Key Performance Indicators (KPIs)


Key Performance Indicators

Performance management is an approach used to manage performance of an organization. It can play an important role in the success or failure of a business. It can be applied to measure the performance of an organization, a business unit, a single department, a project, an employee, and even the process to build a product or service. It includes activities that will help to ensure goals are consistently being met in an effective manner. Those activities include planning and setting expectations, developing the capacity to perform, continually monitoring performance, periodically rating performance in a summary fashion, and rewarding good performance.

Performance indicators are measurements that define and assess the performance and the success of an organization. They are objectives to be targeted in order to add the most value to a business. They are means to periodically assess the performance of an organization, its departments and the people working there. Performance indicators are developed to impact the entire organization. Accordingly, choosing the right performance indicators relies upon a good understanding of what is important to the organization.

An organization may use performance indicators to assess its success as well as the success of an operational goal or a particular activity. Performance indicators are either result oriented or process oriented. Result oriented indicators focus on the key outputs of a process and related to the critical success factors (e.g. customer complaints from key customers and return on investment). While process oriented indicators focus on the inputs to a process (e.g. time to process customer order and late deliveries to key customers).

Performance Indicators are Used to:

  • Help an organization to understand its performance levels and set realistic performance goals.
  • Help aligning daily work to the organization’s strategic goals.
  • Help an organization monitoring its progress on a real-time basis.
  • Help an organization to understand its weaknesses and establish improvement priorities.
  • Determine whether an improvement is being made and maintained.
  • Help benchmark internally and externally.
  • Identify if staff are doing well and to help them if they are not.
  • Provide a basis for recognizing team and individual performance.

Selecting the Proper Performance Indicators:

Performance indicators are often developed based on the critical success factor. CSFs are the elements that are necessary for a strategy to be successful and for an organization to achieve its mission. CSFs selection is a very subjective exercise and requires active leadership by senior management. Examples of CSFs are: delivery on-time and in-full, providing superior customer service, short time to market new products, management commitment and staff orientation.

For example, if one of your goals is to deliver product on-time in-full, then a performance indicator may be the percentage of deliveries that are received by customers not on-time in-full. By monitoring this, you can improve your delivery performance by directly measure how well your organization is meeting its long-term goal of providing an on-time in-full delivery to customers.

Performance indicators need also to reflect the Voice of the Customer. By understanding the Critical-to-Quality characteristics (CTQs) features of your customer, you can use them as a basis to select your performance indicators. Customer satisfaction level, customer retention rate, the number of key customer visits, and the profitability of customers are among the indicators that may be measured. In order to calculate those performance indicators, raw data needs to be collected from customers.


KPI Tree:

An ideal situation is where performance indicators cascade down through an organization. A KPI Tree is a visual method of displaying a range of measures in an organization or related to a project. This helps people work in such a way that their activities are aligned with the organization strategy, and helps individual work areas contribute to overall business performance. It helps bringing together a range of measures and provides a visual representation for which measures contribute to other measures.

A successful KPI tree is the one that contains a balance of measures covering efficiency, effectiveness, quality, delivery and cost. You might find that sometimes you have to develop some new measures to achieve this balance. Effectiveness performance indicators measure processes in the eyes of the customer. They measure customer satisfaction such as quality, on-time delivery, cost, accuracy, ease of use, etc. Efficiency performance indicators measure processes from business perspective, and are of interest to the internal customers. They measure the amount of resources used by a process and are thus likely to have close links with the 8 Wastes. Examples are: processing time, waiting time, cycle time, inspection cost, repair cost and material usage.

Example:

The following is an example of a KPI Tree that was constructed during the implementation of a customer satisfaction research improvement project.



Operational Definitions:

An operational definition is a clear and detailed description of a performance indicator. The need for operational definitions is fundamental when collecting data. The data collection will be meaningless if there is an inconsistency in understanding a measure, a specification, a requirement, or a procedure. Operational definitions ensure consistent data collection, eliminate ambiguity, and ensure standards are applied in the same manner.

The following is an example of a form that can be used to present the operational definitions of performance indicators.


Balanced Scorecard and Dashboard Reporting:

Balanced Scorecard

A very common way to manage and monitor performance indicators is to apply a management framework such as the balanced scorecard. A scorecard is simply a report that displays a collection of performance indicators. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. It helps align business activities to the vision and strategy of the organization and monitor performance against strategic goals.

Performance dashboards are used to easily monitor the performance in an organization. They are often a series of graphics, charts, gauges and other visual tools that can be easily interpreted and analyzed. They allow to see if the performance indicators are being met based on the goals in place. If not, they will visually alert that corrective actions should be made. They are typically limited to show summaries, comparisons and trends. A good dashboard:

  • Is simple and easy to understand.
  • Conveys important information at a glance.
  • Contains minimal distractions and visually appealing.
  • Displays real-time information.
  • Should be displayed on the shop floor using a screen or a bulletin boards.

Common Key Performance Indicators:

Here are some of the common KPIs to measure and monitor per business function:

Manufacturing and Production
Spoilage / rejection rate
Re-work rate
Time spent on product re-work
Total units manufactured
Units per day
Units per labor hour
Line efficiency
Production capacity
Capacity utilization
First time right ratio
Rolled throughput yield (RTY)
Average changeover time
Material usage

Purchasing and Inventory
Cancelled purchase requests
Purchase orders completed
Purchase order cycle time
Emergency purchase rate
Rejected receipt rate
Late deliveries from suppliers
Changes in approved suppliers
Unloading time
Stock level
Inventory days coverage
Re-work on procured inventory
 
 

Sales, Marketing and Shipping
Time to process customer orders
Time to resolve customer claims
Visits to key customers
New customers rate
Customer retention rate
Sales forecast accuracy
Market share growth
Marketing expenses
Product availability
Loading time
Not on-time in-full (NOTIF)
 

Finance and Accounting
Net profit margin
Cost of goods sold
Operating income
Cost per unit
Working capital
Accounts receivable turnover
Inventory turnover ratio
Return on investment (ROI)
Budget variance
Capital expenditure (CAPEX)
Monthly department expenses

Maintenance
Response Time to Breakdown
Mean Time Between Failures
Mean Time to Repair
Spare Parts Inventory Turnover
Work Orders Completed
Preventive Maintenance Completed
Repair Cost
Repair Cost per Unit
Maintenance / Repair Downtime
 

Human Resources
Staff turnover ratio
Employee satisfaction index
Exit interview satisfaction ratio
Internal promotion rate
Labor utilization rate
High performing employees
Training hours ratio
Training attendance ratio
Absenteeism rate
Part-time employees
Disabled staff ratio

Environment, Health & Safety
Recorded safety observations
Workplace inspection audits
Risk assessments implemented
Lost work days
Significant injury cases
Near miss cases
First aid treatment cases
Environmental incidents
Safety circles conducted
Satisfaction with ergonomics
EHS training hours

Quality
Customer complaints
Returns from key customers
Customer satisfaction index
Customer surveys conducted
Defects at customer site
Defects per million opportunities
Defects per unit
Cost of non quality
Quality circles conducted
Audits performed on schedule

Lean
Value added time
Takt time
Operator / machine cycle time
Order processing cycle time
Net available time
Work in process time
Value stream ratio
Process Cycle efficiency
Uptime ratio
Overall equipment effectiveness
Muda-free cost


KPIs and Continuous Improvement:

Performance indicators are key to the continuous improvement process. They are used to establish improvement priorities and track the progress of improvement projects. The following are examples of indicators that are used to measure continuous improvement activities:

  • Chartered improvement projects
  • Project charters approved and signed off
  • SOPs developed after improvement projects
  • Completed improvement projects
  • Financial department involvement in improvement projects
  • Processes perform at 4.5 Sigma or higher
  • Staff trained in Lean Six Sigma
  • Savings resulting from improvement implemented by employee suggestions
  • Time to respond to suggestions
  • Idea conversion rate
  • Kaizen events conducted
  • Cross-industry benchmarking studies conducted

Utilizing Performance Indicators:

The following steps will help you understand how to establish and best utilize your winning performance indicators:

  • Review the quality of the current data collection methods (are you collecting data unnecessarily?).
  • Train staff on CTFs, KPIs, empowerment and process improvement methods.
  • Start by a few easily understood performance indicators.
  • Relate to critical success factors and reflect the voice of the customer.
  • Allow teams to define and select their own performance indicators.
  • Have your performance indicators approved by senior management.
  • Measure and report only what matters.
  • Monitor performance using dashboards.
  • Display at workplace (on screens or public display boards).
  • Use performance indicators as a basis for team meetings and decision making.
  • Identify and pursue improvement goals.