Are Your KPIs Helping You to Perform?

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Are Your KPIs Helping You to Perform?

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Are Your KPIs Helping You to Perform?
When it comes to Key Performance Indicators (KPIs), many terms are used
to describe similar things. A recent ARC survey captured the types of KPIs
currently used at four levels of manufacturing management: Operator, Supervisor,
Plant/Mill Manager, or C-Level. The survey found that the
majority of Operator-level KPIs are translations of the higher level business
performance objectives to which upper-level management
is held. While these KPIs are not always
directly related to financial performance, they have
a definite effect on the financial outcome. If KPI
targets are not directly tied to financial performance,
how can plant personnel be sure their
decisions are increasing corporate performance factors
such as profit? Conversely, many commonly
used KPIs appear to be driving counterproductive
corporate behavior.
The majority of Operating level KPIs
reported in ARC’s recent RPM survey
reflect translations of higher level
business performance objectives.
If KPI targets are not directly tied to
financial performance, how can plant
personnel be sure their decisions are
fueling corporate performance metrics
such as profitability?

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  • 1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN ARC INSIGHTS By Dick Hill The majority of Operating level KPIs reported in ARC’s recent RPM survey reflect translations of higher level business performance objectives. If KPI targets are not directly tied to financial performance, how can plant personnel be sure their decisions are fueling corporate performance metrics such as profitability? INSIGHT# 2003-22ME MAY 28, 2003 Are Your KPIs Helping You to Perform? Keywords KPI, RPM, Performance Metrics, Performance Visualization, OpX Summary When it comes to Key Performance Indicators (KPIs), many terms are used to describe similar things. A recent ARC survey captured the types of KPIs currently used at four levels of manufacturing management: Operator, Su- pervisor, Plant/Mill Manager, or C-Level. The survey found that the majority of Operator-level KPIs are translations of the higher level business performance objectives to which upper-level man- agement is held. While these KPIs are not always directly related to financial performance, they have a definite effect on the financial outcome. If KPI targets are not directly tied to financial perform- ance, how can plant personnel be sure their decisions are increasing corporate performance fac- tors such as profit? Conversely, many commonly used KPIs appear to be driving counterproductive corporate behavior. Analysis Many of our clients, in their quest to achieve Operational Excellence (OpX), have asked the question: “Which KPIs should we use to manage performance - particularly in real-time (RPM)?” ARC perceives an in- creased awareness that Performance Targets are extremely important to successful achievement of enterprise objectives. If KPIs are based on non- real time information, or are themselves not dynamic enough to reflect changes in objectives, then the wrong outcome is very likely to occur. This ARC survey focused on what respondents considered Key Perform- ance Indicators (KPIs) for each class of manufacturing personnel (i.e., Operator, Production Supervisor, Plant/Mill Manager, and C-Level). The “Xs” in the results tables that follow indicate the most frequently cited KPIs employed and their frequency of use at each of the four management levels.
  • 2. ARC Insights, Page 2 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Production and Inventory-based KPIs Many terms are used to express production performance. Words such as Units, Batches, Jobs or even just the term Production are presented as ratios to other factors such as time (e.g. Units per Hour, Day, Shift, etc.). This is sometimes inverted to show Time per Unit. Inventory Turns is a KPI closely related to production. Material Shortages and Inventory Errors are other KPIs used to manage Inventory. Product Availability looks at inventory from the customer satisfaction side. Supply or Supplier Performance was another KPI cited that relates to production and inventory. A best practice KPI is Finished Goods Inventory Turns. KPI “C” Level Plant Mgr. Supervisor Operator Units per Time XX XXX XXX XXX Units per Employee X XX XX XX Production vs. Target X XXX XX XXX Schedule Attainment XXX X X XX 1st Pass Throughput X XXX X XXX Inventory Turns XXX XXX XX XXX Shortages X XX XX XXX Errors X X XXX XX Supplier Performance XX X XX XX Over-emphasizing Production KPIs Can Foster Unwanted Behavior if the Outcome Is Stuffing Inventory to Meet the KPI Asset-based KPIs Asset Utilization and Asset Availability are two key indicators that show how well assets are being managed. Other ways of expressing these in- clude Cycle Time, Down Time, Up Time, Idle Time, and OEE (overall equipment effectiveness). Variations of the theme include Flexibility of As- sets, Reliability, and Maintenance. Conspicuous by their absence in the survey results are "optimum potential"-type KPIs. The measures cited by the summary group tended to highlight asset performance against histori- cal performance but not the true potential of their assets. Quality-based KPIs Quality, expressed both positively as Percent First Pass Quality or nega- tively as Percent Scrap/Waste/Rejects, is another frequently used KPI.
  • 3. ARC Insights, Page 3 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Discrete manufacturing processes tend to use terms such as Fault Rate or PPM Defects as Quality Performance Indicators. Revenue, Cost, and Profit-based KPIs The higher the KPIs are set in the organization, the more they tend to be linked with financial performance. KPIs such as Gross Margin are often described as C-Level KPIs. Cash Contribution per Unit Produced is an- other revenue indicator. Other financial performance KPIs include Market Share and Market Growth. Familiar business terms such as EBIT, EBITDA, ROCE, and ROA are also used. KPI “C” Level Plant Mgr. Supervisor Operator Gross Profit Margin XXX XXX Profit per Unit XXX XX Profit as % of Sales XXX ROA, ROCE, EBIT XXX XX Productivity ($/Emp) XX XX XX XX Revenue XXX XXX X Market Growth XXX Market Share XXX Post Enron: Revenue-based KPIs Can Lead to Bad Behavior at the Executive Ranks! Cost Control, represented as Cost of Goods Sold, Cost per Unit Produced, or simply a total Cost term, is very important in manufacturing today. Energy per unit produced, Labor per Unit, Overhead and Expenses are other cost-related KPIs. Cost of Quality, or Poor Quality, are ways of cap- turing the relationship between quality and cost. Customer Service and Satisfaction KPIs Delivery and Order Fulfillment Performance bracket the Customer Service spectrum of KPIs. Backlog, Shipments, and Service Levels also are related. The On-Time Delivery KPI by itself can be misleading. If a delivery arrives too early, in wrong quantities, or outside the quality specifications, the cus- tomer will not be satisfied. A best practice KPI is the Perfect Order Metric that combines several of these factors.
  • 4. ARC Insights, Page 4 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Health, Safety, and Environment (HSE)-based KPIs Health, Safety and Environment are other performance issues that need to be managed. In some industries a Safety measure is reported regularly. Environmental issues are tracked regularly with a number of indicators that are specific to the manufacturer (e.g. NOX, CO/CO2, H2S, etc.) Of course, government regulations such as the US Government CFRs (Code of Federal Regulations) are closely monitored and reported both within the manufac- turer and often to the government overseer (EPA, FDA, etc.). KPIs in this category are often simply called Legal Compliance. KPI “C” Level Plant Mgr. Supervisor Operator Safety XX XXX XX XX Housekeeping X Days w/ no lost time XX XXX XX X Emissions XX XXX XX X Legal Compliance XXX X CFR (FDA, EPA, etc.) XX XXX XX OSHA Compliance XX XXX XX A Single Day’s Outage Can Eliminate a Year’s Profit in Some Industries Recommendations • Some or all of these categories might be valid ways to measure performance for your particular operation. Managing them requires that the measurement have the same time constant as the process. The fact that so many of these commonly used KPIs do not relate directly to real-time financial indicators makes them difficult to control. • Look for suppliers that can help you link your production, quality, as- set, and customer satisfaction performance indicators to costs in real- time. This will allow you to make decisions that move you toward Op- erational Excellence (OpX). Please help us improve our deliverables to you – take our survey linked to this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further information, contact your account manager or the authors at crhill@arcweb.com. Recommended circulation: All EAS & MAS clients. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be reproduced without prior permission from ARC.