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The Value of Key Performance Indicators in a Lean Transformation

by Ernie Richardson & Tracey Richardson
February 3, 2016

The Value of Key Performance Indicators in a Lean Transformation

by Ernie Richardson & Tracey Richardson
February 3, 2016 | Comments (5)

How do we measure our progress in an organization? How do we know what type of indicators we are using and what do they tell us about the current state of our processes? How do we know when we get there?  What do we raise the bar on to show improvement?

These are just a few of the questions we hear from organizations that want to understand more about what data they are tracking and how they respond to what that specific information tells them. How much of it is truly value added to the company and customer?

What we do is break down the key performance indicators (KPIs) that organizations track into two categories: lagging indicators and leading indicators. Lagging indicators are results-oriented, in that they appear after something has happened. Some would say they’re historical in nature, since they are often a reaction to something that has already taken place in a process, perhaps months ago. In the car industry, for example, this could be a warranty claim a customer filed with the dealership for a creaky suspension. As the manufacturer, it takes a lot more effort to know what actually happened to cause the problem and when. In fact, it’s impossible to go back in time to re-create the exact scenario that allowed the discrepancy to happen. This can often put us in symptom-fighting mode, also known as firefighting. This mode is not always sustainable, nor is it especially value added.

Leading indicators, on the other hand, are KPIs that are tracking right at the process. This gives us a real-time measure as to when we may be out of standard or don’t have what is needed, when it’s needed, to produce our service or output. The beauty of leading (process-oriented) indicators is that while it can take months to get a report that tells the organization, “How are we doing?”, they can tell you what’s happening in the moment.

So for example, let’s look at safety—say a team member gets injured during their work process. This gets documented on an incident-rate report in most organizations. So think about it – I am tracking an injury after it happened. This is a necessary process in the majority of organizations due to OSHA or other safety mandates, but now I have to ask myself, “What does this information tell me about the process?” If the actual incident happened 1-3 days before the report came out, are we able to know what really caused it? Maybe, but it won’t be easy. That incident-rate report is a lagging indicator.

We find the majority of KPIs tracked are lagging (results-oriented) indicators. It seems to be a pattern across various types of industries – not just manufacturing. It is a common misconception that we should only track lagging indicators, as many feel they give us the most information.

But isn’t it better to have a process indicator that gives us a predictive factor before the injury actually happens? That would be more of a leading indicator – and that is where you can shift the focus from results after the fact, to process in the moment. Given the above example, maybe there were trends that were overlooked. Perhaps someone mentioned “This flow rack is very high and I have to reach several times a day.”  Maybe there was a near-miss incident that hinted at a larger problem. That information could be predictive to an injury, letting us address the problem in real time – not just waiting for something to happen before we take action.  

So, how do you start identifying your indicators?

One way is to take a closer look at your daily processes. Asking questions of your team members about how their process is going and whether or not there are issues can help you grasp the situation of predictive measure versus reactive. One way we have seen organizations do this is a “how’s your process” check. This creates a daily touch-point so the supervisor can see if there are any issues with processes. This is then logged on a visual management chart for Safety and posted daily. If something goes wrong it gives us a very specific window of time to track the discrepancy. This check can greatly reduce incident rates by shifting focus to the process itself (leading) versus tracking only after a problem has happened (lagging).

If an organization can shift a percentage of its lagging indicators to leading, they will see that the new focus on processes (and improving them through standardization) will begin to show the results they normally would be focusing on. Measuring the process in real time each day gives us a trend analysis that is perhaps a few hours old, versus a three-month quarterly report to which we will react in hopes that we make changes in something we are unsure of. I often say it’s like “throwing a dart at a moving target.”

So if you want to stay out of an endless “firefighting mode” with a team of hose-holders, then it’s time to change viewpoints and analyze your available measurements of a process’s success. There will always be a level of reactivity in an organization and that is normal in most businesses. But to do business each day in a reactionary mode is not good for long-term sustainability and growth. The key is to bring awareness to the indicators at your business – and you can do this through gemba walks, problem solving, creating standardized work, and better visualization (e.g. what is the current state versus the ideal state through visual management?). The more people can see, the more abnormalities will surface, the more the problem awareness muscle can be strengthened, and your culture can finally start to change. 

~Tracey and Ernie Richardson

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
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5 Comments | Post a Comment
Frank Castillo February 03, 2016

Thank you Tracey & Ernie for reinforcing the importance of process metrics/ conditions vs outcomes. Over the last couple of years, we've come to the realization that we need greater attention to the condition of the shop floor as an indicator of where we'll be in the future. We have a plant that had celebrated multi years of significant cost reductions & 3-4 years into it, they started having significant customer service and other performance issues. What we found is that in their cost cutting efforts, they removed a lot of the support for the shop floor, which led to the erosion of conditions & ultimately customer misses. 

What we started moving towards is being very clear/ prescriptive of the conditions we want to see at every node of our supply chain to enable stability, Jidoka, JIT & development/ respect for people. We'll see where this takes us, but we know for sure that we need to get our leaders to go-see & confirm for themselves much more & help their teams build those conditions. Thanks, Frank

 

 

 

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Tracey Richardson February 03, 2016

HI Frank, 

What we are finding across different organizations (and industries) is the need to be able to differentiate these two types of indicators. It is crucial in understanding what is truly happening at the process level that is more real time than waiting for a report.   Its a paradigm shift in thinking that we see is slowly evolving and folks are learning how to find their leading KPI's.  Great stuff.  We just had this discussion today with our client.  Very enlightening for them.  Tracey

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Dr. Shree Nanguneri February 06, 2016

With all politeness and humility, the message from this article on leading indicators is nothing more than a repeat of what we accomplished in the mid 1990's (25 years ago) on looking at the process key input variables(KPIVs) and predict the process key output variables (KPOVs) and come up with a transfer function to stay proactive versus the traditional reactive methodology.

Wonder what the author is trying to say other than reinventing the wheel that was creatd around this philosophy.



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Tracey Richardson February 06, 2016
2 People AGREE with this reply

Your point is appreciated, thank you for sharing!! In all reality Dr. Nanguneri, most everything about Lean and the business thinking around it --is in fact-- "reinventing" some style of a wheel.  This can date back to Sakichi Toyoda with the Loom production in the late 1800's if you want to bring up history and evolution of thinking.   Our intentions weren't to imply it was new, but rather reinforce something that 80% of organizations are still grasping today from our experiences in many different industries across all their functional areas!   Respectfully, E & T Richardson.

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Bryant H. September 20, 2017
1 Person AGREES with this reply

E & T,

I would also say that this article, (may not be ideal for the seasoned LEAN veteran) - was on point for what I needed as a C.I. Tech in our organization.  I wanted to find something that one of our teams (new to the overall concept of LEAN) could read to learn about leading and lagging indicators.  I will use this as a tool to help build meaningful metrics for these teams. Thank you for the time and effort put into making it available to others.  We appreciate it!

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