Arrow-Tip #53 Establishing Key Performance Indicators (KPIs)
As promised this post is the first in a series discussing how I helped my client Gulf Coast Welding Corp (GCW) establish and communicate performance in key areas of their business i.e. Key Performance Indicators (KPIs). My good friend and super operations management guru Tim Smith was also kind enough to throw in a few other food for thought items – you can check out more of Tim’s great ideas on his site theplaidgroup.com.
We decided to keep things simple by holding ourselves to a handful of KPIs that affected all departments – usually 4 to 6 is a good number. Tim’s Food for Thought: Often companies track a critical few KPIs for all employees, but then each department tracks department specific KPIs that relate to the critical few. For example, a company might track Sales as a KPI, but the Sales Manager might also track sales from new customers versus sales from existing customers to help encourage the sales team to engage in prospecting activities. What KPIs department managers track depends on who will use them and how relevant they are to those people.
So the first big question we had to ask was what to track? Identifying company goals is always an important first step in setting the course for any company let alone for determining what KPIs are important to help predict success of meeting those goals. The GCW team established goals related to improving their safety record, maintaining sales (previous years had been especially good), and improving efficiency to boost competitiveness. Any good management book will tell you that goals should be specific and measurable e.g. Lower safety incidents reported by 10% within one year. Tim’s Food for Thought: Always remember the SMART acronym when setting goals i.e. they should be Specific, Measurable, Achievable, Realistic, and Time-based. There are several great posts out there to help you understand SMART goals – check out this one by Aurel Brudan where he discussed the origin of the acronym.
Now that the GCW team had identified areas for improvement, we began to assess what data was being both formally and informally collected and tracked already. The core document GCW uses on a daily basis to help gauge operations performance is their Production Schedule. The Production Schedule lists all active projects, budgeted man hours for each project, progress in completion of the project and shipping status. Some of the main things the GCW team look for in the Production schedule is the percentage difference between actual and estimated man-hours on each project and what the current man-hour backlog looks like. GCW management also regularly monitors a Quotation Log and various accounting documents related to Work in Process and the cost of labor fully loaded with burden and overhead. The only safety statistic that was being measured and tracked was Days without a Lost Time Incident – an industry standard metric, but not one that is likely to provide much useful information for proactive improvement of safety related issues.
Next GCW took a look at what metrics interested their customers. One of the most effective tools a sales force has is quantitative data that differentiates them from their competitors. Any sales person can claim their company produces a quality product, but very few of GCW’s competitors can produce metrics to back that statement up. So GCW asked their customers and prospective customers what metrics they would find compelling and got some great feedback. GCW customers showed interest in three main areas: safety, on-time delivery and quality as measured by non conformance reports (NCRs). Tim’s Food for Thought: Safety, on-time delivery, and quality are great core metrics for most, if not all, manufacturing or distribution companies and do seem to be the more important ones to customers. But also consider tracking big picture level metrics such as sales, margin, backlog (orders on hand) – to offer a more comprehensive picture.
Finally, GCW looked to their peers to see what they were tracking including vendor partners, fellow members of trade organizations and even some competitors. GCW is also fortunate enough to have a QC Manager who regularly pursues industry specific continuing education and he sought out his professors for input as well. At this point, The GCW team had a pretty good idea of what KPIs were important to help meet not only their internal goals, but also illustrating their capabilities to partners and customers.
Now that the GCW management team knew which key performance indicators (KPIs) they wanted to track, the next task was determining what metrics would best reflect performance in those areas. Tim’s Food for Thought: The meaning of the terms KPI, metric, and also critical success factor vary from company to company, and usually often even within a company. Make sure you’ve taken the time to get on the same page with other members of your organization. In this post and my Using SharePoint to Communicate KPI Dashboards post I distinguish between KPIs and metrics. But KPIs can be thought of as a subset of metrics – a company might record several metrics, but the KPIs are the ones that help monitor critical success factors e.g. the essential variables that measure a company’s success.
A big thanks to Tim for his help on this post and look for Arrow-Tip #56 where collecting the data to create KPI metrics will be discussed.
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