Description of what is the difference between Strategic objectives, KPI, performance objectives. Integrate in one presentation all the concepts on KPI: SMART indicators, leading vs lagging indicator, balanced scorecard, cascading of the objectives

1. Operational Excellence diagnostic
Easier – Faster - Better
Why should we talk about KPO and not KPI
and make the K useful
Defining the right Organisation Objective management system

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Defining the right KPIs is one of the most important
Operational Excellence concerns
 KPI is one of the most searched word in the Business world with 163 000
searches / month according to Google Ads and much as been written about
them
 The objective of this document is to give a comprehensive picture and ‘connect
the dots’ as well as clarify a few foggy areas:
 How many KPIs should we have? Most answers you find are around 3 to 5 though it
might go up to 10!
 What makes a KPI different from a normal Performance Indicator, a simple PI? It
seems like Performance Indicators don’t exist, only Key ones do, whether in the
internet, or in ‘real’ Business. So why ‘Key’ in Key Performance Indicator?
 What is the relationship between the ‘top management team’ KPIs and the other
teams’ KPIs below? Are they KPIs or PIs? How do they derive from the management
team KPIs?

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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Everything starts from Key Performance Objectives (KPO)
 There is no compromise: a KPI can’t exist without a Key Performance Objective
(KPO); or it is not a KPI.
 In a nutshell, a KPO is an objective that comes from the ‘Top’. There are two
situations:
 For the top management team, the ‘Top’ is the strategy, and therefore the KPO is a
strategic objective (a SKPO), defined in the strategy, which obviously must exist, even
if not elaborate.
 For any team at lower hierarchical level, we define that their KPOs are the objectives
coming from their hierarchy
 The KPI is obviously the measure monitoring the progress towards the KPO.

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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‘Simple’ Performance Objectives and Performance Indicators
exist; they are not KPOs and KPIs but support them
 Simple Performance Objectives and Indicators support the values of a KPO or a KPI; they are
always less important or on a smaller scope than their related KPO or KPI.
 There are two main types of PO and PIs:
 the ‘breakdown’ PO/PI: it is a mathematical breakdown of a KPO/KPI into several ‘smaller scope’
performance indicators, meaning that they can be added up to calculate the overall KPO/KPI:
 breakdown by product or service, by geography, by type of client, by plant…
 breakdown by subprocess
 the ‘enabling’ PO/PI: it measures a driver that is believed to be supporting the achievement of one
or several KPO/KPIs; it is not directly linked to a KPO/KPI. The value of the PO is often defined or
refined after some experimentation as opposed to the ‘breakdown’ ones that are more driven by
the KPO they support
 There may be other Indicators that are tracked to understand the context or to facilitate the
analysis of a KPI behaviour e.g. why does it change.
 They don’t have an associated PO.
 They are in general external parameters that can’t really be controlled, so they are not Performance
Indicators, only Indicators. For example, an Ice Cream seller would obviously need to track the
weather temperature to compare his sales performance over several time periods.

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Simplistic example
 The BestCompany designs, produces, and sells one product to two client segments, CA and CB, with two local units. One of its strategy is to have the
most reliable delivery in its markets. It defined a strategic objective, SKPO, of 95% On Time In Full delivery (OTIF).
 To simplify, we assume the two client segments buy with the same volume and we will only look at the cascading to the unit 1.
 The management of the unit 1 gets the OTIF SKPO cascaded, becoming a KPO for the team. However, in its market, the clients CA and CB have
different service level agreements, both with a lead time of 10 days; so, the team defines two different OTIF objectives:
 POa of 97%
 POb of 93%
 The full process to deliver a product to a client is a two-step process, each managed by a different team:
 Step 1: Order to Production start, with a lead time of 8 days
 Step 2: Production start to Delivery, with a lead time of 2 days
 The management team defines two more POs (to simplify they are the same for the clients A and B)
 POs1=below 8 days 95% of the time for step 1
 POs2 =below 2 days 95% of the time for step 2
 It has identified two other factors, important to the performance of the plant:
 its Employee motivation, that is measured regularly through a survey with a PI called Employee Motivation Index (EMI), with an objective (PO) of 80%.
 in the manufacturing process, some of the Products parts have a long lead time to supply so they have set an Inventory Coverage (IC) objective of 15 days

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Example illustration
Process 1 Team
Top management
Plant management
Clients A
Strategy
« Best delivery »
OTIF
97%
OTIF
93%Clients B
OTIF
95%
< 8 days
95%
Process 2 Team
OTIF
95%
Process Step 1
< 2 days
95%
< 8 days
95%
< 2 days
95%
Process Step 2 EMI >80%
Employee Motivation
IC >15 days
Inventory Coverage

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Example illustration: Comments
Process 1 Team
Top management
Plant management
Clients A
Strategy
« Best delivery »
OTIF
97%
OTIF
93%Clients B
OTIF
95%
< 8 days
95%
Process 2 Team
OTIF
95%
Process Step 1
< 2 days
95%
< 8 days
95%
< 2 days
95%
Process Step 2 EMI >80%
Employee
Motivation
IC >15 days
Inventory
Coverage
‘breakdown’
KPO/KPI
‘Enabling’ PO
Not Cascaded down
Comments:
•some ‘breakdown’ KPO/KPI, the OTIFs and the Step 1 and Step 2 internal OTIFs (though statistically their ‘addition’ is more complex)
•two ‘enabling’ PO, the Inventory Coverage and the Employee Motivation
•some KPO/KPI or PO/PI are cascaded down (Process step 1 & 2 OTIFs), others not (inventory coverage, Employee Motivation)
•We may think that a middle management team KPOs may also come from its own market or clients. However, if the Top management
team SKPOs are well defined, the client objectives should be included in the cascaded KPOs; this is the case in the example
Cascaded down

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The General case is illustrated below
Top management
Middle management
Cascaded POs are KPOs for
the team in charge
Clients
Some are cascaded
Strategy
PO from clients Internal PO
Alignment

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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Define SMART objectives
 Specific: the objective must be specific and very clearly defined
 Measurable: the progress towards the objective must be measurable.
 In most cases, it means that it can be quantified.
 However, it might be sometimes difficult, and it is simpler, while still being effective to have at
least a clear definition of how to evaluate the level of performance.
 As a rule of thumb, 80% of the objectives should be quantified.
 Attainable: the objective can be achieved realistically.
 In addition, objectives should also Ambitious and Adapted when the environment changes (or when
the objectives are met).
 However, it doesn’t mean that every objective should be pushed up otherwise that may be
detrimental to the work and people conditions; that’s part of the management challenge to choose
when and which objective should be adapted, up or down.
 Relevant: the objective must be relevant to the organisation, by being aligned to the strategy
and the practice or process it measures
 Time-related: the time-frame to achieve the objective must be clear

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Should the Objectives be Balanced?
 The Balanced Scorecard, originally developed by Dr. Robert Kaplan of Harvard University and Dr.
David Norton, has been widely adopted.
 It is a framework for measuring organizational performance using a more balanced set of
performance measures with four perspectives:
 Financial or Stewardship: financial performance or effective use of resources
 Customer/Stakeholder: Customer value and satisfaction
 Internal Process: efficient and quality processes
 Organisational Capacity or Learning and Growth: human assets and culture, Infrastructure and
technology
 In general, the two first dimensions are lagging Strategic Key Performance Objectives and the
two other ones are leading Performance Objectives.
 It is a good framework to use when defining the KPOs and especially the supporting POs.
 However, it doesn’t mean that all four dimensions must be present for each team, in particular
when cascaded down to teams that can’t have an influence on some of them.

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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3 KPIs and up to 7 PI
 Having a very limited number of KPIs is a matter of focus and priority. It is difficult for a ‘normal’
human being to manage more than 3 objectives or priorities at the same time.
 However, having 3 objectives only doesn’t feel enough to embrace the complexity of businesses.
 In addition, we believe, as many studies have shown, that the objectives drive not only the Business
results, but also the behaviours of the people. And we, as people, ‘play’ with them for our own
benefits, and not necessarily for the benefits of the company.
 So, there might be a tendency to add more KPIs to ‘compensate’ some of the bias or potential poor
consequences of some KPI.
 But then, confusion and loss of focus happens.
 That is why the K is important; when it really is a K.
 When many say that there should be 3, or 5… or up to 10, we believe:
 the number of KPIs should be 3,
 and then up to 7 more Pis,
 provided the PIs support the KPIs and are less important than the KPIs.
 Hence we have both the focus and the coverage of the business complexity.

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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Does that sound familiar?
“Only 3 KPIs, but I have more than 100 products and customers to deliver
per week and I need to deliver them all!”
A supply chain manager
 How many times have you seen management meeting ‘dashboards’ that are in
fact Excel sheet extracts with the list of products/services volume sold?
Yes, all the orders must be delivered, all products must be
produced…But that doesn’t mean they are Performance Indicators.

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A PI or a KPI is formally communicated and reviewed in
systematic management meetings; other indicators are data
 A Performance Indicator is formally communicated and reviewed in focused
systematic management meetings
 All words matter in the sentence
 There can only be a few indicators; otherwise they can’t be reviewed in a focused and
systematic meeting.
 The remaining ones, even though important, are ‘data’ for the management team.
 When there are many products, services, processes… the challenge is to build
consolidated or compound KPIs that enable to have a manageable set of KPIs
representing the overall performance.
 And when one KPO isn’t achieved (or the furthest achieved), then the management
can drill down to more data, or delegate the analysis to the lower management level.
 What is considered as a (K)PI, simple indicator and data as regards to the
communication is illustrated below.

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KPI and PI defined by their use in management
meetings
A Key Performance Indicator
measures the progress to a KPO
A Key Performance Objective
comes from the Top – Strategy or Hierarchy
Key Performance Objectives may
be broken down into POs with PIs
Indicator
Indicators to understand the context
(specific cases / businesses)
Data is the source of (K)PIs and enable
deep analysis
Communicated and
reviewed in
management meetings
Not systematically
communicated
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
7-mai 14-mai 21-mai 28-mai 4-juin 11-juin 18-juin 25-juin 2-juil. 9-juil. 16-juil. 23-juil. 30-juil. 6-août 13-août 20-août 27-août 3-sept. 10-sept.
Production efficiency Line A Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Production efficiency Line A High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Production efficiency Line A Annualised low 19,3 € 38,6 € 57,9 € 77,1 € 96,4 € 115,7 € 135,0 € 154,3 € 173,6 € 192,9 € 212,1 € 231,4 € 250,7 € 270,0 € 289,3 € 308,6 € 327,9 € 347,1 € 366,4 €
Production efficiency Line A Annualised high 21,4 € 42,8 € 64,2 € 85,6 € 107,0 € 128,4 € 149,8 € 171,2 € 192,6 € 214,0 € 235,4 € 256,8 € 278,2 € 299,6 € 321,0 € 342,4 € 363,8 € 385,2 € 406,6 €
Production efficiency Line A Cumulative low 0,4 € 1,1 € 2,2 € 3,7 € 5,6 € 7,8 € 10,4 € 13,4 € 16,7 € 20,4 € 24,5 € 28,9 € 33,8 € 38,9 € 44,5 € 50,4 € 56,7 € 63,4 € 70,5 €
Production efficiency Line A Cumulative high 0,4 € 1,2 € 2,5 € 4,1 € 6,2 € 8,6 € 11,5 € 14,8 € 18,5 € 22,6 € 27,2 € 32,1 € 37,5 € 43,2 € 49,4 € 56,0 € 63,0 € 70,4 € 78,2 €
Producton staffing Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Producton staffing High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Producton staffing Annualised low 10,4 € 20,9 € 31,3 € 41,7 € 52,1 € 62,6 € 73,0 € 83,4 € 93,9 € 104,3 € 114,7 € 125,1 € 135,6 € 146,0 € 156,4 € 166,9 € 177,3 € 187,7 € 198,1 €
Producton staffing Annualised high 12,1 € 24,2 € 36,3 € 48,3 € 60,4 € 72,5 € 84,6 € 96,7 € 108,8 € 120,9 € 132,9 € 145,0 € 157,1 € 169,2 € 181,3 € 193,4 € 205,5 € 217,5 € 229,6 €
Producton staffing Cumulative low 0,2 € 0,6 € 1,2 € 2,0 € 3,0 € 4,2 € 5,6 € 7,2 € 9,0 € 11,0 € 13,2 € 15,6 € 18,3 € 21,1 € 24,1 € 27,3 € 30,7 € 34,3 € 38,1 €
Producton staffing Cumulative high 0,2 € 0,7 € 1,4 € 2,3 € 3,5 € 4,9 € 6,5 € 8,4 € 10,5 € 12,8 € 15,3 € 18,1 € 21,2 € 24,4 € 27,9 € 31,6 € 35,6 € 39,7 € 44,2 €
Waste and quality Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Waste and quality High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Waste and quality Annualised low 1,9 € 3,9 € 5,8 € 7,8 € 9,7 € 11,7 € 13,6 € 15,5 € 17,5 € 19,4 € 21,4 € 23,3 € 25,3 € 27,2 € 29,1 € 31,1 € 33,0 € 35,0 € 36,9 €
Waste and quality Annualised high 2,8 € 5,7 € 8,5 € 11,3 € 14,1 € 17,0 € 19,8 € 22,6 € 25,5 € 28,3 € 31,1 € 33,9 € 36,8 € 39,6 € 42,4 € 45,3 € 48,1 € 50,9 € 53,7 €
Waste and quality Cumulative low 0,0 € 0,1 € 0,2 € 0,4 € 0,6 € 0,8 € 1,0 € 1,3 € 1,7 € 2,1 € 2,5 € 2,9 € 3,4 € 3,9 € 4,5 € 5,1 € 5,7 € 6,4 € 7,1 €
Waste and quality Cumulative high 0,1 € 0,2 € 0,3 € 0,5 € 0,8 € 1,1 € 1,5 € 2,0 € 2,4 € 3,0 € 3,6 € 4,2 € 5,0 € 5,7 € 6,5 € 7,4 € 8,3 € 9,3 € 10,3 €
Production efficiency Line B Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 2% 3% 5% 7% 9% 12%
Production efficiency Line B High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 2% 3% 5% 7% 9% 12%
Production efficiency Line B Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 16,3 € 26,5 € 41,9 € 64,5 € 97,1 € 142,4 € 203,9 € 285,0 € 389,1 € 519,1 €
Production efficiency Line B Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 37,8 € 61,2 € 96,8 € 149,2 € 224,4 € 329,2 € 471,4 € 658,9 € 899,7 € 1.200,1 €
Production efficiency Line B Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,3 € 0,8 € 1,6 € 2,9 € 4,7 € 7,5 € 11,4 € 16,9 € 24,4 € 34,3 €
Production efficiency Line B Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,7 € 1,9 € 3,8 € 6,6 € 11,0 € 17,3 € 26,3 € 39,0 € 56,3 € 79,4 €
Cost reduction Elbens Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Cost reduction Elbens High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Cost reduction Elbens Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 1,0 € 2,3 € 5,1 € 10,6 € 20,8 € 38,7 € 68,1 €
Cost reduction Elbens Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,6 € 1,4 € 3,4 € 7,4 € 15,5 € 30,6 € 56,9 € 100,1 €
Cost reduction Elbens Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 0,8 € 1,5 € 2,8 €
Cost reduction Elbens Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,3 € 0,6 € 1,1 € 2,2 € 4,2 €
Production efficiency Line C Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Production efficiency Line C High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Production efficiency Line C Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,5 € 1,3 € 3,1 € 6,9 € 14,3 € 28,1 € 52,3 € 92,1 €
Production efficiency Line C Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,3 € 0,9 € 2,3 € 5,3 € 11,8 € 24,5 € 48,2 € 89,8 € 158,0 €
Production efficiency Line C Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,5 € 1,0 € 2,1 € 3,8 €
Production efficiency Line C Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 0,9 € 1,8 € 3,5 € 6,6 €
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
7-mai 14-mai 21-mai 28-mai 4-juin 11-juin 18-juin 25-juin 2-juil. 9-juil. 16-juil. 23-juil. 30-juil. 6-août 13-août 20-août 27-août 3-sept. 10-sept.
Production efficiency Line A Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Production efficiency Line A High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Production efficiency Line A Annualised low 19,3 € 38,6 € 57,9 € 77,1 € 96,4 € 115,7 € 135,0 € 154,3 € 173,6 € 192,9 € 212,1 € 231,4 € 250,7 € 270,0 € 289,3 € 308,6 € 327,9 € 347,1 € 366,4 €
Production efficiency Line A Annualised high 21,4 € 42,8 € 64,2 € 85,6 € 107,0 € 128,4 € 149,8 € 171,2 € 192,6 € 214,0 € 235,4 € 256,8 € 278,2 € 299,6 € 321,0 € 342,4 € 363,8 € 385,2 € 406,6 €
Production efficiency Line A Cumulative low 0,4 € 1,1 € 2,2 € 3,7 € 5,6 € 7,8 € 10,4 € 13,4 € 16,7 € 20,4 € 24,5 € 28,9 € 33,8 € 38,9 € 44,5 € 50,4 € 56,7 € 63,4 € 70,5 €
Production efficiency Line A Cumulative high 0,4 € 1,2 € 2,5 € 4,1 € 6,2 € 8,6 € 11,5 € 14,8 € 18,5 € 22,6 € 27,2 € 32,1 € 37,5 € 43,2 € 49,4 € 56,0 € 63,0 € 70,4 € 78,2 €
Producton staffing Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Producton staffing High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Producton staffing Annualised low 10,4 € 20,9 € 31,3 € 41,7 € 52,1 € 62,6 € 73,0 € 83,4 € 93,9 € 104,3 € 114,7 € 125,1 € 135,6 € 146,0 € 156,4 € 166,9 € 177,3 € 187,7 € 198,1 €
Producton staffing Annualised high 12,1 € 24,2 € 36,3 € 48,3 € 60,4 € 72,5 € 84,6 € 96,7 € 108,8 € 120,9 € 132,9 € 145,0 € 157,1 € 169,2 € 181,3 € 193,4 € 205,5 € 217,5 € 229,6 €
Producton staffing Cumulative low 0,2 € 0,6 € 1,2 € 2,0 € 3,0 € 4,2 € 5,6 € 7,2 € 9,0 € 11,0 € 13,2 € 15,6 € 18,3 € 21,1 € 24,1 € 27,3 € 30,7 € 34,3 € 38,1 €
Producton staffing Cumulative high 0,2 € 0,7 € 1,4 € 2,3 € 3,5 € 4,9 € 6,5 € 8,4 € 10,5 € 12,8 € 15,3 € 18,1 € 21,2 € 24,4 € 27,9 € 31,6 € 35,6 € 39,7 € 44,2 €
Waste and quality Low 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Waste and quality High 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 31% 34% 37% 40% 43% 46% 49% 51% 54%
Waste and quality Annualised low 1,9 € 3,9 € 5,8 € 7,8 € 9,7 € 11,7 € 13,6 € 15,5 € 17,5 € 19,4 € 21,4 € 23,3 € 25,3 € 27,2 € 29,1 € 31,1 € 33,0 € 35,0 € 36,9 €
Waste and quality Annualised high 2,8 € 5,7 € 8,5 € 11,3 € 14,1 € 17,0 € 19,8 € 22,6 € 25,5 € 28,3 € 31,1 € 33,9 € 36,8 € 39,6 € 42,4 € 45,3 € 48,1 € 50,9 € 53,7 €
Waste and quality Cumulative low 0,0 € 0,1 € 0,2 € 0,4 € 0,6 € 0,8 € 1,0 € 1,3 € 1,7 € 2,1 € 2,5 € 2,9 € 3,4 € 3,9 € 4,5 € 5,1 € 5,7 € 6,4 € 7,1 €
Waste and quality Cumulative high 0,1 € 0,2 € 0,3 € 0,5 € 0,8 € 1,1 € 1,5 € 2,0 € 2,4 € 3,0 € 3,6 € 4,2 € 5,0 € 5,7 € 6,5 € 7,4 € 8,3 € 9,3 € 10,3 €
Production efficiency Line B Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 2% 3% 5% 7% 9% 12%
Production efficiency Line B High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 2% 3% 5% 7% 9% 12%
Production efficiency Line B Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 16,3 € 26,5 € 41,9 € 64,5 € 97,1 € 142,4 € 203,9 € 285,0 € 389,1 € 519,1 €
Production efficiency Line B Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 37,8 € 61,2 € 96,8 € 149,2 € 224,4 € 329,2 € 471,4 € 658,9 € 899,7 € 1.200,1 €
Production efficiency Line B Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,3 € 0,8 € 1,6 € 2,9 € 4,7 € 7,5 € 11,4 € 16,9 € 24,4 € 34,3 €
Production efficiency Line B Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,7 € 1,9 € 3,8 € 6,6 € 11,0 € 17,3 € 26,3 € 39,0 € 56,3 € 79,4 €
Cost reduction Elbens Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Cost reduction Elbens High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Cost reduction Elbens Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 1,0 € 2,3 € 5,1 € 10,6 € 20,8 € 38,7 € 68,1 €
Cost reduction Elbens Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,6 € 1,4 € 3,4 € 7,4 € 15,5 € 30,6 € 56,9 € 100,1 €
Cost reduction Elbens Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 0,8 € 1,5 € 2,8 €
Cost reduction Elbens Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,3 € 0,6 € 1,1 € 2,2 € 4,2 €
Production efficiency Line C Low 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Production efficiency Line C High 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 4%
Production efficiency Line C Annualised low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,5 € 1,3 € 3,1 € 6,9 € 14,3 € 28,1 € 52,3 € 92,1 €
Production efficiency Line C Annualised high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,3 € 0,9 € 2,3 € 5,3 € 11,8 € 24,5 € 48,2 € 89,8 € 158,0 €
Production efficiency Line C Cumulative low 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,5 € 1,0 € 2,1 € 3,8 €
Production efficiency Line C Cumulative high 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,0 € 0,1 € 0,2 € 0,4 € 0,9 € 1,8 € 3,5 € 6,6 €

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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What are Leading and lagging indicators?
 Lagging indicator:
 It typically measures an output, a result.
 It measures something that has happened and cannot be changed any more.
 In our example, all the OTIF KPIs are lagging indicator, whether they measure the progress towards
the strategic objective of 95%, the client segment objectives or the process step ones.
 By definition, lagging indicators always exist, since they are at least the strategic objectives or the
financial ones
 Leading indicator
 It typically measures an input, or a catalyst.
 It measures something that when present at the right level is favourable to the achievement of the
lagging indicator.
 It is a predictor, though imperfect of the result.
 In our example, the Employee Motivation and the Inventory Coverage are leading indicators.
 In a sales team, the number of client meetings of a sales manager is a business driver and is likely
to predict its sales performance; but it is imperfect because if the client meetings are poorly
executed (or with the wrong clients), then the performance will still be poor no matter the number
of meetings.

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Leading indicators are the essence of management
 Leading indicators measure the real business drivers that need to be managed
by the managers.
 Leading indicators should always exist
 Any business manager should identify the performance drivers, define and
manage his leading indicators because it is just the essence of management.

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Which indicators are usually Lagging or leading?
 From the example we can notice, and this is a general rule:
 except the Strategic KPIs that are mostly lagging indicators, KPIs may indifferently be
leading or lagging.
 the ‘enabling’ PIs are always leading, while the ‘breakdown’ PIs may be leading or
lagging

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Agenda
 Everything starts from Key Performance Objectives
 Difference between simple performance indicators (PI), KPI and KPO
 SMART and balanced objectives
 It is important to have both KPIs and PIs, but how many?
 A PI or a KPI is formally communicated and reviewed
 Leading indicators are the essence of management
 What objectives to cascade down, how many and how?

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What objectives: the ones under the team’s control
 The KPO or PO that can be cascaded are the ones that are managed and
are Actionable by the team ‘receiving’ them.
 A team or an individual should only have objectives that are totally under their
control.
 However, there are two situations where the objectives are somewhat ‘shared’,
without a team having full control on them:
 defining shared objectives may be done on purpose to encourage team spirit and
collaboration.
 it is not always easy to have an obvious indicator direct break down and clearly
separate the accountabilities; there may not be a simple mathematical formula
 Nonetheless, the number of these shared objectives should be limited to keep
individuals, or teams, accountable for some specific scopes

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How many: 3 objectives only should be cascaded but…
 ‘How many objectives’ should be easy: since a cascaded KPO or PO becomes a
KPO for the team below, it should be 3!
 However, this is not that true for two main reasons:
 Large organisations often need to have standard KPIs and PIs used at different
hierarchical levels throughout the organisation. So not only the KPO/KPIs are
standard and cascaded, but also the PI/and PO; we call that the ‘standardisation’
case in the figure below
 Similarly, even for smaller organisation, some cascaded down KPOs or POs may not
actually be KPOs (which in theory they should all be) for the team below, but
supporting POs of some of the other cascaded KPOs.
 However, that should be very clearly communicated so that there is a clear priority between
the different objectives cascaded down.
 In reality, that is equivalent to have 3 KPOs for the team (coming from above), but with all or
part of the remaining 7 POs defined by the team above (and not by the team receiving the
KPOs; we call that the ‘top-down’ case in the figure on next pag

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Difference between the pure ‘reference’ case and the
standardisation or top down cases
Management level n
Management level n-1
3 cascaded KPO/PO
DEFINED BY n-1
( up to 7)
DEFINED BY n
Management level n
Management level n-1
3 - 10 cascaded KPO/PO
DEFINED BY n
and n-1
( up to 7)
DEFINED BY n
Reference Standardisation / Top-down

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How: the underlying principle is that a cascaded KPI
must be managed and useful
 The ‘how’ is the most difficult part, especially in the Standardisation or top down
cases
 A ‘good’ KPI or PI is one that is managed and useful. Specially for the team
‘receiving’ the KPI/PI.
 That seems very obvious, but we can’t count the situations we have observed
that the ‘n-1’ management team must report KPIs they don’t really understand
or must ‘use’ PIs they actually don’t really use, but just report. The result being:
 the reported KPI/PI are often unreliable
 the ‘n-1’ team creates other ‘parallel’ PIs to manage its operation
 or worse does not really use any KPI

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How: involve the teams, demonstrate usage
 In the definition phase (as well as in update phases), we believe there is no
other way to involve substantially the ‘n-1’ teams in the definition of the KPI/PI,
which may be a consequent task for large organisations.
 During the operations life, the ‘level n teams’ must themselves manage the
KPIs reported and demonstrate it consistently to the ‘level n-1 teams’.
 the ‘level n-1 teams’ understand better the purpose
 they are more motivated to report and use the KPI/PIs

30. Operational Excellence diagnostic
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