What is an Operations KPI?
What is a KPI? An Operations Key Performance Indicator (KPI) or metric is a discrete measurement that a company uses to monitor and evaluate the efficiency of its day-to-day operations. These operations KPIs help management identify which operational strategies are effective, and those that inhibit the company.
Why Your Company Should Be Using Operational Metrics to Stay Competitive
The operations department has the daunting task of increasing company efficiency to bring about the highest possible operating profit. If you are tracking operational metrics by counting the number of trucks leaving your factory each day, or looking at how many employees are milling around, you are probably lagging behind your competitors. Leading companies make use of KPIs and KPI dashboards to measure their efficiency in real time. This allows management to quickly make informed decisions that are backed up by data. This article will discuss which KPIs the operations team should be using to keep tabs on the performance of the following company departments:
Financial KPIs for the Operations Manager
While operations managers and operations departments are generally concerned with increasing the efficiency of day-to-day operations, their efforts are often seen directly in financial performance metrics. As such, we have curated a list of example KPIs for operations managers delving into the financials of a company:
- Accounts Receivables Turnover – This operational metric is used to quantify how well a company is able to collect on its receivables. Financial and operations managers will often use this measure as a leading indicator of market conditions.
- Days Sales Outstanding (DSO) – When you really need to drill down into your accounts receivables to find out which clients aren’t paying their bills, you want to be tracking DSO. This metric tracks the average number of days it takes a client to pay after making a purchase. This metric is used to determine the quality of clients, helping decide which ones you want to continue doing business with in the future.
- Operating Cash Flow – You expect most businesses to be profitable in their operations. If they aren’t, it won’t be a business for very long. This operations KPI tracks how much cash flow is being generated from day-to-day company operations.
- Quick Ratio – The quick ratio is a financial metric that any operations manager should be familiar with. It is used to quickly check the financial health of a company by determining its ability to immediately cover its short-term liabilities.
- Accounts Payable Turnover – Do you always pay your bills on time? Most people try to, just as most companies should try to pay their suppliers on time. This operational performance indicator tracks how many times a company pays off its accounts payable over a specified period. A higher number indicates that a company pays its obligations in a timely manner.
- Cash Conversion Cycle (CCC) – Most operations managers keep track of the CCC metric as it indicates how long it takes a company to convert its inventory investment back into cash from selling said inventory. This KPI is comprised of three other KPIs: days inventory outstanding, DSO, and days payables outstanding.
- Operating Profit Margin – The operating profit margin takes net sales and subtracts COGS and operating costs. This gives a better indication of company profitability as it takes operating costs into account.
- Net Profit Margin – The net profit margin is the bottom line of income statement. It represents how much money the company made after subtracting all costs and comparing it to revenue. This is probably one of the most important metrics for operations managers in determining a company’s financial health.
It is important to always try and improve your financial ratios, but that doesn’t mean you need to be obsessed with them. Another equally important element to the company is your staff.
Staffing Operational Metrics
Employees are the backbone of any company. You can have the best ideas, but without a team to implement them, ideas are just dreams. As such, it is important to understand your work force sentiment and how they are performing. Here are some staffing KPIs for operations managers:
- Absenteeism Rate – How many days a year are your employees calling in sick, or just flat out missing shifts? This operations metric helps identify employees that are disengaged at work so that you can bring them back to being an engaged employee. Engaged employees tend to work harder, have a higher retention rate, and help workplace culture flourish.
- Overtime Hours – Depending on your situation, overtime could be a good thing as it means more pay, while for others, it could just mean longer hours for the same amount of pay. This operational performance indicator is worth tracking to identify individuals who may be overworked or having to pick up the slack for their coworkers.
- Utilization Rate – Are your employees always working? Or are they waiting for work? Working on non-billable tasks? The utilization rate operations metric tracks how much an employee is actually working to make the company money. This is a key metric for professional services and consulting firms.
- Employee Satisfaction – Happy employees work harder. Obviously, it is impossible for every employee to be happy all the time, but it is important to have employees fill out surveys and express what they enjoy at work and what they are dissatisfied about. This is vital information for the HR and operations department.
- Employee Turnover Rate – The rate at which employees need to be replaced can fluctuate from industry to industry, or even between companies in the same industry. However, at the end of the day, it is important to understand why employees are needing to be replaced. This operations metric is often best analyzed in conjunction with the employee satisfaction KPI.
- Response to Open Positions – This operational key performance indicator evaluates how well job postings are exposed and curated to their intended audience. It measures this by comparing the number of qualified applicants to the total number of applicants.
It doesn’t matter what industry you are in, hiring good staff is key. But what if you could replace some of your staff with robots? The manufacturing industry is continually moving toward automation and away from manual labor.
Manufacturing Operational Key Performance Indicators
The manufacturing industry has been continually evolving since the industrial revolution. However, most of the KPIs that would have been applicable back when Henry Ford started manufacturing cars are the same ones we apply today. We just track them with higher precision and accuracy using specialized KPI dashboards. Here are some example KPIs for operations managers in the manufacturing industry:
- Throughput – This is one of the most basic operations KPIs for the manufacturing industry. It measures the rate of production of a machine, line, or plant over a time period. This helps the operations department determine their ability to meet production deadlines.
- First Pass Yield – Every manager in the manufacturing industry will know this operations metric. It measures the percentage of products that are manufactured to specification, without requiring any rework (or being scrapped) the first time through the manufacturing process.
- Demand Forecasting – Most people can’t see into the future with a crystal ball, but operations departments will often try to estimate future demand using forecasting. This operations metric is used by companies to estimate the amount of raw materials they will need to meet future customer demand.
- Changeover Time – As an operations manager, changeover time can represent a number of different operational procedures. However, it fundamentally represents the amount of time required to switch from one task to another. Common examples of this are changing products on a production line, or staff during a shift change.
- Takt Time – This operational metric represents the maximum amount of time that can be spent manufacturing a product while still meeting the production deadline. Operations managers use this in conjunction with other metrics when determining if they should take on an order.
- Machine Downtime Rate – Most people associate downtime with a machine requiring repair, however, this operations metric is actually a combination of both scheduled downtime and unscheduled downtime. This metric is often used by the operations department to determine when assets require replacing.
- Cycle Time – The cycle time performance metric tracks the average amount of time it takes to produce a product. This metric can be applied to a complete product, or each of the individual components for a product. When applying it to the components, this becomes a very powerful tool for streamlining production and increasing efficiency.
You are probably feeling a little overwhelmed with KPIs at this point. That is normal. Most people use specialized dashboards to help them manage their KPIs and data.
How an Operations Dashboard Can Streamline Your Reporting
Operations managers and operations departments typically have a lot of different KPIs to track as they investigate every aspect of a company. Most companies implement some sort of ERP software to track large amounts of data, but these ERPs don’t always have the best features or interface. As such, insightsoftware has created a specialized reporting software that is compatible with almost any ERP and uses the data to create custom KPI dashboards. Here are some of the ways an operations dashboard can streamline your reporting:
- Automated Data Collection – Over are the days of massive data dumps. Our reporting solutions are built to interface with your existing ERP and automatically collect data in real time.
- Centralized Data – Thorough automatic collection, our dashboard solutions consolidate all of your data into a central location for easy access.
- Prebuilt KPI and Reporting Templates – Our software comes with out-of-the-box, ready-to-use KPI dashboards and financial reporting templates so you don’t have to waste your time setting them up.
- Instant Report Generation – insightsoftware’s reporting solutions have been developed for ease of use and user interface. Couple this with automatic data collection and prebuilt templates, and you have up-to-date reports with the click of a button.
Operational KPIs for the Distribution Team
Distribution, supply chain, and logistics are some of the most fundamental aspects of operating a company. However, we can clearly see that these are some of the most complex aspects as well. To help monitor this, we have generated a comprehensive list of operational KPI examples that should be applied to the distribution industry:
- Perfect Order Rate – No one likes it when they receive an order that has a mistake in it. The sender also doesn’t like this as it means they may be incurring extra costs and have a dissatisfied customer. This operations KPI compares the number of perfect orders sent from a warehouse and compares it to the total number of orders.
- Picking Accuracy – This operations KPI aims to reduce errors caused during the picking and packing process. It compares the number of properly picked orders vs. the total number of orders. As technology has developed, hand-picking has gone by the wayside. Picking is now completed largely by robots, causing this metric to improve steadily across the distribution industry.
- Inventory Carrying Costs – As an operations manager, are you aware of the inventory carrying costs at each of your warehouses? This metric is often glossed over by operations departments as it can be a bit of a pain to track. The inventory carrying cost is calculated by adding up rent, utilities, salaries, opportunity cost, inventory costs, and insurance.
- On-Time Delivery – The name really describes it all for this operations KPI. It compares how many deliveries made it to clients on time vs. the total number of deliveries. Many operations departments in the distribution industry will track this KPI as it gives an overall indication of how well the distribution network is functioning.
- Dock Door Utilization Rate – When you are analyzing a distribution network, every aspect needs to be investigated. One of these aspects is the dock door utilization rate. This operational metric measures how efficiently the dock doors are being used. A low rate may indicate that there were more docks and warehouse space than necessary, while a highly fluctuating rate may indicate that better fleet management is required.
- Space Utilization – A key component to any distribution network is the warehouse. How do you optimize a building? The space utilization metric measures the amount of space occupied by inventory in relation to the total space available. But what do you do when you run out of floor space? Look to the next metric to find out.
- Storage Productivity – Our last operational KPI measured floor space utilization, which is helpful, but obviously warehouses can be fairly tall buildings. This metric compares the volume of inventory to floor area, meaning that you get better productivity by stacking higher. This is one of the most important metrics for warehouse operations managers.
- Receiving Cycle Time – Another way warehouse optimization is measured is through the receiving cycle time metric. This operational key performance indicator monitors the average amount of time it takes the warehouse to process a delivery.
- Fleet Asset Utilization – Utilization of your fleet is one of the most important aspects of distribution. Operations managers love to ensure their fleets are being utilized to the best of their ability. This operational performance indicator can help reduce a company’s capital cost, and/or help indicate when capital is required to expand the fleet.
The distribution team plays the important role of making sure clients get their products, but how do clients even find out about your products? How do you get new clients? This is where the marketing department steps in.
Operational KPIs for the Marketing Department
Many companies spend exorbitant amounts of money on marketing, but how do they know if the campaigns are working? We believe that these are the key marketing KPIs for operations managers:
- Cost-Per-Click (CPC) – The operational performance of your marketing can be measured in many ways. The CPC performance metric is used when comparing the cost effectiveness of different online campaigns.
- Cost-Per-Acquisition (CPA) – While it is important to see how many clicks you campaign gets, it doesn’t truly show how effective the campaign was. The CPA operational KPI only looks at how many new customers your campaign acquired for you, and at what cost.
- Return on Advertising Spend – Most companies rely on large marketing budgets to increase their market share or bring about brand awareness, but how effective is the marketing? This operations metric compares revenue to marketing spend to measure your marketing department’s effectiveness.
- Marketing-Originated Customer Percentage – Operations managers often use this metric to gauge the performance of the marketing department. However, this marketing KPI is best used in conjunction with the return-on-advertising spend metric. By combining these two operational metrics, you can drill down on your advertising performance.
- Lead Conversion Ratio – Are you turning potential customers into paying customers? This operational KPI tracks how many leads convert into paying customers so you can see the efficacy of your funnel.
This list of KPIs that we covered in this post was fairly extensive, and if you don’t remember all of them, that is fine. However, you should try to remember the operations KPIs that are relevant to your industry and how to efficiently track them using business intelligence software. If you have any questions about BI software or KPI dashboards, get in contact with us!