As we head towards a new year, I have been having a number of conversations with work colleagues and ERP consultants on the subject of KPIs (Key Performance Indicators) and their effectiveness. Out of these discussions it can be concluded that there are good and there are poor KPIs.
Wearing my ERP hat a good example of this is looking at the role of a Purchase Order clerk. A logical metric to ensure they are performing and doing a full days’ work could be to measure the number of purchase orders and purchase order lines they capture in a day. In most environments this would be a poor KPI, as that could lead to more stock being ordered than you need at any one time, resulting in tied-up capital. A good KPI for a purchasing clerk could be the price they are paying for goods, as it will indicate if they have negotiated a good deal on behalf of the company.
That example illustrates why I believe it is more important to use KPMs (Key Process Metrics – also termed Process Measurables), rather than KPIs. And if we take a look at the sales process and what might affect a high service level to your customer in a Make-to-Stock or purely distribution environment we would need to note the following:-
On entering a sales order for 100 of an item you realise you only have 80 in stock, giving you an 80% fulfilment. This would indicate that either there is a problem in forecasting, purchasing or in manufacturing, as you do not have the required stock available when needed.
The next step is the picking process, the picker sets out to pick the 80 items in the designated areas only to find there are only 60 item in stock, meaning he can now only pick 75% of the “available” stock. This would indicate that there is possibly a problem in warehouse management and the inventory manager needs to be alerted.
After picking and packing the 60 items they are shipped off to the customer. When they arrive 10 are damaged or sub-standard and the customer sends them back. This could either be as a result of poor quality control and inspection processes, bad packaging, or an unreliable logistics partner.
The end result is a 50% service level, which I am sure no company will be proud of.
So the question is “How can one define and monitor these KPMs?”
A good starting point would be to model your business processes. In the process of modelling you should identify key business performance measures and link these to each of the processes that would have an impact on them. Then a dashboard should be developed to display the KPM and provide links back to the process.
In doing this your metrics take on a far deeper meaning, are clearly visible and can show areas of improvement for the company.
