Key Performance Indicator

KPI
(Key Performance Indicator)
Apas, Tessie T.
Aradilla, Lady Hope V.
Avila, Catherine

Key Performance Indicator (KPI)
• is a business metric used to
evaluate factors that are crucial
to the success of an
organization.

• These raw sets of values, which are fed to systems in
charge of summarizing the information, are
called indicators.
• Indicators identifiable and marked as possible
candidates for KPIs can be summarized into the
following sub-categories:
– Quantitative indicators which can be presented with a
number.
– Qualitative indicators which can't be presented as a
number.
– Leading indicators which can predict the future outcome
of a process
– Lagging indicators which present the success or
failure post hoc
– Input indicators which measure the amount of resources
consumed during the generation of the outcome

– Process indicators which represent the efficiency
or the productivity of the process
– Output indicators which reflect the outcome or
results of the process activities
– Practical indicators that interface with existing
company processes.
– Directional indicators specifying whether an
organization is getting better or not.
– Actionable indicators are sufficiently in an
organization's control to affect change.
– Financial indicators used in performance
measurement and when looking at an operating
index.

KPIs are applied in business intelligence (BI) to
gauge business trends and advise tactical
courses of action. Before KPIs can be
identified, the following requirements must be
met:
• A predefined organizational process.
• Clear business objectives for the process.
• Quantitative and qualitative measurements.
• An active approach to finding and remedying
enterprise variances.

There are four types of performance
measure:
• Key result indicators (KRIs) give an overview of
past performance and are ideal for the board as
they communicate how management has done in
a CSF or from a balanced scorecard perspective.
• Performance indicators (PIs) tell staff and
management what to do.
• Result indicators (RIs) tell staff what they have
done.
• KPIs (KPIs) tell staff and management what to do
to increase performance dramatically.

KPI Examples Warehouse Inventory Metrics
• Keeping up with everything going on in your warehouse is more
than any sturdy clipboard can handle. New orders are always
flooding in, stock deliveries are late or worse, and tight deadlines
approach too quickly. To stay competitive you need to stay on top of
your inventory metrics whether you are in your office or on the
floor directing traffic. When you need a question answered, you
don't have time to flip through your papers or run back to your
office. With a mobile BI dashboard, you have your inventory metrics
in the palm of your hand, either on your smartphone or tablet, so
the answer is always there when you need it.
• But monitoring inventory metrics alone is not enough. That's where
key performance indicators (KPIs) become important. For starters, a
KPI takes a closer look at your business than a metric. With an
inventory KPI, you not only know what orders have shipped any
given day, but know if you are meeting customer demands over the
long term. KPIs combine real, live data with your business
objectives and strategies to provide insight into your performance.
• To help get you started monitoring your inventory KPIs on your
mobile BI dashboard, we've put together a list of the top 10 metrics
our customers monitor.

Warehouse Inventory Metrics – The top 10
1. Inventory Turnover. This KPI is easily one of the most
important inventory metrics for any organization to measure.
This KPI examines how often you are able to turn over your
inventory each year by calculating the cost of inventory sold
and dividing the balance left over at the end of the year. While
having a high inventory turnover rate is clearly good, it
shouldn't come at the cost of losing sales or disrupting
operations. Use this metric to find out what your optimal
turnover rate is.
Benefit: Know your turnover rate and reduce aging inventory.
Audience: Managers, Executives
Calculation: (Total Sales - Cost of Sales) / (Inventory remaining
at end of year) = Times inventory turns over per year
Example: ($5.0 M Sales - 35% = $3.25M) / ($250k) = 13.0
turns/year

2. Inventory Accuracy. This KPI measures just how accurate your bookkeeping
is compared to in-stock inventory. This can be a telling KPI, revealing costly
gaps in your books. Keeping track of inventory is the name of the game and
you can't afford to waste time tracking inventory that isn't there or, worse,
not knowing what's in stock when a customer comes calling.
Benefit: Gain insight into your bookkeeping practices.
Audience: Front-line, Managers, Executives
Calculation: # of Items counted / # of Items books count = variance %
Example: 500 items counted / 550 items books count = 90% accurate (or 10%
variance)
3. Rate of Demand. This KPI measures the rate of demand for each product
you carry. This metric is an important measure of your product turnover rate
and is an integral part of any inventory organization's business intelligence
strategy. You will want to keep the rate of demand as close to 1:1 as possible
without carrying too much stock or not enough stock.
Benefit: Know which products are in high demand so you always have them in
stock.
Audience: Managers
Calculation: (Monthly unit sales - End of month units in stock (not including
restock)) / (Monthly unit sales) = Rate of Demand
Example: (185 units sold - 10 units = 175) / (185 units sold) = 94% Rate of
Demand

4. Average Days on Hand. This KPI measures the average
amount of days on hand a product or line of products spends
in inventory. While it is pretty much the inverse of the Rate of
Demand KPI, this KPI is important to monitor because it
highlights which products move quickly and which ones are
collecting dust. In fact, this KPI can tie into any number of
metrics and point to shortcomings (or strengths) of vendors or
distributors. However, putting too much stock on this KPI may
backfire especially concerning seasonal or trendy goods.
Benefit: Know which products are slow movers and which
products are fast movers
Calculation: ((Date shipment arrived / Date last item shipped
= number of days in stock) + (Date 2nd shipment arrived /
Data last item shipped = number of days in stock)) / Number
of shipments = Average days on hand
Example: ((Date Shipment 1 Arrived May 21st/ Date Shipped
June 14 = 24 days) / (Date Shipment 2 Arrived June 5 / Date
Shipped June 21 = 17 days)) = 41 / 2 = 20.5 days on hand

5. Carrying Cost of Inventory. This KPI measures how much it costs you
to hold and store inventory over a given period of time. This KPI is
intimately connected to figuring out the profit margin on in-stock
inventory. Use this KPI to determine the amount your organization
needs to produce and to determine the optimum rate of turnover.
Benefit: Know your costs and maximize your profits.
Calculation: (Sum of Monthly Expenses) / (Average Inventory Value *
Average Number of Items) = Carrying Cost / Item
Example: ($100,000) / ($20 * 1000) = $5 per Item
6.Rate of Return. This KPI measures the rate at which products you
ship are returned to you. This metric begs to be broken down to
determine why products you ship are being returned to you. Is it due
to improper shipments? Is it because the items are damaged en-route?
Use this KPI to track rate of return over time, and alert of significant
variances, to increase your turnover and profit margin.
Benefit: An early warning of underlying shipping and or quality issues.
Audience: Front-line, Managers
Calculation: (Total Items Returned) / (Total Items Shipped) = % Rate of
Return
Example: (50) / (1,000) = 5% Rate of Return

7. Perfect Order Rate. This KPI measures your organization's ability to put
together an accurate order, ship without damage, deliver on time, and invoice
correctly. The metric tells you a lot about the efficiency of your practices and
points to where you need to tighten up your game. Are deliveries coming in
late? Are products being damaged en-route? Use this KPI to improve your
entire system and, as a bonus, you should see an improvement in your
customer satisfaction numbers.
Benefit: Know where your orders are going awry and improve your efficiency.
Calculation: # of errors per order = Order Rate %
Example: 100 errors per 15000 orders = 99.3% perfect order rate
8. Back Order Rate. This KPI measures the amount of orders that cannot be
filled immediately, causing your customer to wait before you can ship. As you
know, when your customer orders something, they usually want it right then
and there. This metric tells you how well you are able to cope with customer
orders and give them what they want, when they want it. Again, this metric is
a prime indicator of customer satisfaction, so make sure this KPI finds its way
onto your dashboard. Use this KPI as a starting point for delving deeper into
your back order rate, drilling down to find out which items, customers, or
even seasons are causing you the most headache.
Benefit: Know which products are causing back orders.
Calculation: # of back orders / total # of orders = Back Order Rate %
Example: 5 back orders / 100 orders = 5% Back Order Rate

9. Percentage of out of stock items. This KPI measures the percentage of
items that you are committed to carrying, but that are currently out of stock.
This metric tells you what items need to be restocked and can be a strong
indicator of what items are popular. After all, an item out of stock is likely a
product that is doing well. So this KPI may not be all bad and you will want to
use it to figure out why certain items are out of stock. To use a basic example,
being out of winter coats in July is one thing, but being out of winter coats in
January demands your attention.
Benefit: Know which products are moving and find out why they are moving.
Calculation: # of items out of stock / # of items in stock = % of out of stock
items
Example: 100 items out of stock / 1000 items in stock = 10% items out of
stock
10. Inventory to Sales Ratio. This KPI measures your ratio of in-stock
inventory versus the amount sales order you are filling. This metric is a good
barometer for the well-being of your organization and is an indicator of the
state of the economy. The challenge with this KPI is identifying what the best
ratio is for your organization. Ideally, this ratio will be stable and in lock-step
with prevailing economic conditions. A tricky metric, to be sure, but still
important to measure!
Benefit: Keep your finger on the economic pulse and maintain a stable I-S
ratio.
Audience: Executives
Calculation: (Inventory value $) / (Sales value $) = I-S ratio
Example: ($1,000,000)/ ($750,000) = 1.3

Key Performance Indicator

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