Navigating the road to KPI success

Key Performance Factors (KPIs) have been publicly challenged lately. From corporate scandals to the NHS, nothing is quite what it seems. With credibility at an all time low, are KPIs valid for your company?

As veteran practitioners, we believe that there is only one thing more worrying than the recent cases of KPI manipulation: the possibility that good companies might dismiss the power of measurement systems based on headlines. Our experience shows that they are both valid, and effective when applied in a consistent and comprehensive manner.

Opting out of the discipline of selecting, setting and systematically executing to targets might be acceptable if you do not need to consider long-term viability. But the fact is that financial, service and quality metrics frame your business – shedding light or shadow that will influence the future of the company. Whether they are called KPIs today, or another acronym five years from now, there will continue to be practical value in the discipline of performance management.

If you can agree with that view, this article is designed to get your KPI engines started or perhaps tuned up for sustained progress. So let's begin by seeking a deeper understanding of the appropriate metrics, putting a balanced scorecard of KPIs into context, implementing performance measurements and finally accepting that this is both an integrated and iterative process. With this foundation, managers will increase their ability to successfully drive their business forward.

Selecting measures

Financial performance must be respected as the critical measure of success for every business. Shareholders expect a continuing financial return on their investment. Employees recognise the impact of positive performance on job stability and our customers value healthy returns to support long-term supplier relationships.

For every financial KPI, there is a closely related set of operational metrics.

Logistics and the supply chain have a critical impact on financial KPIs; most benchmarking studies return a range of 4% to 10% for supply chain management costs as a percentage of revenue. With this range the difference between median and best in class performance can mean the difference between being profitable or making a loss.

Careful consideration of the tradeoffs in financial and operational performance is required from management. De-mystifying the complexity of the supply chain and other interrelated measurements calls for a balanced scorecard of performance metrics.

Figure 1 shows a typical set of balanced supply chain performance measures, or KPIs. Performance in all of these measures is important, however, due to their conflicting objectives, no supply chain manager can give each one equal importance. Their relative importance must be ranked in line with the strategy of the business.

Selecting measures to drive business change should remain straightforward although there is a balancing act to consider. Begin by selecting the few key measures that will have the highest impact without creating “analysis paralysis”; weak data collection methods, too many metrics and excessive data to digest. Protect the correct tension between financial and operational KPIs.

Consider the approach adopted by Kaplan and Norton in their book, ‘The Balanced Scorecard: Translating Strategy into Action'. They propose a “What / How” method of asking and answering the questions, “What is to be achieved?”, “How will it be achieved?” This tandem approach ensures a related plan of action developing as each metric is established and ensures the metrics are firmly linked to the strategy.

Setting Targets

Having selected the performance measures, a manager needs to set quantified targets for each one. If lead times are important do they need to be three days or three hours? These decisions have a significant impact on operating costs, inventory levels and even the operating structure of the organisation. Historical data, industry knowledge and customer feedback are each important sources of data for setting these targets. Benchmarking completes the equation, providing a guide to setting quantified targets. There are many sources of benchmarking available from simple data purchase to interactive studies with tailored feedback.

If a performance criterion has very high relative importance, a target of “Best in Class” performance must be considered. For those with lower importance the industry “average” should be considered. Differentiating performance criteria ranking by product, customer, sales channel, or region will lead to optimal performance targets.

A few tips to avoid common pitfalls here:

"Best in Class" is not necessary across all categories
Performance criteria are not constant across all segments
Understand the operational implication of each degree of change to targets
Be prepared to support the structural and operational resources required to meet target performance
Consider just how much change your organisation can effectively manage – perhaps implementing in a phased approach.

Carefully determining what to measure begins with a complete list of KPIs prioritised in accordance with the company's position and strategy and finally, intelligence based targets. A sound formula blends history, industry knowledge and credible benchmarking data.

Keeping Score: A Balanced Scorecard for Management is not enough

A balanced scorecard ranks relative importance of KPIs in line with the company strategy (Figure 2). This analysis links the performance to sources of customer and shareholder value and therefore holds management attention. The challenge lies in capturing the attention and commitment of the balance of the company.

A key failing in many companies is the assumption that once measures are selected and targets agreed the organisation will perform as envisaged. It should be clear that these measures, whilst they are excellent overall management indicators, cannot be used alone for day-to-day management. Tactical control requires the integration of measures at a level below and the process management tools to deploy the plan. Only by weaving this framework into the fabric of the business can success be maximised.

These ‘secondary measures' are elements of the overall performance measures. For example, the secondary measure Raw Material Days of Inventory is one element of the overall performance measure Days of Inventory. A characteristic of secondary measures is that specific individuals or teams can be given responsibility for monitoring or improving their performance. In this way the complexities of the overall performance measures have been broken down into individual ‘department' measures and targets. This approach avoids the perennial challenge of each group optimising their own performance against local criteria and targets, to the detriment of a company's overall performance. It creates an integrated set of measures and targets that managers in different locations and countries can use, knowing that achieving their target will result in maximised overall performance, and ultimately increased shareholder value.

Individual teams and managers need the tools to manage these secondary measures and underlying processes day-to-day. The secondary measures will tell them how they are performing, but they will not tell them why they are achieving that performance. This information comes from ‘diagnostic measures' below the secondary measures. These measure the myriad root causes of changes in performance. For example, levels of Raw Material Days of Inventory may be affected by Incoming Quality, Supplier Delivery Performance, Forecast Accuracy and many other individual measures. Each individual team or manager with responsibility for a secondary measure must assess and define the set of diagnostic measures relevant to their own particular area and set targets in line with the secondary measures.

All measures are simply the output of processes. An overlooked element is an effective process management tool. Each target relates to a process or sub-process that should be executed consistently at all levels of performance. Achieving a common understanding or integrated operational guidelines relies on a continuous loop of identifying, documenting, providing access and enhancing processes. Arming your organisation with a tool is both a step toward successful performance and knowledge management. (Figure 3)

In this way, managers using the highest level KPIs to track performance can be confident that the individual contributions are supporting their overall goals and the best practises/processes can be readily shared.

Activating the Measures in the Real Workplace

A theoretical integrated scorecard cascading through all levels of the organisation is all well and good in an academic paper. Turning this into reality in a working environment is a more difficult proposition. Leaving aside the difficulty of finding time to do this exercise, there are three major challenges in making measures work inside a business. There is the initial challenge of actually finding the right information to calculate the measures. There is the challenge of communicating the measures to all involved and educating all on how they can positively affect these measures. And ultimately the challenge is to achieve improved performance by making tactical and strategic changes that will drive a different and improved level of performance.

It may seem odd in the era of ERP and APS systems that finding information is a challenge; however in our experience many performance measure programmes fail because turning the sheer weight of data produced by these systems into useful information proves too time-consuming and challenging. Often the system itself is blamed for not capturing data, not holding the right dates, or just being too inflexible. In reality these systems can, and usually do, hold the data needed to calculate measures.

Ideally reporting requirements will be defined at the time of implementation and integrated into the set-up of the system. If this is not the case an evaluation of the data captured by the system is an essential exercise along with a review of any changes required. In our experience the reporting functions of these systems are often underutilised and a review of the reports available may yield some interesting, and time saving results. In addition there are specialist programmes designed to extract data from systems and generate reports that could be considered.

In suggesting that communicating measures is a challenge, we do not mean the traditional posting of a scorecard on the wall. In high performance businesses relevant criteria for success and the current levels of performance are understood by employees at all levels of the business. In businesses where performance measures are only recorded and documented by managers in monthly reports the time taken to achieve targets is generally longer. It is a truism to say that senior management involvement is critical for success, but the visible and vocal support of this team is vital. Management teams must do more than collect the reports and review them. They must provide summarised feedback on progress to all employees, highlighting the success that has been achieved. The format of this feedback varies from charts and reports posted on the walls, to emails, newsletters and ‘town hall' meetings. Ideally, the organisation at all levels should have access to the scorecard and underlying processes – creating knowledgeable employees. Whatever method a company chooses to communicate it must be done consistently, so a method that can be maintained must be chosen.

A Continuous Journey

The cycle we have described of selecting measures, setting targets, creating an integrated hierarchy of metrics and using those metrics consistently to manage the business is not a one-off exercise. As markets and product ranges evolve so does the strategy of the business. This in turn must be reflected in the measures and targets of the supply chain. Once targets are achieved, they must be revisited. This process of reviewing and refining targets must always consider the direct and indirect changes a new target or process may have across the company. While this is a goal-oriented effort, there is not a final destination. This effort is both integrated and iterative. Some of the key success factors for this continuing journey are described in the table opposite (See Sidebar).

Applying these fundamentals is no quick fix, but the diligent will recover the integrity and true power of KPIs. Maverick individuals will be hard pressed to manipulate the story with the transparency this formula provides. Employees can trust a system again and enjoy both motivation and fair compensation performance incentives. A company's natural resource is it's organisational momentum. This energy in motion can be properly channelled and positive financial performance is the output of a commitment to comprehensive KPI systems.

Sidebar

Preparing for the trip: timing and team & tool readiness
A trip is always less painful if well planned and taken at the right time. Just as you wouldn't set off for a holiday hot spot at 2pm on a sunny Bank Holiday, so you shouldn't begin the KPI journey at the wrong time. When launching the initiative consider your systems, organisation, people and operating environment. All of these must come together to create the best, if not necessarily the ideal, time to begin.

Recognising landmarks: visible milestones
Reaching major landmarks on a journey gives you encouragement that you are on the right track and making progress. In implementing KPIs it is best to begin with a clear idea of all the major steps required, when these need to be achieved and, most of all, what they will ‘look like' when you reach them. How will you know you have reached the milestone? Define how the organisation, system, or people will be operating differently.

Celebrating progress: reward / recognition systems
This is essential to avoid the business equivalent of, ‘Are we nearly there yet?' Having clearly identified milestones it is vital that all involved in your KPI journey know what they are and what they can expect when they achieve them. Ensure that rewards and recognition for achievement are equitable, consistent and clearly understood by all involved. Above all, make sure that you are able to deliver on your promises.

Pacing the team: improvements at a healthy long term speed
The speed that you can make your KPI journey depends on the power of your business ‘engine' and the nature of the road you are travelling. A low performance business in difficult market conditions will need to plan a slower implementation than a highly tuned organisation in a favourable market. In most cases there is no point going faster than tools allow; a steady progress is better than one that wrecks the engine altogether. The exception to this may be the ‘emergency dash' where a business is in such dire need that the implementation must be achieved at any cost

Navigating detours: responding to unplanned events
On any journey you will meet unexpected hazards; from the slower driver in front, to the endless wait in road works. The key to success here is to expect these events, as far as possible develop contingency plans for them, and not to let them deter you from beginning or continuing the journey

About the authors

Catherine Bean cathybean.acs@btopenworld.com is a director of Applied Consulting Solutions Ltd., and specialises in providing supply chain design and implementation experience, and training to small and medium-sized businesses on a flexible basis. She has more than 12 years of experience in high-tech manufacturing and supply chain management both in industry and consulting.

Kathleen Geraghty Kathleen@eKnowtion.com Director and Operations Officer for eKNOWtion, draws from fifteen years of global supply chain experience. With an emphasis on high tech, her academic interest in Industrial Distribution Management and Technology Transfer provide the foundation for innovative work in the field. Kathleen is currently consulting for Fortune 1000 companies bringing Balanced Scorecard experience to client applications.

Reprinted with permission of Johanna Metsälä, QPR Software, Phone: +358-40-8255 700, E-mail: Johanna.Metsala@qpr.com or http://www.qpr.com

Content date: Wednesday, August 20, 2003
Author: Catherine Bean (cathybean.acs@btopenworld.com )
Company: eKnowtion (http://www.eknowtion.com)

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