A White Paper from Myrtle ConsultingDelivering Operational Improvement

When a company becomes KPI focused, the results are astounding.

Abstract

The Right Mix of KPIs is Critical for Improving Performance

By Howard Hillman

Selecting the right mix of Key Performance Indicators (KPIs) to monitor operations is both challenging and critical for manufacturers. This paper explores how, with the ideal mix of leading and lagging indicators, manufacturers can improve their decision-making, objectively understand performance and make adjustments before losses are incurred. By reviewing or implementing new KPIs, manufacturers can drive operational excellence.

A White Paper from Myrtle ConsultingDelivering Operational Improvement

Introduction All manufacturers use metrics to evaluate performance and get an indication of progress over time. However, in a world where more and more data is available, it can be challenging to know which data provides a true reflection of performance and should be the focus of a manufacturer’s attention.

Which KPIs should be monitored?

How frequently should the numbers be reviewed?

What does the data reveal about the operation?

The answers to these and other questions are vitally important to manufacturers that are trying to achieve operational excellence.

Understanding Leading Versus Lagging IndicatorsOften, KPIs are output-oriented metrics reported on in retrospect. These “lagging indicators” are delivered hours, days or weeks after the fact, when executives and managers sit down to review historical performance and direct their attention to issues that need to be addressed. The most dramatic example is perhaps the meeting after quarter close numbers have been released and revenues and production are down, orders are backlogged and equipment maintenance expenses are through the roof. Unfortunately, these meetings are often characterized by finger pointing, frustration and an inability to impact the past.

The perspective across many industries, including manufacturing, is that lagging indicators provide the most information. However, lagging indicators can actually lead to reactionary behaviors, also known as “firefighting.” For example, reviewing the number of safety incidents that occurred last year, last quarter or even yesterday can’t change the fact that those events occurred. While a common reaction may be to put security checks, training or other measures in place, the KPIs used to track safety are only helpful to evaluate improvement over time—not to prevent accidents before they occur.

On the other hand, leading indicators allow manufacturers to understand what is happening early on, revealing real-time opportunities for course correction to avoid or minimize production loss, increased cost or lost profit. This approach requires more vigilance in managing the active elements within production or manufacturing, but also affords a greater opportunity to control and improve the process, and to develop a more cohesive and productive effort. In the example above, rather than tracking a lagging indicator of the number of safety incidents that occur each week, manufacturers could track pre-incident measurements such as hazards, near misses reported or other safety observations. When a hazard is reported, it could be addressed, potentially preventing an accident.

Knowing in advance that a performance standard is “off track” through the careful monitoring of leading indicators allows manufacturers to identify the root cause, correct the course and reduce or avoid unfavorable results. Leading indicators tend to communicate change in organizational processes closer to real-time and are predictive in nature. Lagging indicators tend to confirm long-term historical trends after the fact, when it’s too late to take action and undo what was lost.

Criteria for Selecting KPIsEven with a clear understanding of the differences between leading and lagging indicators, manufacturers may struggle to identify the right KPIs for evaluating performance. This is complicated by the fact that the optimal KPIs may differ from operation to operation, depending on the complexity of the process. The following criteria may also help guide the selection of KPIs.

A White Paper from Myrtle ConsultingDelivering Operational Improvement

Just a FewA common mistake among manufacturers is evaluating too many KPIs. Reporting and analyzing too many require significant time and effort and the metrics can contradict one another. Consider this example: A manufacturer evaluates production volume and maintenance cost, hoping to decrease those costs and increase volume. However, if volume is temporarily driven by peak seasonal demand, a new product release or other promotion, maintenance cost may go up as a result of the additional parts, materials and labor required by preventive and predictive maintenance to produce the volume. However, in a vacuum, one set of metrics indicates excellent performance, while the other simultaneously indicates poor performance.

As a guide, focus on no more than five to seven KPIs. It’s also important to understand the relationships between KPIs and temporary performance gaps.

The Perfect MixThe value of leading indicators is clear. However, it is not realistic to use all leading indicators, just as it is equally ill advised to use all lagging indicators. Each type is valuable and a combination of both is ideal to get a true representation of what is happening across the business. Most organizations use a 75:25, leading:lagging ratio. The more visibility and accountability a manufacturer has to correct processes as the work is done, the better. Although lagging indicators provide a rear-view mirror perspective of events that have already occurred, they can help show how stable processes vary over time.

Clearly AlignedAnother common mistake is using different KPIs to evaluate different departments within the business, which in some cases can disenfranchise groups from the big picture. For example, if the supply chain department is measured on keeping stocks low, but operations is measured on its ability to meet increased sales demand based on a newly released product, evaluating the two different departments on their distinct KPIs only inhibits their ability to work together to achieve the overarching goal of the company. The right KPIs will align the internal workforce and support departments and other ancillary organizations respective to overall strategy, operational focus and business performance expectations. A rule of thumb is to make KPIs Specific, Measurable, Achievable, Results-focused and Time-based (S.M.A.R.T.).

Success StoriesFigure 1

A White Paper from Myrtle ConsultingDelivering Operational Improvement

Figure 2

Using its Management Operating System Methodology, Myrtle was able to help one major multi-billion-dollar consumer packaged goods (CPG) company improve performance by 10 percent in less than one year. By helping the company build a strong foundation consisting of KPIs and management systems, Myrtle set the company on the path to sustainable, long-term gains that have and will continue to realize step change improvements. Figures 1 and 2 illustrate nearly immediate improvements in throughout and a decrease in the number of rejected units thanks to a shift from lagging to leading indicators.

Some of the measures taken include:• Installed weekly, daily and shift elements to focus on leading KPIs and metrics linked

to long-term trends.• Added structure to new and existing meetings to increase accountability and allow

for better decision-making and more effective action items.• Added structure to new and existing meetings to increase accountability and allow

for better decision-making and more effective action items.• Implemented escalation processes designed to help operators manage “plan versus

actual” deviations and take action quickly when missing their goals.• Developed process maps defining decisions required to support production and quality.

As a result, there were other benefits including a decrease in rejects, reduced overtime, increased employee morale, and better communication and employee engagement.

A White Paper from Myrtle ConsultingDelivering Operational Improvement

ConclusionWhen a company focuses on KPIs, the results are astounding. There is less waste, costs are lower, productivity and job satisfaction increase and employees feel a sense of achievement that boosts morale and improves engagement.

Aligning KPIs that support the overall operations and strategic business goals across the organization should be “key” for every manufacturer.

One might introspectively ask, “Do the KPIs we use drive us to manage our systems and processes in a way that allows us to know the pulse of our entire organization, quickly make course corrections, minimize or avoid losses and sustain market-competitive profitably?” If the answer is “no,” it may be time to revisit those KPIs.

It’s important to take the first step in leveraging KPIs to improve performance today and in the long run. Working with an outside expert to identify the right KPIs, craft KPI trees and develop reporting procedures can help manufacturers achieve goals more quickly and with less trial and error.

About Howard Hillman - Howard Hillman is a senior transformation consultant at Myrtle Consulting Group. He has more than 20 years of business experience leading cross-functional teams, client and resource management, establishing measurable KPIs, training, coaching and reducing operational costs. His specialties include operations management, as well as Lean concepts and implementation. Howard has hands-on experience in operational improvements across multiple industries including food and beverage, consumer packaged goods, life sciences, oil and gas, manufacturing, chemicals and telecommunications. For more information, visit: myrtlegroup.com