Well, I asked Bob Arnold one of our performance management experts, exactly that question! I hope his answer helps you.
What is a KPI? And where do you start to get people to use performance management?
With the essentials! Sometimes there is misunderstanding about some of the basic, but important, concepts underlying performance management, and it’s imperative to start off correctly.
Take the notion of a KPI, or key performance indicator, for example. You’ll hear a lot in different organisations about KPIs, but they are not always used effectively.
As the name indicates, KPIs concern “key” areas of the business. You only want a few of them, but they have to be linked directly to the main goals of your enterprise.
When you know where you want your business to go, what you want it to achieve, and which areas of the business will be crucial for that, then those few KPIs should tell you if those crucial areas are performing sufficiently well.
What examples of relevant KPIs can you give?
Let’s start with manufacturing. In this environment, an effective key performance indicator might be “adherence to plan”. This is the critical measure of how well the factory did in making the products it was asked to make, on the day it was asked to make them. We might also use a KPI to track adherence to cost standards within manufacturing; for example, to see how effective a yield we get from a fixed number of man-hours or a fixed amount of material.
Customer satisfaction and costs are two vital measures for supply chains and logistics as well. To measure how well we are doing on customer satisfaction, we can use a KPI to measure how well the supply chain does in delivering in full and on time to our customers who order products from us.
To check up on our performance in managing costs, a key performance indicator can be the amount of inventory we have in stock. This is often expressed in the number of days of inventory, or “finished goods turns”, the number of times your inventory is turned over in a year.
“Inventory days” (or “inventory turns”) is a KPI that some people find difficult to understand. Here’s a simple way of looking at it. If you have a million dollars’ worth of inventory in your warehouse, how many days would that inventory last you at your current or projected sales rate, if you made no further re-stocks of inventory? If it lasted you two months, or say sixty days, you would have sixty “inventory days”.
If it just lasted two days, you would have two “inventory days”. Yet it’s a KPI worth understanding because it’s important both for managing costs (you want low inventory and high turnover) and customer satisfaction (you still need enough inventory to meet peak customer demand).
Bob Arnold is a contributing Author to the Supply Chain Secrets Book Series.
- Supply Chain and Logistics Benchmarking
- How to Benchmark
- Free KPI Report
- KPI – Key Performance Indicator