When was the last time that you made a declaration?
“We have to ship everything on time!”
“We need better customer service.”
“We must increase sales.”
Goals vs. Declarations
We all do it…but to be effective you need to define your targets in terms of SMART goals. A SMART goal is:
- Time Frame
In this paper we will focus on the measurements of critical goals that represent the health and well being of the organization. These Key Performance Indicators or KPI’s help an organization define and measure its progress towards it critical goals. An example of a SMART goal:
Target: Increase sales by 5% this year as measured on a year-to-date comparison basis with last year.
This goal is specific and measurable. It is actionable by the people whose performance is being measured. And it is realistic and has a time frame attached to it.
Key Performance Indicators Measure the Critical Goals
The Key Performance Indicators must be chosen carefully and must reflect the key targets and goals of the organization. For instance, if your organization is determined to deliver products within one week of order placement, then you might measure the percentage of order shipped within one week. If your key target is quality, then you might measure the percentage of customer complaints or returns.
Be Careful What You Measure – You Might Get It
In setting targets to measure you need to be very careful that you are measuring and controlling the right elements in the business. Sometime a target that sounds simple at the beginning ends up being a disaster. For example, if you measure the number of units shipped per month you may encourage employees to push things out the door faster, however they may not be careful with the quality issues and the increased volume may end up increasing customer returns to the point that you are actually worse off than before you started.
Use KPI’s as a Management Tool
Once you have decided on all the KPI’s that you would like to focus on, what could you do with them? You use these KPI’s as a way to create visibility for the corporate goals. Post them on the wall, in the lunchroom, at workstations…wherever the affected employees will see them. People will ask questions and get interested. And interested employees can be very productive and effective employees.
Selecting Key Performance Indicators
In setting up your KPI system start with a few basic financial indicators. For instance, this may include:
- Sales vs. last year
- Sales vs. target
- Gross margin percentage vs. target
- Profit vs. target
- Cash balance vs. target
- Days Receivable
- Days Payable
From there you want to determine the key drivers in your business and set up systems to measure the performance in these areas.
What are key drivers? These are the items that are critical to your success. Some examples of key drivers in the manufacturing business are:
- Machine run time
- Emergency breakdowns rate
- Labor vs. Standard
- Scrap percentage vs. standard
- Defective parts rate
- Supplier delivery performance
- Supplier quality acceptance rating
- Staff turnover
- Production floor dwell time
- Sales per employee
- Inventory turns
- Days of finished good inventory
- Days of raw material inventory
- Delivery to promise percentage
- Number of customer complaints
- Number of product returns
- Order to ship time
- Number of sales leads
- Quote rate
- Ratio of sales to leads
Customer Service Indicators
Presentation of Key Performance Indicators
Many people have their preferences for presenting performance information, however in cases where the data is historical or where you need a trend shown it is often best to present the data in a graphical format.
The type of presentation shown above combines the need for visual trends with the need for numbers. You will notice that the target is shown as well as the actual performance.
It’s not what you measure, but what you do about what you measure that counts. All this focus on Key Performance Indicators will be lost if you fail to take action.
The first thing the KPI system will do is to create visibility, and then you will have to analyze the situation to determine the correct course of action.
How Many Key Performance Indicators Do You Need?
Some businesses evolve to the point where they have 30 to 40 Key Performance Indicators showing all aspects of the business, from financial to shop floor and customer service. It is important however to start with a few simple KPI’s. Remember the key is to manage the outcomes, and at the beginning it is impossible to focus on 30 indicators.
Stay focused and make progress every day on something that moves you forward on a sustainable path. Do these changes come easy? Of course not. If it were easy, you would have done it already. However, once your plan gains some momentum you will be amazed at the results.
A Word About Using This Report
In order to get value from this report you will need to do the action items and implement the strategies in your business environment, and sometimes this can be challenging. You will need to be persistent and diligent in your follow-up. You won’t get any positive results unless you take action on the information and strategies outlined!
About the Author
Mr. Ray Smalley is a veteran CEO who works with owners and managers who are frustrated with their business performance. He is a specialist in business troubleshooting and strategy.
He has led the management team for companies that include manufacturing, technology, service and construction, from $3 to $50 million in sales. In each case, he achieved outstanding increases in sales and profits in very mature or declining markets, including turnaround situations. He is able to provide leadership for all levels of the organization and effectively manage change.
Mr. Smalley graduated with the top award in his engineering class and graduated from Honeywell’s internal Executive Management Program presented by Harvard Business School.
For a free phone consultation, Ray Smalley can be reached at 1-800-596-0351
(c) 2004 Ray Smalley, VenPlan Inc. All rights reserved.
The contents of this paper are copyrighted and, as such, may be used for personal use only. Duplication and/or commercial use of this material is expressly prohibited without written permission of the author.