Key performance indicators and motivation of personnel in the company
Well, how so? We try to apply the most modern relationship system in our company, we build KPIs, and we also offer good motivation for the staff, and the best employees leave us! Why does this happen? Probably, many managers and owners of companies have already thought about this question more than once. Let’s try to find the answer by considering the experience of using key performance indicators and motivations.
The balance of indicators is the main principle
Let’s start with the most important. It is necessary to understand what the main purpose of the company’s work is. If you represent the logistics department, then you need to know what role logistics plays in achieving this goal. It is important not to break away from the orbit where you should be. Unfortunately, I very often had to observe a completely different picture, when the strategic goal of the company is the same, and logistics seems to live somewhere on another planet. It develops according to its own laws, makes unrelated investments, waiting too long for payback.
From my experience, I can draw several important conclusions. First, all KPIs implemented in the company must be transparent and measurable. It’s not just you as a manager who needs to measure them quickly. Key indicators will work if the employee to whom they relate can calculate them independently in one go. Otherwise, you will get “some” system of indicators, “somehow” related to the production process and “which” indicate something.
But the task is different – to awaken within each person a sense of involvement in a common cause and an understanding of how exactly it affects the final result.
Second, the larger the processes you manage, the less you need to delve into the details. For a manager, key performance indicators are compiled into a system similar to a control panel. It is not necessary to waste energy and dive deeply into the numbers. Most often, you can get by with indicators: here is red, here is yellow, there is green. We understand how to respond to this “traffic light”, do not waste extra time on analysis and can direct our expensive (literally) resource to solve the most important tasks. Why would you want to know if the service level is currently 97 or has remained at 96.5? It is enough for the manager to understand that the service is in the green zone. And the most important thing is that you get such information about each sector instantly.
Of course, it takes time to build a balanced system of simple and easy KPIs. But when you manage to make the metrics measurable online, the goal will be achieved. However, we should not forget about one more feature of the balanced KPI system. There will always be a conflict in it. In this case, we understand it as a neutral phenomenon, which is a kind of counterbalance in the system.
For example, what would happen if you set yourself the goal of maximizing turnover? Obviously, as a result of your efforts, this indicator will really improve. But at the same time, most likely, the level of service will drop. Why? But because we, logisticians, optimize very quickly, and if we are given a goal, we will reduce the inventory to such a level that we will start selling “from the wheels”.
Imagine that the car has not yet arrived at the warehouse, and the cargo in it has already been distributed among customers – everything has been accounted for, invoices have been issued, etc. Only the product itself is not physically present. Such a practice will not bring anything good. At a minimum, there will be problems with shortages and re-sorting, periodically “something will not go there”. Of course, the level of service will drop.
Something similar will happen when bending in the opposite direction. Those companies that chase a high level of service, for example, want to reach 98% at any cost, get big problems with excess inventory.
Logistics KPIs cannot exist separately from other departments. It is necessary to build a system in one chain so that each link complements each other. And there will definitely be a conflict here as well. We need to make it balanced, using only key performance indicators.
Another important rule: no more than three or four KPIs per employee. Life shows that more key indicators do not work well. I had to watch how one customer service employee tried to “hang” 14 KPIs at once. As a result, a person did not understand at all what indicators to focus on. Even when there are seven of them, it is difficult for the employee. When it’s five, the washout begins. A person can keep three or four KPIs in focus.
Conflicts during KPI implementation
When compiling a system of key performance indicators, it is necessary to distribute them at different levels. So, managers need to keep in focus the issues of meeting profit goals, budgeting, and service level. In the planning and forecasting department, it is important to monitor the implementation of the sales plan, turnover and, again, the level of service. Purchasing and E&E are also busy with the implementation of the sales plan and profit, but there is also a cost KPI.
In the warehouse, the level of service is tracked by lines. We also keep the sales plan and budget in focus. In the transport department, there is again the level of service plus the profitability of transportation, the norms of loading cars and the timeliness of deliveries. In customer service – the level of service and execution of the plan.
Theoretically, this system looks quite slim. And what in practice? Undoubtedly, there are conflicts. For example, for the planning function, I implemented the following system: we measured the implementation of the sales plan by half-years, because there was an obvious dependence on the season. And we reviewed KPIs for turnover and service level every month.
Another typical conflict is an attempt to impose sales figures on logistics. But logistics itself does not sell anything, its task is only to ensure this process. Your subordinates will definitely want to object. They will say that they do not sell anything and ask ironically, what do you want from them? Like, we can bring the cargo to be processed on time. But we do not sell!
After hearing such arguments, one should remember for whom and for what the company works. After all, she needs to make a profit, which is formed by the difference between sales revenue and cost price. One is closely related to the other. Therefore, even if your employees are not directly selling, they should still feel involved in the overall process and keep the Company’s goal in focus.
I managed to “sell” this KPI not only to the transport department, but also to the warehouse. My warehouse employees were motivated for the sales plan and, of course, in order not to face misunderstanding and resistance, it was necessary to correctly present their decision on the implementation of such a key indicator.
Too bad if the shippers and packers decide that the KPI on the sales plan means they have to get their hands on something and sell it too. All that is required of them is to do their job well. They should understand that this will help increase sales. And when sales really start to grow, we pay a bonus at the end of the year not only to the staff from the sales department, but also to employees of other departments, including in the warehouse. We congratulated everyone on the successes achieved by the company, thanked them for their good work and, rewarding them with money, explained that even “thanks to your efforts” the company made a good profit.
Of course, it will not be superfluous to emphasize precisely those functions that are the main ones in this area. If we thank the warehouse workers for the clear performance of cargo handling tasks, then the transporters – for the timely delivery and profitability of transportation.
Budgeting as an element of motivation
Imagine that you have an employee under your command who shows all his abilities and talents to the maximum. You can see that he learned to do his job very well and even began to outgrow his position. On the one hand, having such employees is the dream of every adequate boss. But as a smart person, you should understand that this person will soon leave the company if you cannot move them up the career ladder or motivate them in some other way.
Since promotion can be awarded quite rarely, other options for motivation should be considered. In particular, those related to budgeting. The solution may be very simple: give a talented and capable employee a developmental task. Train him to do something more challenging than what his job responsibilities and KPIs dictate. In short, do not regret spending a little time to give him new perspectives.
I conducted such an experiment. Employees of the transport department were instructed to independently calculate the budget. This is quite serious work, because first you need to conduct an analysis of the transport services market, monitor fuel prices, predict their changes in the future, as well as fluctuations in the exchange rate of the hryvnia against the dollar, etc. In addition, it was necessary to take into account which carriers were contracted with and on what terms, which companies would still have to be involved, and which costs the company would incur for maintaining its own vehicles.
Of course, without sufficient skills, people could not do such work at a high professional level. For example, it turned out that their analysis showed the cost of transportation to be about 40% higher than it actually was. We tried to understand why they got such a result. It turns out that they began to take into account all the risks that may arise in the near future. That is, in their opinion, all possible force majeure had to happen. But it’s not scary. The main thing is that we saw among our employees people who want to develop themselves as professionals.
Believe me, a few months will pass, and they will be able to work effectively in their new field. Only they need to be given more powers, more opportunities. They will become more understanding in the economy and will begin to suggest valuable ways to optimize the budget. It may not keep such employees on your company’s staff for long. Even probably later they will still find for themselves a new area of application of their talents. But, in any case, your personnel potential improves. If you have a vacancy, you can fill it without any problems. If you yourself go up the official ladder, you will have a worthy replacement.
The same can be done in warehouses and in other departments. Most of the warehouse workers I have worked with before have already become logistics directors.
KPIs and motivations in the warehouse: the whip and gingerbread method
The main key indicator of warehouse efficiency is the level of service. However, here it is calculated a little differently than in the field of customer service.
Let’s say the company received an order for 100 units of a product. And there are only 90 in stock now. Accordingly, they can ship no more than 90, and the overall level of customer service can be estimated at 90%. But for the composition, these 90 are equal to 100%. And there begins a new story. Maybe it was shipped, but the entire product did not reach the recipient. Probably something was damaged at some stage. And a few more units turned out to have an expired shelf life. As a result, it may turn out that only 70% of the initial 90% will remain. Moreover, the areas of responsibility for this are divided between different departments.
In order to manage the level of service under such conditions, it is necessary to introduce a two-level evaluation system. Yes, for warehouse we set each line as a separate order. If any line is not executed, the system immediately automatically displays this fact and indicates the reason. However, it is necessary to understand that it is possible to improve the quality of service only when the interest of the warehouse workers in performing this KPI has been achieved
The level of engagement and internal motivation of the warehouse staff is different than, for example, in the sales department. Getting them to work after their shift or unload the car on a Saturday when they have a legal day off is difficult. And the system of motivations must be built differently. Therefore, we have to admit that motivation in such sectors is good both with a plus sign and with a minus sign. That is, we apply not only bonuses, but also penalties. By the way, for some categories of employees, the threat of receiving a fine is even more effective than the prospect of receiving a bonus.
If allowances are paid for exceeding regulatory indicators, fines are applied for re-sorting, shortages, incorrect attachment of accompanying documentation, packaging of goods with goods that have expired. The result is a system of influence based on the principle of a whip and a gingerbread man.
I would like to note that at the same time managers should not communicate with people according to the principle: “I’m the boss, you’re a fool.” We still remain partners and tell our subordinates that the fate of the entire business depends on them, as well as on us: “The company will make a profit only after everyone does their work well!”.
It is very useful to digitize all data on personnel errors and automate the analysis of their causes. To begin with, you can use the usual 1C. Then you will probably feel the need for a more serious software product. For example, our system did not allow transferring the invoice if the reason for the error was not specified. This way you can get important information that will improve the quality of the service. The main thing is that everything works quickly, without taking a lot of time from the staff to describe the reason
Salary for warehouse staff should be competitive in any case. In general, the amount of bonus payments can average up to 20%. The situation here is very different from the one that exists in the sales department, where the employee’s earnings, rate + bonus are 50×50. It is logical there, in the sales department there are “getters”. The warehouse is another story. They pay for work done honestly, and they pay extra for extra effort.
Hygienic and motivating factors
In order to understand how to build an effective personnel motivation system in the entire company based on KPI, let me remind you of Herzberg’s theory, which defines hygienic and motivating factors. Unfortunately, at many Ukrainian companies, managers mistakenly believe that a slightly higher salary than that of competitors can be a good motivating factor for staff. This is a wrong judgement.
According to Herzberg’s theory, hygienic factors must be observed in any self-respecting company. Only after that you can think about the motivation system. In other words, no motivations will work if hygiene factors are not observed. On the other hand, if you decide that only “hygiene” is enough for you, rest assured that your entire KPI system that you have created to continuously improve the performance of your staff will have zero effectiveness. That is, as a skilled manager, you need both.
Herzberg’s theory refers to hygienic factors:
- Policy of the organization and management;
- Working conditions;
- Salary of employees and their social status;
- Interpersonal relationships in the team, in particular between superiors and subordinates;
- The degree of direct control over work.
Motivating factors are:
- The possibility of promotion.
- Recognition and approval of work results.
- High degree of responsibility.
- The possibility of creative and professional growth.
Your task as a manager is to ensure the implementation of hygienic factors, as well as to understand what motivations are important for this or that employee. After all, for some, a high salary is important, while for others, career growth or professional development is what motivates them. Let me clarify that motivation always comes from within the person himself, it cannot be imposed.
In Ukraine, where salaries are not high, the money factor often comes into play. But it should be borne in mind that money motivates most people only up to a certain point. Often, having reached the social minimum, having bought, for example, one’s own apartment, car, etc., a person ceases to be interested in additional payments. He will not enthusiastically work on projects he is not interested in, even if you offer him a very large sum. Although, I had to meet such people for whom money is always important – even when, as they say, they can’t take it anywhere.
However, when performing hygienic factors, most people begin to pay attention to career growth, education, and professional growth. Often they want to do something very important and responsible. I also had to observe people for whom the most important thing is to take on as much responsibility as possible, without which they are simply bored.
How to understand what a person needs? First, we can just watch him, communicate. He himself will tell you about it. Second, special tests have been developed that help identify motivational preferences. This can be done at the time of hiring. Such information is important for the development of the company, because a motivated employee always fulfills his KPIs and does even more than what is expected of him. He can voluntarily come to work earlier and leave later, take his laptop home to finish the work assigned to him earlier. After all, what the employer and the manager need turns out to coincide with the needs of the employee himself. He works hard and conscientiously, but at the same time he does not burn out. The fire in his eyes does not disappear, he is satisfied and is not going to go anywhere, because he is happy here. Isn’t that what you and I are trying to achieve?
