KPIs 101.3: How Fast Does Your Business Go?
As discussed in KPIs 101: How Much Can Your Business Improve?, every quantifiable Key Performance Indicator that has ever been devised falls into the following categories:
Size - how big is the deal?
Count - how many deals are on the table?
Velocity - how fast does the deal take to work through?
Capacity - how many deals can we actually do?
Statistics - averages, conversion rates, ratios, standard deviations, skew, correlation etc. etc. etc.
Today we will discuss #3: Velocity - how fast a deal takes to work through...
Whenever I have been asked to help a business search for a new business system, I have started off by asking "what happens now?". From there, I use a tool like Xsol to model the current processes cradle-to-grave, identify the weaknesses, identify the possibilities for change, and ensure that all RFP documentation addresses these opportunities for improvement explicitly.
It is not rocket science, and by calculating how long it takes employee A to do task B, it is easy to calculate how much a process costs to run. Having said that, it is amazing how many businesses cost their processes on a smooth flow through - instead of on what actually happens. As a result, they so often miss the silent velocity killer...
Wait time is any time that a process goes into a non-value adding halt.
Let's clarify what constitutes a "non-value adding halt". If you are building fibre glass boats, the drying time required for the fibre glass to cure properly is not wait time. It is adding value to the final product because non-cured fibre glass is useless.
If your boats are sitting idle waiting for the engines to be delivered, that is a non-value adding halt. The halt is incurring costs e.g. of electricity, storage, security etc.
Now some of you may argue that these costs are being incurred anyway, and should not be allocated to the idle products. However, if there was no idle time in all of the production, then it stands to reason that the same size facilities could produce a greater number of products.
For example: if one boat takes 20 days to produce, and there is only room to produce 1 boat at a time, then assuming there are 200 production days a year, the facility can produce 10 boats. The velocity of the plant is 10 boats per year. If we assume that the facility costs for the year are $100,000, then each boat effectively carries $10,000 of those costs each.
However, if there are 2 wait days per boat, meaning that it now takes 22 days to produce a boat, only 9 boats can be produced a year. But your facility costs are still the same. Now each boat must carry $11,111 in facility costs - an increase of 11.11%.
All else being equal...
Slower Velocity = Lower profit.
I said "all else being equal" because it rarely is. For example, a bottling line might be rated to run at 200 bottles per minute. However it only runs at 180 bottles per minute - 10% slower than its rating. According to the equation above, this leads to a lower profit.
But sometimes, faster is not always better. For example, if an increase in the line rate leads to a significant increase in breakage and wastage, it might make more sense to run slower and better than faster and looser.
The key takeaway on velocity is this:
Understanding how velocity interacts with your other KPIs is critical to optimising your profit.
For mortgage brokers, one of the key brakes on their velocity is getting signed contracts back from customers. Suitebox eliminates this brake immediately.
For anyone quoting in construction, Planswift reduces quote preparation time by 50%-80% while increasing quoting accuracy.