What is a key performance indicator (KPI)?
A key performance indicator (KPI) is a metric a business has chosen to watch because it reflects progress toward a goal, paired with a target and a period. On-time delivery rate, days sales outstanding, first-call resolution, scrap rate, and gross margin per order are typical KPIs. A company tracks hundreds of metrics but should run on a handful that leadership agrees matter.
A KPI needs a precise definition. On-time delivery must say whether the clock stops at ship, at carrier scan, or at the customer dock, and whether partial shipments count. That definition belongs in a semantic layer or data dictionary so every dashboard computes it the same way.
Why KPIs matter
KPIs are how an organization converts strategy into something measurable, and they are the yardstick for any AI investment. A proposal to deploy a demand forecasting model should name the KPI it will move, such as stockout rate or inventory days, and the starting baseline. AI value tracking is largely the discipline of measuring that KPI before and after.
A regional retailer tracks sell-through by store and category each week. When it introduces an AI replenishment tool, it keeps the same KPI and compares test stores against a control group, which gives a clean read on whether it worked. Two cautions apply. KPIs that people are paid on will be gamed, so pair each with a counterweight, such as service level alongside inventory turns. And a KPI nobody can influence within the reporting period records history without guiding any decision.