The Role of Key Performance Indicators (KPIs) in Effective Inventory Management
Widely (but incorrectly) attributed to the management guru Peter Drucker, the famous quote “What gets measured gets managed” has had a large impact on business thinking ever since it was first uttered several decades ago.
This philosophy emphasizes the importance of measuring outcomes. By measuring results and performance, it is believed, organizations can take crucial steps towards bolstering their effectiveness and success.
This mode of thinking has been applied to spare parts inventory management as freely as any other business function. Indeed, using inventory management metrics to take stock of performance and better manage business operations is one of the best ways for a company, particularly one in an asset-intensive industry, to grow over the long term.
Properly using inventory performance metrics can provide several advantages, including:
- Lowering operating costs and improving cash flow
- Raising demand forecast accuracy levels & increasing inventory accuracy
- Improving the inventory turnover ratio and inventory turnover rate
- Lowering inventory service costs & the carrying cost of inventory
- Improving customer service and boosting overall customer satisfaction
However, as far as inventory management KPIs go, simple measurement is not a panacea in and of itself. In business, we must ask ourselves three crucial questions at the outset of a performance measurement program:
- Should this be measured and why?
- How does an improved outcome of this metric further business objectives?
- How can this metric be influenced?”
Inventory Metrics: The Value of Asking Why
Many in the business world can relate to a common challenge: being held responsible for a quantifiable objective over which they have little to no control or influence.
It begs the question: What purpose do such metrics serve? The answer, unfortunately, is very little. In fact, uncontrollable or unattainable metrics are generally demotivating, and ultimately distracting.
Therefore, our starting position when defining our measurement framework should begin by finding the answers to some fundamental questions:
- As above, what should be measured, and why should we measure it?
- How does the measurement of the metric tie back to business objectives?
- Assuming it should be measured, how should it be measured exactly?
- Is the data readily available to efficiently generate the metric?
The questions pertaining to inventory metrics, inventory management KPIs and inventory analysis doesn’t stop there. You might also ask:
- Who owns reporting, and are the existing processes sustainable as a part of an ongoing workload?
- What can be done to influence the metric?
- Are the people being held accountable to the metric realistically able to influence the outcome?
- How are those metrics related to those of the customer and supporting departments?
These are universal considerations, and while certainly not limited to inventory management processes and KPIs, they are true nonetheless.
Common Company Mistakes: Neglecting the “K” in KPI
It can be easy to head down a path of defining metrics that report on business process performance without ever truly grappling with the most fundamental question of all: Are the KPIs your organization has chosen truly “key?”
Questions abound, such as: What metrics have a direct bearing on company performance? Which KPIs pertain to Environmental Health & Safety? What indicators are “key” to measuring the effective use of company resources?
Without properly taking stock of their choice of KPIs, organizations will find themselves amid a proliferation of metrics that are not only hard to generate, confusing, and potentially contradictory, but put themselves in a position where they ultimately make their own businesses more difficult to manage, distracting from what really matters.
Leading and Lagging Indicators
The final challenge, assuming your metrics have made it through these first two filters, is to ensure a balance between leading and lagging indicators.
Leading indicators help you identify pending challenges in which proactive intervention can help mitigate a situation, or even avoid it altogether. Lagging indicators, by contrast, illustrate what has already happened. Both have a role.
No business is perfect, and none are realistically able to catch everything; mistakes and oversights are an operational fact of life. However, what’s most important is that they are identified, so that any important lessons can be learned. Without lagging metrics these events quickly fade into the past and are forgotten.
A combination of lagging indicators and robust root cause analysis practices can ensure that lessons are incorporated into business process changes, turning negative events into ensuring process improvements.
Xtivity’s Promise: Inventory Metrics That Work
Every organization is different in terms of available data, analytic resources and access to reporting tools. But it’s important to remember that the right metrics to track are also informed by these three elements.
Within Xtivity’s Pulse Inventory Management Solution we maintain reporting and dashboard capabilities to help reduce the effort associated with this function.
We also help our clients define those ever-important KPIs to manage their operational performance. As mentioned above, the inventory management KPIs can make all the difference.
At the end of the day, driving performance still rests with the operational team. Without a commitment to drive improvement, even the best KPIs will remain ineffective.
As you start to consider the role KPIs may play in enhancing inventory management within your organization, get in touch to explore how Xtivity can help you measure and manage your MRO inventory.
Contact us today to continue the discussion.