Key Performance Indicators (KPIs) are essential to effectively manage and keep track of organizational requirements, helping drive operational improvements. But determining KPIs for teams and individuals isn’t exactly straightforward and shouldn't be rushed into. Instead, a planned approach should be followed, keeping in minds the long-term operational goals that need to be fulfilled.

KPIs are often interchanged with metrics, especially within manufacturing organizations. This isn’t true. A KPI can be a metric but the reverse can’t always be true. The concept of KPIs revolve around metrics, and their ability to drive competitive advantage within an organization. On the other hand, a metric is just the quantization of any business activity.

A simple search within Amazon’s book section with the keyword “metrics” gives back 17,000 results. Similar results appear when “key performance indicators” are searched. This reiterates the fact that a relation does exist, and both add value to the organization’s structure. The article explores the best practices associated with KPIs’ development and takes a real-world approach towards many of the problems faced by managers when developing these metrics.

True to the numbers

What would be an essential performance metric for an aerospace manufacturer? One important metric would be keeping track of deliverables against their due date, and ensuring they are following the pre-decided timeline. In order to fulfill it, the staff needs to gather information regarding open orders, identifying what can be shipped on a specific day and what may be missed due to incompleteness.

If the staff realizes that an order can’t be shipped within the due date, it effects their metrics. It’s simple: meeting the due date would give the team/individual 100% grade while missing it would give them zero. But what happens if the team’s manager takes the client on board, asking for an extension in the due date, and gets a positive reply? Does this mean that the metric is reset, and the team has a new lifeline, with their grade unaffected?

This may seem like a harmless tactic, but the end-result will be artificially raised metrics. Sure, if the customer calls first asking for a delay in shipment, then the metric should remain unaffected. But when the manager initiates such requests, he/she is only promoting a culture that is harmful for the worth ethic for the company. In the end, the client may feel worried about the company’s ability to meet its commitment, while the senior management, for the most part, will be in the dark due to the satisfactory paperwork they receive.

Therefore, it is important that teams strive to meet the required deadlines, and not manipulate with the numbers. A zero on the metric for one late shipment will lead to greater effort for the next one.

See things from the Customer’s perspective

A great way to measure KPI is positioning yourself at the receiving end of the metric. For instance, if you were a client and had a shipment coming in at 10:00 AM, you would have aligned certain teams to take care of the order. If you had ordered a machine component, you would also have scheduled your technicians’ services accordingly. Lateness would disrupt all this.

Clients usually expect their shipments to be on time, especially in modern industrial framework where managers are making every effort to cut inefficiencies.

Therefore, a company should create its work ethic around KPIs/metrics in order to maintain organizational competitiveness. Otherwise, any edge that the company has in the market will be adversely affected, and ultimately erode. Several times, teams view KPIs as something that will have an effect over their grade/monetary bonus. Instead, they should look at it with a wider lens and account for the chain-reaction one missed shipment may put-off.

A great way to ensure this KPI is met is by moving the due date an hour earlier. This will increase the chances of the customer getting his order earlier or at least on time. A single modification can grow customer satisfaction and also spike up grades for concerned employees.

Excess Metrics

Several top-level managers put monitoring system in place that helps them keep a track of established metrics. The resultant display full of numbers, graphs and charts may look aesthetically pleasing but how useful is it?

Research has stated that the short-term memory only has the capacity to hold seven chunks of information, and even those lose their detail after 20 seconds. This means that the dashboard can help overcome our biological constraint. But the adverse effect of this data is flooding your mind with numbers, many of which have little significance. Furthermore, they volume of data displayed can be too overwhelming to make sense out of.

A better approach with dealing with metrics is designing them around “Rules of Three”. You can start off by writing the top three metrics in each of the company’s functions, e.g. employee performance, production, etc. and then have these displayed on the main screen. They will be easier to study, retain, and if required secondary screens can be installed with detailed views.

Unintended Consequences

Poorly structured KPIs can lead to unintended problems that can bring down the operational effectiveness of the company. For instance, a metric at a precision monitoring tool plant may be “number of units produced per hour”. The management may feel that having this number can give staff motivation, which would boost productivity. Now, if the metric is raised on a particular day, what effect would it have, given that all other factors remain same? Sure, the first attempt by employees would be to meet the numbers, but as they do so, the quality may take a hit. As a result, the KPI’s poor implementation may lead to counter productivity.

If the company does want to boost productivity, it would have to deal with all associated factors as well, such as labor, equipment, training, procedures, etc. In such conditions, the raise in numbers is justified, and the management can expect better quality as well.

Key Best Practices

KPIs have established themselves as an effective way to measure employee performance. However, they must be managed so as not to have an adverse effect. The following are a few key rules that must be taken into account during the planning phase:

• Long-term goals should be kept in mind
• Accurate and clear definition should be followed
• Corporate goals and objectives must be met
• The metrics should be measurable and achievable
• Evaluation should be carried out on a constant basis
• Modifications should be made if necessary