Goldratt on KPIs and OKRs

In today’s competitive business environment, organisations rely on KPIs (Key Performance Indicators) and/or OKRs to measure progress and gauge success. Dr. Eliyahu M. Goldratt, the mastermind behind the Theory of Constraints (TOC), offered invaluable insights on the subject. Here, we unpack Goldratt’s wisdom on KPIs and OKRs

The Ultimate Business Goal

Goldratt’s seminal work, “The Goal”, highlights his belief that every profit-making enterprise shares a dual-purpose: earning money presently and securing future profitability. Therefore, the KPIs or OKRs a company selects should echo this core mission.

T, I, and OE: Goldratt’s Global Measurements

Goldratt delineated three pivotal metrics for organizational assessment:

• Throughput (T): This is the velocity at which a system produces monetary value through sales.
• Inventory (I): It refers to all the funds an enterprise invests in products earmarked for sale.
• Operational Expense (OE): The total expenditure a system incurs to morph inventory into throughput.

Balancing Local and Global Measurements

Goldratt’s teachings stress the differentiation between local (pertaining to individual units or departments) and global (company-wide) metrics. Enhancing a local metric, like a department’s efficiency, doesn’t assure that the whole organisation will see corresponding gains.

Potential Pitfalls: Negative Side Effects

Goldratt cautions businesses: ill-conceived KPIs might inadvertently promote counterproductive behavior. For instance, myopically concentrating on cost reduction could compromise product quality or erode customer trust.

Vanity Metrics: Illusory Success

For Goldratt, not all metrics are born equal. He warned against “vanity metrics”, numbers that, while impressive on paper, might be hollow and not contribute to the organization’s principal objectives.

The Interplay of Cause and Effect

One of the pillars of TOC is a deep appreciation for cause-and-effect relationships. KPIs, Goldratt believed, should shine a light on these dynamics, rather than simply record disconnected data.