The Pierian Mountains are in current day Macedonia and legend has it that they were sacred to the Muses, who were the personification of knowledge and the goddesses of inspiration. What you may ask does that have to do with KPI’s, It has everything to do with it and let me begin by quoting the first two lines of “An Essay in Critism” by Alexander Pope
““A little learning is a dangerous thing
Drink deep, or taste not the Pierian spring:”
As in the water from the Pierian Spring, if you are going to drink from the KPI spring, make sure you drink deep. While shortly I will share with you my “favorite” KPI, I must stress the importance of taking a holistic approach to using KPI’s. Generally one KPI itself should be used to pose questions that will then be augmented or debunked with the use of others, and only after consuming several drinks from various KPIS’s should you plan your course of action.
So if I must; (and I am told I must) pick a favorite KPI it would be Days in Stock.
The inventory to cost of sales ratio can signal potential problems in cash flow. For example, an increase in inventory to sales ratio from one month to the next indicates that one of the following is happening:
- investment in inventory is growing more rapidly than sales
- sales are dropping
No matter which situation is causing the problem, an increase in the inventory to sales ratio may signal an oncoming cash flow problem.
Likewise, a decrease in the inventory to sales ratio from one month to next indicates that one of these is occurring:
- investment in inventory is shrinking in relation to sales
- sales are increasing
Here again, no matter which situation is causing the reduction in the inventory to sales ratio, either one suggests that you are effectively managing your business’s inventory levels and its cash flow.
Again I caution that no KPI should be used independently; the first drink should be here; but drink deeply from the spring, taste the GMROI and the Turnover Ratio and whenever possible drink from this drink of knowledge under the filter of classifications and vendors. Only then will you achieve the knowledge that is sacred to the muses