Why Traditional Cost-Based KPIs Can Bankrupt a Company Faster
Introduction
Many companies believe that the best way to improve performance is to reduce costs. They use KPIs (Key Performance Indicators) in each department to measure how well costs are being controlled — like lowering cost per unit, reducing purchase prices, or minimizing delivery expenses.
But here’s the surprise: the more strictly a company enforces these KPIs, the faster it may go bankrupt.
Why? Because these KPIs focus on local efficiency, not overall performance. Departments try to win individually, but the company loses as a whole.
Let’s break this down in simple terms — with real examples.
The Wrong Goal: "Reduce Total Company Cost"
At first glance, it seems logical: “If every department reduces its cost, the whole company becomes cheaper to run.”
But companies are systems, not a collection of separate parts. Like the organs in your body, they need to work together — not just perform well individually.
When departments try to optimize their own KPIs in isolation, they create friction, delays, extra work, and even lost sales. The end result? Costs go up, not down.
How It Falls Apart: Examples from Real Departments
Let’s look at how common KPIs in different departments conflict with each other and cause harm.
Operations: "Lower cost per unit"
What they do: Run large batches to maximize machine use.
Why it looks good: Spreads fixed costs over more units.
But what really happens:
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Creates excess inventory that sits in warehouses.
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Ties up cash and increases storage costs.
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May build products no one has ordered yet.
➡️ Local win, global loss.
Purchasing: "Buy materials at the lowest price"
What they do: Order in bulk from the cheapest supplier.
Why it looks good: Gets a lower price per unit.
But what really happens:
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Huge orders = too much inventory.
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May get slow deliveries or poor quality.
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Production delays if parts don’t fit or arrive late.
➡️ Cheap inputs can cause expensive problems downstream.
Sales: "Sell more units or increase revenue"
What they do: Sell anything they can, including low-margin or hard-to-make products.
Why it looks good: More sales = good, right?
But what really happens:
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Pushes orders the factory can’t handle efficiently.
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Creates chaos in production, longer lead times.
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Ignores what products are most profitable.
➡️ More sales ≠ more profit — sometimes it creates losses faster.
Logistics: "Reduce cost per delivery"
What they do: Delay shipments until trucks are full.
Why it looks good: Fewer shipments = lower transport cost.
But what really happens:
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Customers get products late.
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Causes cancellations or penalties.
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Hurts reputation and repeat business.
➡️ Saving $200 on freight could lose a $20,000 customer.
Maintenance: "Reduce maintenance cost"
What they do: Skip or delay preventive maintenance.
Why it looks good: Less downtime, fewer expenses short-term.
But what really happens:
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Machines break unexpectedly.
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Production stops, causing missed shipments.
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Emergency repairs cost more than planned maintenance.
➡️ Saving small now, paying big later.
The Domino Effect
Each department acts logically — based on its own KPI. But together, their actions:
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Create too much of the wrong inventory
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Cause delays, errors, rework, and customer complaints
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Slow down cash flow and increase total costs
Worse still, they blame each other when problems arise:
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Operations blames Sales for unstable orders
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Sales blames Production for late delivery
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Purchasing blames Logistics for delays
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Finance blames everyone for going over budget
➡️ The company becomes a battlefield of local winners and a global loser.
The Irony: The More You Succeed, The Faster You Fail
If every department gets better at hitting its traditional KPI:
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More units produced (but not sold)
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Lower purchase costs (but worse materials)
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Lower freight costs (but late deliveries)
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Lower maintenance cost (but more breakdowns)
The company looks better on paper, but worse in reality.
Customers leave. Cash disappears. Morale drops.
The company chases efficiency until it efficiently drives itself off a cliff.
The Better Way: Focus on Flow, Not Cost
Instead of focusing on cost per unit or department savings, smart companies ask:
"Will this decision help us sell more, faster, with less waste?"
That’s the True North:
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Increase Throughput (T) = money earned from sales
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Reduce Inventory (I) = less cash trapped in stock
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Reduce Operating Expense (OE) = smarter use of resources
KPIs should help each department support the flow of value through the system — not just reduce their own cost.
New Thinking, New KPIs
| Old KPI | ❌ Leads to Conflicts | ✅ Better KPI | 🚀 Helps True North |
|---|---|---|---|
| Cost per unit | Overproduction, high inventory | Throughput per hour at bottleneck | Increases profitable flow |
| Lowest purchase price | Unreliable suppliers, excess stock | Supplier reliability at constraint | Maintains flow, lowers total cost |
| Sales revenue | Unprofitable sales | T per product or per constraint hour | Sells what makes money |
| Freight cost per ton | Delayed shipments | On-time delivery rate | Keeps customers happy |
| Maintenance cost | Machine failures | Uptime at constraint machine | Protects flow |
Final Thoughts
Cost accounting isn’t evil — but using it to drive KPIs across silos can destroy a company’s performance.
The solution isn’t just new metrics — it’s a new mindset:
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Flow > Efficiency
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Profit > Cost savings
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System > Silos
The companies that win are those who stop asking:
“How can we each save more?”
and start asking:
“How can we help the company flow faster and profit more?”
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