Key Performance Indicators for Sustainable Management

A Compendium Based on the "Balanced Scorecard Approach"

Hans-Ulrich Krause, Dayanand Arora

• Publisher: De Gruyter Oldenbourg
• Year: 2019
• Print ISBN: 9783110598087
• eBook ISBN: 9783110599343
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

Key Performance Indicators (KPIs) have become a regular and useful tool for measuring business performance everywhere. The KPIs not only help in strategic planning but also in managing operative business world over.

The KPIs in the book are organized according to the Balanced Scorecard (BSC) approach, which emphasizes the importance of using both financial and non-financial information to remain competitive in the modern world. We proudly place on record the fact that our book is the first of its kind and provides for a complete analysis of KPIs under financial, customer, process and human resource/innovation perspectives.

The book is a major contribution towards achieving sustainable growth as a competitive advantage. It also emphasizes the importance of social acceptance and environmental impact of the business activity.

The compendium provides over 170 KPIs in a compact form. It delivers simple definitions, easy to calculate formulae, possible interpretations and useful suggestions towards an efficient and effective implementation of KPIs as controlling instruments.

1 Basic Indicators

1.1 Technical Productivity

Analytical Question

How large is the technical (pure tangible) yield of an input factor, measured in terms of a particular output unit?

Definition

Output Quantity

Input Quantity

or

Output Quantity of Combined Factors of Production

Input Quantity of Deployed Factors of Production

Examples of different factors of production are: raw material, labour-time, capital, supplies/utilities and area.

Various measures of quantity are: units produced, length, area in square meters, weight and time duration.

The measured value of efficiency may be expressed in units per hour (for example, produced quantity per hour), hours per customer (for example, time consumed per customer), square meter per unit (for example, required packing material quantity per machine) and Kg per hour (for example, produced chemical, measured in Kg per hour).

Calculation/Derivation

The required data for this quotient is prepared from the internal cost accounting system, which is then processed and made available to decision makers in different cost types, cost-centres, and product costing.

Interpretation and Typical Range

With the help of Technical Productivity, a physical measure of yield for all production factors is derived.

Since various combinations of production factors (each one measured differently) are used for a particular output, data for measuring Technical Productivity has to be collected and valued for each factor separately. Often the measured value shows individual and partial efficiency.

Therefore, it is not easy to recommend a typical range for this ratio. A useful interpretation of this ratio is possible over time, when intra-firm or inter-firm comparisons are made over several periods. When making international comparisons, the impact of other value drivers, such as changes in the bilateral exchange rate over time has to be carefully considered.

An important, though simplified, assumption made when calculating this quotient is that the input and output factors have a linear cause-and-effect relationship with each other. It should be emphasized that this assumption of linearity is not always true. Since the deployed factors of production are usually scarce, managers always try to achieve the highest possible yield, i.e. technical productivity.

Useful Suggestions

The demand for targeted productivity has increased in firms and is often grounded in the need to improve future competitiveness. Through an improved (quantity-based) input-output relationship, the firm should make maximum use of scarce production factors. Improvements in productivity are focused at increasing the yield value of the deployed resource input. Thus, measuring productivity over time is an important step in process-optimization, which is often achieved through skilfulness in avoiding wasted time, energy or effort. Lean manufacturing provides an interesting example of process improvements, which supports the business benefits of rapid execution.

There is one more aspect that needs to be considered. If the input factors of production have substitutes, a part-improvement in productivity may not necessarily lead to total improvement in productivity. Moreover, an improvement in the productivity of a particular factor may well be due to increased consumption of another input factor.

A change in this ratio in the context of desired corporate goals can be achieved by a disproportionate increase or decrease in the achieved output (as numerator) and deployed input (as denominator). For further details and systematic explanations of this argument, refer to the information in Appendix I.

Related Ratios/Additional Notes

“Technical Yield” and “Output-Input Ratio” are often used as synonyms for Technical Productivity. In some cases, productivity is labelled as efficiency, such as material efficiency.

The inverse value of Technical Productivity (input quantity/output quantity) is known as “Production-Coefficient”.

In order to make better judgments about the performance of a particular process, it is desirable to measure the outputs (the numerator) in monetary terms. This leads to the calculation of the so-called “economic productivity”. If both output and input factors are measured in monetary units, the resultant value will be called “operating efficiency” In process reengineering, any change that increases economic productivity is considered as an economically efficient change.

1.2 Efficiency

Analytical Question

How large is the relative yield of (or return from) an input factor in terms of a particular output unit? What is the quantifiable relative performance of a particular process, operation or a system?

Definition

The term “efficiency” and various measures, which are related to or derived from it, are not uniformly defined. Some measures of Efficiency relate to “technical productivity”, whereas other measures relate to “economic productivity”. Mostly, Efficiency is named and described with reference to the input factor, such as material efficiency, labour efficiency (or employee efficiency), energy efficiency, etc.

Output Value (Measured in Monetary Units)

Input Value (Measured in Quantity or Monetary Units)

Some examples of efficiency are: production per employee, energy costs per machine hour, sales per square metre of sales area, and contribution margin per client.

Various measures of quantity are: units produced, length, area in square meters, weight and time-duration.

The measured efficiency value may be expressed in % (in the case of technical quantity-based efficiency) or in € per square meter, € per client, € per unit, € per hour (in the case of economic/value-based efficiency).

Calculation/Derivation

The required data for this quotient is prepared from the internal cost accounting system, which is then processed and made available to decision makers in different cost types, cost-centres, and product costing.

Interpretation and Typical Range

Put simply, Efficiency is a measure of performance. If it is measured in technical terms, it is similar to productivity and implies the yield of a particular production factor. Since various combinations of production factors (each one measured differently) are used for a particular output, data for measuring efficiency has to be collected and valued for each factor separately. Often the measured value shows partial efficiency.

Therefore, it is not easy to recommend a typical range for this ratio. A useful interpretation of this ratio is possible over time, when intra-firm or inter-firm comparisons are made over several periods. When making international comparisons, one has to consider carefully the impact of other value drivers, such as changes in the bilateral exchange rate over time.

An important, though simplified, assumption made when calculating this quotient is that the input and output factors have a linear cause-and-effect relationship with each other. It should be emphasized that this assumption of linearity is not always true. Since the deployed factors of production are usually scarce, managers always seek to achieve the highest possible economic yield, i.e., economic productivity.

Useful Suggestions

Every measure of Efficiency is aimed at improving the value of the deployed resource input. Thus, measuring efficiency over time is an important step in process-optimization; this is often achieved through skilfulness in avoiding wasted time, energy or effort. Lean manufacturing is an interesting example of process improvement, which helps to achieve the business benefits of rapid execution.

If the input factors of production have substitute...

Table of contents

• Title Page
• Copyright
• Contents
• Preface
• Introduction
• 1 Basic Indicators
• 2 Financial Perspective
• 3 Customer Perspective
• 4 Process Perspective
• 5 Human Resource and Innovation Perspective
• Appendix I: Systematic Analysis of Possible Changes in Relative Ratios
• Appendix II: DuPont Ratio System
• Appendix III: Alphabetical Overview of Key Performance Indicators
• Appendix IV: Smart Key Performance Indicators at a Glance
• Selected Bibliography (For Balanced Scorecard Approach)
• Index