Friday, May 22, 2009

Monitoring Business Performance Leads to Improving Business Performance

In a recent article, I focused on the issue that the operation of any organization has plenty to offer in terms of letting management know what is working and what needs to be addressed. Once there is agreement on this, the next questions usually relate to what to do and how to do it. The key to success here is to get executive visibility into the operation so that focus can be put on issues that 1) matter and 2) can be controlled and affected. Monitoring current and future performance factors will be much more effective than monitoring performance for decisions made in the past. For instance, controlling the purchasing process to buy only what is needed when it is needed will affect the bottom line much more that paying attention to the utilization rate of a fixed asset which was bought and paid for some time ago. Three steps can be utilized to facilitate this process of monitoring key issues for performance improvement:
  • Measure Critical Few Performance Criteria
  • Analyze Results and Recommend Actions
  • Implement Focused Improvement Activities

Measurement activities need to target the life line issues that must be satisfied in order for the organization to survive. They also need to be factual, without emotional influence, so that owners of the process can objectively evaluate their performance and identify issues. Selecting a few key measures that tie directly to success will focus attention on the factors that affect success and will allow people to get a quick, substantive picture of current performance. Using drill down type metrics to provide more detailed information regarding the specific performance is fine, but it is most important that the appropriate message is received by the appropriate people via the top level measure. Areas to focus on include:

Customer Value: This is the most important area for any organization. What the customer considers as value is the only thing that is of importance to the organization. Having everyone understand how their actions relate to what the customer wants will allow them to re-evaluate what they do so that they can focus on eliminating wasteful non-value added activities. One way to think of value added activities is to consider if an item could be listed on the invoice for the activity in question. If not, then its value should be questioned. Suggestions for measures here include on-time delivery, total order lead time, quality per complaints/returns, and repeat business or lost customers. These metrics need to be at the customer level and not departmental level since the customer sees one organization, not a group of departments, some that perform well and some that don’t.

Operational Performance: Operational flexibility will allow the organization to adjust with the changes in demand without having to make major sacrifices in order to do so. By making a connection between what the operation does (actual supply) and what it needs to do (actual demand), those involved can begin to understand which of their activities are wasteful and which are value added. Suggestions for measures in this area include total operational throughput (as defined by deliveries to customers, not additions to inventory), processing lead time (quote to cash), non-capital investment (inventory, supplies, etc, not fixed assets), and ability to make changes to the schedule.

Financial: Cash. Let people know what is happening to the money in the organization on a regular basis (weekly or daily) and let them know how they affect this cash flow. Once workers understand this and see their impact, they will probably focus more on making good decisions. Obviously, this information must be presented in accordance with corporate information sharing policy, but the more people can relate their actions to the money being spent, the more they can affect the outcome. Some suggestions include cash flow - inflows and outflows, spending trends as a function of shipments, and comparisons to plan that are adjusted for volume differences. Simply showing the bottom line is ineffective because people typically cannot relate their actions to this measure.

All too often metrics are created, detailed and publicized that have little effect on improving performance. In order to be effective, it is important to improve the executive visibility to operational drivers, replace “gut-feel” decisions with “fact-based” decisions and educate everyone in the organization about the operational life-line drivers of performance. By making a direct connect between the metrics of performance and the actions of people, positive results from improvements are possible.

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