KPIs: Not All Metrics are Created Equal
One of the key concerns during development of key performance indicators (KPIs) is the ability to differentiate the more important strategy-driven metrics from the plain vanilla metrics. This has become an even more urgent concern as the many performance management and BI products are now delivered with thousands of "ready" metrics. Selection of the wrong metrics for KPIs can significantly damage or even submarine a performance management initiative. How does one decide when a metric qualifies as a KPI metric? In my September column, we defined KPIs as measures that reflected the performance of an organization in achieving its goals and objectives. This month, we will use a supply chain management (SCM) example to expand on that definition and provide some characteristics that help distinguish a KPI from all those other metrics.
Supply Chain Management Case Study
In recent years, businesses have realized that competitive advantage in the marketplace can be significantly enhanced by leveraging SCM to decrease costs, increase efficiency and improve delivery time to customers. One of the big events in SCM was the much publicized mandate issued by Wal-Mart requiring that its 100 biggest suppliers place radio frequency identification (RFID) tags on most cases and pallets shipped to three of its Dallas-area warehouses by January 2005. Wal-Mart views this revolution in intelligence technology as the foundation block for the next-generation real-time supply chain. When RFID tags are attached to products, boxes and pallets, items can be tracked automatically as they move through the supply chain, providing a real-time and accurate view of inventory. RFID tags contain data profiling the product, such as serial number, model number, size, quantity and color, which is captured by readers and relayed to a centralized data store. Can't we already capture that information using present-day UPC codes? The major difference is that the RFID technology is a proactive system that requires no line of sight between the reader and the tag, and no manual intervention to exchange data and save it to a data store. Another benefit is that the data capacity of RFID tags allows them to carry the same information as UPC bar codes and more. With the approaching deadline next month for the Wal-Mart RFID implementation, we will explore developing KPIs that capture the strategic impact of this new technology.
In the consumer packaged goods and retail industries, the typical supply chain consists of a manufacturing (or assembly) facility, a distribution center, the retail (or supermarket) outlet and the logistics of moving the product through the supply pipeline. From a warehousing perspective, RFID tagging provides several major enhancements to existing practices: advanced real-time notice of arrivals/delays, automatic identification, detection and manifest mapping, correct vehicle assignment and reduced shipping errors. In the logistics area, RFID tagging streamlines the hand-over process, eliminates human-intensive reconciliation activities, automatically routes correct products and reconciles physical goods to customer orders. In both situations, the inventory management systems are updated continuously to provide real-time decision making. With this wealth of new data, one can quickly generate metrics by the thousands. The real challenge is to identify the important strategy-driven KPI metrics. The dimensions approach suggested in my October column represents a valid point of departure by targeting such KPI families as productivity, timeliness, process efficiency, cycle time and resource utilization. The candidate KPI metrics could include:
Metric 1: Response-Time Metric
- Focus: reduce supply chain response time for product replenishments.
- Formula: metric = hours required to complete full product replenishment cycle.
- Profile: aligned with enterprise-wide customer strategy, executive driven, measurable/valid data, cascadable.
Metric 2: Visibility Metric
(process efficiency dimension)
- Focus: identify products and their location in the supply chain pipeline.
- Formula: metric = minutes required to locate products using inventory management system.
- Profile: aligned with logistics/distribution department(s) strategy for product transparency, function driven, measurable/valid data, not cascadable.
Metric 3: Productivity Metric
- Focus: increase resource utilization during supply chain activities.
- Formula: metric = warehouse/logistic/distribution hours worked per net tonnage delivered.
- Profile: aligned with enterprise-wide productivity strategy, executive driven, measurable/valid data, cascadable.
Metric 4: Shrinkage Metric
Focus: reduce product losses due to theft and damage.
Formula: metric = dollars of product shrinkage versus dollars of total shipments.
Profile: aligned with logistics/distribution department(s) strategy to reduce costs, function driven, measurable/ valid data, not cascadable.
Although countless additional metrics could be developed, these will suffice to illustrate the important attributes of KPI metrics.
The challenge now is to select the appropriate KPIs from the proposed smorgasbord of metrics. Although performance management and KPIs have been a hot topic for the last two years, little concrete guidance has been offered to develop a "litmus test" that distinguishes between KPIs and all-purpose metrics. One of the best articles is "The Ten Characteristics of a Good KPI" (see www.bpmpartners.com, April Newsletter), authored by Wayne Eckerson, research director at The Data Warehousing Institute. Eckerson discusses in some detail the important KPI characteristics shown in Figure 1. Several of his criteria, such as strategy-driven, executive defined and corporate standardization, reflect an enterprise perspective rather than stovepiped functional or business-focused views. In the data arena, the KPIs must be measurable, comprehensible, relevant and based on valid data. From an organizational perspective, the KPIs should be cascadable, empower the users and promote positive action via linked compensation. If we examine the proposed metrics in the KPI selection matrix (see Figure 1), it becomes immediately apparent that metric #2 (visibility metric) and metric #4 (shrinkage metric) are more process-focused and are specific to the logistics/distribution functional area(s) rather than enterprise in nature. On the other hand, metric #1 (response-time metric) and metric #3 (productivity metric) have executive-level sponsorship and align with enterprise-level strategies and therefore merit consideration as KPIs.
Figure 1: The KPI Selection Matrix
Keep in mind that the bottom line benefits of the new "supply chain visibility" offered by RFID tagging are significant. By carefully profiling your candidate metrics using this KPI selector framework, you can facilitate identification of the most appropriate KPI metrics.