Quick Definition

Key Performance Indicators are measurements and metrics that support and facilitate achieving critical
goals of the organization. KPIs are very important for understanding and improving manufacturing
performance; both from the lean manufacturing perspective of eliminating waste and from the
corporate perspective of achieving strategic goals.

Expanded Definition

Every company measures themselves to some degree. Often these measurements are based on
historical information. While there is certainly value in historical analysis, it is a fundamental principle of
Key Performance Indicators to be current or forward looking metrics. It is also critical that KPIs be closely
aligned to strategic company goals and implemented in such a way as to support positive change.

Key Performance Indicators can be highly effective for exposing, quantifying and visualizing muda (the
lean term for waste). The essence of lean manufacturing and the central theme of the Toyota
Production System (TPS) is to eliminate waste – in other words, to relentlessly eliminate all activities
that do not add value for the customer. Effective KPIs quantify waste, provide an early warning system
for processes operating outside the norm, and offer important hints as to where improvement efforts
should be focused.

Key Performance Indicators are also highly effective motivators. Motivation theory (i.e. organizational
behavior) is a complex field with many diverse opinions; however, there is wide agreement that a
central key to effective motivation is setting challenging but attainable goals (e.g. SMART goals, which
are Specific, Measurable, Achievable, Realistic, and Time-Specific). SMART goals are excellent candidates
for KPIs.

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Effective KPIs can energize the plant floor – unleashing competitive spirit and promoting kaizen (the lean
term for continuous improvement). How is this achieved? By providing both a “will” (a strong desire for
improvement) and a “way” (effective tools). The “will” flows from a culture of trust. The goal isn’t simply
to improve a number; it is to truly improve performance. Achieving this requires genuine buy-in from
the plant floor. The “way” flows from KPIs that can be influenced and controlled by plant floor
personnel. After all, if operators can’t influence the KPI what value does it provide for them?
Collectively, this “will” and “way” create information democracy; empowering plant floor personnel with
actionable information and a meaningful level of control over the process.

KPIs must also provide meaningful, reliable, and accurate information. Thus, it is important to carefully
define and document the methodology of measurement before implementing a given KPI. Goals and
desires are often vague, whereas Key Performance Indicators are very specific. And, since KPIs are
indicators of progress and performance, it is vital that everyone that uses them be able to trust in their
accuracy.