Key performance indicators - AbsoluteAstronomy.com

A performance indicator or key performance indicator (KPI) is an industry jargon for a type of performance measurement

Performance Measurement

Performance measurement with a process is the complement to process execution. Based on measured performance, the feedback control loop may be closed. The metrics to assess performance is set according to a determined econometric model...

.. KPIs are commonly used by an organization to evaluate its success or the success of a particular activity in which it is engaged. Sometimes success is defined in terms of making progress toward strategic goals, but often, success is simply the repeated achievement of some level of operational goal (for example, zero defects, 10/10 customer satisfaction, etc.). Accordingly, choosing the right KPIs is reliant upon having a good understanding of what is important to the organization. 'What is important' often depends on the department measuring the performance - the KPIs useful to finance will be quite different to the KPIs assigned to sales, for example. Because of the need to develop a good understanding of what is important, performance indicator selection is often closely associated with the use of various techniques to assess the present state of the business, and its key activities. These assessments often lead to the identification of potential improvements; and as a consequence, performance indicators are routinely associated with 'performance improvement' initiatives. A very common method for choosing KPIs is to apply a management framework such as the balanced scorecard

Balanced scorecard

The Balanced Scorecard is a strategic performance management tool - a semi-standard structured report, supported by proven design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the...

Categorization of indicators

Key performance indicators define a set of values used to measure against. These raw sets of values, which are fed to systems in charge of summarizing the information, are called indicators. Indicators identifiable as possible candidates for KPIs can be summarized into the following sub-categories:

Quantitative indicators which can be presented as a number.
Practical indicators that interface with existing company processes.
Directional indicators specifying whether an organization is getting better or not.
Actionable indicators are sufficiently in an organization's control to effect change.
Financial indicators used in performance measurement
Performance Measurement
Performance measurement with a process is the complement to process execution. Based on measured performance, the feedback control loop may be closed. The metrics to assess performance is set according to a determined econometric model...

and when looking at an operating index.

Key performance indicators, in practical terms and for strategic development, are objectives to be targeted that will add the most value to the business. These are also referred to as key success indicators.

Some important aspects

Key performance indicators (KPIs) are ways to periodically assess the performances of organizations, business units, and their division, departments and employees. Accordingly, KPIs are most commonly defined in a way that is understandable, meaningful, and measurable. They are rarely defined in such a way such that their fulfillment would be hampered by factors seen as non-controllable by the organizations or individuals responsible. Such KPIs are usually ignored by organizations.

In order to be evaluated, KPIs are linked to target values, so that the value of the measure can be assessed as meeting expectations or not.

Identifying indicators of organization

Performance indicators differ from business drivers and aims (or goals). A school might consider the failure rate of its students as a key performance indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from returning customers as a potential KPI.

The key stages in identifying KPIs are:

Having a pre-defined business process (BP).
Having requirements for the BPs.
Having a quantitative/qualitative measurement of the results and comparison with set goals.
Investigating variances and tweaking processes or resources to achieve short-term goals.

A KPI can follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period.

Marketing

Some examples are:

New customer
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...

s acquired
Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections, and pending numbers.
Status of existing customers
Customer attrition
Customer attrition
Customer attrition, also known as customer churn, customer turnover, or customer defection, is a business term used to describe loss of clients or customers....
Turnover
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

(i.e., revenue) generated by segments of the customer population.
Outstanding balances held by segments of customers and terms of payment.
Collection of bad debts within customer relationships.
Profitability of customers by demographic segments and segmentation of customers by profitability.

Many of these customer KPIs are developed and managed with customer relationship management

Customer relationship management

Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...

software.

Faster availability of data is a competitive issue for most organizations. For example, businesses which have higher operational/credit risk (involving for example credit cards or wealth management) may want weekly or even daily availability of KPI analysis, facilitated by appropriate IT systems and tools.

Manufacturing

Overall equipment effectiveness

Overall equipment effectiveness is a hierarchy of metrics which evaluates and indicates how effectively a manufacturing operation is utilized. The results are stated in a generic form which allows comparison between manufacturing units in differing industries...

, is a set of broadly accepted non-financial metrics which reflect manufacturing success.

Cycle Time – Cycle time is the total time from the beginning to the end of your process, as defined by you and your customer. Cycle time includes process time, during which a unit is acted upon to bring it closer to an output, and delay time, during which a unit of work is spent waiting to take the next action.
Cycle Time Ratio –
Utilization
Utilization
Utilization is a statistical concept as well as a primary business measure for the rental industry.-Queueing theory:In queueing theory, utilization is the proportion of the system's resources which is used by the traffic which arrives at it. It should be strictly less than one for the system to...
Rejection rate
Rejection rate
In manufacturing, the rejection rate is the percentage of processed parts that are rejected, for a fixed period of time or lot of pieces.RR = x 100...

IT

Availability
Availability
In telecommunications and reliability theory, the term availability has the following meanings:* The degree to which a system, subsystem, or equipment is in a specified operable and committable state at the start of a mission, when the mission is called for at an unknown, i.e., a random, time...
Mean time between failure
Mean time between failure
Mean time between failures is the predicted elapsed time between inherent failures of a system during operation. MTBF can be calculated as the arithmetic mean time between failures of a system. The MTBF is typically part of a model that assumes the failed system is immediately repaired , as a...
Mean time to repair
Mean time to repair
Mean time to repair is a basic measure of the maintainability of repairable items. It represents the average time required to repair a failed component or device. Expressed mathematically, it is the total corrective maintenance time divided by the total number of corrective maintenance actions...
Unplanned availability

Supply Chain Management

Businesses can utilize KPIs to establish and monitor progress toward a variety of goals, including lean manufacturing objectives, minority business enterprise

Minority Business Enterprise

A Minority Business Enterprise is an American term which is defined as a business which is at least 51% owned, operated and controlled on a daily basis by one or more American citizens of the following ethnic minority classifications:...

and diversity spending, environmental "green" initiatives, cost avoidance programs and low-cost country sourcing

Low-cost country sourcing

Low-cost country sourcing is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called global sourcing. The process of low cost sourcing...

targets.

Any business, regardless of size, can better manage supplier performance with the help of KPIs robust capabilities, which include:

Automated entry and approval functions
On-demand, real-time scorecard measures
Single data repository to eliminate inefficiencies and maintain consistency
Advanced workflow approval process to ensure consistent procedures
Flexible data-input modes and real-time graphical performance displays
Customized cost savings documentation
Simplified setup procedures to eliminate dependence upon IT resources.

Main SCM KPIs will detail the following processes:

Sales forecasts
Inventory
Procurement and suppliers
Warehousing
Transportation
Reverse logistics

Suppliers can implement KPIs to gain an advantage over the competition. Suppliers have instant access to a user-friendly portal for submitting standardized cost savings templates. Suppliers and their customers exchange vital supply chain performance data while gaining visibility to the exact status of cost improvement projects and cost savings documentation.

Government

The provincial government of Ontario, Canada has been using KPI since 1998 to measure the performance of higher education institutions in the province. All post secondary schools collect and report performance data in five areas – graduate satisfaction, student satisfaction, employer satisfaction, employment rate, and graduation rate.

Further performance indicators

Duration of a stockout
Stockout
A stockout, or out-of-stock event is an event that causes inventory to be exhausted. Reorder points are often specified in such a way as to reduce the likelihood of stockouts during replenishment, due to the vendor's lead time, which cause interruptions to sales or deliveries.Stockouts are...

situation
Customer order waiting time

Problems

In practice, overseeing key performance indicators can prove expensive or difficult for organizations. Indicators such as staff morale may be impossible to quantify.

Another serious issue in practice is that once a measure is created, it becomes difficult to adjust to changing needs as historical comparisons will be lost. Conversely, measures are often of dubious relevance, because history does exist.

Furthermore, since businesses with similar backgrounds are often used as a benchmark for such measures, measures based only on in-house practices make it difficult for an organization to compare with these outside benchmarks.

Measures are also used as a rough guide rather than a precise benchmark.