It’s important to take the right steps when setting Key Performance Indicators (KPIs) to ensure they are meaningful and deliberate to help improve business performance. To achieve meaningful KPIs you must first have a clear understanding of the difference between KPIs and targets.
Key performance indicators
KPIs help businesses to understand how well they are performing in relation to their strategic goals and objectives. They help you to understand whether you are achieving one or more of your strategic goals. Once you’ve identified your strategic objective, you then define a target by which to measure it, this target becomes your key performance indicator.
KPIs are used to measure anything from customer satisfaction and consumer engagement levels to employee performance and return on investments. For example, customer satisfaction metrics are used to drive improvements in customer experience.
The objective of any meaningful KPI is to be a method of learning and delivering continuous improvement. Setting the right targets is critical to achieving this however, you should only set a few KPIs for each goal, only tracking what you really need. Each KPI should directly link to the goal to facilitate a meaningful result.
It’s one thing to identify your strategic objective, but key performance indicators need targets to be effective. A strategic objective could be to improve inventory control, so how do you measure progress towards this objective?
It may be to cut down on inventory waste. Waste reduction, therefore, becomes your KPI. A target is then established for the KPI and must be specific and time-bound. For example, to improve inventory control with a 10 percent reduction in inventory waste in the next business quarter.
Target setting needs to be specific, measurable, achievable, realistic and time-bound (SMART).
Setting meaningful KPIs
You can only create meaningful KPIs and measures when you focus on activities that will impact both your customer KPIs and the organisations internal KPIs. When you are aware that KPIs for product innovation can assist inventory control, KPIs for marketing campaigns can help to attract new customers or subscription KPIs will improve purchase repetition rates, you can set the appropriate targets and tactics to best achieve these goals.
Firstly, you need to evaluate any existing KPIs and performance measures you have, then decide what to keep and what to cull. Start with a framework of evaluation that addresses the criteria for meaningful KPI measurement.
As you gather this information you can quickly audit each KPI to ensure it has the essential details that each measure needs. Make sure your goals are clearly worded, measurable and specific enough to recognise when they have been achieved.
Have a deliberate technique for setting KPIs to ensure they are the most relevant and practical indication of your objectives. Develop clear and quantitative measures from correlated and feasible proof for your goal.
Get buy-in from employees to support your KPIs. If your staff don’t see the relevance or don’t understand KPIs they will be less willing to adopt the actions necessary to reach set targets.
Determine your five-year target for KPIs then work backwards from these to create your annual targets.
Start with the lagging indicators that are easy to measure but hard to change such as sales results, new customers gained in a set timeframe or the percentage of revenue increase. From there you can work towards leading indicators that are harder to measure but easier to change like traffic, unique website visitors or the ratio of sales calls to conversion rates.
Finally, once your KPIs have been set, be sure that you measure them consistently, on a weekly or monthly basis to track performance.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.