We all know that if you are not measuring it, you cannot manage it. Equally important to note that if you are measuring it incorrectly or measuring the incorrect metric you will be driving the wrong behaviour, which can have a direct impact on your business’s bottom line. An example of a poorly considered measure would be measuring the time it takes to load a dispatch vehicle. This would drive employees to load fast, which will lead to carelessness. A better measure would be: Are the dispatch vehicles loaded on time? Another example of a poor metric is measuring output quantity in manufacturing. This would drive the team to make easy to manufacture products, perhaps at the cost of products for which there is high guaranteed demand. A better measure would be planned vs. actual manufactured quantities.
Perhaps you have recently started a new job and inherited your Key Performance Indicators (KPIs) from your predecessor, or maybe you have been in your current organization for years. Either way, it might be time to have a critical look at your KPIs. It is especially important to review your KPIs if you are measuring things based on what the software you are using is capable of and perhaps not what you actually need to measure.
Metrics vs. KPIs
A metrics is a measure of an activity at a specific point in time, e.g., manufacturing yield per batch. A KPI measures a drive to achieve a strategic objective, e.g., manufacture to plan. This means that all KPIs are metrics, but not all metrics are KPIs.
Strategic vs. Tactical vs. Operational KPIs
Strategic KPIs should drive the long terms goals of the organization. These are usually financial and should generally drive growth. For profit driven companies, the ultimate strategic goal should be profitability growth over time. This can then be filtered down to various departments within the organization. Examples could be that the sales department is measured by sales growth, supply chain by improved efficiencies or productivity, and HR could be a reduction in unplanned absenteeism.
Tactical KPIs are medium term measures that should drive towards achieving the strategic goals. You know these are strong KPIs if they give a clear indication of tactical pursuits to achieve the targeted KPI goals. From the departmental examples stated above, the tactical sales KPI could be customer profitability. This would drive reviewing which customers’ pricing or payment terms to evaluate and eventually even suspend trading with unprofitable customers. Tactical KPIs for the supply chain could be manufacturing to plan and on-time-in-full (OTIF). By manufacturing to plan, you can ensure that there are less wasted resources, and by improving OTIF, customer satisfaction increases, thus driving growth.
Operational KPIs are short term measures that can be acted upon immediately to drive improvements. Ideally, they are easily identifiable, highly visible and understandable to anyone and should involve everyone. A great operational example is making sure that the dispatch staging area is clear before vehicles can be dispatched. Another good example is ensuring good housekeeping. Various studies* have shown that absenteeism is reduced by ensuring a clean and tidy environment for people to work in.
From the above, it should be clear that you need to start from the strategic goals to establish strategic KPIs, see how these can be rolled down into at least one tactical KPI each. And each tactical KPI must drill down into at least one operational KPI. The next question is: What are good KPIs? We can start by determining:
What are bad KPIs
Here is a list of warning signs, and if your KPIs exhibit any of these traits you might want reconsider them:
- Any KPI that takes long to calculate or is not very accurate. Estimates just aren’t good enough.
- If the KPI cannot easily be explained or defined, even to a lay-person. If it is difficult to explain it will be difficult to determine how to improve.
- A KPI you cannot influence. There is no use measuring something that you cannot control, where you have no influence over the results, or where you can make no impact.
- If the KPI drives the wrong behaviors. Just because you can do it fast, does not mean it has been done right.
- Any KPI that is not aligned to objectives and goals. Just because you can measure it, doesn’t mean you should have it as a KPI.
- If the targets of the KPI are unachievable. Why work for something you know you cannot achieve.
- If the KPI is irrelevant. If you cannot show why it is relevant, it means it is not important, and measuring this will be a waste of time.
The worst KPIs are those that are being measured for the sake of measuring something