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Using KPI in Your Business


Key Performance Indicators (KPI) is an inexpensive, powerful, and deceptively simple management tool to help focus people’s activities.  Because it can help focus the way people do their jobs, it provides a BIG PICTURE about what is important and it suggests how to deal with daily roadblocks.  Properly identifying KPI, help people distinguish the important from the trivial, the “must be done” from the “could be done” and allow employees to set their own priorities that are in keeping the company’s goals and objectives.  Another way to think about the acronym KPI is that it is a tool to “Keep People Involved.”

 

What exactly are KPIs?  KPIs are a tool and targets that show performance to a particular goal or objective and the distance between the objective and the current state.  For example, a common KPI in manufacturing and distribution organizations is an assessment of the accuracy of the inventory.  The KPI also states what the target value for that objective is and plots regular progress toward the goal. The management team would define a target value for the goal of Inventory Accuracy of say 95% that means there are only 5 parts in 100 that do not have the accuracy (up or down) stated in the computer.  Management negotiates this value with the team responsible for maintain that portion of the system.

 

The inventory team would then responsible for maintaining the inventory accuracy goal.  They design, measure and assess process toward the goal. The activity empowers the team to improve their areas of responsibility, in this case, the accuracy of the inventory.

 

To support the KPI, requires several activities: 

  1. A specific team counts the inventory system on a regular or cyclic basis
  2. The inventory team determines the causes of inventory inaccuracies
  3. The inventory team suggests KPI for other departments to assess the targeted state for correcting those errors
  4. The inventory team tracks result of the measure on a chart that shows how close the team is to achieving their goal

In practice, inventory accuracy improves with time.  The charting of the cyclic counts shows the difference between the current state and the company’s stated goal.  The activity of a focus on inventory accuracy creates energy for the company and an improved bottom line as well.  Additional benefits are:

  1. Purchasing teams trust the computer’s inventory numbers and spend less time validating whether to act on a request to procure material
  2. Production teams trust the computer’s inventory numbers and spend less time validating whether sufficient  material exists to build products
  3. Shipping teams trust the computer’s inventory numbers and spend less time validating that they have the material to send to customers

KPI are not a new concept.  Henry Ford had many KPIs defined before he sold the first car for Ford Motor Company on July 15, 1903.  He used KPI to help the production teams streamline the production processes.  He continued to establish new KPI for the company to focus other areas.  KPI helped him to convert iron ore into an automobile in only 81 hours in 1926.  Ford motor company continues to use and post KPI performance today.  The company understands that you do not control what you do not measure, so they measure.

 

KPI helped Toyota’s Shigeo Shingo focus efforts to speed the “setup” process on industrial presses.  Because he kept score on those die exchange efforts, Toyota has been able to change machine dies (machine setups) to less than 3 minutes in the early 1980s.  That may not seem impressive except that his original die changes exceeded 4 hours.

 

Why are any of these activities important?  Well, Henry Ford was able to reduce the price of automobiles by 50%.  At the same time, wages for his workers doubled.  Toyota’s Shigeo Shingo’s efforts started a revolution and revitalized manufacturing companies to focus their efforts to reduce inventories.  His inventory reduction efforts – called Just-in-time (JIT) began the “LEAN” revolution.  Toyota uses KPI results today to give feedback to people who perform the work to drive profitability into the organization.  Focused individuals are the most effective individuals for any organization.  Keeping People Involved™ pays dividends beyond the cost of implementing such a project.

 

Here is another example.  When a machinist has a problem on the shop floor, he uses a signal (a colored light) to indicate that there is a problem at that work cell.  Different colors could indicate a particular sort of problem and alert different types of teams.  There is an immediate signal that says, “I am in trouble, and I need help.  Please come here!”  There is a focus to resolve the issue before the problem moves to someone else.  If the group does not take immediate action, the problem will move down the supply chain and may infect the final customer!  This type of action stops problems before they become an infection of the organization and of an outside customer.  That simple light has the effect to focus a portion of the production team to fix what might ultimately be a huge problem to the end customer.  The light is a very simple KPI that focuses different teams to continue process improvements.  When the light is off there are no known problems, when it is on there are actions to be taken.

 

The effects of KPI are powerful and can change the philosophy of a company.  The informal silos of information break down and become an information sharing philosophy and ownership of part of the system becomes part of the job.

 

KPI differ by industry; and KPI are best when employed at the lowest level, i.e., for an individual.

  1. Inventory Turns is an important KPI for the Materials’ Manager at Manufacturing and Distribution organizations.
  2. Inventory Accuracy is an important KPI for Inventory Managers
  3. For a Doctor’s Office, the number of patients treated daily is an important KPI
  4. For an IT Manager, the number of PC outages is an important KPI
  5. For all Managers, employee turnover is an important KPI

Displaying KPI performance is a vital part of the process that produces tangible results.  For example, Manufacturing and Distribution companies post On-time Sales Order Shipment results.  Posting these data accomplishes several things:

  1. People understand the focus of the process
  2. People know that one goal of serving the customer is to ship on time
  3. KPI provide a level of control that is not apparent by not measuring those values

 

The benefits of deploying KPI lie in focusing of the business scorecard activities of Revenue, Costs, and Cash.  When the company focuses Revenue, Costs, and Cash properly, the difference appears on the company’s bottom line in the form of PROFITS!

 

KPI are a simple to implement but may take time to deploy effectively.  One of the easiest way to focus an employee is to make the KPI a documented part of the employee’s daily activities.  Everyone should have KPI list defined with the stated goal.  Then the employee charts the daily performance to that goal.  That chart is usually a report that calculates the result of daily activities and not one that requires additional effort to create and track.  Employee displays the goal and the current state in a chart at the employee’s workstation.  The payback for the process is:

  1. People know what the process requires
  2. People know how they stand in comparison to what is expected
  3. They take pride in showing the company how well they perform their jobs

The question of where the data exists to do the scoring may come as a surprise.  It does not come from additional work that people do or from completing excel spreadsheets that pass between departments - the information comes directly from the ERP System.

 

In most companies, properly maintaining the Sales Order line item ship date is required.  Shipping the product is required.  Most ERP Software does not allow ‘back dating shipments’ and the date that the employee ships the product is the date the system captures as the ship date.  If a company wants to measure the percent of the fill rate for shipping sales order line items, the only requirement to measure the KPI is the development of a report.  In most ERP Systems that report may already exist.  Posting the result is the only real requirement to measure the performance.

 

ERP Systems also already have reporting mechanisms for a number of standard KPI:

  1. Inventory accuracy
  2. Inventory turns
  3. Expected margin on a quote vs. actual margin
  4. Actual Ship Date vs. Expected Ship Date for customer orders
  5. Customer Order fill rates
  6. Bill-of-Materials accuracy
  7. Bill-of-Operations accuracy
  8. Actual PO Delivery vs. Expected PO Delivery Date
  9. Actual PO Delivery Quantity vs. Expected PO Delivery Quantity
  10. PO Quality Performance
  11. RMA by Product
  12. RMA by Customer
  13. RMA by Customer by Product
  14. Work Order Quality performance by Product
  15. Work Order Quality performance by Employee by Operation
  16. Days AP Outstanding
  17. Days AR Outstanding
  18. PO spending vs. budget
  19. Departmental spending vs. budget

Many, many more KPI exist in your ERP System.  All that is required is for people to use the ERP System properly.  The only KPI that does not exist in the ERP System is how well people are using the ERP System.  However, you probably already know the answer to that question, don’t you?

To begin a dialogue, contact us. Call us at 770-772-6894, Skype: michael.a..roman, or email: operations@manufacturingpractices.com. We look forward to earning your business.