Digital: Digital Consultancy for Manufacturing

Unveiling the story: KPIs are more than just a number

KPIs are the business metrics that are used to measure progress towards organisational goals and progress strategic objectives − they form the story of business performance. Setting KPIs that are relevant to the organisation, various key organisational departments and the industry sector is crucial and will help any firm make informed decisions. But when faced with information and data overload, it can be overwhelming and the judgement on whether a KPI is appropriate and effective or not can be clouded.

As in any good story, there will be highs and lows and that is the case with KPIs. High-level KPIs are designed to measure company performance against main business objectives, while low-level KPIs will relate to department processes, productivity and, where applicable, products. KPIs based on ‘leading indicators’ will help predict what might happen in the future and those that look back on historical actions are known as ‘lagging indicators’. Both are important in a business performance narrative; leading indicators can help with decisions on pursuing opportunities, lagging indicators are vital in highlighting past trends that can inform future decisions. Where the business is in its journey is also a key consideration. A good KPI will match where a business is in its life cycle. The metrics for a growing business will be different from those of an established one. KPIs for an established firm might be centred around stable monthly revenue and retention of customers, whereas a growing firm might focus on building customer feedback.

Rising costs in pharma put financial KPIs high on the agenda

Financial KPIs are undoubtedly the biggest elements to measure in most businesses, but with rising costs from inflation and pressure on drug pricing being key challenges for the pharma industry, it’s even more pertinent to focus on. Financial health is crucial to all businesses and having a clear picture of it will help with highlighting areas for revenue growth, as well as indicating an increase or decrease that provides a simple barometer of success or decline: evaluate and take action accordingly.

Popular financial KPIs include gross profit margin, operating profit margin, operating cash flow, working capital ratio and budget versus actual. Gross profit margin is a very important metric and an accurate indicator of a pricing strategy, as it is the profit left after deducting the cost of goods sold. There are many more financial KPIs that can be added to the mix, such as days sales outstanding – which measures the time it takes customers to pay the company for goods and services (the lower the number, the better) – and burn rate, which shows how long a company can run with its current outgoings based on the cash it has in the bank. This can help businesses know when to make spend cuts, or seek additional funding. A burn rate that becomes faster over time can signify a company overspend. Each financial KPI should be chosen based on business goals and priorities and the availability of accurate and reliable data.

The financial management features available within cloud-based ERP solutions – which are becoming much more commonplace in the pharma industry – automate the expedition of daily financial transactions and reduce budgeting and forecasting cycle times. Data is available in real time and is always accurate. Having this true picture of the financial performance of the business makes monitoring KPIs much easier and reliable. Many software options offer out-of-the-box dashboards, offering pre-built reports to utilise, allowing users to automate monitoring and have at-a-glance visibility into key financial metrics.

Operational efficiency is boosted with the right KPIs

With challenging economic conditions comes the need to reduce costs and improving overall efficiency is key to this.

Making gains in operational efficiencies can dramatically impact the bottom line and so operational KPIs should be tracked as they are crucial for pharma companies with growth goals but that are grappling with market changes.

Lead time is a good KPI to monitor as, not only does it help create a more efficient supply chain process and accelerate business revenue but also it impacts the amount of inventory needed by the firm to fulfil orders, which affects customer satisfaction. Put simply, often the faster the product can be made or ordered and delivered, the faster the cash comes into the business. Therefore, as a factor that can impact multiple areas, it’s a valuable KPI metric. In tandem with this, inventory turnover and on-time delivery rate are key to customer satisfaction: inventory levels impact customer satisfaction as not stocking enough could mean not being able to fulfil an order. In a competitive landscape and with increasing customer expectation, on-time delivery rates are important to customers and so these should certainly be tracked.

Lost sales ratio will highlight the effect on the business when specific products are out of stock, calculating what sales could have been expected, based on historical data and estimating the loss of sales to the business. The aim should be to achieve the lowest lost sales number, so tracking this KPI is a good indicator of a company that is running too lean, or is subject to demand surges – all important operational factors. Inventory management features within many ERP solutions available today will be able to provide firms with real-time inventory counts and automate many of the goods in and goods out processes for optimum operational efficiencies. This information can be fed directly into KPI measurement dashboards and because it is real-time data, it will always be accurate data feeding the KPI reports on which business decisions will be made.

Don’t fall for unachievable or vanity metrics

A KPI should focus on factors that move a business closer to its goals, not those that create numbers that make the business look successful in less important areas. Substance over style is key here. Similarly, setting targets that are unrealistic, either because the data needed to support it isn’t attainable or the KPI itself isn’t achievable. A good KPI measures achievable goals that can benefit the company. A KPI should also be actionable, not just a measurement, but a measurement of something that can lead to moving closer to achieving a business goal. Though there are some questions to consider: does it measure progress? Does it have the potential to reveal a trend or pattern? Is it truly aligned with business goals? Does it matter to the business?

The setting and tracking of KPIs is much easier for businesses large and small when integrated data is available with a few clicks; the centralisation of accurate business data facilitates easy access and analysis capabilities, all automated and with artificial intelligence (AI) driven forecasting. Armed with this heightened performance information, businesses are better equipped, better informed and better placed to make the right decisions, to ensure they thrive, not just survive.