KPIs are strategic instruments that organizations cannot afford to do without as they are used in the evaluation of performance. Indeed, cost efficiency has been identified as a key factor where KPIs are informative. Research has revealed that companies that use financial KPIs to monitor their performance are 60 percent more likely to report that they have achieved more than 10 percent cost reduction as compared to those who do not monitor their financial KPIs. Moreover, reports have showed that the companies that utilize KPI to assess operational performance can slash costs by up to 25 percent. It is, therefore, not a luxury but a necessity for any organisation to seek ways of reducing its costs in the current cut-throat business world. Let us look at five ideas on how to use KPIs to drive cost efficiency.
KPIs when implemented can be used to enhance cost efficiency in terms of operating expenses (OPEX). Other expenses such as rent, electricity, water and staff remunerations may greatly affect a company’s profitability if controlled poorly. The OPEX KPI helps in understanding the total cost required in maintaining the day-to-day business operations and thus enable the identification of areas of inefficiency.
For instance, Walmart, a retail firm, ensures that it keeps an eye on its OPEX to sustain the firm’s cost leadership strategy. Based on the store operation cost KPIs, Walmart has managed to improve its supply chain, source better contracts for suppliers and manage to reduce manual tasks. This has helped Walmart to keep its operating expenses low in comparison to other players it operates with, which has helped the firm to offer low prices to its customers while at the same time being profitable.
Himanshu Agarwal, Chief Operating Officer, Zydex Industries, says "Building strong relationships and partnerships can create a network of support that enhances the overall resilience of the supply chain"
Cost per Acquisition (CPA) is considered as one of the most important indicators for the companies, which aim at acquiring new customers and making sales. With CPA, companies are able to know whether the marketing they are doing is paying off or not and this can be of great help.
Cloud storage service provider Dropbox used CPA KPIs to handle its marketing expenses. The company had high levels of marketing expenses, which affected the level of profitability in the company. As a result of using CPA tracking in their marketing campaign, Dropbox changed its marketing approach and began using a referral program that targets the current consumers to invite new ones. This decreased Dropbox’s CPA by 25%, enhancing cost effectiveness while having a high growth rate.
Wages are usually one of the biggest overheads for any company. When implementing the KPIs for labor productivity and efficiency, it is possible to determine how efficient the companies are in using the workforce. Some of the typical performance measures used in this area consist of Revenue per Employee or Output per Labor Hour. These indicators assist the managers to know where labor could be used optimally or reduced in order to improve cost effectiveness.
One of the best examples is Toyota with its “Revenue per Employee” KPI. The company has also adopted lean manufacturing techniques in a bid to enhance the efficiency of labor utilization and minimize wastage. The revenue per employee was tracked by Toyota, and this helped in the realization of areas that needed improvement in the manufacturing process. They streamlined the processes, trained their employees, and integrated technology where possible, which increased labour productivity and significant cost reduction.
The other important cost efficiency indicator that can be used to measure and enhance cost efficiency is the Inventory Turnover Ratio. This KPI describes the rate at which a firm turns over its inventories within a given time span. A high inventory turnover means that the management of stock is efficient by holding costs low while a low inventory turnover ratio may imply that stocks are overstocked or the stock is slow moving thus implying costs are high.
Zara, the fashion clothing retailing company, is among the most efficient when it comes to stock control. The company monitors its Inventory Turnover Ratio closely to have a quick turnover. It has a capability of coming up with new products, manufacturing, and making them available in the various stores in no time hence enabling the brand to meet customer needs without incurring a lot of costs on inventory. Consequently, Zara has been able to sustain competitive advantage and reduce cost by cutting down on avoidable losses due to excess inventory.
Energy costs can be a significant portion of the total expenses of a business especially if the business is in areas such as manufacturing or transportation. This is important because through monitoring of the energy efficiency KPIs including the Energy Usage per Production Unit, companies can be able to determine the wastage of energy and come up with ways and means of preventing the same. This also increases cost-effectiveness while contributing positively to sustainability measures.
Among the companies that have employed efficiency KPIs in their operations, General Electric (GE) is among the leading firms. Assessing the energy consumption in the manufacturing facilities, GE realized that there were several opportunities in the plants to save energy, for example, old equipment and poor lighting. Energy efficiency is a major program that was initiated by GE after developing a KPI tracking system; the company was able to cut down energy use, thereby saving costs besides experiencing a decrease in their carbon footprint.
KPIs are crucial for cost efficiency assessment and enhancement in a wide range of industries. In general, through the identification of the operating expenses, labor productivity, or energy consumption ratios, KPIs provide opportunities to identify problem areas and undertake necessary corrections in order to improve performance. It has been proven that KPI-driven strategies help to cut costs and be sustainable in the long run. Thus, as companies will keep on struggling with economic challenges, the effectiveness of KPIs will persist as one of the decisive influences on their competitive position and financial performance.
