If you’re really not sure of the differences between KPIs, PIs, and other types of supply chain measurement, don’t worry. The whole subject of performance measurement and metrics is a source of confusion for many companies.
Furthermore, some leadership teams remain in a state of unintentional ignorance, blissfully unaware that what they consider to be KPIs are really not. By reexamining their approach to supply chain measurement, these companies might create more opportunities to improve performance.
A quick skim through this post should help straighten out any confusion about the differing types of supply chain measurement and metric, so you can check if your business leaders are really monitoring the performance elements that matter most.
Know Your PIs from your KPIs
Perhaps the most persistent point of confusion is the difference between the supply chain measurements known as PIs, versus the more well-known but seldom well-understood KPI.
Performance indicators (PIs), key result indicators (KRIs), and key performance indicators (KPIs) are all types of performance metric. But each really differs in its relevance to select audiences within your company and among its supply chain partners.
If you want a definition of each in a nutshell (with the exception of the KRI, which we’ll come to a little later) it’s like this:
- A metric is simply a numerical measurement used to provide information
- A performance indicator (PI) is a metric which informs about some element of performance
- A KPI is a metric used by leaders and managers to understand performance in business-critical elements of a supply chain operation.
Hopefully, this is a fairly clear and concise explanation. However, the “business criticality” part of the KPI definition is what often seems to trip management teams up.
KPIs are “key” performance indicators for a reason, and while it’s important to measure performance in many elements of a supply chain operation, only a few of those measurements are truly vital to the attainment of business objectives.
PIs are Many, KPIs are Few
Five to ten KPIs should be more than enough for a management team to assess performance and make decisions to drive improvement. More than that and the picture typically becomes confusing and/or promotes preoccupation with the wrong performance aspects.
If your company, department, or team has a portfolio of “KPIs” that reads like a monthly shopping list, you can be pretty sure that most of those metrics are not KPIs at all, but are merely PIs.
A KPI is a measure which when improved, will directly and significantly help to move your business towards its objectives. A good KPI will have the following characteristics:
- It will be a non-financial measurement (so will not be expressed as a currency value)
- It will measure an actual value in relation to a target value
- It will be a measurement which is captured frequently and regularly (daily, weekly, monthly, etc)
- It will be directly relevant to operational managers and will drive their decisions
- It will encapsulate the values of several lesser PIs and will have significant business impact
The Theory of KPI Relativity
It can be (and often is) argued that the distinction between a PI and a KPI is relative. As an example, let’s take the common fulfilment metric known as “perfect order”, which is typically included in a suite of supply chain measurement KPIs.
Perfect order is made up of a number of related metrics, like “on-time delivery” and “order line fill”. These metrics may then be broken down further into measurements relating to functional performance.
In a warehouse operation, line fill can be impacted by picking accuracy, so while “Percentage of Orders Correctly Picked” would not be a KPI at company board level, it could certainly be considered as such for the warehouse management team.
Whether you consider the concept of a KPI to be relative or not, the fact remains that it is the criticality of the measurement to company, department, or team success which separates a key performance indicator from a normal PI.
So if a KPI is a critical measure of performance relative to a target, a PI is simply a less critical, but nonetheless important performance measurement. The problems for many companies arise when the two types of measurement are confused with one another.
When is a KPI Actually a KRI?
Not all organisations make use of PIs and KPIs, although fortunately, the number that does is continually growing. However just about every company uses another type of metric—the Key result indicator (KRI)—both for supply chain measurement and to monitor other parts of the business.
A KRI will typically be a financial measurement but is often mistakenly considered to be a KPI. Yet aside from the fact that KRIs measure in dollars, they usually provide only a collective measurement of performance, whereas a KPI, even at the highest level, will enable performance to be attributed to a team, or a specific group of teams.
Here are a few examples of Key result indicators which commonly get misconstrued as KPIs:
- Cost of goods sold
- Supply chain cost per unit sold
- Logistics costs
- Total delivered costs
- Working capital turnover
KRIs like these are of more use to executive teams than to those responsible for day-to-day supply chain management. While they can allow users to monitor upward or downward trends over time, they can’t show what factors are driving the results displayed.
Supply Chain Measurement Semantics … Or Something More?
Does it really matter what you call your supply chain measurement instruments? Perhaps it’s more a matter of semantics than anything else. At the same time, though, it is important to show the right measurements to the right audience.
For that reason alone, it’s best to be clear at least about which measurements have the most impact and are really key to business success.
When you are no longer confused about the PI and KPI of supply chain measurement and metrics, you might find you can redesign your KPI-suite, making it a little less incomprehensible and a lot more revealing. That in itself will be a “key” step toward performance improvement in your supply chain.