SIMULATION AND KEY PERFORMANCE INDICATORS:

Key performance indicators (KPIs) help an organization define and measure
progress toward organizational goals. Once an organization has analyzed its
mission, identified all its stakeholders, and defined its goals, it needs a way to
measure progress toward those goals. KPIs are typically used for that purpose
as measurements that are quantifiable, agreed to beforehand, and reflect the
critical success factors of an organization. They will differ depending on the
organization, but within a vertical industry sector some should be common and
used to benchmark a company�s performance against competitors.
A business needs to set targets for each KPI. A company goal to be the
employer of choice might include a KPI of �people turnover rate.� After the
KPI has been defined as �the number of voluntary resignations and terminations
for poor performance, divided by the total number of employees at the beginning
of the period� and a way to measure it has been set up by collecting the
information in the human resources system, the target has to be established.
�Reduce people turnover by 5% per year� is a clear target that everyone will
understand and be able to take specific action to accomplish. The question then
becomes: What are the specific actions that will deliver the objective?
Business process management is about managing corporate or business performance
through managing those processes which drive the firm to the desired overall objectives.
KPIs therefore need to be designed at various levels in order
to be relevant at an individual process level. While the KPI defined above
concerning turnover rate might be relevant for the board, it is not appropriate
for the supervisor of the human resources department�s contact center. That
center�s performance may well have an effect on turnover rate, but it requires
its own process-level KPIs, perhaps based on responding successfully to employee
questions, in order for it to be managed effectively.
Simulation and optimization supporting the identification and design of
KPIs have been used extensively to help improve processes and consequently
to ultimately improve business performance. Simulation can be used to both
help define and set targets for a KPI. This feature is in addition to the use of
simulation to identify process changes (resources, rules, and structural needs),
which deliver improved performance. Simulation aids the definition of a KPI
(that is, the equation and data of which it is composed), through examining the
reaction of that KPI under different circumstances. This procedure ensures that
the KPI does in fact properly connect to the organization�s goals and will help
drive the appropriate behavior and reaction to different potential events. Most
KPIs are developed directly from the overall goals or critical success factors
of the organization. Process-based KPIs tend to be focused on results or outputs
from a process, such as customers served per hour or claims processed.
Simulation is also valuable in the setting of targets against KPIs (such as
the number of calls to be answered per hour), because the simulation can
accurately assess what is achievable in theory by the process and resources
employed. Many KPIs are now presented as part of a �digital cockpit,� using
gauge or dashboard-style displays. Depending on the KPI and the targets selected,
they often include some use of zones to highlight acceptable levels (e.g.,
green, yellow, and red). It is important when calibrating these gauges to understand
the effect of natural fluctuations due to inherent randomness within processes
or behavior. Simulation can support this calibration to help ensure that
unnecessary reaction to natural short-term fluctuations does not occur.
Processes have a series of steps, and at each step measurement can be taken
to better understand the behavior of the process under different circumstances.
Identification of key points in the process and the relevance of specific measures
(probes) in predicting failure of the process can provide significant opportunity
for improved process management and business value. Effective process monitoring
through probes at specific points in the process involves watching factors
to give prior warning that the target levels are under threat. Simulation is able
to help identify these probes and the threshold values that indicate a deterioration
of the process which will ultimately end in an unacceptable KPI.