Key performance indicators (KPIs) are measurable values related to essential business objectives. A KPI provides a means to monitor the performance of a specific function.
In larger organizations, with sales & marketing, research & development, operations, supply chain, and other teams working to bring products to market, each department has a specific role. For example, the sales team engages with potential customers to assist with the customer’s purchase decision. The organization and the sales team may want to focus on sales growth or average profit margin as KPIs.
KPIs provide visibility within a team and to the team managing the overall organization. Setting appropriate objectives and measuring them frequently provide a dynamic scorecard or dashboard useful to local and organizational decision making.
KPIs are business metrics primarily used to monitor the status of specific business processes. They influence tactical decision making for the team responsible for the metric’s outcome.
Characteristics of Effective KPIs
In the book, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 2nd ed., David Parmenter describes elements of effective KPIs.
1. Nonfinancial
KPI are not measured in dollars, yen, euros, etc. In part, we are not interested in the amount of profit, for example, but rather the direction or trend of profit growth. KPI measures do focus on business process outcomes that impact the organizations bottom line yet also focus on the performance of the selected process.
2. Timeliness
As with any measure, KPIs provide meaningful information as they accurately reflect the current situation and trend. If the thermometer outside your door only reported the temperature from a week ago, this would not be a useful piece of information. If possible, the measurements should be made in real time or as close to real time as possible. Daily and weekly updates for some business processes are acceptable.
3. CEO Focus
Besides guiding the local team, say the sales team, the measures guide the decision making of the senior management team. Setting up and monitoring business processes takes resources to accomplish, thus providing measures useful for business operation decisions ensures that the investment in the measurement process provides value.
4. Simple
KPIs should be simple but not simplistic. They should be easy to understand and interpret. The measures or calculations involved for KPIs should not shroud how the values reported reflect the actual business process status.
5. Team-based
In most cases a business process has a team or cluster of teams responsible for process performance. KPIs thus reflect on the efforts of the team or group of teams.
6. Significant impact
KPIs do not need to be set up for every process or element of a process but each KPI should measure something important to the organization. Ideally, each KPI should connect to a strategic critical success factor for the organization.
7. Limited dark side
Care should be exercised in identifying what you measure because people tend to respond to what is measured. Each measure certainly can be optimized and appear to be meeting goals yet be a detriment to other important performance factors. Establishing measures that contain or limit the unbridled optimization of one measure (similar to a balanced scorecard approach) enables the team to optimize the overall system of business processes and making appropriate business tradeoffs.
Why Are There No KPIs for Reliability?
Although a KPI can be an important business performance measure and be directly related to customer satisfaction, it can be difficult to measure frequently. It is not the responsibility of one team or small group of teams within the organization. Key elements of accessing product reliability performance are customer satisfaction and performance relative to alternative solutions, both of which are beyond the direct control of the organization.
There are business processes that benefit with the use of KPI monitoring yet, unfortunately, tend to erode the organization’s ability to achieve product reliability objectives.
Consider the following examples; A procurement organization may focus on reducing the purchase price of components year over year; by using this measure the impact of increasing failure rates from the use of less robust components may tend to be ignored. Using KPI for sales growth may encourage the sale of products into new applications and environments beyond the original design’s capability to perform well. Use of a KPI for factory throughput would essentially defer preventative maintenance and thus increase corrective maintenance and line shut down events. Then the pressure is on to quickly get the line running again, without performing effective corrective maintenance.
Final Piece of Advice
If you are using KPIs in your organization, think though and detail the eventual impact on reliability performance of your product or system. Most decision makers understand the importance of reliability performance for the success of their products or services, yet they may find it difficult to measure in a meaningful manner. KPIs help focus an organization on what’s important, yet they do not work when left unchecked with respect to the longer term implications to reliability.
Bio:
Fred Schenkelberg is an experienced reliability engineering and management consultant with his firm FMS Reliability. His passion is working with teams to create cost-effective reliability programs that solve problems, create durable and reliable products, increase customer satisfaction, and reduce warranty costs. If you enjoyed this articles consider subscribing to the ongoing series at Accendo Reliability.