Key Performance Indicators (KPIs) Essay

Key Performance Indicators (KPIs) are quantitative and qualitative measures used to review an organization’s progress against its goals. These are broken down and set as targets for achievement by departments and individuals. The achievement of these targets is reviewed at regular intervals. KPIs are used to monitor the performance of a company, department, process or even an individual machine. They will also help shape the behaviors of employees within the company. KPIs need to be flexible and reflect the changing goals of the organization. Goals change as the organization changes in reaction to external factors or as it gets closer to achieving its original goals. Individual KPIs need to be directly linked to organization goals and objectives, or overall organization KPIs where they are used. They need to reflect organization culture and values, by indicating the types of behavior and performance the organization will recognize as ‘successful’ and reward employees for. KPIs need to be measurable and reflect a balance between operational and people orientated measures. KPIs are a fundamental component of sustaining a change process and maintaining a performance management culture. KPIs should be aligned with the organization’s vision and direction. When performance is measured, and the results are made visible, organizations can take action to improve. SMART KPIs The acronym SMART is often used to describe KPIs. Specific Measurable Achievable Relevant Timely Specific KPIs need to be specific to the individual job and if possible expressed as statements of actual on-the-job behaviors. For example, a KPI should: Explain clearly to the employee what he/she has to do in terms of performance to be successful Have an impact on successful job performance, that is distinguishing between effective performance and ineffective performance  Focus on the behavior itself, rather than personality attributes such as ‘attitude to customers’. Terms such as ‘work quality’, and ‘job knowledge’ are too vague to be of much use. Measurable KPIs must be measurable, that is based on behavior that can be observed and documented, and which is job-related. They should also provide employees with ongoing feedback on their standard of performance. Achievable Performance management needs to be an open, collaborative communication process. KPIs must be seen by all that they are achievable. The KPI must be realistically achievable. If it is set too high for the circumstances (such as an ambitious production target), not only will it be irrelevant but it will ensure failure. Relevant It is essential that employees clearly understand the KPIs, and that they have the same meaning to both parties. Consultation is more likely to result in standards that are relevant and valid. Timely KPIs should have an appropriate time frame. It should be possible to collect the relevant information either ‘as it happens’ or within a short time afterwards, otherwise it will lose its relevance. As outputs of the performance management system, KPIs also need to be in alignment with other HR-related functions, including training and development, recruitment and selection, rewards and recognition, and career planning. Business aspects that require KPIs KPIs should cover every aspect of the business. Sample examples are Customer satisfaction Employee satisfaction Staff turnover Absenteeism Department/division specific measures Triple bottom line: financial, environmental and social responsibility Finance including revenue and costs OHS reporting including incidents and related costs Equipment usage and OEE Maintenance costs and effectiveness New product development & innovation Lead times and down times Quality KPI components KPIs should identify the required outcomes, for example: The minimum acceptable performance e.g. daily break even point Target performance eg desired daily output. KPIs should: Be communicated to all staff so that they are aware of how they are to be measured and how their KPIs impact on the organization as a whole Be aligned with the vision and direction of the organization Have relevant reward and recognition criteria linked to each KPI. When implementing new KPIs, having baseline data to measure improvements is very important. Progress on KPIs should be communicated at regular times to highlight emerging trends. As these trends emerge, corrective action can be implemented in a timely fashion. KPIs need to be communicated via multiple media. The measures that are selected must be carefully specified to ensure they do not cause non-lean behaviors. In many cases there will need to be a selection of measures that balance quality and quantity factors to ensure the correct behaviors are encouraged. Listed below are some examples of the behaviors and outcomes that measure in isolation can cause. Measure in isolation Behavior Outcome Production output Make more Overproduction Machine efficiency Run machine longer Run in most efficient sequence for machine Unnecessary stock Customer orders late Maintenance costs Reduction in maintenance activities to reduce costs Machine breakdowns Cash flow performance Pay suppliers as late as possible Supplier deliveries XX unreliable Creating KPIs KPIs must be designed for each proposed change to the production process so that: There is a base line measurement taken to establish a starting performance standard There are measures developed to track the team’s  performance There are measures established that can highlight any variability. This can assist in future diagnoses Reward and recognition can be effectively implemented. Before data is collected three questions need to be asked. What is the purpose of collecting this data? Will this data tell us what we want to know? Will we be able to act on the data we collect? The goal is to create an easy-to-use, accurate measurement system with as few measures as possible. The following questions need to be answered when setting up a data collection system: What type of metric is it (financial, behavioral or core-process)? Why was it selected? Where will the data be collected? How will it be collected? How often will it be collected? How often and where will the metric be displayed? Who will use it? KPI examples Some examples of measures that can be used to monitor the performance of a competitive manufacturing company are listed below. Financial Examples Costs Material costs Labor costs Operations costs Inventory Overtime Warrantee costs Cost of Sales Interest on overdraft Number of projects completed on time and on budget Revenue Sales Gross margins Return on assets or investment Product profitability Team metrics Overtime Material costs Revenue generated by team Inventory value in team’s area Number of projects completed on time and on budget Core metrics Examples OHS Lost time injuries Number of staff off work Length of time staff are off work DIFOT Delivery in full on time Quality First time through quality Yield Lead-time Order to cash in bank Raw material to dispatch Dock to dock Inventory Inventory turnover rate OEE Overall equipment effectiveness Schedule performance % Changes to the weekly schedule Value added ratio Ratio of value adding time to lead time Team metrics Turnaround time for jobs Output rates Quality rates Equipment OEE Attendance rates Schedule compliance Customer feedback Number of deadlines/milestones met Metrics relating to specific team tasks Behavioral metrics Examples Employee satisfaction Gained from regular Employee Satisfaction Surveys Staff turnover rates Participation levels in improvement activities Customer satisfaction Gained from regular Employee Satisfaction Surveys Retention rates Skill uptake Skill matrices Absenteeism Absenteeism Error rates Error rates Time spent on managing under-performing staff Team metrics Number of team meetings Members at team meetings Number of ideas generated Number of ideas implemented Total Savings generated