Like a movie director on a busy film set, you’re beset by a constant flow of information and questions.
How can you get a handle on this data? Which questions should you and your team ask to grow sustainably? Where can you get the answers you need?
Moreover, without reliable, precise, and timely answers to these questions, you risk hobbling your growth — or worse.
That’s where Key Performance Indicators (KPIs) become vital. They allow you to react nimbly to rapidly evolving business situations. KPIs help you make better decisions faster that increase your profitability, reduce waste, and support your growth while reducing risk.
What is a KPI and how is it useful?
A KPI is a measurable value that tells you how your business is progressing toward your desired result.
Tracking your KPIs helps you gain insight into problems. For example, while analyzing your KPIs, you may notice that your food waste increases when you use raw materials from vendor X.
KPIs also help you measure your performance against industry benchmarks. For example, if your gross profit margin is X% and the industry benchmark is Y%, you know you have to reallocate your resources to get an improvement.
What are OKRs and how do they relate to KPIs?
If you manage your business using an Objectives and Key Results (OKR) framework, you most probably use KPIs. Here’s how to distinguish between the two concepts.
When you use OKRs, you define a business objective and the component milestones needed to reach the objective.
Here’s an example of an OKR relevant to the new food product X you’re about to launch.
Objective: Make X the best-selling product in your food line.
Key Result #1: Evaluate your purchasing, production, and shipping capabilities to ensure you can support the targeted sales volume for X.
Key Result #2: Hire and train the appropriate number of sales reps to generate the sales goal for X.
Key Result #3: Ensure that the marketing team provides the right support in sales enablement, public relations, and media to generate targeted sales.
Key Result #4: Train the customer service team to respond to questions and issues that might arise from X’s launch.
For each key result, you attach a performance metric, or KPI, to measure your progress toward the objective.
Take for example key result #1. To reach your objective, your shipping team needs to be able to pick, pack, and ship 10,000 units of X per week. The total units shipped per week would become the KPI for that business function.
Or, for key result #3 involving the marketing team, your KPI for the public relations project may be a certain number of media impressions.
What is a bad KPI?
Certain KPI-related factors can actually detract you from reaching your business goal. Consider these three.
Bad KPI #1: Unreliable data
One factor that makes a KPI meaningful is the accuracy of the information it’s based on. Your KPI data must be reliably correct and available at the right time.
When your information strays from these parameters - when it’s less accurate and less timely - you increase the risk and cost of your data-supported decisions.
In a growing business, where a rapidly rising number of products is continuously moving to different locations, the consequences of these decisions increase accordingly.
In fact, getting reliable data from operations in a timely fashion is one of the key challenges of many fast-growing small and medium-sized businesses.
How data gets waylaid and mishandled
As data travels through these businesses, it often suffers the fate of mishandled airline luggage: it may get delayed, battered by error, and even sidetracked in a silo.
Since the company has no centralized database, individual business functions enter their data in siloed software or in paper-based records. As a result, all these data may only be brought together once in a regular synchronized way — at the end of an accounting period.
That accounting snapshot of the company is only valid for a moment. Meanwhile, days pass, and purchasing, production, and pricing decisions continue to be made based on this snapshot, even as the accuracy of the data behind the snapshot erodes.
Bad KPI #2: Too many KPIs
Your business may have many accurate KPIs, but like a kid in a candy store, you can be overwhelmed and distracted by them. The mountain of data and reports available for review may lead to analysis paralysis.
So, it’s important to keep a well-known business maxim in mind: “Not everything that can be measured matters.”
Later in this post, we’ll highlight some KPIs worth tracking.
Bad KPI #3: Obsessive focus on one KPI
Being overly focused on one KPI can hurt your company.
For example, you may focus mainly on maintaining high throughput. While doing so though, you can’t disregard the levels of food waste in production, the products rejected by your quality control and the downtime of your hard-working production equipment.
If you don’t keep an eye on these other KPIs, your pursuit of throughput will hurt you in costly waste and lost production time.
What does a good KPI look like?
Since KPIs track progress toward your business goals, these goals need to be defined precisely and quantifiable.
An effective way to do this is to define your goals according to the acronym SMART, which stands for Specific, Measurable, Achievable, Realistic, and Time-bound. The following example illustrates the SMART approach.
Let’s say your executive team decides that increasing your profit margins by X% is a priority.
Using the SMART method for setting goals, you can define the different facets of this goal by answering questions such as the following:
Once you have this clarity on your business goals, you can align your performance indicators accordingly.
Who is responsible for the KPI?
Call them the KPI owner.
They oversee the process, function, or project that the KPI is tracking. They can access the expertise and information of the area they oversee and have the power to make whatever changes necessary to improve performance.
Thus, if a KPI relates to sales volume, your overall sales leader would be accountable for that metric. They’re the person you’d go to whenever sales-related issues surfaced.
What are leading indicators vs. lagging indicators?
Performance indicators can be divided into two baskets:
1. Leading indicators tell you what is actually happening to a metric and give you a preview of the success you may expect if this trend continues. For example, your Q2 average daily sales volume may be a leading indicator of what your end-of-quarter sales number will look like.
2. Lagging indicators show your level of past success at achieving a result. For example, last year’s Q2 average daily sales number is a lagging indicator. Comparing it to the current year’s number tells you how your sales team is doing, year over year.
If a leading indicator isn’t trending in a positive way, you can work on the root causes of the performance to help improve the number that will later become a lagging indicator.
Which KPIs in the food and beverage industry should you track on your KPI dashboard?
The KPIs you track will depend on your business model, product, and segment of the food and beverage industry.
Because this industry traditionally has low margins, business leaders continuously seek ways to enhance profitability. KPIs tracking real-time data often provide insights or paths to solutions that help improve margins.
To illustrate a few of these major KPIs, we recommend the following three to help you stay on top of your profitability.
KPI #1: Production efficiency
Production makes up such a large part of your cost of goods sold that improvements in efficiency can make a significant difference to your bottom line.
The production efficiency KPI calculates the production performance of your recipe by measuring the variance between estimated and actual values. The higher the ratio, the better your return.
This KPI includes raw material loss (past expiry date), finished product loss, and recipe errors.
KPI #2: Inventory turnover
This KPI ensures you maintain a healthy inventory rotation by updating you on which ingredients to use quickly.
The KPI calculates how often your business sells and replaces its stock in a given period (i.e., year, month, day). To get the inventory turnover rate, divide the cost of goods sold by the average inventory value.
A low ratio points to poor sales and excessive inventory. A high ratio indicates strong sales or insufficient inventory.
KPI #3: Variations in raw material costs
This KPI enables you to monitor in real-time variations in actual raw material costs vs. budgeted.
The precision and depth of your real-time data also enable you to drill down into your costs to see the sources of the increases. As a result, you can follow up with vendors to review and potentially renegotiate your volume contracts or discover if the vendors made an involuntary error.
In the hectic stressful world of a growing food business, it’s reassuring to know that tracking a good KPI will empower you to act in a quick and informed way to support or enhance your profitability.
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