Measuring Operational Efficiency
by Marty Kirshner, CPA, MSA & Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP
We have long been proponents of “measuring to manage,” the process of monitoring performance of business operations by capturing and measuring metrics through financial and numerical data. But financial and strategic metrics are focused on making long-term improvements in your fuel oil or propane company. What about changes you can make in things you are doing now?
That is where operational metrics come in. Operational metrics provide near real-time feedback on essential day-to-day activities that are essential to a company keeping its customers satisfied and its doors open. But it is important to select the correct key performance indicators (KPIs) to help you know whether you are getting more efficient or if there is room for improvement. We’ll look at some operational KPIs that are important to energy marketers below.
But first, there are two mistakes to avoid in selecting operational KPIs. The first is choosing KPIs you have always measured, without accounting for changes within your organization or shifts in customer behavior that might offer opportunities to grow and improve. The second is to choose KPIs that are the easiest to measure, instead of doing the work to track activities that could have a more direct impact on efficiency. Measuring to manage is not simple or easy, but it is important enough to devote time and energy to doing it properly.
Important Operational KPIs
Every propane or fuel oil business is different and should establish its own unique KPIs to track and assess. Every department should have its own KPIs and the company owner should have theirs. The areas of responsibility are different for each one, so the numbers to be tracked should be different. What’s important for the fuel manager is not important for the service manager, while the owner may want to know cash balance, accounts receivable and payable balance, number of gallons delivered, number of jobs closed and other overarching statistics.
That said, here are five operational activities common across most retail energy marketers, which should be monitored and measured. This is by no means a complete and exhaustive list of KPIs – you should work with a trusted advisor to determine the full range of metrics that are right for your company.
1) Delivery Time: Getting fuel to customers efficiently is the core function of your business. You need to track on-time delivery (OTD), which measures how many orders arrive when expected, whether automatic delivery or will call. The goal should be to minimize delivery time to maximize efficiency. Bear in mind that numbers can hide problems. For example, if order processing or dispatching took longer than it should, the overall delivery time will suffer even if the routing and driver performance were excellent.
2) Delivery Costs: All the costs related to the transportation process should be included in this measurement: order processing, administrative costs, bulk storage, dispatching, and the actual transportation costs (driver payroll and benefits, truck depreciation, insurance, vehicle repairs, vehicle fuel). This will help determine the average cost of distribution expressed in percentage, a critical component of successful process optimization. The final goal is to decrease the costs while maintaining high-quality deliveries. The number and cost of deliveries should be reviewed every day.
3) Capacity Utilization: The cost of owning and maintaining vehicles and equipment can be lowered by using equipment to its full capacity. By measuring the actual output produced and comparing it to potential maximum output, you can understand the efficiency of your operation. For example, is your routing system set up to ensure that every delivery vehicle is using the most efficient route to drops? Do you have software in place to efficiently redirect service technicians between jobs? Increasing capacity utilization increases overall efficiency and can help you better manage assets. Track this weekly.
4) Total Service Tickets vs. Open Service Tickets: The overall volume of service requests is an important KPI to measure. Measuring the open tickets versus completed ones on a weekly basis can assist in service planning and management and help optimize the overall ticketing system.
5) Overtime Hours: The workload of employees is an operational KPI that can impact payroll costs as well as employee absenteeism and job satisfaction. This KPI should be monitored in detail since it can be interpreted differently, according to context. For example, is a spike on overtime hours being caused by a seasonally high volume of orders, or something completely different? This should be examined every week.
Additional Factors to Consider
Whatever your KPIs are, they must be measurable and quantifiable. After you have measured your input into your business, you must also measure the output. Once you have the metrics, you can compare them to previous years, against your competitors, against industry standards, or use them as an initial benchmark to compare future statistics. Regular monitoring makes it easy to identify something that may have underperformed or over-performed, as well as what may have happened within this period to cause the change.
Each department should have its own KPIs to track, and different people within the organization should be tasked with monitoring different KPIs. As the company owner, you’ll have your own set of numbers to monitor, many of which should be reviewed daily. These include cash flow items (cash balances, cash collected, and cash disbursed) and the margins you achieved that day. You should also track profitability of every department on a monthly basis.
You can’t do this effectively with spreadsheets that are several months old. That is ancient history in today’s face paced environment. There are management and accounting software systems (e.g., Sage Intacct) that produce near real-time results, which gives you the ability to make meaningful changes in time for them to have a positive impact on your business.
To ensure the whole team is on the same page, and because many measures and goals are interconnected, it is vital to share these findings with all relevant parties. Transparency in reporting is the only way improvements can be generated and implemented.
Marty Kirshner and Joe Ciccarello are Partners in the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the energy industry. They can be reached at 781-407-0300 or email@example.com.