Are Your KPIs Helping You to Perform? When it comes to Key Performance Indicators (KPIs), many terms are used to describe similar things. A recent ARC survey captured the types of KPIs currently used at four levels of manufacturing management: Operator, Supervisor, Plant/Mill Manager, or C-Level. The survey found that the majority of Operator-level KPIs are translations of the higher level business performance objectives to which upper-level management is held. While these KPIs are not always directly related to financial performance, they have a definite effect on the financial outcome. If KPI targets are not directly tied to financial performance, how can plant personnel be sure their decisions are increasing corporate performance factors such as profit? Conversely, many commonly used KPIs appear to be driving counterproductive corporate behavior. The majority of Operating level KPIs reported in ARC’s recent RPM survey reflect translations of higher level business performance objectives. If KPI targets are not directly tied to financial performance, how can plant personnel be sure their decisions are fueling corporate performance metrics such as profitability?

1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN
ARC INSIGHTS
By Dick Hill
The majority of Operating level KPIs
reported in ARC’s recent RPM survey
reflect translations of higher level
business performance objectives.
If KPI targets are not directly tied to
financial performance, how can plant
personnel be sure their decisions are
fueling corporate performance metrics
such as profitability?
INSIGHT# 2003-22ME
MAY 28, 2003
Are Your KPIs Helping You to Perform?
Keywords
KPI, RPM, Performance Metrics, Performance Visualization, OpX
Summary
When it comes to Key Performance Indicators (KPIs), many terms are used
to describe similar things. A recent ARC survey captured the types of KPIs
currently used at four levels of manufacturing management: Operator, Su-
pervisor, Plant/Mill Manager, or C-Level. The survey found that the
majority of Operator-level KPIs are translations of the higher level business
performance objectives to which upper-level man-
agement is held. While these KPIs are not always
directly related to financial performance, they have
a definite effect on the financial outcome. If KPI
targets are not directly tied to financial perform-
ance, how can plant personnel be sure their
decisions are increasing corporate performance fac-
tors such as profit? Conversely, many commonly
used KPIs appear to be driving counterproductive
corporate behavior.
Analysis
Many of our clients, in their quest to achieve Operational Excellence (OpX),
have asked the question: “Which KPIs should we use to manage
performance - particularly in real-time (RPM)?” ARC perceives an in-
creased awareness that Performance Targets are extremely important to
successful achievement of enterprise objectives. If KPIs are based on non-
real time information, or are themselves not dynamic enough to reflect
changes in objectives, then the wrong outcome is very likely to occur.
This ARC survey focused on what respondents considered Key Perform-
ance Indicators (KPIs) for each class of manufacturing personnel (i.e.,
Operator, Production Supervisor, Plant/Mill Manager, and C-Level). The
“Xs” in the results tables that follow indicate the most frequently cited KPIs
employed and their frequency of use at each of the four management levels.

2. ARC Insights, Page 2
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
Production and Inventory-based KPIs
Many terms are used to express production performance. Words such as
Units, Batches, Jobs or even just the term Production are presented as ratios
to other factors such as time (e.g. Units per Hour, Day, Shift, etc.). This is
sometimes inverted to show Time per Unit.
Inventory Turns is a KPI closely related to production. Material Shortages
and Inventory Errors are other KPIs used to manage Inventory. Product
Availability looks at inventory from the customer satisfaction side. Supply
or Supplier Performance was another KPI cited that relates to production
and inventory. A best practice KPI is Finished Goods Inventory Turns.
KPI “C” Level Plant Mgr. Supervisor Operator
Units per Time XX XXX XXX XXX
Units per Employee X XX XX XX
Production vs. Target X XXX XX XXX
Schedule Attainment XXX X X XX
1st
Pass Throughput X XXX X XXX
Inventory Turns XXX XXX XX XXX
Shortages X XX XX XXX
Errors X X XXX XX
Supplier Performance XX X XX XX
Over-emphasizing Production KPIs Can Foster Unwanted Behavior if the
Outcome Is Stuffing Inventory to Meet the KPI
Asset-based KPIs
Asset Utilization and Asset Availability are two key indicators that show
how well assets are being managed. Other ways of expressing these in-
clude Cycle Time, Down Time, Up Time, Idle Time, and OEE (overall
equipment effectiveness). Variations of the theme include Flexibility of As-
sets, Reliability, and Maintenance. Conspicuous by their absence in the
survey results are "optimum potential"-type KPIs. The measures cited by
the summary group tended to highlight asset performance against histori-
cal performance but not the true potential of their assets.
Quality-based KPIs
Quality, expressed both positively as Percent First Pass Quality or nega-
tively as Percent Scrap/Waste/Rejects, is another frequently used KPI.

3. ARC Insights, Page 3
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
Discrete manufacturing processes tend to use terms such as Fault Rate or
PPM Defects as Quality Performance Indicators.
Revenue, Cost, and Profit-based KPIs
The higher the KPIs are set in the organization, the more they tend to be
linked with financial performance. KPIs such as Gross Margin are often
described as C-Level KPIs. Cash Contribution per Unit Produced is an-
other revenue indicator. Other financial performance KPIs include Market
Share and Market Growth. Familiar business terms such as EBIT, EBITDA,
ROCE, and ROA are also used.
KPI “C” Level Plant Mgr. Supervisor Operator
Gross Profit Margin XXX XXX
Profit per Unit XXX XX
Profit as % of Sales XXX
ROA, ROCE, EBIT XXX XX
Productivity ($/Emp) XX XX XX XX
Revenue XXX XXX X
Market Growth XXX
Market Share XXX
Post Enron: Revenue-based KPIs Can Lead to Bad Behavior at the
Executive Ranks!
Cost Control, represented as Cost of Goods Sold, Cost per Unit Produced,
or simply a total Cost term, is very important in manufacturing today.
Energy per unit produced, Labor per Unit, Overhead and Expenses are
other cost-related KPIs. Cost of Quality, or Poor Quality, are ways of cap-
turing the relationship between quality and cost.
Customer Service and Satisfaction KPIs
Delivery and Order Fulfillment Performance bracket the Customer Service
spectrum of KPIs. Backlog, Shipments, and Service Levels also are related.
The On-Time Delivery KPI by itself can be misleading. If a delivery arrives
too early, in wrong quantities, or outside the quality specifications, the cus-
tomer will not be satisfied. A best practice KPI is the Perfect Order Metric
that combines several of these factors.

4. ARC Insights, Page 4
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
Health, Safety, and Environment (HSE)-based KPIs
Health, Safety and Environment are other performance issues that need to
be managed. In some industries a Safety measure is reported regularly.
Environmental issues are tracked regularly with a number of indicators that
are specific to the manufacturer (e.g. NOX, CO/CO2, H2S, etc.) Of course,
government regulations such as the US Government CFRs (Code of Federal
Regulations) are closely monitored and reported both within the manufac-
turer and often to the government overseer (EPA, FDA, etc.). KPIs in this
category are often simply called Legal Compliance.
KPI “C” Level Plant Mgr. Supervisor Operator
Safety XX XXX XX XX
Housekeeping X
Days w/ no lost time XX XXX XX X
Emissions XX XXX XX X
Legal Compliance XXX X
CFR (FDA, EPA, etc.) XX XXX XX
OSHA Compliance XX XXX XX
A Single Day’s Outage Can Eliminate a Year’s Profit in Some Industries
Recommendations
• Some or all of these categories might be valid ways to measure
performance for your particular operation. Managing them requires
that the measurement have the same time constant as the process. The
fact that so many of these commonly used KPIs do not relate directly to
real-time financial indicators makes them difficult to control.
• Look for suppliers that can help you link your production, quality, as-
set, and customer satisfaction performance indicators to costs in real-
time. This will allow you to make decisions that move you toward Op-
erational Excellence (OpX).
Please help us improve our deliverables to you – take our survey linked to this
transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further
information, contact your account manager or the authors at crhill@arcweb.com.
Recommended circulation: All EAS & MAS clients. ARC Insights are published
and copyrighted by ARC Advisory Group. The information is proprietary to ARC
and no part of it may be reproduced without prior permission from ARC.