06 Oct Understanding Key Performance Indicators – part 1
Visibility of the correct key performance indicators (KPIs) can make or break a business. KPIs not only allow the day to day monitoring of performance, but also permit the identification of areas for improvement and give an insight into the overall profitability of the business.
Those companies that fail to monitor the correct indicators will often find their profit margin reducing, as they are unable to identify poor performing areas of the business, or inefficient activities.
Through the use of the correct KPIs, it becomes easier to identify opportunities for improvement and to set and monitor targets. But how is it best to select relevant KPIs for your business?
Here and in future blog posts, Supply Chain Consultant with Balloon One, Edward Napier-Fenning, examines this topic, with the aim of answering this question.
The Hierarchy of Key Performance Indicators
KPI hierarchy corresponds to the hierarchy in the organisation. The generally accepted categories for this hierarchy are: strategic, tactical and operational.
As a top level metric, strategic measures provide performance information to senior management and stakeholders within the business, in order to enable decisions about business policies and objectives. They directly relate to the overall profitability, success and sustainability of the business.
These metrics generally look across a longer time period than the lower level measures, perhaps months, quarters, years.
As strategic objectives are higher level, and therefore have a number of influencing factors, further drill-down is often necessary to identify areas for improvement and diagnostics.
Strategic measures may be based on a wide variety of areas. For example, financial information may be captured to understand return on investment or percentage growth in certain areas. Or perhaps a set of specific KPIs may be identified that are directly linked to a company goal or objective, such as overall delivery performance OTIF (on time in full) or customer satisfaction.
At a more detailed level, tactical measures are used by senior and departmental management to monitor operations over a shorter period of time – typically weeks, months or quarters.
As these measures are “closer to the action”, they are used to track and identify trends in performance, as well as to quantify the effect of an adjustment to the operation.
They are generally derived from the company’s key processes and determine the effectiveness of each stage, over a period of time.
Tactical measures are often based on operational performance at a departmental level. For example: in the warehouse, measurement could be based on picking performance; out in the field, drivers may be assessed on delivery performance; and in customer services, the effectiveness of calls taken might be measured.
More detailed again, operational measures are the day to day metrics used to help run the business. They directly relate to operational processes and usually track the influencing elements of tactical performance results.
Generally measured across short periods of time (shifts, days, weeks), these metrics provide “front line” managers and supervisors with the information they need to control operations on a daily basis.
For example, an operational measure could look at the performance of an individual or shift, or track their progress towards a goal. This could perhaps be packing performance on a line, or the percentage of total orders completed for the day.
Each company will have a different set of overall goals. By first understanding KPI hierarchy, and how it relates to the different levels of staff throughout the business, relevant measures can be identified and provided to your work force. This gives them the information they need to contribute towards the company goals.
In Edwards’s next post, he looks at the process of understanding the KPIs needed, and investigate the relationship between them.