We have identified five steps to ensure that the key performance indicators (KPIs) a company tracks actually help drive performance and deliver on the company's strategy. The first step is to choose KPIs that clearly align with the business strategy. As part of this exercise executives need to gather customer input and translate what customers value into KPIs the company can follow. How much do customers care about price, or time to delivery, or ability to customize? Many companies don’t know the answers to these questions and that hurts their ability to align KPIs with the business strategy. According to PwC’s 2015 Global Operations Survey, 63 percent of executives said it is challenging to understand what customers value.
But identifying the right KPIs is just the first step. Once the KPIs are chosen, companies need to baseline those metrics to understand how those KPIs have performed historically. What are the low and high water marks for those KPIs? Are they cyclical or seasonal? Once the company has identified and baselined the KPIs, it can then set reasonable targets for those KPIs, whether the goal is to improve your own performance, outperform a specific competitor, or become best in class. It’s also critical to distinguish between KPI targets that call for a change in the absolute number (as you might with inventory) and a percentage change (such as delivery to commit).
Next the company must track and manage those metrics. This involves bringing the appropriate stakeholders together so the company has a full view of the KPIs and how the business is performing. But it also means managing those individual KPIs as part of a “balanced scorecard” that shows progress toward the business goals, as well as the trade-offs necessary to achieve those goals; otherwise KPI targets could work at cross-purposes and undermine the business strategy.
For example, if the business strategy involves offering product customization for premium pricing, then the order fulfillment cycle might increase. That longer fulfillment cycle might be acceptable to customers who expect a customized product to take longer to deliver. A balanced scorecard can put these different KPIs in perspective. It can show how a KPI often assumed to be a negative - a lengthening order fulfillment cycle - is actually a positive sign that the business strategy is working as more customers choose the more expensive, customized product.
Finally, internal policies and procedures are necessary to ensure the company adjusts operations based on the KPIs. This involves holding people accountable for specific KPIs and incentivizing them to take action when appropriate.
Today’s consumers are more informed and demanding than ever, and as a result companies need to do a better job identifying and tracking KPIs that represent what consumers value. As noted, according to PwC’s 2015 Global Operations Survey, almost two-thirds of executives said it is challenging to understand what their customers value. This creates a potentially huge competitive advantage for companies that can identify and track the right KPIs.
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