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Quick tips for understanding and implementing Key Performance Indicators immediately!

Daryl Mather, Author of The Maintenance Scorecard

There is an interesting situation developing in the modern asset management environment. First, asset management is becoming more and more important as a means of increasing profitability, defending a company against the possibility of legal actions, and of course, for increasing shareholder returns on the investment in assets. We all know this by now, (unless you live in a cave) in fact every second article I read focuses on this.

However, the second element that makes this all the more interesting is the fact that traditional approaches of rationalization, (E.g. cost reduction driven through labour levels or inventory reduction), is starting to reach its physical limits. The easy benefits were taken out during the late eighties and through the nineties; today they have mostly been removed. 

So where are we today? Companies are striving to find new ways of increasing the economic yield from their assets, and there are a range of new initiatives and techniques for doing so. Advanced RCM analyses, Multi-criteria decision-making, deterioration modelling, Whole-of-Life asset management and so on.

However, one of the methods often used is that of performance management systems. The Maintenance Scorecard (MSC) is a new method for creating measurement programs. Rather than building a measurement program based on what maintenance does, the MSC looks at what maintenance can contribute. Instead of building a set of metrics around what is currently in place, the MSC looks at what we really need to be doing, then places targets and measures around these initiatives.

Regardless of how you go about it, building a measurement program will often bring a company into some new areas regarding asset management and performance measurement. If these areas are not well understood, then sometimes it can become quite a daunting task.

This article is going to look at one of the areas within performance management. That of creating useful KPI’s or key performance indicators.

What are KPI’s anyway?

Key performance indicators are often confused with normal metrics. When managers talk about metrics in general they generally refer to them as KPI’s. This is not really true and can be a bit misleading.

At the base of what we are talking about here is the measurement of performance, in one form or other. So a KPI is the key measure that will give us an overview of the performance of an asset, system, department, site or company, within a particular performance area.

This is a vital point and one that has helped me a lot in the past. Performance indicators do what it says on the tin, they indicate performance, but Key performance indicators give a picture of the overall performance within a specific area.

Rather than get caught up in semantics on the issue, lets look at an example to help illustrate the point.

A particular company, we will say it’s a manufacturing company of some sort, has uncovered the need to increase cost effectiveness of their asset management functions. Reviews against previous years has shown that the unit cost for producing each item has risen steadily and is now having an impact on profitability.

Further investigation shows that direct costs have risen slightly, but the more telling area of performance was that the reliability of the assets, which for the sake of this discussion will be stated as the failure rate Mean Time Between Failures, has been steadily going down. This, along with rising supplier costs, rising worker costs, and rising levels of inventory, all seem to have been contributing to the higher unit costs.

The last issue, and one that ultimately turned out to be a very important one, was that of data integrity. When things were bad, nobody knew it! And nobody knew about it because the data they were all relying on to tell them was incorrect. This was not the reason that unit costs got out of control, but it was the reason why nobody realised!

So, after some considerable reviews and reflection, the company puts in place the following measurement regime and initiatives, within the strategic theme of cost effectiveness. (Warning: These are real world examples of indicators, not textbook stuff.)

As we can see in the example, the Key Performance Indicator is unit costs of maintenance. That is because if we want to find out how we are going with respect to achieving our goals in the area of cost effectiveness, this is the indicator we look at. Supporting this indicator is a range of additional metrics in the areas of productivity, learning and quality.

So, if we notice a problem in cost effectiveness, we can easily drill down to see what else is going on. In a real-world MSC strategic and functional level indicators would support these further.  Allowing you to drill further down into the real causes of the problems.  Visually, the MSC might represent the diagram in figure 1.

As a side note there are another few items to drop out of this model. First, you may have noticed that the target for service level of the inventory was revised downwards. This goes against much of the common statements made on the matter. If we are running a level of inventory at 95% service level, 95 times out of 100 people get what they want from the store, and we either have vendor held stock arrangements in place to supply before we have unacceptable consequences, or an item has a lead time less than the time taken before we have unacceptable consequences.

Then why would we keep the item in the store?

Second, of course, if you don’t already have the data and information sources to produce this information. Then you need to look at what it is going to cost you to get them. Mostly it will mean a change to processes, but sometimes it could mean a lot more than this.

Summary

If your company can get a handle on what a KPI really is, and how it can be used, then you can place yourself ahead of the competition in terms of putting real mechanisms in place for performance management. Correct use of KPI’s will enable you to focus on a few rather than a lot of indicators, put in place a means of troubleshooting poor performance rapidly, and put in place something that helps all those working for the company to focus on what is required.

Added value

If this article was of interest and you are interested in knowing a little more about indicators and measurement programs,please send me an email to darylm@strategic-advantages.com, hopefully with some feedback on this article, for a short document titled “7 Leading Indicators for Breakthrough Performance”.

Daryl Mather is an international consultant, author and speaker on reliability and asset management. He currently works with selected companies in the United Kingdom.