Measure your way to success: every business, large or small, needs to develop key performance indicators.

• Author: Britten, Eric
• Position: Business Basics - Column

Not long ago, I was reading about a manufacturer that had completed a successful lean initiative. They had boosted production by nearly 20 percent. The only problem was their product demand didn't match the production increase and they soon found themselves with excess inventory on hand.

A closer look revealed they focused on monitoring production because increased production was a strategic goal for the organization. They were successful with their initiative. Unfortunately, they didn't monitor demand as closely. It was actually slowing while their production was increasing. It's a classic example of the saying "you get what you measure," so be careful of what your primary monitoring metrics are. In this case, the organization should have been monitoring both supply and demand, or better yet, a single metric indicating the balance or ratio between the two.

The good news for this organization is they were practiced in working with metrics. They realized their problem and corrected the imbalance. The issue for most organizations, unfortunately, is not this one. The issue for many organizations is do they measure key performance indicators at all? Do they know what key performance indicators are? Or do they just look at every number on the balance sheet periodically?

KPIs TO THE RESCUE

It's not just manufacturers or large organizations that need to monitor key performance indicators (KPIs). Every business, large or small, needs to develop key performance indicators. Let's take a quick look at what KPIs are and how to use them.

What is a KPI? A key performance indicator is a metric which is used to measure the performance of a critical or high-leverage activity or process. Depending upon the size of the organization, KPIs may be layered. In a large organization, there may be organizational KPIs at the highest level supported by departmental or functional KPIs at other levels. Small organizations may be able to establish significantly fewer KPIs to monitor their performance.

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The problem with KPIs. Many organizations think everything they measure is a KPI when, in fact, many of their metrics are only metrics, statistics or numbers. Defining and developing KPIs is important for several reasons. First, defining your organization's KPIs helps you understand how strategy and performance are linked in your organization. Secondly, defining KPIs helps you understand what the most...