Howard Hillman is a senior transformation consultant at Myrtle Consulting Group. He has more than 20 years of business experience leading cross-functional teams, client and resource management, establishing measurable KPIs, training, coaching and reducing operational costs. For more information, visit www.myrtlegroup.com.
In the past, the challenge centered around the inability to access needed information. How long did the changeover take? How long was the equipment down? How many units were scrapped? In a bygone era, this information had to be collected by hand or, at best, extracted from a highly sophisticated and coveted software system by experts who had trained for years to be able to create readable reports. Generating ad hoc reports required significant lead time and specialized resources, meaning that the information was often outdated by the time it made it to the meeting table.
Today, the internet has made it possible to generate data from literally any and every part of the process. Even livestock ranchers have tags on their cows, indicating what cows eat and how much, how active they are and when they need to be milked.
Generally speaking, the availability of this data is a boon to businesses. Most manufacturers take full advantage of it, pulling dozens of reports on a daily, weekly or monthly basis to evaluate their businesses, make decisions and drive performance. However, while information is invaluable, it can also result in “analysis paralysis,” where the bigger picture gets lost because so much emphasis is placed on monitoring individual metrics.
Consider these basic guidelines for establishing or evaluating KPIs. Key performance indicators for airlines are often used to show the efficiency of operations. However, some KPIs such as on-time departures based on when the cabin door closes versus wheels up, or aircraft capacity based on sold — and oversold — seats may be a great indication of how well the operation is performing.
However, driving KPI performance to the point of having to sit on the runway for an extra hour after pulling away from the gate or being dragged off the plane because the airline needed another seat can drive the behaviors that can be detrimental to customer service, if not tempered with common sense.
Select a strategic few
To avoid becoming overwhelmed with data, reporting and reviews, take the time to carefully select a few KPIs to navigate the business. These may include metrics such as overall equipment effectiveness or asset strategy, as opposed to indicators like maintenance cost or production volume. The former provide a high-level view of business health and performance, whereas the latter provide information about how the delivery is occurring.
By selecting between five and seven KPIs that are communicated to and understood by everyone from the executive boardroom to the shop floor, everyone can rally around general performance -- and understand that if those numbers slip above or below a certain threshold, changes must be made immediately. Other KPIs may be used by the individual teams to measure their own performance goals underneath the umbrella of company-wide performance. These few strategic KPIs should be the primary focus, and moving those metrics is the goal of everyone across the team.
Consider shifting from lagging to leading indicators
Another common mistake is to evaluate lagging KPIs rather than leading KPIs. For example, revenue, number of rejects and accidents on the plant floor are all examples of lagging indicators. They represent a snapshot of historical performance after the production cycle is complete. Lagging indicators are extremely valuable for evaluating and spotting trends over time but fail to provide advance warning of potential problems.
Leading indicators, on the other hand, allow understanding of what is happening early in the process, providing the opportunity for real-time correction to minimize loss. Consider how leading indicators from food safety audits in a food manufacturing plant allow the team to take action and prevent food recalls before they wreak havoc on performance for a day, week or month. Lagging indicators are often reviewed. A good rule of thumb is to evaluate 75% leading indicators and 25% lagging indicators.
Some KPIs can lead to tunnel vision in the trenches. Consider, for example, that the procurement team is measured on keeping inventory low. Particularly where food is concerned, it’s important to manage the supply chain to ensure just-in-time arrival of raw materials, avoid losses due to spoilage and keep cash from being tied up in backroom inventory. However, if operations are evaluated on production output, a measure of ability to meet peak season demand or projected demand surges associated with a new product launch, those two metrics can work against each other. The right KPIs will align the internal workforce. They will support departments and other ancillary organizations respective to overall strategy, operational focus and business performance expectations.
Where to begin?
Undoubtedly, a company’s operation is using metrics to evaluate its performance. However, it may be using KPIs that divide the team’s efforts or allow them to only correct problems once they have occurred.
Understandably, it’s difficult to change the metrics against which entire teams are evaluated. To lay the foundation for change, it’s important to involve all stakeholders, communicate the new changes and reasons for them, and evaluate and test the KPIs to select a strategic few.
Great KPIs are “SMART” — specific, measurable, achievable, results-focused and time-based. By using these five criteria to evaluate KPIs, people can begin to assess which need to be reconsidered, replaced or removed.
With so much at stake, it’s critical to ensure that KPIs are working for the business, not against it. It’s well worth the time and trouble to evaluate if strategic KPIs are truly taking the business where it needs to go.