I am a big believer in measuring everything.
Set lofty (but realistic) goals and then measure progress toward achievement. This is a fundamental of good execution.
Apart from several key KPIs we’ve discussed so far (cash conversion ratio, operating leverage, a few related to manufacturing operations), here are a some more for your consideration with a short explanation as to why I consider them important.
New Product Sales as a Percent of Total Sales
New products are defined as those launched within the previous two years.
I like a 15% metric here. It means that you will turn over your product lines every 5-7 years.
New products can be totally new development or meaningful enhancements that improve performance to existing products. Constant innovation is one of the keys to sustaining a great business.
If you are a job shop, are you measuring velocity improvement? For instance, if it took you 20 hours from order launch to shipment, can you improve that time in the upcoming year by implementing processes, tooling, warehouse efficiency, etc. that allow you to reduce this time?
We always measure this in lead-time reduction and like to show 20% first year improvement declining to 15, 10, etc. over time.
Again, improved velocity is another critical item to sustaining a great business.
Internal Hiring Rate
Another is hiring internally for key positions. A good KPI here is 70% promotion from within.
It provides for continuation of the culture, motivates people in the company that if the work hard to develop their skill set (development program in place via HR), they will get the first shot at the promotion.
The 30% from the outside is also important in that it brings in fresh ideas and different, perhaps more efficient ways of doing things.
No Major Audit Findings
I always welcome outside audits whether they be financial, environmental, or safety. We may have thought we had it nailed, but what does an outsider with multiple experiences in auditing other businesses think?
My metric for these audits was no major findings and clean up of all minor findings before the auditor leaves the premises.
DSO, Payables, Inventory Turns, OTD
Finally, some of the basics which you may already be using. Are your goals on each of these as high as mine?
- DSO: 30 days or less.
- Payables Days: 45 days or more.
- Inventory Turns: 10 or more. This depends on whether you are a job shop or manufacture in volume runs. If the latter, turns goal should be much higher. Inventory turns are a key indicator of velocity.
- On Time Delivery: 100%.
- Ship From Stock (depends on type of business): same day.
If you’re serious about achieving excellence, these should give you an ambitious starting point .