One of the thorniest problems confronting top management is how best to improve production efficiency—and how to find out whether any steps taken to foster that improvement actually work. Companies already spend a great deal of time and money devising intricate systems to do the job and impose them on an unwilling, uncomprehending, and often hostile, functional manager. Instead, this article suggests a simpler method, created by top managers who identify targets and efficiency measurement in consultation with lower- to middle-level managers and their departments. Not only does the Key Indicator Management system provide an easily readable, graphic picture of operations, but it also helps managers keep tabs on operations and their trends while they function, finding and hopefully solving problems before they become endemic.

While most executives are routinely confronted with financial statistics reported under normal accounting procedures for their companies, they often do not receive the same kind of detailed information about the actual performance of manufacturing operations. Even when the accounting numbers ordinarily should give some indication about the health of operations, they lump together results and help obscure rather than illuminate the root cause of problems and successes. What many companies need is a system to help managers monitor operations so that they can realize—at a glance—just how well things are doing, and why.

Companies can institute a monitoring system, which I call Key Indicator Management (KIM). Much as economists watch monthly ups and downs of various components of the gross domestic product or industrial production, operations or division managers can easily keep track of the key measures of company operations. For each measure, a target is established and a monthly report created to show progress (or lack of it) against a particular goal.

Rather than lock a company into a rigid design, the system is flexible and involves all levels of management. The department head typically selects appropriate targets and measures in consultation with his or her supervisor. That helps resist the temptation to keep tabs on too many different indicators and focuses on a few meaningful measures. They need not be permanent; often the indicators are used for a short time to highlight a special problem area and are discarded once the difficulty no longer exists.

Unlike other techniques, KIM has the advantage of helping companies before rather than after the fact. And it lets the manager select those indicators that will help provide the most information, in the quickest and easiest way possible.

Format & Reporting Structure

The typical format (illustrated in Exhibit I) shows the particular task to be measured, the actual measurement, and the target; it also provides room for the month and year-to-date accounting on a graph. In this way, the manager can immediately assess whether there has been progress or lack of it.

Exhibit I KIM Typical Format

In using the graph reporting method, the desired goal can be indicated by a line or shaded section. Other “trend measurements” may be substituted for the graph, including statistics for the year to date, past year, and the most recent months’ high and low statistics for comparison purposes (see Exhibit II).

Exhibit II KIM Format with Other Trend Measurements

To report the necessary figures, the company usually institutes a pyramid system. Each function or department manager selects three to eight indicators that give the best measure of the functional area; he or she then chooses a select few to pass on to his or her immediate supervisor, who receives 12 to 20 measures from all his or her departments. The division manager may use from 20 to 30 indicators to monitor the entire unit’s operations. In a very large corporation, the chief operating executive normally assigns a staff assistant to review 40 to 50 indicators. Those with unfavorable results or showing new trends are forwarded to him or her for special review.

Key Indicators & Standards

Companies typically use a wide range of formal and informal operating measurements already, including clerical documents processed per hour, past-due customer orders, rejected goods not resolved, vendor performance, production against labor standards, orders inspected per day, and even orders completed on time. But their value can be increased if scrutinized more carefully—and with some imagination.

For example, inventory turnover is a common measurement that can be more useful if inventory is segregated by its inventory classification, stage in the manufacturing process, or by product line (see Exhibit III).

Exhibit III Inventory Investment Key Indicator Report

A more unusual, but often meaningful indicator, is the amount of unsatisfactory goods returned by customers. Quality control usually keeps track of these rejects, but the information takes on significance for the whole company when it is reported as a percentage of monthly sales (see Exhibit IV).

Exhibit IV Quality Control Key Indicator Report

Companies usually find that the key indicators can be used to measure a variety of functions and capabilities, either in absolute terms (inventory investment is a good example) or relative terms (presented in relation to some other measure, such as rejected goods as a percentage of monthly sales) Exhibit V shows one example of the major measures in terms of timing, achievement, completeness, accuracy, and planning.

Exhibit V How a Key Indicator Report Can Promote Efficiency

Perhaps the most difficult task found when instituting the system is the setting of standards. These must be known to and be easily understood by employees. A good example is the time required to complete a task. But they also may be used to covertly measure a function (such as shop order completion dates) by supplying information meaningful to management but not necessarily to employees.

When setting a standard, it is advisable to obtain the opinion of those involved in the operation. Several years ago I determined a production standard for a molding operation by asking hourly employees, engineers, and foremen their opinion of what was a fair hourly production rate. I threw out the high and the low rates per hour and then averaged the remaining nine bits of information to yield the target measure for molding productivity.

A company may also opt for a historical approach. Data collection to establish the initial standard should extend over a recent period of time (at least three months). The resulting rate can also be adjusted based on the opinions of those who know the operation. Companies with an industrial engineering capability may elect to base their standard on actual time studies. There are also published reference sources, such as government statistics and trade association information, which offer invaluable comparisons. For example, it is relatively easy to obtain inventory turnover data both by industry and by type of product.

Establishing the New System

Following is a simplified approach to setting up a monitoring system:

1. Identify the operating departments or functions to be measured, such as inventory control, production scheduling, purchasing, etc.

2. Determine the items to use in the measurement program. Most departments already monitor their activities; while many of these measures are not always quantitative, they can be identified and incorporated.

3. Determine the measurement details. In the case of the order entry example in Exhibit V, the company might have used either the daily average time per employee, the overall average for the department each day, or even the number of orders processed.

4. Establish the target. Companies often use a management by objective (MBO) approach and tie the productivity of the department to its managers’ compensation rates.

5. Prepare a monthly report. Since each functional manager prepares his or her own report, this self-scoring feature may also promote improvement.

Department & Company Reports

Exhibit VI is a key indicator report consisting of nine major measures of the purchasing function for a medium-size assembly product manufacturer. It is produced on a monthly basis; certain trend information can be taken from the indicator movement.

Exhibit VI Purchasing Key Indicator Report

At first glance, the report may seem to indicate that the time to place a requisition, status of late deliveries, number of rejected invoices, and productivity are all satisfactory. However, a closer look reveals progress toward the department’s goal of placing 70% of purchase orders, as a result of multiple requests for quotation (RFQ) or negotiation, has been stagnant for the first nine months of this year. And the continuing “higher than desired” monthly commitments could indicate an excessive inventory buildup. Cost savings and the cost to make purchases also are unsatisfactory. Finally, the company’s overall prices have risen 2.3%, when compared to the U.S. Government Producer’s Price Index.

Exhibit VII is a key indicator report used for the entire company and sent to the president. It might also include a narrative portion to summarize the action being taken to correct any unfavorable trends.

Exhibit VII Company Key Indicator Management Report

The basic advantage of KIM is that it provides early warning of areas that require improvement in management style, procedure, or other system changes. This provides management with the information to assess strengths and weaknesses on a monthly basis and encourages better control of operating functions. Managers then can better make the right corrections of operations and choose the most qualified persons to follow up on improvement projects.

A version of this article appeared in the November 1980 issue of Harvard Business Review.