Five Rules for Selecting the Best Key Performance Indicators (KPIs)

By: Jason Piatt

There’s no question that KPIs are needed to help drive operational improvements. KPIs are absolutely essential for organizations to present performance information for all levels of the organization. The key to success is selecting KPIs that will deliver long-term value to the organization.

It’s problematic that the terms KPI and metric are used interchangeably within manufacturing operations. A KPI is always a metric, but a metric may well not be a KPI. Key to the concept of KPI is that it must be a metric that will drive strategic competitive advantage (and in turn value) for the organization. A metric can be a measurement of any business-related activity.

Here are five rules for selecting the best KPIs for your manufacturing organization:

1. Focus on the critical few, not the trivial many: If you measure too many things, you’re really not measuring anything. Managers have a habit of adding KPIs but never “rightsizing” the list to drive strategic intent. This causes confusion as to what is really important.
2. Ensure that selected KPIs drive toward your strategic intent: KPIs should not just measure performance. They should measure performance toward the strategic objectives that you’ve laid out as part of your operations strategic plan. It is absolutely critical that these KPIs measure the most important factors in achieving your success.
3. Ensure that KPIs are relatable on all levels of the organization: It is very easy to measure performance purely in terms of financial factors. It’s important to remember that members of your production staff at all levels should be able to relate to the metrics. KPIs such as overhead absorption percentages are common, but they are not particularly effective for production personnel. Instead, metrics such as units shipped per hours worked will give a meaningful KPI (if your objective is to increase production and/or reduce hours per unit).
4. Ensure the data for KPIs are valid: Much like any Six Sigma project, before seeking process improvement, we should ensure that our measuring system is valid. This means validating the repeatability and reproducibility of our measuring system. Will the system yield data that are meaningful, timely and reliable for sound management decision-making?
5. Ensure controllable KPIs are selected: When someone is placed in charge of KPIs for their portion of the organization, is it really something they can control? Is the individual empowered to make necessary changes in order to drive performance of the KPI? This is an often-forgotten factor in successful operational strategy. What you measure is what you get ... but more importantly, what you measure must be controllable in order to obtain the strategic objectives you desire.

Finally, when selecting and implementing KPIs, please be certain to train your employees to work in a KPI-driven environment. All too often, manufacturers roll out the latest and greatest KPIs for their production environment with little or no plans to educate production personnel as to what it takes to be successful.

See this and other newsletter articles at May 2015 Newsletter

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