Essential KPIs to Track a Business’s Efficiency

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Today’s markets are cutthroat. You are constantly racing with your competitors to capture a higher market share and generate the maximum revenue for your stakeholders. To ensure your business succeeds, you need to track its progress constantly and set appropriate metrics that tell you about your organization’s health. Key Performance Indicators, or KPIs, can help you here.

KPIs as Performance Trackers

You need a suitable method to track your organization’s performance so you can evaluate your strengths and shortcomings. KPIs are immensely valuable in this regard as they’re simple, measurable, and trackable.

An organization’s KPIs vary according to its processes, needs, and goals. Remember that KPIs must be simple and quantifiable: if you cannot measure your KPI because it is too complex or too abstract, you have not identified the right KPIs.

Several individuals confuse KPIs with metrics and Objective and Key Results or OKRs. A metric is any quantifiable measurement, while a KPI is a metric that gauges your organization’s progress toward its long-term business goals. All KPIs are metrics, but not all metrics are KPIs. Likewise, OKRs refer to the expected results if you complete your objectives, while KPIs are the indicators of your organization’s performance.

Production KPIs

The product development process is a central business function: without a suitable product or service model, there is no business. Mistakes in product development can set your business back, so you must devise and track your KPIs at every step of product development.

Production involves creating a deliverable product. This process involves research and development, product design, and product manufacture. Consider automating your production workflow and devise relevant KPIs to optimize your production. Here are essential production KPIs to consider:

1. Cycle Time

Cycle time refers to the time it takes to produce one product from start to finish. It essentially measures the efficiency of the production process; the fewer delays there are, the more streamlined the process is, and the lesser the cycle time will be.

You need to track your Cycle Time and attempt to reduce it, as the less time it takes to produce a product, the more products the company can produce in a given period, and the greater its productivity will be. Tracking this KPI after introducing a change, like new equipment, can let you gauge the effectiveness of your techniques.

2. Production Attainment

Production Attainment is a percentage of the number of products produced to the target production. Your organization should aim to achieve as high a production attainment rate as possible. If your production attainment rates are low despite your best efforts not, then you may be setting targets that are too high, or your processes have redundancies. Consider investing in technical equipment and hiring specialized staff if you believe your current attainment rate can’t let you make suitable profits.

3. Unit Maintenance Cost

Unit maintenance cost is your organization’s maintenance expenses per every unit of product produced. You can calculate the unit maintenance cost for the machines involved in the production of one unit by dividing the total maintenance costs by the total units produced.

Your organization may be losing significant revenue if the maintenance cost is a significant percentage of the unit’s sale price. Track your unit maintenance cost and aim to cut it as much as possible. Replacing old machinery or investing in better tech can help with that.

4. Production Cost Per Unit

You need to track your current expenses accurately if you aim to reduce your costs to get better profits or gain a competitive edge by reducing your prices. You can calculate the production cost per unit by dividing the total manufacturing costs by the total units produced.

5. Material Usage

The material used in producing one unit of your product is an important KPI related to your goods procurement. The actual material used may be different from the planned material usage. By tracking your material usage, you’ll better understand the resources you use per unit, which can let you forecast future expenses appropriately. You can calculate material usage by dividing used material by planned material and taking its percentage.

6. Waste Reduction Rate

The waste reduction rate depicts your resource optimization and the extent to which you mitigate your waste production. You can calculate this by defining equal intervals in which you’ll measure your waste production. Then you divide the waste produced in the latest interval by the waste produced in the previous interval. If your ratio comes to greater than 1, you’re producing more waste now and need to work on your resource usage. The greater the ratio, the more severe the problem.

Procurement KPIs

You must streamline your organization’s purchasing process to keep your expenses minimal. Procurement of goods and services involves purchasing them and managing and building supplier relationships valuable to your business. You must identify the most suitable suppliers, evaluate their performance, and negotiate agreements that favor your business to streamline your procurement process. Similarly, you must manage your Purchase Requisition, Purchase Order, approvals, invoicing, and AP workflow if you want clarity in your organization’s purchasing process.

An inefficient procurement process can lead to missing deadlines for your deals as you run out of critical goods and services. Similarly, an obscure procurement workflow can leave room for fraud and costly errors. You can also miss payment deadlines and ruin relationships with suppliers, or you can continue dealing with low-quality suppliers by not tracking their performances.

Consider integrating digitalization in your procurement processes, like automating KPI tracking, approval routing, and finance automation strategies into your procurement process. Keep these KPIs in mind to oversee your procurement processes:

1. Number of Suppliers

This KPI monitors your dependency on suppliers. Limiting yourself to a few suppliers risks creating dependency: if one supplier pulls out at the last minute, you risk problems in production. However, too many suppliers make it difficult to forge meaningful relationships with them or track the quality of goods and services, and you can miss out on discounts and special offers. Go for contracted suppliers over uncontracted ones.

2. Purchase Order Cycle Time

The Purchase Order cycle time is a measure of the time from the creation of the Purchase Order to its payment. Your PO cycle time can be short or within four days, medium or from five to eight days, and long or over eight days.

You will have to track your PO cycle time per each supplier. A short PO time shows that you’re getting your supplies fast and are dispatching payments to suppliers on time. If you notice larger numbers, identify the cause of the delay and work to mitigate it. For instance, if your vendor is taking time to dispatch goods, it may be time to look for better ones. Similarly, if your department is taking time to process the invoice, it’s time to look into the state of your technology.

3. Supplier Defect Rate

Supplier Defect Rate is an important KPI impacting your product’s quality. It is the percentage of rejected supplies per vendor. By tracking your supplier defect rate, you can evaluate which suppliers provide you with consistently high-quality goods and which suppliers to let go of. Measure your supplier defect rate by taking a percentage of the goods you rejected from the total supplied goods. You can evaluate multiple suppliers' performance by comparing their defect rates.

4. Procurement ROI

The return on investment (ROI) refers to the ratio of profit and cost of investment and shows you how much return an investment gave your company. It expresses how much your organization saved through its effective procurement strategies. Your procurement ROI should be around 10 times higher than the internal investments in the procurement department.

Marketing KPIs

Once you have made the product, you must ensure it sells well. Effective marketing strategies can ensure your product is a success and earns your money revenue. You can employ several digital marketing strategies for your product, including pay-per-click, B2B, and content marketing. The following KPIs can help you gauge your marketing strategy’s performance.

1. Customer Acquisition Cost

Customer acquisition cost is the money you spend on marketing to gain a new customer. You can calculate your customer acquisition cost by dividing your total marketing costs by the new customers obtained through your marketing strategies in a particular time frame. The higher your customer acquisition cost is, the less efficient your marketing campaign is.

2. Traffic-to-Lead Ratio

Your traffic-to-lead ratio determines your website or social media contact’s effectiveness. If your website gets decent traffic, but the lead generation is low, you need to re-evaluate your content instead of paying to promote your page or investing in SEO. If that is the case, ensure you concentrate your marketing efforts on lead generation instead of webpage promotion.

3. Lead-to-Customer Ratio

The lead-to-customer ratio indicates how many new customers you gain from your leads. You simply calculate it by dividing the number of customers by the number of leads you have. If the lead-to-customer ratio is low, you must re-inspect your sales funnel and your lead-gathering methods. Your leads may be of low quality, or your sales funnel may be too long.

4. Landing Page Conversion Rates

Your landing page conversion rate refers to the leads generated by your landing page. You can calculate it by dividing the number of leads generated during a time period by the total number of visits to your landing page during that time. Fewer conversions mean you need to optimize your landing page. You can optimize your call to action, shorten your form, and make your content more persuasive.

Endnote

Key performance indicators are essential to any organization as they ensure it is going in the right direction. You can increase your company's revenue by devising and monitoring KPIs. Digitization can help track multiple KPIs at once by using specialist software. You can reach your KPI benchmarks by investing in the right technology to reduce processing times, facilitate communication, enable oversight, and streamline workflows.