Performance measurement metrics are critical for a successful supply chain management. Let’s assume that your company has implemented an advanced supply chain planning and execution system with logistics and other related systems. You’ve improved demand management and strengthened partnerships in your supply base. The company has also redesigned and changed all key business processes for conversion from “push” to “pull” lean manufacturing. Key suppliers and customers are beginning to sign on for collaborative participation in the supply chain process. In and of itself, just implementing these changes represents some major steps toward a high-speed lean supply chain. Currently, the right performance metrics for gauging everyone’s performance and level of improvement are essential to supply chain management’s success.
Ineffective performance measurement will never reveal what really needs adjustment in your business and externally in the supply chain. Performance improvement, effective collaboration with suppliers and customers to streamline the supply chain is an iterative process. This means that how you measure that performance is a critical and continual process. Many manufacturing companies continue to evaluate their performance and make adjustments by focusing on financial data that looks to the past rather than the future.
Why Conventional Measurements Fail
In the traditional monthly operations review, senior management spends an inordinate amount of time discussing the financial results for the previous month or quarter. In addition, there is usually a lengthy review of the budget versus actual expenditures. What’s more, managers at different levels are expected to answer questions about variances and shortfalls, even though many such explanations end up being pure guesswork. Traditionally, monthly operations reviews rarely result in systematically changing the company’s future performance because the operations review process does not connect and coordinate strategy with operations and achieve lasting cost improvement results.
These meetings actually encourage managers to modify their activities so that management will not grill them next month. Paradoxically, the modifications they institute in their units are often counterproductive to the company’s real strategy. Why? Because the managers are seeking to satisfy standards that fail to incorporate all of the real drivers of business success. Business process improvement is sacrificed because the performance measurement system does not work effectively.
For example, a purchasing manager may get his or her purchase price variance (PPV) in line with what the operations review team wants but possibly at the disconnected cost of shortages in materials and problems with quality. Strongly customer-focused metrics often do not figure in these traditional monthly financially-orientated reviews. And the common focus on plant utilization, production efficiency, and overhead absorption rewards behavior that has little to do with customer satisfaction.
Performance Measurement Counter Productivity
In fact, performance measurement systems can have everything to do with counterproductive actions such as building up inventory or controlling purchase price variance with vendors to satisfy ineffective management accounting methods. Here are some of the telltale symptoms of a management that focuses on the wrong metrics.
- Engineering continues to design products that are not designed with a lean supply chain in mind.
- Accounting is focused on historical, myopic measures that emphasize sub-process performance optimization without considering the performance of the entire process.
- Sales is encouraged to focus heavily on booking orders without regard for what product mix was planned to be sold and produced or for what margins will be realized.
- Plant management is totally focused on shipping dollars, efficiency, utilization, and overhead absorption metrics that run counter to reducing cycle time and increasing customer satisfaction.
Without properly focused and balanced performance measures you won’t see process and functional performance as it really could be. Instead, you will likely see process and functional performance as you think they are. That can lead you to make decisions that are less than optimal from the point of view of the whole business.
Revising Performance Measurement to Match Strategy
Any complete strategic plan must specify goals, strategic objectives, actions, and the final performance measures by which management and stockholders will gauge success. Top management’s performance can usually be measured by sales volume, market share, cash flow, profit, ROI, dividends, and, if publicly held, market value. Operating management, however, is often disconnected from the strategic plan. As a result, business processes and activities under the control of operations are not affected in the ways that will make the company more profitable or give it more market share.
This misalignment of performance measurement between strategy and process performance in operations is often poorly understood. It certainly does not receive the priority it should from top management. The critical success factors management defines at the strategic level must be transferred to the operations level measures and clearly linked to business process performance (see Figure PM-1). Successfully linking the real drivers of overall business performance at the operations level is a prerequisite for effective performance measurement.
A primary purpose of measurement is to assess performance levels and to analyze what is happening and where. The most beneficial aspect of performance measurement, however, is pinpointing problem areas and focusing attention on actions that will have the best impact on overall business performance.
Without good performance measurements, it is easy for companies to fall into a very common trap: Employees keep busy with all kinds of activities but achieve few of the desired results. Effective performance measurement is the compass that guides management toward meaningful results at the process level, results that will tie in directly with the company’s goals.
Wrong Measures Cause Havoc
It is very difficult to improve something that you fail to measure properly. The pressure to focus energy on activities that really matter must come from the highest levels of the manufacturing enterprise. Top management may well know about the need for making improvements, but unless the right performance factors are measured and rewarded, nothing usually changes. Today’s world-class manufacturers are continually tracking process performance factors that ultimately impact business success, such as order-to-delivery cycle time, throughput, inventory levels, quality, operating expenses, and customer satisfaction.
Inappropriate measures often lead managers to respond to situations incorrectly and to reinforce undesirable behavior. For example, if manufacturing’s goal is to focus on maximum overhead absorption, the result is often a bloated inventory and decreased customer service. Measuring and driving toward a singular metric, such as purchase price variance or labor efficiency, often leads to higher overall costs that are invisible to traditional accounting methods. Getting a low price on material is important, but ensuring an uninterrupted supply of needed material to maintain the production schedule and meet customer deadlines is more important. Just think about the real cost of material shortages. The best purchased material value is a result of price, quality, and fast on-time delivery.
Keeping an entire organization focused on the right objectives and moving in the right direction is no easy task. Of course, what managers think their superiors consider important, based on the formal or informal measurement system, determines what is going to get done. For example, if something like cycle time gets only lip service from top management, then cycle time essentially becomes a secondary issue.
If your company has conflicting performance measures, your managers are certain to have differing values and directions, many of which will be disconnected from your company’s strategy. Without uniform expectations, it is virtually impossible to keep an organization marching toward the same goals. This, by itself, makes reevaluating how you measure business processes and functional performance a very high priority.