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Blog Post By Charles Dietz
This series of posts will help a typical Small and Mid-sized Business (SMB or Mid-Market) achieve Business Improvement / Business Transformation starting from a process of developing appropriate, structured performance measurements (KPIs). These measures can be at different levels of detail, and can be:
Let’s talk about a couple of KPIs that could be important to your business, developing data that will be valuable in higher-level measurements of business transformation / improvement.
Example #1, Waterfall Forecast and Sales KPI:
For many organizations where there are ongoing sales of many products that must be made or procured, one helpful tool is the Waterfall Forecast and Sales Report (KPI display), a stylized version shown below. Our example is for a consumer-products distribution company, sourcing most of their 5,000 products in China and distributing to retail outlets in the USA from a Chicago warehouse.
For the Product sub-class: Consumer Widgets (imported from China), representing a summation of the Consumer Widgets (China) data (forecasts, sales, purchase orders, customer orders), the time to plan, make/procure, and have a widget available for sale is 3 months. So on December 1st of this year, our current day and month, we have a current proposed forecast of 260, 290, 250, 169, 150, 140, 130, 120, 240 units for December through next August. We need to understand a few things:
1. Since there is a three month delay from a month’s order placement with suppliers in China until ocean delivery to our customer-facing USA warehouse, the forecast made back on September 1st for delivery on December 1st of 262 units is what we put on a Purchase Order (PO) and will get (aka Frozen Forecast / what we should measure Forecast Performance against).
2. The December forecast made on November 1st (for 275) will not change the 262 units originally planned/ordered, unless you take extraordinary actions to change the China suppliers' POs for 262 made on 9/1. (and that will likely cost extra $$$$s (flying potato peelers on a 747 from China to the USA is often cost prohibitive ))
3. So today (December 1st) is the last opportunity to change the forecast/PO for MARCH 1st!
4. The Three Month Total (far right column shows the changes in these forecasts over time for the period March thru May. This helps to look for trends in the forecasting process (under/over forecasting, lots of last minute promotional deals, etc.
5. Remember: for a senior-level Forecast Review Meeting, if you have a great number of SKUs, the forecasts and other KPIs are reviewed at an agreed-to aggregate level (Product Sub-Class in our example), and the forecast analysts (and others) are responsible for “allocating” the forecast changes down to the individual SKUs / Suppliers / PO's.
6. The Forecast / Sales / Marketing Analyst(s) can access the same type of report at the SKU level.
Some other KPIs that might be of interest to your business:
1. From the above example, another important KPI might be the ongoing review of and efforts to decrease the lead time of products (considering the tradeoffs of the various associated costs and benefits).
2. Another related KPI might measure production/delivery to Frozen Forecast. In our example, you have to measure the actual delivery to the USA for December 1st against the December forecast for the Consumer Widgets from China made on September 1st. Thus, our March KPI for a rolling 3 month KPI calculation would be to compare the Actual Sales (275 + 320 + 255 = 850) to the appropriate forecast: ((265+290+230) – Actual Sales) / Actual Sales = 6 % forecast error shortfall. (Which may have resulted in lost sales )
3. KPI displays can be constructed that deliver additional measures of the business. For example: adding current stock levels and safety stock quantities to a KPI display, you can calculate potential stock-outs / lost sales and the ratio of sales to inventory value.
Outside experts with KPI and S&OP creation and implementation experience can work with your stakeholder team to speed the design, process development and implementation of a KPI and S&OP process customized for your organization.
The key values to the business is the development of meaningful KPI measures of the business’ health, the discussion between the key stakeholders over past and current KPI results, and what can be done to continue improvements in all the operations of the business.
Future posts on KPIs and related topics will include: