Using KPIs to Guide Manufacturers’ COVID-19 Accelerated Recovery
As companies plan for 2021, driver-based analysis will be vital for proactive decision-making and managing a shifting business environment. Manufacturers commonly monitor business activities through key performance indicators (KPIs) that boil down financial and production outputs into meaningful operational insights. As you enter an accelerated recovery mode, your management teams should take inventory of your current processes to unlock data-driven decision-making on a day-to-day basis across your business.
The following KPI considerations are a few of the key factors that will help spur driver-based discussions within your organization. For each area of focus we suggest the people, processes and technology that typically inform the decision-making process.
Prospecting & New Business
Your customers are operating in a new and changing landscape just as you are. One of the key considerations for companies in 2021 will be to gauge new opportunities and changes in customer demand. If the company has used digital tools to assist in prospecting new business and maintaining customer relationships, such as a customer relationship management system (CRM), it is time to consider investing time and resources into cultivating those relationships.
Planning areas of focus
- Maximize opportunities to sell additional products and services to your existing customer base.
- Take a fresh look at significant customers to anticipate risk in projections and take mitigating action where possible.
- People – sales and customer relationship engagement
- Process – monthly sales forecasting
- Technology – CRM system; business intelligence solutions
- Weighted pipeline value
- Value of new opportunity generation
- Value of closed opportunities
- Trend of daily gross revenue
- Net sales %
- Backlog days
- Value of customer attrition
Production, Warehousing & Shipping Interplay
As supply chains recover from a fractured state, your organization will have to implement the best strategy in terms of supply chain and fulfillment optimization. Tracking real-time core metrics across purchasing, production and warehousing intertwined with targets and relevant financial impacts can pinpoint areas of opportunity in which supply chain leaders can proactively optimize operations. From raw materials to finished goods, a more granular view of inventory turns and days on-hand can help reduce the inefficiency of tying up cash in slow-moving or excess inventory on an ongoing basis.
Planning areas of focus
- Proactive supply chain management – month-end snapshots of operational performance may not be timely enough to react to changing supply and demand factors.
- A more granular view of days on-hand can help reduce the inefficiency of tying up cash in slow-moving or excess inventory.
- People – operations and sales coordination
- Process – sales and operations; operations KPI flash reporting
- Technology – ERP and MRP systems; business intelligence solutions
- Production and shipping volumes
- Manufacturing capacity utilization
- Downtime instances
- Over-time %
- Days inventory outstanding (DIO)
- Order fulfillment lead time
- On time in full delivery (OTIF)
Tracking Safety & Wellness of Employees
Businesses need to prioritize the health and safety of their employees in this business landscape. In addition to production-related incidents, other employee-related KPIs are critical to maintaining the organization’s overall wellness and engagement. As such, organizations should consider tracking employee departures and turnover by functional areas to help identify if any additional resources need to be deployed to maintain talent within the company.
Planning areas of focus
- Pinpointing areas to improve safety – tracking incidents, such as injuries or OSHA violations, can help illuminate broader trends and areas that may need additional attention as operations continue to flex (up or down) to meet demand requirements.
- Employee engagement and turnover – in a landscape where employees may need more creative working accommodations, organizations should consider taking a more purposeful approach to analyzing employee departures and turnover trends
- People – executive management support
- Process – executive flash reporting
- Technology – payroll and incident tracking systems; business intelligence solutions
- Net headcount change
- Employee turnover
- Net revenue/employee
- Safety incident rate
Ongoing monitoring of KPIs against targets helps companies analyze performance and provides a measurable path to successful execution of your recovery strategy. In general, it is a best practice to align ongoing performance management with the annual budget through ongoing comparisons against both financial and KPI targets. While you will want to select a group of measures most appropriate for your goals and operations, these three measures will likely be important for most manufacturers:
- Days Inventory Outstanding: (Avg. Total Cost of Inventory / Annual Cost of Goods Sold) x 365
- On Time In Full Delivery: Orders that are On Time AND In Full / Total number of cases
- Cash to Cash Cycle Time: Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
As manufacturing companies exit the depressed market conditions related to COVID-19, demand and production need to flex to meet market opportunities. To compensate for the many unknowns of the recovery, 2021 financial plans will benefit from utilizing KPIs to isolate the impact of volume from other driving factors.
A shifting economic environment demands more visibility and attention from business leaders. Management teams need to be offensive by simplifying objectives and empowering business leaders through KPIs.
We are here to help you identify key areas that will affect performance in the years to come as well as other issues that will arise as recovery efforts are employed to combat the effects of the COVID-19 pandemic. Don’t hesitate to contact Luke Espich (260.609.2317) or your CBIZ advisor for information about the strategic financial planning and analysis functions in the current environment.