Key Performance Indicators - KPIs (E)
How do you assign responsibility for result? What is the Key Performance Indicators? What are definitions of KPIs? What is the Root Cause Analysis? What is the Fishbone Diagram?
Posted: Nov 2007
Once the team has identified his internal/external clients, identified what is their job and formulized the Team Mission Statement ( way of doing job ), it is time to employ the team, to give him a task and to measure them and evaluate.
Activities of a team can be focused in many different fields at same time. Therefore, it is extremely important to deeply analyze and identify them.
Value creation process starts in the company, it passes several phases, and once is ready, the final value is delivered to the Customer. The process is divided in segments of Input, the Process, the Output and serving the Customer. This is called Horizontal process:
Every process starts with Input components. This includes all resources that enter the process. Management of Input means:
- Quality Control - managing the quality of goods and services provided by internal and external suppliers.
- Cooperation with Suppliers, in order to fulfill all demands.
- Costs Control – Initiative to reduce internal costs and costs of Suppliers to minimum level.
- Investments in input increase, in order to achieve productivity
The main Process refers to way how we do a job, structure, task sequencing, technology, roles and responsibilities, ... Management of the process means its improvement. This improvement can be continuous process improvement, or radical project redesign. Whether they are gradual or radical, the improvements are reflected through:
- Structure of the process
- Workflow – number of steps and sequence
- Time cycles
- Policies and Procedures
Result component of the process represents Outputs of the system. The good output result is represented through System productivity. The productivity of the system can be measured through indicators such as:
- Production line productivity
- Warehouse productivity
- Cost efficiency per unit produced
- Products sold.
But still even the most productive system does not guarantee you that you will necessarily satisfy your Customers. The satisfaction of customers can be measured through:
- Delivery accuracy ( right product, just in time )
- Report accuracy ( correct data, in time )
- Service quality
Measuring of the processes is represented through tracking and evaluating the quantifiable output of process segment expressed as process indicator. The number of indicator can be numerous, but those most important, regarding the company and team, are called Key Performance Indicators ( KPI ). These KPIs can be selected on Pareto principle ( e.g. choose 20% of total indicators that have 80% impact on business ).
The most important thing is to assign Key Performance Indicators to respective individuals in the team. KPI must have the owner – the person responsible for the result. When the team is responsible than the KPI target is split among the members. The sum of their targets is target to their supervisor, and so on up through the hierarchy.
To be able to track and measure Key Performance Indicators, we need:
1. ) The KPI definition, e.g. Sales Volume in physical cases.
2.) Information, e.g. What was the output of production, along with additional data about factors that directly influence specific KPI.
3.) Standard, expected level of output, preset before the process begins. Standard is set based on history results, Business Strategy, market situation, competition, ...
4.) Calculation, comparison of actual result versus the predefined standard, expressed through absolute positive/negative variation versus Target and through percentage variation.
Volume Product A
period January 2008
The measurement of process result is not always easy to measure. The example from above is Hard measurable indicator, which is easily measurable, because it can be precisely quantifiable through the unit of measure – physical case.
But there are situation when the KPI is Softly defined, meaning that it cannot be expressed through clear unit numbers. Example. Merchandising standards or maintenance. In such situation we use a Standards Check List tool, which describe the process result:
Merchandising of Rack
In this example, Merchandising is 4/5 or 80%. With this system we can measure other soft measurable KPIs.
5.) Root Cause Analysis ( or Fishbone Diagram ) should be always done for those KPIs that are below Standard ( Target ). As underperformance is always possible, the Fishbone Diagram must be ready for identification of possible causes of underperformance.
During the Fishbone Diagram analysis, group causes in two groups:
- External ( economy, weather, legislation ) just list them, but do not focus too much about them, since it is hard or impossible to influence them.
- Internal ( productivity, discipline, high costs, ... ) are causes that you can influence.
Based on Route Cause Analysis ( Fishbone Diagram ) owner of the KPI need to prepare Action plan with a purpose of returning the result of process back on track, meaning to be on Target with that specific KPI next time. The action plan is focused on defining a 4 key points that are defines by simple questions:
Who - The owner of the KPI is responsible for conducting the action plan
What - Action plan, specifying activities that will lead to achieving target
When - Time frame, deadline for the activities
How - Resources required for Action plan
Owner of the Key Performance Indicator - KPI has to prepare action plan whenever he have underperformance of specific KPI. Read more about this topic in the section Review Meeting.