17 Nov Understanding Key Performance Indicators – part 2
In a previous post, Supply Chain Consultant with Balloon One, Edward Napier-Fenning looked at the hierarchy of KPIs. Now that this is understood, in this post, he looks at identifying a company’s KPIs and introducing appropriate targets surrounding them in a process of five steps.
Step 1 – Define your key goals and objectives
It may sound obvious, but many companies fail to consider their true objectives when creating their KPIs. It is imperative to understand what the key goals of a company are and use these as the basis from which targets are set; rather than implementing a generic set of KPIs and hoping that by monitoring them, the company goals will be achieved.
A good example of this is that, many supply chain companies will have delivery on time in full (OTIF) as a principal KPI. However, having an excellent service level to customers as a key goal, does not necessarily mean the company will be successful. Having an exceptionally high service level, might gain you an excellent reputation, but if you have high operating costs to obtain it, it may be unsustainable in the long term.
In this case if we look at what may be a real objective, for example, one of the company goals might be to create a profit of £2 million per year, increasing by 10% in the following years – we need to consider what will effect this goal, and by doing this, understand what KPIs to use.
Step 2 – Understand contributing factors
Each company goal will have a number of contributing factors, and these in turn will have elements that influence them. By understanding the relationship between these factors, it becomes easier to see how each part of the business contributes to the ultimate success of the goal. By mapping these contributing factors from the company goal, the basis of our KPIs can be identified in line with the hierarchy of the business.
Here’s a basic example:
Using the objective we mentioned above, one of the company goals is to create a profit of £2 million per year, increasing by 10% in the following years.
If we consider at a basic level what contributes to this goal, we have:
- The ability to sell and provide sales growth – sales creation.
- The ability to create profit on sales – pricing and costs.
From these contributing factors, we can drill down further into the areas of the business:
- Sales creation: marketing, advertising, customer services, quality control, etc.
- Pricing and costs: distribution, manufacturing, buying, market analysis, etc.
Looking at manufacturing as a specific area, it will have various links to the goal, and also other factors:
- At a high level, one of the indicators chosen may be average cost per unit, as it provides a good measure of cost management in the area.
- But by focusing solely on cost per unit, quality control may take a hit, affecting sales creation. Therefore a quality element KPI should be included in the reporting for the area.
By understanding these relationships between factors, and towards the goal as a whole, KPI indicators can be identified that cover all the important activities of the business. They can be set so that they are in line with the hierarchal structure of the business, from strategic to operational level.
Step 3 – Analyse performance, consult with staff
Before setting targets, it’s important to understand current performance levels. This information provides a point of reference against which future performance can be compared. It also assists in the setting of future targets, ensuring they are realistic.
When performing this task, certain assumptions may be made to enable the production of performance data. For example, if detailed staff hours are unavailable, then perhaps the average shift length may be used. It is imperative that these assumptions are well documented, as they will need to be taken into account when used for comparison in future.
Step 4 – Set targets, record assumptions, clarify goals, ensure acceptance
Once current performance is understood, targets can be set for the future. Targets must be considered in relation to the factor they contribute to. They also need to be realistic targets, and therefore careful consultation needs to take place with the staff members they affect. SMART target setting is a useful tool to help enable this:
- S – Specific
- M – Measurable
- A – Agreed upon
- R – Realistic
- T – Time based
Targets should be a challenge, to encourage improvement, but it is important to provide staff with an opportunity to discuss the targets, to ensure acceptance.
Finally, the targets should be clear to all of those involved, to provide focus, and give the best chance of achieving them.
Step 5 – Maintain visibility, report, review
The final point for this post – and perhaps an obvious one – is that the whole process of setting KPIs is pointless if they are not kept “visible”. Staff should be routinely reminded of performance and progress towards targets. Through the use of reporting, review should take place with staff to ensure performance is maintained. If performance levels are achieved, then that should be rewarded. And if not, the staff responsible should be held accountable. Regular review of targets and KPIs is necessary to ensure relevance.
In my next post, I will look at how KPIs can be used to help improve performance, and what can be done to ensure their successful use within a company.
Balloon One has a vast amount of experience in helping companies to review and improve their operations. We have a dedicated team of supply chain consultants, with a proven track record. Get in touch to understand the benefits that we can bring to your company.