Thursday, February 25, 2016

5 Elements of KPI Lifecycle

By John Horst, MESA member, National Institute of Standards and Technology (NIST)
and Barry Ezell,Virginia Modeling, Analysis and Simulation Center (VMASC) 

Humans go through distinct phases of life: from dependence to learning to producing to sharing and back to dependence. We call this a lifecycle. The phases of life keep repeating as new persons are born and the elderly complete their lives. 

Key Performance Indicators (KPIs) also have a lifecycle with a similarly cyclic pattern: from definition to collection to set composition to implementation to assessment and back to definition

Manufacturers who use KPIs naturally implement this lifecycle, but there is some real value to clearly and carefully articulate the elements of the lifecycle. 

An accurate and detailed model of the KPI Lifecycle:
  • Enables efficient and effective performance management 
  • Enables a cottage industry of performance methods and software tools
  • Provides a basis for open standards on KPI use
Assuming the target proceses have been identified, here is an outline of five elements to consider to successfully use KPIs in your manufacturing process throughout their entire lifecycle. 


KPI Lifecycle Element 1: Definition

The first element of the KPI lifecycle is KPI Definition. Since there are probably tens of thousands of different KPIs used by manufacturers, one might think that all the KPIs that need to be defined have been defined. To be sure, KPIs like Quality Ratio, Overall Equipment Effectiveness Index, Scrap Ratio, and Rework Ratio are not going to go away any time soon, but KPIs may sometimes need to be redefined as a more focused or aggregate KPI. 

Furthermore, as corporate objectives change over time, KPIs change because corporate objectives drive the definition and use of KPIs. Remember how the sustainability objective quickly became an increasingly important metric? But, it’s important to follow good KPI definition practices, otherwise interoperability will suffer throughout your supply chain.. 

KPI Lifecycle Element 2: Collection

The second element of the lifecycle is KPI Collection. Collection consists largely of excluding obvious outlier KPIs from consideration like irrelevelnt KPIs. Still, one can easily end up with far too many candidate KPIs. 

Keep in mind that humans typically monitor KPIs, but humans can only comprehend and process five to nine distinct items simultaneously (the “seven plus or minus two” rule from psychologist George Miller). Therefore, we have a need for KPI set composition, our next step in the lifecycle.

KPI Lifecycle Element 3: Set Composition

The third element of the lifecycle is KPI Set Composition, which is substantially more complicated than KPI collection. The following guidelines should be followed: 
  • Select appropriate KPI performance criteria (ISO 22400 Part 1)
  • Follow the “seven plus or minus two” rule for the number of KPIs selected
  • Find the sweet spot between detailed versus aggregate KPIs 
  • Ensure that the chosen KPIs satisfy all the stated critical objectives of the process
A structured criteria-based method satisfying these guidelines has been generated at NIST. It enables a group of stakeholders to form an effective subset of KPIs from a larger set of candidate KPIs, whether the KPIs are currently in use or not. It also employs value-based decision making for accurate stakeholder elicitation. 

The criteria chosen constitute a comprehensive, unambiguous, and independent set. Along with the criteria, user-defined critical objectives are used to guide KPI set composition. The particular decision-making approach was selected to keep the number of process stakeholder measurements manageable, while allowing the maximum number of relevant and independent criteria. The method has been tested at a chemical process plant on the environment, health, and safety process. One of the benefits of KPI set composition is that it may reveal that new KPIs need to be generated. 

KPI Lifecycle Element 4: Implementation

Implementation starts with a selected set of KPIs that will keep the process operating optimally in the face of variation. These chosen KPIs can now be properly implemented within the target process. In this 4th element of the lifecycle, the stakeholders need to:
  • Ensure that the KPIs implemented are accurate, actionable, aligned, documented, independent, inexpensive, predictive, quantifiable, relevant, standardized, timely, traceable, understandable, verified, and have buy-in from stakeholders
  • Ensure that candidate KPI sets satisfy critical objectives and that set size is kept small
  • Define and implement stakeholder training
  • Define and conduct process performance assessments, examining KPI values and trends periodically
  • Define procedures for handling changing circumstances such as customer requirements, machine health, critical objectives, KPI definitions, new stakeholders, etc.
  • Define procedures for utilizing knowledge about KPI-to-KPI relationships and dependencies, and for describing action plans for improving process control from KPI values
KPI Lifecycle Element 5: Assessment

The final activity in the lifecycle is KPI Assessment. This is when stakeholders take time to examine how relevant the KPIs are performing (different than process performance). It is also the time to examine how well have the KPIs been implemented. KPI Assessment is typically done over longer time spans compared to assessment of KPI values. The following are the key elements in the assessment: 
  • Determine how well the KPIs align with current performance objectives for the process 
  • Determine how well the KPIs perform with respect to the criteria
Take these results and generate a prioritized list of action items by {KPI, criterion} pairs formed by measuring the importance of the KPI to the process. And then list how well the KPI performs with respect to the criteria. Plot the {KPI, criterion} performance with the {KPI, critical objective} performance and assess ways to improve the performance of the KPIs. 

For a more detailed example of KPI Assessment Method click here.

For more information on KPIs, visit the MESA Resource Library.





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