If you want something done right, you don't have to do it yourself. You only need to measure and reward behavior. Key performance indicators (KPIs) are a critical piece of an organization's business performance and can be exceptionally helpful if used correctly.
"But KPIs have not been all that successful in a lot of organizations," said Marc Leroux, ABB's CPM marketing manager, in his presentation at ABB Automation & Power World this week in Houston. "If you want people to act the way you want, you'd better measure it and reward them for doing it."
Many companies use KPIs with the best intentions, but fail to align them with business objectives, or they make any number of errors in executing their plans.
"When choosing KPIs, keep the list short," explained Leroux. "Start with the result in mind and remove obsolete KPIs. If you have three KPIs, people will pay attention to those. If you have 10, they will ignore all of them. By the time you've got a KPI in front of someone, you should be able to explain why it's important, and how it rolls all the way up to the corporate level. Once you've established it and achieved it, then move on."
Leroux recommends measuring, collecting the information and adding the context. "Sometimes, we sit down with the plant manager, and he says he doesn't believe the numbers because he's never had those numbers before," said Leroux. "KPIs need to be measurable. You need to get people's agreement. They need to agree how it's going to be measured, and you need to explain why it's meaningful. Also, there's nothing worse than being measured on a KPI that you have no influence on, that you can't influence or change. That's frustrating. Make sure the KPI is actionable."
Leroux also warns that KPIs can be dangerous because they can encourage unwanted behaviors. "People will do whatever it takes to make that KPI look good, even if it's detrimental, because that's what they're measured on," he said. "Another key reason we have challenges to KPI implementation is because the language is different, depending on where you are in the organization. The language and the metrics and the frequency can be slightly different from the executive level to the VP level to the plant manager level." While C-level executives look at quarterly results, vice presidents will typically review monthly numbers and, at the plant level, it's daily numbers.
While there is no one-size-fits-all solution for KPIs, some helpful starting points are available. "Different manufacturing organizations have different objectives," explained Leroux. "If you're in a growth business, you may be looking at new products and new revenues. If you're in a business that you're milking, you're focused on how to maintain customer base and profitability. AMR and SCOR have good ideas to start with, but in the end, it's up to you. You need to balance your supply and your costs. The best way to do that is to create KPIs that match up."
He listed common manufacturing KPIs that the business side looks at, such as net operating profit, earnings before income taxes, depreciation and amortization (EBITDA), labor cost per unit, return on assets (ROA), economic profit, market share, revenue per employee and average days total inventory. Leroux also listed standard manufacturing KPIs, such as OSHA-reportable incidents, energy consumption per unit of production, manufacturing cycle time, overall equipment efficiency (OEE), capacity utilization and emission reductions.
"From a manufacturing perspective, you've got needs and benefits associated with each," explained Leroux. "With a lot of measurement, you can improve reliability and the quality of your products. But how does that translate to the business side? How do I improve quality, safety and agility? How does that impact my supply chain? You can drive these down in your organizations to innovation, responsiveness, flexibility and cost, which drive down to profitability, return on assets and return on equity. That gives you financial results."
But it begins with breaking down the corporate goals into KPIs at the plant level. "How do we get there?" asked Leroux. "The first step is to understand what your strategy and the key corporate objectives are. I always start by looking at the quarterly report because that's what the CEO wants. You can establish the priorities and map the activities to the metrics."
When you do implement, make sure the affected personnel agree on the measures, he warned. "Just telling someone what they're being measured on is a recipe for disaster," said Leroux. "If you get the buy-in and agreement, they're going to have ownership."
Finally, make sure the metrics are applicable to the business and track them. "If you want your KPI program to be successful, you've got to have follow-up," he explained. "Typically, after several months, it will stabilize and then start to decline. If you have a KPI, and no one looks at it, did the tree make a noise in the forest when it fell and no one was there? Once you've achieved results, move on and replace that KPI with a new one to get the new behavior you want to encourage."