3 questions to consider for selecting a Key Performance Indicator

Posted by Bala Deshpande on Tue, Sep 14, 2010 @ 06:48 PM

The term KPI, for Key performance indickey performance indicator fuel gageator is a widely used catch-all phrase in many industries today. This is of course, a very healthy trend because it indicates that businesses are rightly placing emphasis on measuring performance objectively. There are many important facts to consider while selecting or forming a KPI and one KPI does not fit all functions within a company, and in the same way one KPI does not fit all industries.

A quick search on the wonderful KPI library for just supply chain and manufacturing functions revealed no less than 260 different KPIs. Most of these KPIs are ratios which compare two different measured quantities or percentages. One commonly used supply chain KPI is % of safety stock used. Safety stock is the buffer maintained in order to prevent stock-outs due to demand uncertainty. KPI library documents nearly 4000 different KPIs across all industries!

While the concept is great and utility is unquestioned, there are several open questions that come up for KPIs starting with

1. What is a good KPI to be measuring in the first place?

Clearly there are industry benchmarks and universally popular metrics which can be simply picked "off-the-shelf". But experts frequently state that people confuse the real meaning of a KPI and pick just about anything they would like to keep tabs on! A second and equally important question is this:

2. What is a good target for my KPI?

In other words, if i finally decide to select a few, what is a realistic target? A third and final question that comes up when your supply chain or operation is increasing in complexity. This is:

3. Which KPI(s) is the most critical for my needs?

This question in our opinion is the most important of them all. As interrelationships between the various components or steps of a process grows, these interactions are more critical than the components themselves.

Take a very simple everyday example: lets say you take 3 spoons of cream and 2 packets of sugar in your coffee. If you dont stir the sugar, cream and coffee mixture properly the drink is not really "up to spec". If you are only monitoring how much cream and sugar are in the coffee then you have met your "KPI targets" but your process is still out of spec! And this is with a process as "simple" as making coffee!

Clearly metric which accounts for all the components and all the interactions between those components would form a comprehensive KPI.

Do you have such a metric for your processes?

Tags: key performance indicator, analytics to measure KPI, KPI