So what is this KPI and why should it be used in Dashboards?
Key Performance Indicators (KPI).
A KPI is simply a metric that is tied to a target. Most often, a KPI represents how far a metric is above or below a pre-determined target. KPI’s usually are shown as a ratio of actual to target and are designed to instantly let a business user know if they are on or off their plan without the end user having to consciously focus on the metrics being represented. For instance, we might decide that in order to hit our quarterly sales target we need to be selling $10,000 worth of widgets per week. The metric would be widget sales per week; the target would be $10,000.
KPI help change the way people do their jobs, approach their day, and deal with
daily roadblocks. KPI help people focus on the BIG PICTURE. KPI help people distinguish the
important from the trivial, the “must be done” from the “could be done” and allow employees to set
their own priorities. When the boss passes and sees performance charts, questions follow.
People begin to learn the importance of those measures.
When people focus on activities and
apply what they learn from the KPI, good things happen.
KPI are not a new concept. Henry Ford had a few defined before he sold the first car for Ford
Motor Company on July 15, 1903. He used them to help streamline the production process. He
continued to establish new KPI while he managed the company. KPI helped him to convert iron
ore into an automobile in only 81 hours in 1926.
KPI helped Shigeo Shingo focus efforts to speed the change over process on industrial presses.
Because he kept score on those die exchange efforts, today Toyota has been able to exchange
dies in less than 3 minutes. That may not seem impressive except that his original benchmarks
exceeded 4 hours.
Why are any of these activities important? Well, Henry Ford was able to drastically reduce the
price of automobiles by 50%. At the same time, wages for his workers doubled. Shigeo Shingo’s
efforts started a revolution and revitalized manufacturing companies to focus their efforts to
reducing inventories. His inventory reduction efforts became known as Just-in-Time. (He did
credit Henry Ford with the outline of the process improvement activities though!)
- KPI differ by industry; and KPI are best employed at the lowest level, for an individual.
- Inventory Turns is a very important KPI for Manufacturing and Distribution Companies.
- Inventory Accuracy is an important KPI for companies that carry inventory.
- For Telemarketers, the number of phones calls made is an important KPI.
- For Retail, the average dollars per sale is a good KPI.
- For Accounts Payable departments, the number of AP Days outstanding is important
- For Accounts Receivable departments, the number of AR Days outstanding is important.
- For Managers, employee turnover is an important KPI.
The goal of KPI lies in focusing the business scorecard activities of Revenue, Costs, and Cash.
When the company focuses Revenue, Costs and Cash properly, the difference appears on the
bottom line in the form of PROFITS!
Benefits and Effects of using KPIs
Here is an example. When Inventory Accuracy falls, everyone knows that corrective measures
are required. Everyone becomes aware that “On time” and “Complete” Customer Shipments are
in jeopardy. Everyone understands that because the inventory records may not be correct in the
computer, Customer Service may not be able to trust the computer to produce a valid Promise
Date. Everyone knows what happens when Promise Dates to customers are missed. The simple
act of posting the results of Inventory accuracy has a cascading affect on the entire business.
Inventory accuracy is only one example of the company wide impact of KPI.