Process indicators: When data becomes meaningful

Overview

Process KPIs make it possible to understand and evaluate processes in production and logistics. With the help of this evaluation, better decisions can be made. In addition, you can see from the process KPIs where there is potential for optimization. Regardless of whether you currently have too much or too little data as a basis for your KPIs, I will show you in four steps how to establish KPI management in your company.

You can use these steps to establish a key figure management system:

• Target definition of the key figure system
• Derivation of KPIs from the corporate strategy and objectives
• Selection of a suitable key figure system
• From the key figure system to key figure management

Target definition of the key figure system

Why do you want to have a KPI system in your company? There can be various reasons for establishing a KPI system and KPI management: Process KPIs can be used as an overarching information or analysis tool or as a control element.

The use of key figures as an analysis tool is suitable for monitoring processes. For example, you can use the key figure “rejects per hour” to see whether your system is running with the correct settings. On the other hand, you can use your KPI system as an early warning indicator, e.g. for predictive maintenance. If previously defined tolerance thresholds are exceeded, countermeasures can be taken. The third major area of use of KPIs as an analysis and information tool is the evaluation of decision alternatives. The right key figures help management to make better decisions. One example of this is the ROI (return on investment) of a machine purchase.

In addition to their function as an information and analysis tool, key figures can be used for control and management purposes. The control function is important, for example, in a large company with different divisions or in a holding company with several companies. Here, individual targets for the different units can be derived from an overall target for the company, thus ensuring that everyone is working towards the same goal. Process KPIs can also be used as a management tool. Goals for individual persons or organizational units can be derived from the company goals. Key performance indicators can then be used to track how these targets are being met.

Different process KPIs are required depending on the objective you are pursuing with your KPIs. As a first step, you should therefore think carefully about the purpose for which you want to use KPIs and, associated with this, who the recipient of the KPIs is. If you do not do this, you run the risk of the KPIs not being meaningful and therefore useless. In the end, the different purposes of the KPIs may well result in different KPI systems.

Derivation of process KPIs from the corporate strategy and objectives

In the first step, you considered the purpose of your KPI system. The next step is to find the appropriate process KPIs for this. The starting point of a KPI system is always the corporate strategy. Goals can be defined from the strategy, for which suitable KPIs can then be generated. If you do not have clear objectives at company or divisional level, you should think about these first. All goals that you define should comply with the SMART rule (Specific-Measurable-Activating-Realistic-Timed). Make a note of all objectives and derive key figures from them in the next step.

For example, if the company’s goal is to be the quality leader in a product range, one possible KPI could be the number of customer returns. If, on the other hand, your goal is cost leadership in logistics, possible KPIs could be the cost per pick in the warehouse or the storage fee. These examples show how important the clear definition of targets is for the implementation of KPI management. If you collect KPIs without clear targets, they will have no control, management or analysis function and you will not generate any added value from KPI management.

Type and number of process indicators

To ensure that your process KPIs are balanced, they should come from different areas (e.g. quality, service, productivity, time, efficiency, structure, etc.). For example, it makes no sense to only collect financial KPIs, as otherwise you would only focus on these and other areas, such as quality, could suffer as a result. It is also important to collect different types of key figures. For certain applications it may make sense to use absolute key figures (e.g. number of employees), for others relative key figures (number of picks per picker) make more sense.

The situation is similar with local or global, strategic or operational key figures. The most important thing here is differentiation and a mix in order to achieve a balanced KPI system. You should start with KPIs that answer questions that regularly concern you and for which you have only ever been able to answer according to your gut feeling. Do you think your stock levels are too high? Then measure the inventory turnover rate, for example. You can now find definitions and lists of key figures and benchmarks on countless websites or in special databases.

Another important point is the number of key figures. The good data basis thanks to digitalization makes it possible today to collect countless key figures, which is something that is often done. Key figures look good on specially visualized dashboards and therefore the maxim “more is better” often applies. However, you should not be tempted by the possibilities, but should think carefully about which key figures make sense for you. A good guideline is 15-20 key figures per business unit (e.g. logistics, production), which you collect and discuss regularly. In practice, 3-5 focus KPIs that you should concentrate on and report to management have proven successful.

Selection of a suitable key figure system

To enable you to establish a balanced KPI management system that is aligned with the company’s objectives, as described in the previous paragraph, it is advisable to use standard logic for KPI systems. In the following, we would like to introduce you to two different key figure systems that are widely used: The value driver tree and the balanced score card.

Value driver tree

The value driver tree always starts with a major overarching corporate goal, e.g. a specific EBIT that is to be achieved. Based on this EBIT, mathematical and logical relationships are used to determine what leads to this target (for the example of EBIT: cost of sales). These relationships can be examined down to the smallest detail. Figure 3 shows an example of a value driver tree. A key figure can now be determined for each field in the value driver tree. The advantage of this method is that the individual levels of the value driver tree are mathematically and logically linked to each other, meaning that there is always a connection between the process KPIs.

The disadvantage is that KPI systems based on the value driver tree are often dominated by financial targets and KPIs, meaning that other areas are completely neglected. If you want to use the value driver tree, you should therefore make sure that you also integrate non-monetary key figures such as employee satisfaction into your KPI system. You can also attribute a monetary value to these seemingly non-monetary KPIs and link them in this way. For example, employee satisfaction has an impact on motivation and therefore ultimately on the company’s financial results.

Balanced Score Card (BSC)

In addition to the value driver tree, the balanced score card (BSC) is a widely used key performance indicator system. In the BSC methodology, targets are defined for the four areas of finance, customer, process and development based on the corporate vision and strategy. Key figures must be determined for each target in order to measure target achievement. In addition, targets must be set and measures defined to achieve the objectives. A good guideline for the number of targets per area is four, which means you end up with 16 key figures that you regularly collect and derive measures from.

It is a good idea to create the BSC as a team, as this allows input to be gathered from everyone involved. You will always have several BSCs in your company that overlap. Within logistics, for example, there could be three different BSCs for procurement, warehouse and shipping. These three BCCs then result in the overarching logistics score card. In this way, you have also defined the targets and KPIs for each department at the same time.

The great advantage of the balanced score card is that you have key figures from different areas. Another advantage, if you stick to the rule of four targets per area, is the number of key figures. With 16 key figures, you have exactly the right number to control and monitor a department or division. The disadvantage of this method is the resource-intensive creation of the BSC. In addition, the BSC does not necessarily ensure that the key figures are linked to the overall company objective. With the value driver tree, this is necessarily mathematically and logically given.

From the key figure system to key figure management

In the previous steps, we have shown you how to identify the right KPIs and set up a KPI system. The only thing missing now is the final step: establishing a key performance indicator management system. First of all, you should think about how to record and visualize your key figures. There are a large number of BI tools on the market today that can process a large amount of data and visualize it in an appealing way. It is important to focus on a tool that is used by all departments in your company. Otherwise you will have additional expenses for licenses, training, implementation, maintenance, etc.

Reporting structure

You also need to determine the frequency with which key figures are collected and what the reporting structure looks like. Reporting for the management or the board of directors may take place once a quarter with a few KPIs, while a warehouse manager wants to know how the warehouse KPIs are developing on a daily basis. When reporting to people who do not work in the area in which the KPIs are collected on a daily basis, it is important to comment on the figures. Some KPIs will be reported temporarily to track a specific measure, others permanently.

Clear responsibilities

You should also set regular meetings in which you discuss CIP measures based on suitable process KPIs, for example, and derive measures. In addition to the right structure, a functioning KPI management system requires clear responsibilities. It must be defined who is responsible for collecting and reporting the KPIs. It is important to note that the person who sets targets and defines key figures should not be the same person who collects and reports them. Otherwise, there is a risk that key figures will be manipulated in order to ensure that personal targets are achieved.

Summary

Before you introduce KPI management, you should think about why and how. What is the purpose of your KPIs and which KPI system do you want to work with? This is the only way to end up with a meaningful KPI management system that will really get you ahead. In our projects, we often notice that companies collect a lot of unrelated key figures that are meaningless. Concentrate on a few balanced key figures for your production and logistics!