Fall 2006 issue of Horizons

Key Performance Indicators: Building Business Efficiency

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Conclusion

• Orders Shipped Complete and On Time (OSCOT) identifies and eliminates the root causes of out of stocks. In some cases, OSCOT may have the greatest impact on a company's bottom line - particularly in the distribution indus- try. When OSCOT is at world-class levels (i.e., 95 percent fill rate), the production floor is operating efficiently, product quality is high, inventory carrying costs are at appropriate lev- els, labor costs in receiving and shipping are under control, and most importantly, your customers are happy. To achieve a 95 percent OSCOT rate, your company is hitting on all cylinders. • SKU (stock-keeping unit) Rationalization identifies which product lines contribute the most to your company's prof- itability. SKU Rationalization efforts are effective in focusing the entire company on producing and selling the most prof- itable product lines. The most common error in SKU Rationalization is eliminating product lines simply based on low profit margins and ignoring customer requirements. You may eliminate a SKU that struggles to break even but is val- ued by a customer who orders a multitude of other highly profitable items. Another common pitfall is the inaccurate measurement of profitability. The cost of a product may not be fully loaded with all overhead costs or, in certain cases, may be overly burdened using a standard costing system. An effective SKU Rationalization effort will eliminate hidden costs associated with unprofitable product lines and increase production capacity. In certain instances, a well-managed SKU Rationalization effort combined with a smart Sales Incentive Plan results in unimagined profit improvement as both your production and sales teams focus on the right prod- uct lines.

It is important to note that the ultimate goal in building a KPI system is to create a culture of continuous improvement and teamwork within your company. KPIs provide an opportunity to keep everyone - management, employees, suppliers and customers - focused on what needs to be done to improve performance and keep the business on course. When employees understand where management wants the busi- ness to go and how their job fits into that plan, they are empowered to help the company achieve its objectives.

Questions? Contact Mike Lewis, CPA Partner-in-Charge, Manufacturing and Distribution Services Group 314-290-3391 mike.lewis@rubinbrown.com or Rick Feldt, CPA Manager, Internal Audit Services Group 314-290-3220 rick.feldt@rubinbrown.com

21 • summer 2006 issue