Setting your sight lines: how to position performance measures to connect staff to an organization's goals.

Managers often struggle to sustain the changes required to remain competitive. Often this is a result of poor implementation, or a lack of training. What many managers overlook is the role of performance measures in cementing changes within an organization months and years after implementation.

In the last issue of CMA Management ("Profit driver management," May 2004), Jean-Francois Fontaine outlined again some of the basic benefits of applying theory of constraints to an organization's production. This month, we look at a case study of an organization that has used the theory of constraints to improve its human resource performance.

Embassy Food Specialties and TOC

Martino Brambilla, owner and president of Embassy Food Specialties, was ready to take his company to a new level of performance in the flavour industry. To do so, he launched an improvement program that would eventually affect all of his staff and sales force. Brambilla had read about the theory of constraints (TOC) business philosophy, and the ideas resonated loudly with his attitude towards running a business. TOC advocates actively managing the constraints present in every system, and ensure that measures used to monitor or reward directly align people's actions with an organization's goals.

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Prior to TOC, staff at Embassy had 17 different measures in place. Some measures were captured for feedback, but most were used to determine staff bonuses. The measures ranged from per-shift output, to the percentage of orders shipped correctly and percentage of orders shipped on time. Most of the measures had a reasonably solid foundation for existing--who can argue with measuring the rate at which orders are shipped to customers on time.

On close examination however, seemingly small problems with certain measures actually turned out to frequently reward staff for taking actions that negatively affected the business. For example, on a day that a couple of large orders and many more small orders are to be shipped, shippers would achieve a better on-time delivery measure by shipping all of the small orders, and leaving the big ones until the end. If the shippers are unable to get all of the orders out, they may have actually failed to ship half of the day's potential revenues.

The sales staff was rewarded for exceeding revenue targets in existing accounts, as well as growing volumes in new accounts. Using TOC product profitability measures, it became clear that not all products earned profits for Embassy at the same rate.

TOC advocates a modified form of direct costing to evaluate product profitability. This means that there are no allocations of labour or over-head. The metric used is throughput, or sales less total variable costs (typically only materials, though commissions or other variable costs may be included). For example, one product (A) may yield $500 of throughput from $1,000 sales; another (B) may yield only $250 from the same sales figure. At the same time, products are evaluated in terms of how much capacity of key limited resources (constraints) they consume. Product A may consume five times as much capacity per unit as product B, actually making it less profitable for the business. In other words, product A will generate fewer throughput dollars for a fixed amount of constraint capacity.

Sales dollar days

Brambilla decided that he didn't want sales people, he wanted throughput people. By changing the reward basis to throughput from sales, Brambilla completely shifted the focus away from low margin, easy-to-sell products towards the products that make Embassy more money.

Brambilla decided to base bonuses for all non-sales staff on a measure of late shipments that he calls "sales dollar days." This measure captures the sales value of all orders that are not shipped on the due date, and averages the value over the course of a month (see the chart sample, which is posted daily in the plant and office).

Staff members in the development and quality assurance department were initially confused about their impact on achieving this measure--after all, they may not have anything to do directly with a particular order. As Brambilla explains, "The R & D staff has a great influence over our sales dollar days. As the group that initially develops the formulation, they can rationalize ingredients and use products already in stock. They have to properly notify the purchasing department on the lead times and issues regarding new raw materials."

Embassy Food Specialties requires scrupulous adherence to good processes in making flavours and ingredients. By tightening up the order management processes, they have been able to improve their delivery performance while at the same time reducing the levels of inventories needed to support operations. Key in achieving these results was stripping away measures that could in any way conflict with good order flow. Embassy is now positioned to go after new opportunities in the flavour and ingredients marketplace, knowing that all employees are measured in a manner that will focus them on delivering products on time and at the best profit rate.

By Peter Milroy, CMA

Peter Milroy, CMA, ([e-mail]) is a Director with Constraints Management Systems Inc.