Why Do Companies Need KPIs to Achieve Their Goals?

Mauricio Guerra
Industrial Engineer

Key Performance Indicators (KPIs) are known as measurable values or metrics that help track progression toward a company’s business goals. Some common examples of KPIs used in the retail industry are found below.

  • Total Sales, whether at the weekly, monthly or yearly time frame, is the kingpin of KPIs. Sales are the driving force behind any profit-oriented business.
  • Many companies also want to know the profitability of their sales through Net Margin of Total Sales. This helps companies define better pricing strategies, for example.
  • Conversion Rate is similarly important. This indicates the number of customers that enter the store and make a purchase versus the number of visitors that enter the store without buying anything. This applies in e-commerce as well.
  • The total sales divided by the total number of customers equates to the Average Sales per Customer. Knowing this value gives companies insight into basket size and opportunities to increase their offerings effectively.
  • On the same token, the Average Number of Items Purchased per Customer helps the corporation determine if higher or lower value items are driving customer demand.

These are just some few examples of the many existing types of KPIs that are used in the retail industry. The types of KPIs that are available to a company depend on the raw data that it tracks. Thus, if a company has the existing data and computability power, it can create any KPI it desires. With an idea of what KPIs are, let us dive more into understanding why companies need them.

KPIs can be utilized for a plethora of advantageous reasons beyond tracking goals. One of the biggest reasons is maintaining a competitive advantage (Anand & Grover, 2015). Anand and Grover (2015) also noted that performance measurement through KPIs offers opportunities for development incentives, quality awards, organizational efficiency, increased demand, and IT advancements if used correctly. The key, as this play on words would have it, is choosing the right performance indicators.

A couple of years ago, I worked with a medium size company that included 200 to 300 employees. I was surprised that this company, although founded 30 years prior, did not utilize KPIs fittingly for tracking their performance. We started analyzing each department’s KPIs and evaluating which ones they lacked in order to pursue their goals.

The company struggled with negative profitability, so we analyzed the current KPIs to adjust them to fit new goals. They had two new goals in particular:

  • Reach company sales of 300 million pesos annually
  • Grow to a profitability of 5 percent

Updated KPIs would be applied to different business strategies in each department, like marketing, sales, finance, logistics, etc. After this, we started tracking the KPIs and saw the company increase sales and turn to positive profitability over time. One important learning was how to manage to KPIs, updating our expectations and objectives intermittently to align with reality and check our status overall.

Within this process, we realized that many staff members did not understand the KPIs or their benefits, so they were unable to participate in the process of utilizing KPIs effectively. After determining the correct KPIs, we trained the staff on the importance of these tools. We also helped employees understand which KPIs to focus on to achieve growth and how to use them appropriately.

In reflection, the benefits of KPIs to the company were: 1) they had a clearer view of where the company was heading, and 2) they knew the whole company was heading in that same direction. Before the KPIs were aligned to all departments, each department had their goals and tracking mechanisms. Some of them did not help to meet company goals. After our work, staff was less stressed, which built a more confident and unified team.

Internally, KPIs are a wonderful tool for employee coaching and development. Performance management is the business term used for utilizing…In the end, these KPIs created an environment more prone to return on its original investments. The old adage once again reigned true: “if they had not measured it, they would not have improved it!”

References
Anand, N., & Grover, N. (2015). Measuring retail supply chain performance. Benchmarking, 22(1), 135-166. doi:10.1108/BIJ-05-2012-0034