Measuring process improvement: Defining and delivering actionable KPIs using SAP NetWeaver Business Intelligence

1. Measuring process improvement: Defining and delivering actionable KPIsusing SAP NetWeaver Business Intelligence Dr. Bjarne Berg Director SAP BI MyITgroup - A VIP consulting company

2. What We’ll Cover … • Introduction & definitions • Defining, Prioritizing, & Implementing KPIs • Core KPIs (sales, finance & supply chain) • Examples of dashboards, scorecards & cockpits • Top-10 rules for performance management design & development roadmap • Wrap-up

3. What we will cover.. How to create a strategy and a roadmap for defining, prioritizing, & implementing KPIs for process improvement. Look at which KPIs are easiest to put in place & which require greater effort when analyzing sales, finance & materials performance. Gain insight into how others use dashboards, scorecards, & cockpits to deliver KPIs to stakeholders. Explore the top-10 rules for designing a performance management solution, along with suggested SAP applications and tools. How to avoid common pitfalls, such as poor cockpit construction and performance, & emphasis on KPIs that few care about.

4. Dashboard, Scorecards, and Cockpits • Many companies and people confuse the concepts of dashboards, scorecards, and cockpits. They vary in terms of purpose, usage, source, data, and measures • Most SAP NetWeaver BI systems fall into the cockpits or scorecard category Definition KPI: “The level of achievement expected of the average resource given the current operating environment”

5. Customer Measures Financial Measures • % Sales of New Products • Customers Acquired • Customer Satisfaction • Market Share • ROI and ROA • Revenue Growth Internal Process Measures Innovation & Learning Measures • Product Time to Market • Unit Manufacturing Cost • Days Supply of Inventory • New Product Introduction • Management Skills • Employee Turnover Performance Measures Performance measures are carefully selected set of measures derived from strategies, goals, & objectives that represents a tool to communicate strategic direction to the organization for motivating change. These form the basis to plan, budget, structure the organization, and to control results. • The Three KPI Dimensions: • What to Measure • How to Measure • How to Interpret

6. What We’ll Cover … • Introduction & definitions • Defining, Prioritizing, & Implementing KPIs • Core KPIs (sales, finance & supply chain) • Examples of dashboards, scorecards & cockpits • Top-10 rules for performance management design & development roadmap • Wrap-up

7. Encourage Wide Array of Measures - The Three Types of Indicators • Lagging - historical look at past performance (quarterly revenue, hours off due to job related injury, employee turnover) • Leading - predictive of future results (safety training completion rate, scheduled maintenance compliance rate, grievances) • Real-Time – where things are right now (inventory levels, employee count, contractual obligations outstanding) 4 Signs of a Good Indicator: • Tracks mission critical outcomes and activities • Is influenced by productive behavior but can’t be easily manipulated by your team • Something that all team members can focus their efforts on • Value of measuring exceeds cost of measuring

8. The 7 KPI “Commandments” Performance indicators should have a sponsor, the sponsor is the person or organization element responsible for the definition of the indicator and its purpose and the maintenance thereof A KPI may be ”typed” as internal, or “customer facing” May be linked to some form of external analysis technique, such as SIGMA Six, the EFQM etc. Must have a clearly defined aim or purpose. Must have a descriptive name or title. The name should be as short as possible, but be meaningful. May have an effective date, and a redundancy date. It is likely that a KPI will have a life span. By definition, a KPI is a measure or yardstick. It follows that there must be a method or formula for calculating the measure itself and associated scores Source: Performance Management Association (PMA) - 2006

9. Use the Value Chain to Identify KPI Requirements Use the value chain as a guide to identify information needed to analyze performance measures that support strategies What we want is a “war room” like Europe’s SHAPE headquarters to monitor the state of enterprise & the direction What tasks must be completed on a regular basis to add value to the end “customers” of the process? What key events need to occur for the business to be successful? How can we analyze the success of the business and progress toward that success?

10. What We’ll Cover … • Introduction & definitions • Defining, Prioritizing, & Implementing KPIs • Core KPIs (sales, finance & supply chain) • Examples of dashboards, scorecards & cockpits • Top-10 rules for performance management design & development roadmap • development roadmap - operational, managerial & executive KPIs • Wrap-up

11. Use the Value Chain to Identify KPI Requirements • Equipment/ Labor (Utilization) • Headcount • Process Steps (Number) • Product Development (Cost) • Product Development (Cycle Time) • Product Introduction (Number) • Schedule/ Cost Estimates (Accuracy) • Equipment/ Labor (Utilization) • Design quality (rework count) • Headcount • More… • Process Steps (Number) • Purchase Discounts (Value) • Purchase Order (Volume/ Frequency) • Purchase Price Variance (Value) • Purchasing (Cost) • Purchasing (Cycle Time) • Supplier Defects (Number) • Supplier Lead Time • Supplier On-time Delivery • Suppliers (Number) The first step in KPI definition is to determine what is the value driver of your organization’s success. The KPIs should be different for a sales and marketing firm, a manufacturing driven firm or a service firm

12. KPI Requirements - Manufacturing • Changeover/ Turnaround (Cycle Time) • Defects/ Off-Quality (Cost) • Defects/ Off-Quality (Volume/ Quantity) • Engineering Design Changes (Cycle Times) • Engineering Design Changes (Volume/ Frequency) • Equipment/ Labor (Utilization) • Parts/ Stock Keeping Units (Number) • Inventory Work In Process (Level/ Value) • Process Steps (Number) • Headcount • Rework (Cost) • Scrap/ Waste (Cost) • Manufacturing (Cycle Time) • Production (Lot/Batch Size) • Production Schedule (Accuracy/ Fulfillment) • Productivity/ Throughput • Quality of Service • Rework (Volume/ Frequency) • Scheduled Maintenance (Cost) • Scheduled Maintenance (Cycle Time) • Scheduled Maintenance (Frequency) • Theft/ Shrinkage (Cost) • Unscheduled Maintenance (Cost) • Unscheduled Maintenance (Cycle Time) • Unscheduled Maintenance (Frequency)

13. KPI Requirements – Distribution of Products Plan/ Design Products/ Services Produce Products/ Service Distribute Products Market / Sell Products / Services Manage Customer Service Perform Procurement • Carriers (Number) • Dock-to-Stock (Cycle Time) • Equipment/ Labor (Utilization) • Headcount • Inventory (Accuracy) • Inventory Finished Goods (Level/ Value) • Inventory Finished Goods (Turnover) • Inventory In transit (Level/ Value) • Inventory Raw Materials (Level/ Value) • Inventory Raw Materials (Turnover) • Picking/ Packing (Cycle Time) • Process Steps (Number) • Picking (Accuracy) • Many others… Measures in this area can be supported by SAP modules that captures events such as SAP’s Supply Chain Event manager (SCEM)

14. KPI Requirements – Marketing & Sale of Products/Services Plan/ Design Products/ Services Produce Products/ Service Distribute Products Market / Sell Products / Services Manage Customer Service Perform Procurement • In-Stock Ratio on Promoted items/ Rainchecks • Marketing (Cost) • Marketing (Cycle Time) • Marketing Effectiveness (Cost) • Marketing Effectiveness (Cycle Time) • Product/ Brand Forecast (Accuracy) • Forecast (Accuracy) • Forecast (Cycle Time) • Headcount • Event ROI • Shelf/ Floor Allotment • Shopping Frequency • SKU’s (Number) • Traffic Count • Transaction Size • Advertising Effectiveness (Awareness) • Advertising Effectiveness (Perception) • Annual Purchase Volume • Closure/ Conversion Rate • Customer Complaints (Volume/Frequency) • Customer Retention Rates • Customer Returns (Number) • Design/ Formulation/ Package Changes (Number) • Distribution Channels (Number) • Product/ Brand Forecast (Cycle Time) • Variance to Plan (Market Share) • Variance to Plan (Production Cost/ Volume) • Variance to Plan (Sales Value/ Units)

15. Use the Value Chain to Identify KPI Requirements Plan/ Design Products/ Services Produce Products/ Service Distribute Products Market / Sell Products / Services Manage Customer Service Perform Procurement • Adjusted Orders (Volume/Frequency) • Backorders/ Stockouts (Volume/Frequency) • Billing (Cost) • Billing (Cycle Time) • Credit/ Debit Memos (Volume/ Frequency) • Customer Satisfaction Rating • Equipment/ Labor (Utilization) • Headcount • Inquiries & Complaints (Volume/Frequency) • On-time Delivery Rate • Order Fill Ratio • Order Fulfillment (Cycle Time) • Order Processing (Cycle Time) • Order Processing (volume) • Process Steps (Number) • Response/ Wait Time • Warranties/ Claims/ Returns (Cost) • Warranties/ Claims/ Returns (Volume/Frequency) It is just as important to retain a customer as it is to attract a new one. KPIs can help an organization with high customer turn-over to refocus, and shift some of the marketing budget to customer retention.

16. Performance Measures by Information Category You can also organize KPIs around information categories or key organizational objects such as store, warehouse, balance sheet etc. • Store inventory performance • System inventory per store • Store inventory per store • Sales floor inventory per store • Backroom inventory per store • DC inventory per store • Backroom % store inventory • YTD inventory turn • YTD inventory turn • Inventory performance • BOM inventory • EOM inventory • Turnover • Monthly average inventory • Shortage • P&L • Balance Sheet • GM • AP leveraging • Working capital amount • AR turn • Inventory turnover • Average inventory • Delinquency rate • ROI Inventory • Store performance • Sales per payroll hour • Units sold per payroll hour • Average sale per unit • Average units per customer • Average transaction per payroll hour • Average sales per customer • Average hourly rate Performance Measures Income Statement Balance Sheet Store Retail • Gross Margin • Markdown • Stock Shortage • Inventories at retail • Marketing ROI • Industry measures: PMU%, RMU%, CMU%, ESMU% 08

17. Where do I start? Do NOT include any measure just because: • The data is easily available • It is already being used • The manager likes those numbers • It can be embarrassing to the organization if we don’t include some ‘good’ numbers • There is a political pressure to include a what others have done in the past Be very carefully what KPIs you include: Things are not always measured because they are important. They are important because they are measured!

18. What We’ll Cover … • Introduction & definitions • Defining, Prioritizing, & Implementing KPIs • Core KPIs (sales, finance & supply chain) • Examples of dashboards, scorecards & cockpits • Top-10 rules for performance management design & development roadmap • development roadmap - operational, managerial & executive KPIs • Wrap-up

19. Background Sedgwick county has 21 cities, including the city of Wichita with 354,000 people. It also has 27 townships and an area of 1,008 square miles. Sedgwick County is home to a number of aviation-related industries and is known as the “Air Capital of the World.”

20. Background (cont.) • The county has many organizations, such as public health, fire, emergency medical services (ambulances), sheriff and jail operation, forensic center, code enforcement, registrar of deeds, county clerk, criminal justice (district attorney, district courts), highways, mental health services, parks, solid waste, housing, election, HR, treasurer, tax collection, county zoo and coliseums, and much more … • A major challenge was to measure these many services effectively to improve accountability and achieve transparency.

21. Determine where you need to go and the steps to get there… • Develop Management Story • Develop Primary KPI and Secondary KPIs • Group KPIs into KPI Themes How Do You Manage? - Three Components of a Management Story • Primary Outcome: KPI • Identify Service Requirements (accuracy, timeliness, quality, volume) • Manage Resources to Meet Service Requirements (people, tools, process, communicate with funding source)

22. A User Experience Example Our first step is to navigate to the departmental KPIs 22

23. Accessing Frames Now we want to explore the summary cockpit for Public Safety 23

24. Accessing Summary Cockpits These KPIs are weighted measures of six KPIs for the emergency management services. The index is color coded for acceptable performance levels. We can click on any graph to enlarge it … 24

25. Drilling Down to Details Here we can see that the index has turned red. That indicates that further research is warranted. We added a new drill-down button to make user navigation easier … 25 Note: This is sample data from the test system

26. Exploring the Emergency Management Profile The profile does not contain benchmark data, but is informative about the activities. Here we explore the number of EMS 911 calls. From the EMS profile, users can access: Primary KPIs for the organization Program outcome KPIs Tertiary KPIs to manage the operations KPIs are for all levels of the organization 26

27. Program Outcomes for EMS Program outcomes include detailed benchmarks for monthly performance and are coded red, yellow, and green based on actual data. Here we see ambulance performance for one month. - Building hierarchies of measures gives everyone, at all levels of the organization, some benefits of using the cockpit. - Getting the management to use the same tool is a major benefit of SAP NetWeaver BI. 27

28. Tertiary Operational Indicators for EMS The tertiary indicators are most important for the director of Emergency Management Services. It may be combination of survey data taken periodically and system data loaded monthly. Don’t be afraid of merging periodical data, such as customer satisfaction and employee ratings taken every six months, with operational data from source systems 28

29. Tertiary Financial Indicators for EMS By making financial data easily accessible with the operational data, the department managers see a greater benefit of using the cockpits. The data can be annual, monthly, or weekly, as long as it is used for trend lining and management decisions. Be careful about adding daily information. When doing so, you are leaving management cockpits and have started building dashboards which have different usage communities and a variety of different tools 29

30. Back to the Walls This case study has 821 KPIs for management and operations – we only looked at one small area with 18 KPIs so far. Let us look at the senior management’s view of the cockpit and the community profile … For senior management, the KPIs tend to have more broad applications in terms of scope and level of aggregation. Policies and budgets are based on overall performance and not the day-to-day operations which may fluctuate by season. Dashboards – not cockpits, are used for operational management 30

31. The Senior Management Community Profile The Community Profile is a great way to summarize the organization in terms of descriptive statistics. It is a very high-level overview of the status of the organization. For commercial enterprises, this is an area that may contain a summary of all employees, locations by demographic information and organizational model, and/or summary production volumes or sales volumes for last quarter, or year, and trend lines. Keep the information very summarized 31

32. The Community Profile of an Organization The community profile should be organized in sub-categories that are informative, interesting, and have long-term trend line value. This example has six sub-groupings of measures and a total of 34 KPIs. For example purposes, we will explore the long-term Economic trend lines

33. Community Profile – Economic Indicators For long-term indicators, don’t be afraid to use external data and data that has annual updates. The collection of this data is simple, low cost, and provides everyone with a shared knowledgebase. In the community profile, the data should be long-term trends and relevant to strategic decision making

34. Keep the Cockpit Useful for a Large Community By keeping the cockpit “wide” and for a large user community, we were able to provide a shared view of a highly diverse government organization Build a “wide” cockpit with shared measures that is widely available to all users 34

35. Query Performance and Simplification in Infocubes For Non-SAP data Since single KPI values for a given department and period are stored in the SQL Server and transmitted to BW. The Queries takes on average 0.2 seconds !!!! For SAP data The details are kept in the DSO and the InfoCube has only the single value for the department for the period. Query speed is therefore only 0.2 seconds on average…

36. Automating Thresholds and the KPI Data from Non-SAP Systems The data table in SQL server provides a set of columns that capture the summary of the results for the period for a department. This allows the department to update the KPI values for a short time period to correct any errors (done in a simple ASP page) Threshold values (Red, Yellow and Green) are captured for each period, so that the history of historical thresholds can be preserved.

37. Try to avoid empty spaces, but don’t force unrelated measures into the cockpit view — it confuses users Don’t use as many types of graphs as possible, and never mix more than 3 types of graphs. If you use more, users have to interpret the pictures as well as the data. Missing data points add irritation. (it is hard to hide bad data in a cockpit) Rules for Graphs and Real Estate 37 37

38. There is nothing wrong with using the same type of graphs on a cockpit (e.g., tachometers or line charts). Users adapt quickly and can absorb the information faster. Cockpit Rules for Graphs and Real Estate (cont.) 38

39. Tracking Changes Over Time – Annual Measures in Context For an organization to act strategically, you need annual performance measures to see the big picture. You often have to merge measures also. This is of little value to the operational managers, but of great value to the CFO, CEO, CxO, and upper-level executives. When the executives are looking at their organization, they are frequently examining external data at an annual level 39

40. Use of Complex Graphing of Annual Measures Sometimes measures have little value unless they are seen in context of other indicators. You can use complex graphing with different scales to address this. Example: Number of fatalities in road accidents have limited value in assessing vehicle safety without seeing the context of total number of accidents. We can click on the graph to examine this closer 40

41. Use of Complex Graphing of Annual Measures (cont.) We now have two measures over five years of different scales. However, you can merge these in a single graph with two scales. 41

42. KPI Change Management Process IT responsible Change Request form Approved? Integration tested QA environment No Business responsible Sr. mgmt. responsible Yes Yes Approved? Moved to production No Submission No Approved? System tested Devl. environment Complete? Scheduled No Yes Yes Change Request form Review recommended? Developed Unit Tested Devl. environment No Yes Approved? No Yes

43. The Change Management Form – Page 1 • To make this process work, you need a formal instrument. • The instrument can be online (i.e., a Web page), electronic (Word document), or a paper-based system. • The form should contain at least these fields: The front page that the requestor fills out

44. The Change Management Form – Page 2 • This page is used by the system administrator or the project team • The purpose is to have controlled changes that are scheduled and tested appropriately The back page that the system admin and approver fill out 44

45. What SAP Tool Should I Use? – Other Options There are many options and sometimes the choice is based on what you are familiar with and whether you enjoy using new tools

46. What We’ll Cover … • Introduction & definitions • Defining, Prioritizing, & Implementing KPIs • Core KPIs (sales, finance & supply chain) • Examples of dashboards, scorecards & cockpits • Top-10 rules for performance management design & development roadmap • Wrap-up

47. Top-10 rules for performance management design 1. Keep KPIs at an aggregated level. If it is a list of numbers it is performance measures and not KPIs. 2. Use statistical methods to determine what your KPIs should be. The objective is to increase net income. Question: Can you determine what the KPI should be by looking at this report?

48. Top-10 rules for performance management design 2. Answer: Use a correlation matrix. Here we see what is correlated with net income & what is not. These are the primary KPIs for this objective. 3. Keep detailed data in a Data Store Object (DSO), and roll it up to InfoCubes for analysis. Use even more summarized cubes for your KPIs. Query performance on dashboards are critical to your success. 4. IT does not own KPIs. Make sure your have a change control board and executive (not senior management), sponsorship.

49. Top-10 rules – Types of KPIs 5. Strategic KPIsTime-horizon: 6 months to 5+ years and should be forward looking based on historical and market data. Users are CxOs, shareholders and board of directors. Ideal measures are summarized measures such as obsolete product mix (sales trends), return on equity/Investments (ROE/ROI), weighted average cost of capital (WACC), market segmentation, customer segmentation 6. Informational KPIsTime horizon: 1-12 months and is for senior & middle management. Ideal KPIs include production data, vendor performance, monthly and quarterly reports, division profit & loss KPIs, inventory, employee data etc. 7. Operational KPIs Time horizon: 1 day to 1 month. Changes outside tolerances require immediate action. User are line managers and operators. Typical KPIs include shipments, production plans, transportation, customer complaints, stock requirements, capacity management.

50. Top-10 rules – Assigning KPI weights 8. Create KPIs that are clearly defined & assign weights to them. We can take example #2 further (income statement), and use regression analysis to tell us how much each factor should be weighted: Result: Monthly sales forecast model (99.97% accurate): Net Income = €128.86 + (0.42 * sales amount) + (0.63 * manufacturing cost) – (0.56* other expenses) – (0.29* tax amount) (guess what my KPIs & weights will be)