KPI: Key Performance

Indicators
MEASURING SYSTEM PERFORMANCE

Georgia Tech, 2014

ISyE 3104 Fall 2014

Content
Context: Enterprise financial performance
Income statement and EBITDA
Balance sheet and RONA

Operational KPIs

Resource focused
Flow focused
System focused

Georgia Tech, 2014

ISyE 3104 Fall 2014

Brief financial background

Income statement and EBITDA
Balance sheet and RONA

Ultimately, the success of the enterprise is seen in its financial

reports, and sustained success requires enterprise leadership to
pay attention to the financials. The goal of this short module is not
to become a financial expert, but to understand how operational
results contribute to financial results.

Georgia Tech, 2014

ISyE 3104 Fall 2014

Income Statement
Net Sales

Income = Revenue Expense

Net
Income
Pre-tax
Net
Income
Tax

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Operating
Income

Gross
Income

Other
Income

Operating
Expense
(SG&A)

Extra
Gains or
Losses

Depreciation
Expense

Interest
Expense

ISyE 3104 Fall 2014

Cost of
Sales

Summarizes financial transactions over a

period of timea month, a quarter, or a
year. Close the books to create the
income statement.
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EBITDA
EBITDA = Earnings before interest, taxes, depreciation, and amortization
Thought by many to be a more informative assessment of the enterprises
performance in terms of generating revenue; interest is a financing outcome,
not an operating outcome; taxes are beyond the control of the enterprise,
depreciation is not a cash flow, nor is amortization.

Georgia Tech, 2014

ISyE 3104 Fall 2014

Computing EBITDA

NB: this example doesnt include

amortization, but it would be
treated like an interest expense

EBITDA = Net Income Before Taxes Interest - Depreciation

Net Sales

Net
Income
Pre-tax
Net
Income
Tax

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Operating
Income

Gross
Income

Other
Income

Operating
Expense
(SG&A)

Extr.
Gains or
Losses

Depreciation
Expense

Interest
Expense

ISyE 3104 Fall 2014

Cost of
Sales

Facility
Equipment

Quality
Delivery

Direct costs:
Labor
Material & parts
Indirect Costs
Allocated
overhead
Utilities
Supervision
etc

Balance Sheet
Assets = Liabilities + Equity
Current: Easier to convert
to cash Current
Assets

Total
Assets
Shareholder
Equity

Total
Liabilities

NonCurrent
Assets
Current
Liabilities

Inventory
Other
Net Property &
Equipment
Investments
Other
Notes Payable
Accts Payable
Other

Non-Current
Liabilities
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Cash and Market

Securities
Receivables

Long term debt

The Balance Sheet is a

snapshot at a point in time
(immediately after closing the
books). Two consecutive
balance sheets show how
assets, liabilities and
shareholder equity have
changed during the accounting
period.

Other

ISyE 3104 Fall 2014

RONA
RONA = Return on Net Assets, or
Net Income/(Fixed Assets + Working Capital)
= Net Income/(Fixed Assets + Current Assets Current
Liabilities)
RONA is viewed as a measure of how well the enterprise
managers are using the enterprise resources. If RONA is
low, the managers should liquidate some of the resources
and return the money to the owners, who can invest it
elsewhere (with a higher RONA).

Georgia Tech, 2014

ISyE 3104 Fall 2014

Computing RONA
Quality
Delivery

RONA =

Direct costs:
Labor
Material &
parts
Indirect Costs
Allocated
overhead
Utilities
Supervi

Net Income
Fixed Assets + Current Assets Current Liabilities

Georgia Tech, 2014

ISyE 3104 Fall 2014

Facility
Equipment

Why is this important?

RONA and EBITDA are typical of the financial metrics ultimately used to judge enterprise
performance
Its a good idea to have alignment between operational performance metrics and the
metrics that drive enterprise level decisions
In practice, you will need to be able to explain how a particular operational metric relates to
the enterprise level financial metrics

Georgia Tech, 2014

ISyE 3104 Fall 2014

10

Operational KPI
Resource focused

Tell something about how resources are used or the condition of resources

Flow focused

Tell something about the flow, e.g., its properties or flow results compared to expectations

System focused

Combine information about resources and information about flow

An important category is productivity measures, which are always of the form,
productivity = (units of output)/(unit of resource)
Issue: there are several categories of resource (labor, machines, space, etc) so which productivity metric is the right one?
No single productivity metric is adequate by itself

Georgia Tech, 2014

ISyE 3104 Fall 2014

11

Resource focused KPI

Provides information about the condition or
use of resources, which include facilities
(space), equipment, and people.

Examples:
Doctors: clinic hours per day (daily, average)
Patient rooms: percent of time occupied
X-ray machines: # exposures since last maintenance;
exposures per day (daily, average)
Waiting room: number of patients (at specific times, daily
maximum, daily average, )

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ISyE 3104 Fall 2014

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Warehouse resource focused KPI

Examples:
A-frame: fraction of slots utilized (daily, average, max, );
mispicks (per hour, daily, average, )
Flow rack: fraction of facings utilized (daily, average, max);
inventory capacity utilization (daily, max, min,
average)
Conveyor: % misreads (daily, average, max, min, ); #
jams (daily, average, max, min, )
Pickers: paid hours (daily, average, individual, department,
); error rate (daily, average, individual, department,
)

Georgia Tech, 2014

ISyE 3104 Fall 2014

13

NB: Customers dont care about your

resource focused KPI, but they certainly do
care about flow focused KPI!

Flow focused KPI

Provides information about flow properties or
about flow properties relative to expectations.

Examples:
Number of patients seen per day (by specialty, total, daily,
average, )
Patient arrival rate (by specialty, total, by hour, average,
max, min, )
Distribution of waiting time (by step in process flow, by
specialty, average, max, min, )
% of patients with total flow time less than 60 minutes
(by specialty, average, )

Georgia Tech, 2014

ISyE 3104 Fall 2014

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Warehouse flow focused KPI

Examples:
Orders shipped (daily, average, max, min, by customer
type, by carrier, )
Lines picked (daily, average, max, min, by department, by
product family, )
Items picked (daily, average, max, min, by department, by
product family, )
Contain flow rate from A-frame to fast pick (by hour,
hourly average, daily average, max, min, )
Order fill rate (daily, average, max, min, by department, )
% orders shipped same day
% orders shipped within 24 hours

Georgia Tech, 2014

ISyE 3104 Fall 2014

15

System focused KPI

Combines information about resources and
about flows.

Examples:
Number of patients seen per doctor per day (by specialty,
total, daily, average, )
Patient arrival rate (by doctor, total, by hour, average,
max, min, )
Exposures per x-ray machine (daily, average, max, min, )
Number of patients see per mid-level per day (daily,
average, max, min, )

Georgia Tech, 2014

ISyE 3104 Fall 2014

16

Warehouse system focused KPI

Examples:
Orders shipped per labor hour (daily, average, max, min,
by customer type, by carrier, )
Lines picked per labor hour (daily, average, max, min, by
department, by product family, )
Items picked per labor hour (daily, average, max, min, by
department, by product family, )
(Earned hours)/(paid hours)
(Error rate)/((Earned hours)/(paid hours))
(Order fill rate)/(average inventory level)

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ISyE 3104 Fall 2014

17

KPIs are an important tool, but

They can distort behavior (people respond to rewards and punishments)
No one KPI can give the whole story

Beware of sub-optimizing, i.e., focusing on one particular productivity can lead to unanticipated
(negative) outcomes (optimizing the A-frame overloads the slow pick conveyor, resulting in a backup
that stalls the A-frame)

There can be conflicting goals, and these result in dueling KPI

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ISyE 3104 Fall 2014

18

Appliances Manufacturer

Goods
Reception

Goods
Storage

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Assembly

Packaging

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Finished
Products
Handling

Picking

Delivery

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Conflicting Operational KPIs in our manufacturing

example
Procurement wants:

Warehousing wants:

Flexible and little variation in delivery time

Little variation in mix
Large order quantities

Production/Assembly wants:
No setups
High throughput (productivity)

Low inventory
Quick picking and replenishment capability

Sales and Marketing want:

Large inventory in stock

High product variety

What does the consumer want?

Georgia Tech, 2014

ISyE 3104 Fall 2014

20

Hierarchical Objectives
High
Profitability
Low
Costs

High
Sales

Low Unit
Costs
High
Throughput

High
Utilization

Less
Variability
Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Quality
Product
Low
Inventory

Short
Cycle Times
www.factoryphysics.com

High Customer
Service
Fast
Response

Low
Utilization

Many
products

High
Inventory

More
Variability
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Whats next?
Process mapping tools that are useful for understanding and analyzing material flow systems
Some team collaboration tools that are useful in almost any setting

Georgia Tech, 2014

ISyE 3104 Fall 2014

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