Apr 14, 2014
Lagging indicators are death to sales
Most ERP systems can give you a lagging indicator of something that went wrong:
- You are out of stock of an item, and you 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 your forecast was woefully low
This is all good, but you already sit with the problem. Now you’re in fire fighting mode. Everything is a crisis, and everyone is unbelievable stressed.
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
- You are potentially going to stock out. You have inventory on hand right now, but before the next order arrives you will run out
- You placed a surplus order. Either the order was placed wrong, or since the order was placed, the market conditions changed, and now your order is too big
- By the 7th day of the month you have already sold more than 50% of your forecast for the month. In other words, your forecast was too low, but you can still fix that now
- You have just gone under the Safety Stock level for a critical item. In other words, you’re selling at a greater rate than anticipated
Leading indicators, or early warning systems, give you enough time to calmly fix the 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 problem with 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, and not a fire fighter.