KPIs, the abbreviation for Key Performance Indicators, have become critical in the modern business world. In a nutshell, KPIs measure a company’s actual success compared to its own targets or those of others in the industry.
KPI reports are often published periodically and are essential for every type of business to retain an understanding of, simply put, how things are going. Hereby, KPIs can be used to assess whether projects, marketing campaigns, or products have met their target results.
KPIs are always oriented towards the past and are not meant to predict the future. They are, after all, indicators and not predictors.
There are dozens of potential KPI metrics. Performance means something different for every business. For example, while most companies focus on financial KPIs, such as net profit or cash availability, KPIs can also be used to measure more anecdotal data. For instance, employee turnover or foot traffic in a store.
A difference can also be made between quantitative indicators – essentially pure numbers – and qualitative indicators, which can also include opinions or feelings. Qualitative KPIs are often text based instead of number based and are particularly helpful when measuring whether intangible targets have been met. For example, whether a vision has been implemented as intended.
Ultimately, anything can be measured to indicate performance: the number of accidents in your nuclear plant, the customer’s satisfaction with the smartphone you produce, how many new customers your door-to-door salesmen acquire – the list is endless.
KPIs play a particularly important role in value chain management as the value chain produces an incredible amount of quantifiable data. Thus, by measuring your value chain KPIs, you can spot inefficiencies, weaknesses, and strengths. Ultimately, this will help you make sure that your value chain can keep up with the growth of your business and can tackle unforeseen events.
Of course, there is an uncountable number of possible KPIs in Value Chain Management but introducing a few key examples will give an idea of what they can look like.
Measuring inventory turnover means that a company counts how many times an entire inventory has been sold over a certain period of time. Measuring inventory turnover helps, for example, to plan production more efficiently or to set new targets for the sales team.
Keeping an eye on your Inventory Days of Supply helps to calculate how many days it would approximately take to run out of stock, assuming your stock is not replenished. This KPI is especially useful in preparing for potential supply chain disruptions.
Calculating how long shipping takes, how often wrong items are sent out, and where incidents occur most often will not only to optimize shipping and delivery, but also allows to give customers a reliable indication for delivery times, increasing customer satisfaction.
Because KPIs have become ever so important in understanding a company’s strengths and weaknesses, our business simulations pay particular attention to their role.
What we have observed over the years is that companies often apply silo thinking to how they manage their business and strictly differentiate between sales, finances, operations, etc.
Quite often, this is also reinforced by the measurement of siloed KPIs. This approach does not always lead to the best overall outcomes, as it neglects the interdependence between different departments and the mutual influence they have on each other.
This is why our business simulations focus on tearing down silos, encouraging departments to collaborate, be aligned and have their performance evaluated by a shared set of KPIs. Read more about in on our business games page.