Key Issues for Management Aligning KPIs With Business Purpose A key difficulty is to stick to a deadline for a countermeasure

e plan. Goals, measures and plans are easy but implementation is difficult. Plan>Do>Check>Act Understand that some old KPIs are now irrelevant. Circumstances and goals have changed. Create a balance between output KPIs and input KPIs. Forecasts and results. Have a strategic plan and design KPIs that respond flexibly to changed strategy. The plan determines the measures and the measures then drive performance. Choose measures that cascade and communicate to all levels, especially to lower levels. Measures should be transparent to shareholders, departments and individuals. Create cultural acceptance and readiness for KPIs by selling the concept and designing KPIs at the level of each department. (Design department KPIs to provide measures of their contribution to overall goals and honour requests for resources that will contribute to department level of KPIs.) Review KPIs on a timely basis to drive behaviour. Link all tasks to a KPI to ensure that they appropriately contribute to objectives and drive planned initiatives. Holistic and transparent KPIs make clear the relationships between the local business and other business units. Any KPI must be SMART o o o o o Specific Measurable Achievable Realistic and Timely

KPIs must expand to include more than just manufacturing eg logistics must be required to measure parts shortages because this impacts on plant efficiency as does poor sales projections

Benchmarking Benchmarking is difficult and complicated because it requires whole of business measures. Measures are often only partial. For example, hours per car is a partial measure of productivity; it leaves out capital and component contributions to product. Cost per car gives a better whole of business measure. In benchmarking, it is more reliable to use trends rather than measures. However, even with trends, benchmarks using partial measures can mislead. For example, a measured reduction in hours per car may result from added costs of shifting to preassembled components or investment in capital equipment and machinery. The measured decline in hours per car may be an increase in cost per car. The plan to improve productivity would require sufficient reduction in hours per car to provide a reduction in total cost after paying for components and capital inputs. Trend changes in like for like measures can be useful.

Challenges in Aligning KPIs to the Business Objectives What are two challenges facing your organisation currently in the area of aligning KPIs to the purposes and objectives of the business? 1. Completing the link to people on the shop floor. The connection between corporate and strategic goals and middle management is often well done, but the connection to the shop floor often falls down. For people on the shop floor, KPIs can seem insular and of interest only to management. If so people on the shop floor are not able to see how the task they perform relates to strategy and business goals, and cannot identify from among their improvement initiatives those which will contribute to business goals and those which will not. Access to KPIs should give people the ability to track the impact on company results of their day-to-day work and of their improvement projects. The KPIs should link personal key result areas with corporate purpose and values. In many companies, KPI information does not filter down to the shop floor. This can be a feature of family owned businesses, where principals want to keep financial measures private. All manufacturers have difficulties communicating the meaning behind KPIs to people on the shop floor. An effective approach to communicating meaning is involvement in planning, and team building and operations team days. 2. The over measurement of manufacturing in relation to other business functions. KPIs often report the contribution of manufacturing to overall business objectives, but do not always cover other aspects of the business. For example, marketing and sales plans and KPIs often do not cover to overall business objectives. Where sales overshoot forecast, marketing KPIs do not report the added costs of fulfillment and the drop in customer service. Where sales undershoot, but sales managers do not adjust forecasts, marketing KPIs do not report the inventory build up. The aim is to develop clear links between sales and strategic objectives such as return on investment, customer service. This aim leads towards better ways of managing sales and manufacturing to accommodate the variability in sales, the need for predictability in manufacturing and the goals of sustained customer service and return on investment. Some businesses seek to smooth manufacturing to maximise capacity, and face logistics and inventory difficulties in marketing, especially where markets generate large orders for specific designs. Some manufacturers address this difficulty by smoothing the production of components. They tolerate some inventory of components, which are less costly than final products, and undertake final assembly only to order. This process requires different products to share a common family of components. Inventories of components require less working capital than inventories of final products, and provide flexibility for final assembly to respond to market changes.

A Ten Minute Quiz on Aligning KPIs with Goals Q1. Alignment of KPIs with Business Goals How do you take account of business purpose, objectives and strategies when choosing KPI's for management of manufacturing? How do you ensure that your KPIs align the overall business purpose and objectives with individual functional activities? Do your KPIs follow value chains or do they report by department or function? How many KPIs do you use? Alignment of KPIs with business objectives means a complete two-way exchange of information from top management through middle management to the people on the shop floor. KPIs should allow people at the shop floor to connect their tasks with achievement of business goals and strategies. A few strategic KPIs will each produce several KPIs for operational strategy and planning, and these will generate several improvement plans directed at bringing KPIs back to plan. Plans provide the link between manufacturing goals (and KPIs) and corporate goals and strategy. In some cases, implementation of KPIs has proceeded from manufacturing goals, plans and KPIs to corporate goals, strategies and KPIs. Q2. Involvement of Shop Floor in the Development of KPIs Do you involve the shop floor in defining and developing KPI's? Is this for their specific functions, or does the shop floor participate in the development and balance of the overall scorecard including return on funds, customer service etc.? KPIs have meaning when they measure progress towards planned objectives. Involvement in KPIs implies involvement in planning. Master Production planning systems provide KPIs and report progress in some businesses. Q3. External Benchmarking Are these measures the same as those used for external benchmarking, and for internal international reporting? Which KPI's do you use in comparing practices with other businesses? How do you select business partners for benchmarking? How do you take account of differences? Multinational businesses use external benchmarks to control manufacturing activities in local plants. The international benchmarks use percentages rather than values and cover high-level summary measures.

Q4. Collection and Manipulation of data for KPIs Do you use a computer system to collect data for KPI's? If so what systems do you use, eg SCADA, ERP, accounting? How do you manage or audit data entry for KPIs? Does the computer system compile and report all KPI's or only a selection? Would you say that your system uses any data that becomes available, or do you select and develop data specifically for KPIs? Collection of data for KPIs uses accessible systems. MRP, payroll and accounting systems all have useful data. Some businesses use database systems that cover all processes and allow managers to view data at all planning levels, strategic, operational and improvement. Cognos is one such system. Where all reporting managers have access to information in real time, as events unfold, they can focus the content of their own reports on key points and corrective action. The base information is available to all and does not have to be carried in reports. Manipulation of data often uses Microsoft systems in the work place. Allowing employees to check data does build credibility. Distributing manipulation across the company tends to create a diversity of KPIs that do not relate to business objectives. Automating the process of manipulating data, removes the data manipulating task from the workplace and frees time to address countermeasures and to communicate about results. Errors in data collection and manipulation will happen. These errors can distort variance reporting. Correcting errors at the work site reassures people about the value of the system. The correction process must protect the integrity of the system. One means of achieving this is to have errors and corrections reported as part of accountability for performance. Q5. Accessibility of KPIs Who has access to KPI results? How do you share information from different internal performance measurement systems? How frequently are KPIs updated? What behaviours and outcomes do you seek when providing access to KPI's? There is a debate between distributing KPIs on request (pull) or sending them to selected targets (push). Where KPIs provide information that is relevant to the reporting accountability of managers, those managers will request the information. Perhaps the key to this debate is that failure to use KPIs may be a symptom of a lack of accountability, rather than poor indicators. People on the shop floor should receive information, even when they may ignore it. Open access to the information helps to validate the data and builds trust.

Q6. KPIs for manufacturing Processes What do you think are the characteristics of good KPI's for a manufacturing process? Can you give some examples from your workplace? Eg customer service (on-time delivery), stock control (stock turnover), safety (accident free days), morale (attendance), product development (time to market), production planning (order response time), etc. Good KPIs focus on the objectives and belief system of the enterprise. They will differ for public corporations and private or family owned businesses. They link those objectives and goals to plans and strategies, and to outcomes of operations. Manufacturing KPIs are often partial, including only part of the story. For example, product per hour of manufacturing labour omits the cost of other inputs to production such as capital, management and purchased components. These omissions make benchmarking outside the business very difficult, because counterparts may use different amounts of management, capital and purchased inputs. This leads managers to a focus on the direction of change over time in narrowly focused indicators. KPIs will usually be about people, quality, service and dollars (return on investment). KPIs arise at system interfaces, because these are points at which control action is possible. For example, KPIs will arise between production planning, resources planning and supply management systems. The Balanced Scorecard measures will focus on the key interfaces, and the key transformations that add value to the business.

Q7. Monitoring External Service Providers Do you have an alliance or contract arrangement in place? If so, how do you align KPI's with the purpose and objectives of the alliance, and of the business? KPIs on supplier performance make suppliers aware of how their performance compares with others and how well they meet the planned requirements of manufacturers. Some businesses give awards at supplier dinners. Many post supplier performance KPIs where they can be viewed by all suppliers, either on-site or on a supplier intranet database. KPIs for suppliers include on-time delivery in full, quality and customer service. Manufacturing systems can supply on-time delivery and quality data. Some businesses survey their team leaders and logistics managers to obtain perceptions about customer service, such as: are they available when you need them?

Q8. Reporting and Monitoring KPIs Do you have people assigned to maintaining the alignment of KPI's with business purpose, objectives and strategy? Who monitors and ensures alignment: dedicated information officers, managers or front line operators /trades /supervisors? The rate of change of business goals and strategies determines the effort required to manage and maintain alignment. Where goals and strategies are static, businesses can use resources better by maintaining planning systems and the flow of information. Maintaining good KPIs and good planning systems does require resources, and it is important to sustain support for good KPIs. The frequency of distribution of KPIs depends upon the level of planning. Reporting frequency is higher at the workface than in the boardroom. Visual management and countermeasures require immediacy, daily review and updating. At corporate level, a business should have a limited set of business wide key performance indicators that relate to central goals and values. For example, MMAL use quality, safety, delivery, cost, efficiency, involvement and environment. These corporate measures apply to all business units. At divisional or business level, the corporate indicators should derive from a common set of intermediate KPIs that relate to the individual business and provide focus and detail within each business. Within each business, intermediate indicators derive from shop floor KPIs through the local department and section structures. At shop floor level, KPIs link directly to countermeasures and report daily performance against plan.