Do you get scared when metrics discussions come up? Are you frightened to think of all the metrics involved in your day-to-day work that have no visible link to corporate strategy? Do you feel the number of KPIs you own has grown to monstrous proportions?
It seems that lurking around every corner of the company is a KPI. With so many KPI’s around, do you fear you’ll miss the key performance indicators that really are important?
Fear no more.
For now, let’s keep the KPI designation until the very end of our discussion. Instead, let’s refer to metrics by names that describe where they “live” in a company: strategic, tactical, and operational.
Once strategy has been created, the executive team will want to use specific metrics to monitor if the strategy is actually working. Candidates are ROI, Inventory Turns, Customer Satisfaction, On Time Delivery, etc. These are the large, aggregate metrics being used to monitor if the actions being taken by the company are actually moving the company in the desired direction according to the strategic plan. Let’s call these strategic metrics.
As the strategic plan is communicated through the company, functional management will need to work cross-functionally to develop processes and other supporting infrastructure to support and enable the strategic plans. Two things now need to happen, 1) the processes need to be monitored to make sure they are providing the desired performance, and 2) the tactical metrics used to capture performance need to be capable of diagnosing problems that show up in the associated strategic metrics. In other words, the tactical metrics are diagnostic tools for the strategic metrics. Without this alignment, great processes will produce great results that do not correspond with desired performance. Poor processes are even scarier.
We now get to the day-to-day operational activities. These are the tasks that must be performed to provide customer value. The tasks can be measured for performance time, or correctness of performance, etc. Certain metrics are associated with the larger tactical metric of interest so that if a tactical metric falls out of range, it is easy to look at the associated operational metrics for diagnosis of the problem. Now the operational metrics have a visible link through the tactical metrics and on into the main strategic metric that the executives monitor.
How does this work? Let’s look at an example: if my company produces specialty drinks for holidays, with our current drink being Witch’s Brew, and because I have quality under strict control and have no problem delivering a perfect order, at the executive level we are focused on responsiveness. Responsiveness is a SCOR attribute that focuses on shortening the response time out to the customer. The metric is measured from order receipt to customer acceptance.
At the operational level, I’m measuring my quality in terms of correct manufacture according to the recipe, making sure there are no contaminants introduced, and I’ve just improved the process so that brewing only takes 80% of the time it used to. My quality control and cross-trained operators will monitor the quality aspects and take corrective action as required. My operational metric of concern is making sure the new brewing process works to give me time reduction without sacrificing quality, so I am measuring the brew time. I will also track any delays in getting the brew through the process.
At the tactical level, I am concerned with the end-to-end process time from order entry to delivery on the customer’s dock. I have many tasks being performed and all measure different things to make sure we uphold quality and hold to the timing needed. Because I’m concerned with Responsiveness, I’m going to gather all the end-to-end timing pieces, including the brew time and the wasted time spent in any unnecessary queues. I can quickly see if I’m staying within the acceptable zone for my tactical metric that feeds into Responsiveness. My tactical metric is the end-to-end process time. If the metric shows that I am not performing as fast as needed, I know which operational level metrics review to determine a root cause for the slow down.
At the strategic level, I’m concerned with overall Responsiveness which will include the time between when the sale was made to when the customer accepted my delivery. I take all of the contributing tactical metrics that relate to the Witch’s Brew supply chain responsiveness and I evaluate if I am performing within acceptable limits. If not, I know which tactical process metrics to evaluate for root causes to the problem.
Now that I have my metric hierarchy established, I can figure out what, out of everything I am measuring, is a key performance indicator. If the established KPI goes out of range, then I know that the performance for that supply chain will be off. This is my early warning signal.
Now, it is often the case that we have a more balanced approach to metrics than just along one performance attribute such as Responsiveness. However, the chosen metrics must work together to evaluate different important aspects of the supply chain to give me fuller understanding. This means I may have financial metrics also associated with this supply chain. For example, I know just what the company incurred when I had to expedite the brew via air transport to the customer’s location. My operational performance looked good, I kept my response timing in control, but I took a hit financially.
With this organized set of knowledge, I now can make strategic, tactical, and operational decisions that will benefit the company in the future. Borrowing from The Court Jester movie lyrics, “What started as a scary tale, ends as a fairy tale” complete with a happy ending and no more scary metrics.
Key words and concepts: metrics, KPI, performance, customers
About the author: Cynthia Kalina-Kaminsky with Process & Strategy consults with and provides training for organizations eager to increase their competitive value by helping enable growth, align performance, make and move product (even when the product is a serving of electrons). She has been invited to teach SCOR (Supply Chain Operations Reference model) in Baton Rouge this October. SCOR is the framework Fortune 500 companies use to increase their agility.