What are KPIs - Key Performance Indicators
Definition of KPI
KPI stands for “Key Performance Indicator.” It is a tool commonly used by businesses to consistently measure what is most important, make decisions, and forecast. Companies use KPIs to keep their teams aligned with the company’s goals and accountable for outcomes. ERP platforms make it easy to design, report, and display KPIs.
KPIs For All Business Areas
Successful companies carefully construct KPIs which encompass employees, customers, processes, and revenue. Without KPIs, it can be easy to become so laser-focused on an urgent problem that you lose ground in other critical areas of the business. Here are some key questions to prompt team discussions on constructing KPIs:
1) Are the employees productive, engaged, and focused on goals that matter to them?
2) Are your customers enthusiastic about working with you?
3) Are your operations scalable and disciplined?
4) Are your product offerings and sales strategies supporting your revenue goals?
No matter what your gut tells you is the answer to these questions, the next thing you must ask is, “How do we know?” A KPI is a specific and measurable operational result that you continuously measure, monitor, and adjust in order to keep employees, customers, processes, and revenue on the desired tracks.
An Example of a KPI for Manufacturing: On-Time Delivery
One very common KPI is On-Time Delivery. As this example shows, the specific calculation is up to the organization. On-Time Delivery can be measured as one minus (the number of items shipped late or early, divided by the total number of items shipped) for a given timeframe. It could also be the number of line-items shipped late divided by the total number of line-items shipped. You could define an acceptable window of time as “on-time” for example, as one day late and five days early. If the item shipped outside that window, it’s not considered on-time. So, if you shipped 175 items outside this window, out of 5,000 items total in a month, your on-time delivery by this definition is:
1 - (175 items not-on-time / 5000 total items shipped) = 96.5%
KPI Dashboard Indicators
Each KPI should be reported on a dashboard and/or printed report with certain indicators. Results indicators show how this KPI has changed over time. For example, the On-Time Delivery KPI could be a bar chart with each month’s results for the last 12 months. It should have a green target line for the goal and a red line for an unacceptable result. It may also have a yellow warning zone and a super green stretch goal.
How to Create New KPIs
- Decide on a business result, problem or priority you want to improve
- Determine the activities that influence the outcome and find a way to measure those activities
- Set your red-yellow-green criteria for your dashboard and/or report
- Determine specific actions required to achieve “green” success and do it.
Keep KPIs Relevant to Your Business
Over time, it is critical that you use the KPIs and adjust them to meet your organization’s needs. Each department may have its own set, rolled up each month, quarter, and year and then reported to senior management. You need to see in a glance if there’s an area of business that needs attention. It’s a good idea to periodically audit your KPI’s with a few good questions such as “Does everyone understand the purpose of this KPI?”, “Is the red-yellow-green success criteria realistic?” and “Does this KP spark discussion and action items in your meetings?”
A robust set of Key Performance Indicators is key to sustainable business success. It helps teams focus on the things that matter most, prevents business areas from being neglected, and increases accountability. Take the time to set them up properly, maintain them, and establish the discipline to use them for measurable improvements.
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