Five Rules for Selecting the Best KPIs to Drive Operational Improvement

Oct. 25, 2012

The key to success is selecting KPIs that will deliver long-term value to the organization.

There’s no question that key performance indicators (KPIs) are needed to help drive operational improvements. KPIs are absolutely essential for organizations to present performance information for all levels of the organization. The key to success is selecting KPIs that will deliver long-term value to the organization.

It’s problematic that the terms KPI and metric are used interchangeably within manufacturing operations. A KPI is always a metric, but a metric may well not be a KPI. Key to the concept of KPI is that it must be a metric that will drive strategic competitive advantage (and in turn value) for the organization. A metric can be a measurement of any business-related activity.

Here are five rules for selecting the best KPIs for your manufacturing organization:

1. Focus on the critical few, not the trivial many. If you measure too many things, you’re really not measuring anything. Managers have a habit of adding KPIs but never “rightsizing” the list to drive strategic intent. This causes confusion as to what is really important.

2. Ensure that selected KPIs drive toward your strategic intent: KPIs should not just measure performance. They should measure performance toward the strategic objectives that you’ve laid out as part of your operations strategic plan. It is absolutely critical that these KPIs measure the most important factors in achieving your success.

3. Ensure that KPI are relatable on all levels of the organization: It is very easy to measure performance purely in terms of financial factors. It’s important to remember that members of your production staff at all levels should be able to relate to the metrics. KPIs like overhead absorption percentages are common, but they are not particularly effective for production personnel. Instead, metrics like units shipped per hours worked will give a meaningful KPI (if your objective is to increase production and/or reduce hours per unit).

4. Ensure the data for KPIs are valid: Much like any Six Sigma project, before seeking process improvement, we should ensure that our measuring system is valid. This means validating the repeatability and reproducibility of our measuring system. Will the system yield data that are meaningful, timely and reliable for sound management decision-making?

5. Ensure controllable KPI are selected: When someone is placed in charge of a KPIs for their portion of the organization, is it really something they can control? Is the individual empowered to make necessary changes in order to drive performance of the KPI? This is an often-forgotten factor in successful operational strategy. What you measure is what you get ... but more importantly, what you measure must be controllable in order to obtain the strategic objectives you desire.

Finally, when selecting and implementing KPIs, please be certain to train your employees to work in a KPI-driven environment. All too often, manufacturers roll out the latest and greatest KPIs for their production environment with little or no plans to educate production personnel as to what it takes to be successful.

Jason Piatt is president of Praestar Technology Corp., a provider of consulting and training services to manufacturers in the Mid-Atlantic region specializing in lean, Six Sigma & strategy formation.

About the Author

Jason Piatt | President

Jason Piatt is cofounder and president of Praestar Technology Corp. Prior to founding Praestar Technology, Jason held various tactical and executive positions in engineering, sales and marketing, and program management with a leading power transmission component manufacturer. He has served as a member of the faculty at Penn State University and has taught at Pennsylvania College of Technology in electrical and mechanical engineering technology, mathematics, and physics.

Jason earned a Bachelor of Science in electrical engineering with minors in mathematics and physics from Bucknell University. He also earned a Master of Science in electrical engineering from Bucknell and an MBA with honors from Mount Saint Mary's University. Jason earned an executive certificate in technology, operations, and value chain management from the Sloan School at The Massachusetts Institute of Technology (MIT). Jason completed his Six Sigma Black Belt training at the University of Michigan as well as additional graduate education at the Wharton School - University of Pennsylvania.

Jason and the Praestar Consulting team have assisted numerous manufacturers in the areas of lean manufacturing, Six Sigma, sales and marketing management, and strategy formation.

Jason has received numerous awards and recognition including senior membership in the Institute for Electrical and Electronics Engineers (IEEE) and membership in Sigma Xi Research Society. He is a monthly columnist for IndustryWeek.com and has been referenced as an authority on manufacturing competitiveness by the Wall Street Journal Radio Network and other leading publications.