Fall 2006 issue of Horizons

Business Efficiency

When you are satisfied that each of the KPIs will significant- ly impact your critical success factors, the implementation process begins. Targets are developed for each KPI. The tar- gets should reflect your operating budget or stretch goals above established budgets. In every case, targets should be reasonable both in fact and appearance. The next step is to communicate the KPIs to appropriate par- ties both within and outside of your company. In addition to staff and line employees (including the plant floor), suppliers and customers should be informed of your KPIs when their actions are critical to the successful achievement of your tar- gets. For example, if your KPI is Rejected Raw Materials, your supplier should know the criteria for rejection and how the rejection rate is measured. If your KPI is Orders Shipped Complete and On Time, your customer could help you iden- tify and correct problems in your order and shipping process. As is the case in most business endeavors, the ability to obtain the buy-in and support of all individuals and groups that can affect your success is critical. The final step in the implementation process is to monitor your KPIs regularly and compare them to established tar- gets. A system should be implemented that regularly tracks and reports the information to appropriate individuals and departments. This system could take a number of forms but usually consists of graphs or spreadsheets - visual represen- tations of operating results. If desired results are not being achieved, you should deter- mine if the KPIs address your company's critical success factors. Potential actions might include revising the target, making operational corrections or changing your company's strategy.

Even if your company's results are meeting your expecta- tions, periodic review (e.g. annually) of your KPIs is critical to ensure they continue to have the greatest impact on your critical success factors.

Key Performance Indicators in the Inventory Business Cycle

The Inventory Business Cycle encompasses the entire length of the supply chain, beginning with your suppliers and moving internally to purchasing, the plant floor, accounting, sales and distribution. There are many effective measures in each of these functions, but remember, the best KPIs are those that have the greatest impact on your critical success factors. Several common indicators in the inventory business cycle that have the potential to significantly impact your bottom line are discussed below: • Production Interruption/Downtime measures machinery efficiency and utilization while reducing waste and increasing product quality. An important by-product is improved cus- tomer satisfaction. When measuring production interruption and downtime, it is critical that targets dovetail with your financial expectations - you do not want to achieve a KPI that, if met, does not result in the expected cost per hour embedded in your manufacturing budget. The most common pitfall when measuring this KPI is not identifying the root causes of improvement. In essence, a band-aid is often applied to achieve decreased machinery downtime only to have the same problems continually resurfacing. If a Production Interruption/Downtime KPI is successfully meas- ured and managed, you will reduce on-hand inventory and maintenance costs and improve product quality and cus- tomer satisfaction.

20 • summer 2006 issue

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