The KPI Connection -- COGS

November 22, 2017 | Dr. Stephen Timme
The KPI Connection -- COGSOn Tuesday we posted the metric of the month (COGS this month). Today we’re going to take it one step further and talk about how COGS translates into – or “connects” -- to Key Performance Indicators (KPIs)….in other words, things you can actually talk to your client about impacting through your solutions. Said differently – This is the HOW to make the numbers make your job easier. How do you incorporate it into a meaningful discussion with your client? If your client has expressed a need, or you have identified an opportunity, to reduce COGS as a percentage of revenue, HOW and HOW MUCH can your solution help them? Let’s take a look at an example of a tool we use here at FinListics. We call them Business Process Maps and they do just what you might think from the name – they map a financial metric to the business processes that impact it, the activities related to each process, and ultimately to the KPIs that can be impacted by changes or improvements in that business process. Here we’re looking at the Business Process Map for COGS in the Retail industry, and are focusing on the breakdown of Logistics for our example: The KPI Connection -- COGSThe map connects COGS to the Logistics process and shows warehousing as a % of revenue as one KPI that can be impacted by changes in the underlying logistics processes within a company. So when talking to a retail client who is focused on reducing COGS as a % of revenue, one example of talking the HOW, would be to show how your solutions can reduce warehousing costs….and HOW that will ultimately reduce COGS. Operational KPIs In Action Here’s how that conversation could go -- for a retail client with $1 billion in annual revenue, industry averages show warehousing costs to be 1.5% of revenue (trust us on this one). Your experience with other retail clients shows your solution can reduce those costs by 5%-10% on an annual basis. Which means you can save your client $750,000 - $1.5 million per year just in that one area with your solution! That’s the kind of talk that gets attention from client executives. Not only that, but you can also point out that delaying the decision to implement, or dragging the decision out through a long RFP process, will cost them too – in this example, between $60,000 and $125,000 per month! Compelling stuff….. The key to getting the above information? Asking questions:
  • For your clients’ industries, what metrics, business processes and operational KPIs can your solutions significantly impact?
  • What are industry norms for these operational KPIs?
  • What ranges of improvement do your solutions provide for these KPIs and what is the cash flow value to your clients?

And of course – the most important question: How can you impact these areas and ultimately drive results for your client’s business? For a deeper discussion on Operational KPIs and how they drive sales, see our previous blog post at http://www.finlistics.com/blog/introducing-a-new-series/.

This blog was originally posted on November 21, 2013. 

Posted in Executive Industry Insights, KPI, Metric Matrix, Key Performance Indicator

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