Nov 17, 2015
Lagging indicators are a death to sales
Most ERP systems can tell you when something has gone wrong:
- You are out of stock of an item and cannot fulfil your sales obligations
- You just received a purchase order, but it’s too much and you’re now stuck with excess inventory
- Half-way through the month you run out of stock, because the forecast you purchased to was just way too low
Finding out on the day that something has happened (or in some cases the day after) is all well and good, but you already sit with the problem. Now you’re in fire fighting mode – everything is a crisis and everyone is unbelievably stressed.
These are called lagging indicators, because they are “output” oriented, easy to measure but hard to improve. With a lagging indicator of stock-outs, we find out after we stock-out that we are out of stock but it is difficult to “not run out of stock” in the future.
Imagine how much better your life would be if you could know about these things before they become a nightmare.
These are called Leading Indicators
Leading indicators are often related to activities undertaken by employees, such as responding to early warning signals. This implies the prediction of a situation in order to take action to mitigate the impact.
Some examples of leading indicators are:
- Potential stock-out; you have inventory on hand right now, but you are predicted to run out of stock before the next order arrives
- Surplus order; you have an order in the pipeline where there is too much on order, either due to an incorrect order being placed or market conditions having changed since order placement
- Forecast is too low; you are selling at a greater rate than anticipated and by the 7th day of the month you have already sold more than 50% of your forecast for the month
Leading indicators, or early warning systems, give you enough time to calmly fix problems, before they become a crisis. Even better, if you had a system that could give you the leading indicators, ranked from the most severe problem to the least, that would allow you to focus your attention on the problems that would have the biggest impact.
Ultimately leading indicators allow you to make more sales and, perhaps more importantly, allow you to think more strategically about your business.
After all, you’re a business owner, not a fire fighter.