KPI to an individual performance metric, leading to internal confusion or lack of tactical staff buy-in towards the flavor/initiative of the week. Starting a KPI improvement initiative using the prescribed KISS philosophy noted above, while mitigating the risks of the common failures, will ensure your organization adopts and takes ownership of its metrics. If you are currently reporting a balanced scorecard for each operational area, then consider comparing your metrics against best-in-class data to identify underperforming KPIs. In summary, a balanced approach to KPI improvement, concurrently focusing on financial and transactional key performance indicators, will best position your company for growth and scalability as business volumes increase. Epicor s Business Consulting Services team comprises authorities in distribution and manufacturing best practices, ERP management, project management, change management, and business process re-engineering. Services include: Key Performance Indicator Improvement Initiatives Best Practice Assessments Assisting with Mergers and Acquisitions Leading Lean Kaizen Blitz Initiatives Conducting Change Acceleration Process Workshops Metrics That Matter: The Most Effective KPIs to Transform Your Business 8

11 About Epicor Epicor Software Corporation is a global leader delivering business software solutions to the manufacturing, distribution, retail, and services industries. With nearly 40 years of experience, Epicor has more than 20,000 customers in over 150 countries. Epicor solutions enable companies to drive increased efficiency and improve profitability. With a history of innovation, industry expertise, and passion for excellence, Epicor inspires customers to build lasting competitive advantage. Epicor provides the single point of accountability that local, regional and global businesses demand. For more information, visit Disclaimer This document is for informational purposes only and is subject to change without notice. This document and its contents, including the viewpoints and content expressed herein are believed to be accurate as of its date of publication, February, 2012, but Epicor Software Corporation makes no guarantee, representations or warranties with regard to the enclosed information and specifically disclaims any applicable implied warranties, such as fitness for a particular purpose, merchantability, satisfactory quality or reasonable skill and care. We welcome user comments and reserve the right to revise this publication and/or make improvements or changes to the products or programs described in this publication at any time, without notice. Epicor is a registered trademark and/or trademark of Epicor Software Corporation in the United States, certain other countries and/or the EU. All other trademarks mentioned are the property of their respective owners. Copyright Epicor Software Corporation All rights reserved. No part of this publication may be reproduced in any form without the prior written consent of Epicor Software Corporation. For more information, contact Epicor Software Corporation: info@epicor.com or Worldwide Headquarters San Francisco Bay Area 4120 Dublin Boulevard, Suite 300 Dublin, CA USA Toll Free: Direct: Fax: Latin America and Caribbean Blvd. Antonio L. Rodriguez #1882 Int. 104 Plaza Central, Col. Santa Maria Monterrey, Nuevo Leon, CP Mexico Phone: Fax: Europe, Middle East and Africa No. 1 The Arena Downshire Way Bracknell, Berkshire RG12 1PU United Kingdom Phone: Fax: Asia 238A Thomson Road #23-06 Novena Square Tower A Singapore Singapore Phone: Fax: Australia and New Zealand Level Miller Street North Sydney NSW 2060 Australia Phone: Fax: Metrics That Matter: The Most Effective KPIs to Transform Your Business 9