Ask yourself whether your company is one of many which has fallen into this classic measurement trap: You have performance measures, but they are not linked to actionable plans to drive progress toward the company's goals.
Measures must be aligned to strategy, but it's important that the measurements be linked to logistics execution. Without that vital link and ample communication, the people performing the logistics tasks in your organization won't see the value or the connection between what they do and the larger corporate or division strategy.
Strategies are a little too “up there” to be immediately significant at a functional level, so you must communicate on a level that is significant on the shop floor. Measures may actually be a good means to communicate the importance and relevance of a strategy.
Here's how the disconnect looked for one Fortune 50 company. A senior manager was demonstrating what a great job her company had done in establishing measures. They had created a series of scorecards, and the results were posted on an internal website. It was a simple matter to click through the current measures for any group in the business unit. But when she pulled up a sample scorecard and was asked, “Is that a good thing or a bad thing?” she had to admit she had no idea.
When establishing measures, two key questions must be answered before proceeding:
n Will I change my behavior, or ask others to change their behavior, based on this measure?
n Does the potential benefit gained from this information exceed the cost of obtaining it?
The toughest part of establishing measures is making them meaningful in the right way. Put customer needs and expectations first in importance of what you measure. Next, take a process view rather than a functional approach. To do this, you must identify who owns a process and what drives the process.
Remember that you can't do it all at once. You're most likely to tackle the items first that are causing the most pain. Communicate down to the shop floor level how the employees' actions will affect or support your overall strategy. Do some root cause analysis and link measurements to compensation.
To overcome the problem that people working to support a strategy often don't understand their role, break the strategy down into initiatives and then into tactical steps:
Segment measures. Which are the most important? Does the cost of the measurement balance with the value or benefit of measuring? For instance, measuring customer satisfaction requires knowledge of what is important to the customer. At one company the logistics group was measuring cost per loaded mile. Performance was driven by what was being measured, so more effort was spent cramming product into every space on a trailer while encouraging sub-optimization in other areas. The cost per loaded mile went down, but this ignored the customer's real need, which was lower total cost.
Communication is also important, and not just communication within your organization. In another example where on-time delivery was measured, the shipper ran into problems in spite of the fact it was making deliveries within the 15-minute windows established by its customer. But, because the goods were less desirable to handle for the customer's warehouse labor, the warehousemen tended to put the goods aside at receiving and dealt with them at a later time. When the shipper and consignee examined the problem, the shipper's on-time records were accepted because the logs it used were accurate and thorough (and also included measurements when performance failed).
So, having good measurement practices and disciplines can be an advantage outside the four walls of the organization. To be accepted, good measurements must be quantitative, not subjective.
Some companies choose to approach overhauling or creating their entire measures process from scratch. However, this approach can be overwhelming. To get some quick wins ask, “Where are we having the most pain?” Then focus on developing appropriate measures and action plans in those areas.
Change is difficult for all organizations, but it's a fact that change happens faster and with broader support when it is addressing known problems that threaten the health of the organization. By mapping the pain points against the strategic goals and isolating the significant factors, you can find a quick-win starting point for implementing — or re-crafting — performance measurements.
To demonstrate how the process works, let's select the following strategic initiatives:
n Become a customer-focused organization. “Customer focus” is hard to define for anyone, but especially difficult to explain to people who do not have direct contact with the customer.
n Improve cash flow, specifically by reducing cash-to-cash cycle time. Cash-to-cash cycle is easier to explain, but the math is complex.
Two significant issues are customer complaints and rebilling of invoices. By breaking down the pain points into root causes (errors on shipments and invoices contributing to both problems) and showing the linkages back to the strategic goals, you can demonstrate to both the accounting and shipping departments how their performance affects the customer — and the organization overall.
Acting on issues like these often involves other departments. For instance, sales must provide clear, accurate information on the order for clean shipment and invoicing to take place.
Companies have been most successful implementing meaningful measures by limiting their initial scope as they change their measures, so don't try to boil the ocean. Small pilot programs implemented quickly and improved over time are generally more successful than the large project that tries to analyze all components and implement a new scorecard all at once.
Another common issue is how to set targets and benchmarks. There are two views on this:
n Only by understanding how your performance compares to others in your industry can you identify where improvement efforts will be beneficial.
n The only benchmarks that matter are your customer's expectations.
In general, the latter should be your starting point. After you've addressed the critical factors demanded by your customers, you will have the data necessary to join benchmarking studies and begin to evaluate your company against your competition.
In the words of management guru Peter Drucker, “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” That pretty much sums up the wasted effort of the measurement trap — collecting measures without driving actionable change to meet the overall corporate objectives and goals.
Keep in mind that you may want to start measurement with someone other than your biggest customer or your most profitable partner. Look for someone in your supply chain who may be experiencing the same pain as you, someone who may be willing to work with you on measurement in order to make some gains.
When establishing measures, companies must keep in mind that performance measures should be used to drive a change in behavior to help companies meet their goals. Simply having a measure and doing nothing with it results in a data dump. The key is turning all that valuable data into information that is meaningful and actionable.
Chief logistics officers should strive to keep the measurement program positive, not penal. When employees see management actively fixing problems (instead of fixing blame), removing obstacles and helping them reach their goals, they will get enthused.
As you move into an assessment of your measures, keep in mind this point made by J. Thomas Mentzer of the University of Tennessee: “What gets measured gets rewarded. What gets rewarded gets done. What is it that you want to get done?” LT
Mike Ledyard and Kate Vitasek are partners in Supply Chain Visions (www.scvisions.com), a consulting organization specializing in business process management and performance measures.
Five rules for good measurement
1. Clearly articulate the objective(s) to be met. Do your people understand your strategy? Do they understand their role in helping you achieve that strategy? Have operational and functional tactics been linked back to the strategic objectives?
At one company, over 40 people were asked to state the division's vision and goals. The results clearly demonstrated the underlying cause for the friction in the working relationships between departments. The view of the goal and of the workers' roles in achieving the goal caused the various departments to focus their efforts on disparate initiatives. When they began pulling together, bottom line results improved, as did the morale of the workers.
2. Link specific measures to the objectives and set targets. This will help translate the strategic objective into a tactical common denominator. For example, if the overall objective is “to increase customer service,” one key measure might be to improve customer service levels in the call center by reducing wait time. The goal could be “to answer 80% of all customer calls within 20 seconds.”
Clearly linking a tactical measure to a broader objective will help employees understand where to focus. An important step is to determine the measure of success — or target — so employees can readily know when they have reached the goal.
3. Once clear expectations have been set, measure progress against the goal. Statistical process control methods are good for measuring. However, for many companies the Six Sigma methods and statistical control charts are deemed as too stifling and do not fit into more “unstructured” cultures.
This does not mean that companies whose culture lacks rigor should not measure. Many companies have been very successful using informal methods such as Excel spreadsheets — or even simple graph paper — that plots their progress against the goal. The main focus should be that employees can easily understand and track their performance against the company's objective. Using Excel spreadsheets is often the simplest way to get employees to maintain the measures.
4. Establish a process for root-cause analysis and corrective action plans. So far, so good — but now comes the hard part. What do you do if you are not meeting your goal? Continuous improvement methodologies, such as the Deming Wheel PDCA (Plan/Do/Check/ Act) or the Six Sigma DMAIC (Design/Measure/Analyze/Improve/ Control), are good guidelines to follow.
For companies that are not familiar with or have not invested in wide-scale process improvement methods such as Six Sigma, a simple Pareto chart technique works. The purpose of a Pareto chart is to help determine the root cause of why employees are not meeting their goal. In simple terms — what are the top reasons that there is a problem? The investigation into root causes should be done by the working team that is performing the function to determine the barriers that stand between them and success.
5. Fix the problem and take action. This is where results begin. Employees who understand the problem or barrier to meeting the objective can develop action plans to fix the problem.
Having the best metrics in the world won't mean a thing if it all gets reduced to a simple “report” full of data buried in the paper stacks on a manager's desk. A company needs to act on its information to create a positive change. The goal of any performance management program should be to turn key data into information that can be used to create a positive result for the company.