In this VIDEO, Stephen Hanman provides some tips on developing and managing your Key Performance Indicators in a Supply Chain.

“I’d like to talk to you about the development and management of Key Performance Indicators or KPI’s. Many organizations still struggle with the dynamic key performance indicators system that drives the organization in a healthy way. The questions I see and hear include: why have KPI’s? What value the KPI’s deliver? Which KPI’s? How many? And down to what level of the organization? And lastly who should own the KPI’s? KPI’s a part of the performance management tool kit, importantly, KPI’s can also facilitate improvement processes if linked to internal and external benchmarking and other improvement methodologies.

Let’s move to why have KPI’s? Given the KPI’s are accurate and people believe in them, then KPI’s create a culture of management by facts. As we say, in the absence of facts everyone is right except when the boss is in the room. In our benchmarking peer groups, we state “In God we trust” but everyone else has to bring their data. Given that most organizations work in a hierarchy there is a real danger that people start to think like a hierarchy. The people at bottom are the dumbest and those at the top are the smartest. KPI’s and facts ensure that expertise outranks rank, this is a catch try for high reliability organizations.

So what value of KPI’s? KPI’s provide feedback and feedback is the breakfast of champions. We need clever ways to learn about what we don’t know.

Okay, so what KPI’s to measure? That’s easy, measure what is important, but how do I know what is important? We can apply sophisticated theoretical models to find the answer like the balance school card, performance presumed or results based management. A simple pragmatic down to worth approach is the following.

The steps in the KPI development process can include:

1. Review or create your strategic Plan. The plan is about the strategic What for the organization. The What should be consistent with the Why of the organization, the vision or the leading image and the How the values that guide organizational behaviours.

2. Review customer perceptions of your service performance. Does it align with the strategic plan? Now, given involvement is critical in the ownership of developed KPI’s, I suggest to:

3. Workshop environment with relevant group of people, be them the senior managers or other groups. Conduct of you of what they see is critical to the success of the business, using the strategic plan and customer perceptions as inputs. Brainstorm the critical success factors of business success, that typically includes outputs of business like customer and internal service levels and the costs incurred to provide that service level. And each manager ranks each factor from most to least important. Then they rate current performance from their perspective out of 10 where 10 is best. Remember, perception is reality, so this is an important step in ensuring than all managers are reading from the same sheet of music or are all rowing on the same direction or are all committed to the current business plan. The challenge is then to change these perceptions into reality by since checking each perception with reliable, accurate, timely performance data in the relevant area. Believable KPI data turns perception into reality.

4. These perceptions are then aggregated and averaged and the factors are sorted by importance and current perceptions of performance reviewed. This will highlight current improvement opportunities, for example, for the top 5 most important factors, you may want performance to be 8 out of 10. If it is lower, then start the improvement focus there. The question is how close to reality are these perceptions. This is where the KPI’s can play a role. The process to develop the KPI’s follows the steps below. Now take the critical success factors, develop and consider who and which functions or departments deliver each factor or is it cross functional. This addresses who should own the KPI’s.

5. Discuss and allocate responsibilities for each critical success factor. Remember the aim of the process is how to measure business success.

6. Developing KPI’s for each critical success factor is a good starting point. This is the easy answer to what KPI should exist in a business, those that measure the success or failure of each critical success factor. The workshop process is to brainstorm KPI’s that could measure success of the critical success factor. When the brainstorming activity is complete, each CSF may have 5 to 10 suggested KPI’s, now select any one or two KPI’s for each critical success factor and begin to measure performance. How close was the perception of performance to reality? For example, if the overall performance across the management team wasn’t 8 out of 10, that may equate to performance at the 80% level. If average performance was 7 out of 10, then performance perceptions where overstated. Consider how these KPI’s can be system generated and begin to enhance the management of the business.

7. Another step is to create a KPI hierarchy with levels of KPI’s. Level 1 is strategic and work down from there. For example, a level 1 KPI is the probability of a perfect order for a business with a physical product. This can be disaggregated into reason codes that can cascade down to level 4 of KPI’s. Now there’s a need to review the level 1 KPI’s identified with the elements of customer, financial, process and people as articulated in a balanced school card process. Another sense check I use is to ask each person believe they were on holidays and wanted to extend their break, what KPI’s would indicate that things are on track as planned at the office? KPI’s need to be integrated across the business and aligned up and down the silos from top managers to the shop floor. The KPI system should provide alignment for the organization. No disconnects across or up and down the organization. And at the level of complexity with regard to KPI’s is whether they are a leading or lagging KPI. Does the KPI look back or forward? An example for costing our cruising may indicate a potential out of stocks in the future. High customer service KPI’s may indicate achievement of increased revenues.

In summary KPI systems enable better business management and the pursuit of improvement as well as process in KPI Benchmarking. Thank you!”

More information on Key Performance Indicators:

Performance and Benchmarking Consultants

Free Key Performance Indicator Report