Key Performance Indicators (KPIs)

Selecting the Proper KPIs

KPI Tree
Operational Definition
Balanced Scorecard
Common KPIs
KPIs & Continuous Improvement

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:

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.
 Click to enlarge

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 Producti on

Spoilage / rejecti on rate
Re-work rate
Time spent on product re-work
Total units manufactured
Units per day
Units per labor hour
Line effi ciency
Producti on capacity
Capacity uti lizati on
First ti me right rati o
Rolled throughput yield (RTY)
Average changeover ti me
Material usage
Purchasing and Inventory
Cancelled purchase requests
Purchase orders completed
Purchase order cycle ti me
Emergency purchase rate
Rejected receipt rate
Late deliveries from suppliers
Changes in approved suppliers
Unloading ti me
Stock level
Inventory days coverage
Re-work on procured inventory 

Sales, Marketi ng and Shipping

Time to process customer orders
Time to resolve customer claims
Visits to key customers
New customers rate
Customer retenti on rate
Sales forecast accuracy
Market share growth
Marketi ng expenses
Product availability
Loading ti me
Not on-ti me in-full (NOTIF) 

Finance and Accounti ng

Net profi t margin
Cost of goods sold
Operati ng income
Cost per unit
Working capital
Accounts receivable turnover
Inventory turnover rati o
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
Preventi ve Maintenance Completed
Repair Cost
Repair Cost per Unit
Maintenance / Repair Downti me
 

Human Resources
Staff turnover rati o
Employee sati sfacti on index
Exit interview sati sfacti on rati o
Internal promoti on rate
Labor uti lizati on rate
High performing employees
Training hours rati o
Training att endance rati o
Absenteeism rate
Part-ti me employees
Disabled staff rati o

Environment, Health & Safety

Recorded safety observati ons
Workplace inspecti on audits
Risk assessments implemented
Lost work days
Signifi cant injury cases
Near miss cases
First aid treatment cases
Environmental incidents
Safety circles conducted
Sati sfacti on with ergonomics
EHS training hours
Quality
Customer complaints
Returns from key customers
Customer sati sfacti on index
Customer surveys conducted
Defects at customer site
Defects per million opportuniti es
Defects per unit
Cost of non quality
Quality circles conducted
Audits performed on schedule

Lean
Value added ti me
Takt ti me
Operator / machine cycle ti me
Order processing cycle ti me
Net available ti me
Work in process ti me
Value stream rati o
Process Cycle effi ciency
Upti me rati o
Overall equipment eff ecti veness
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.