Making performance measurements meaningful to the performers.
The plant accountant looked at the latest plant variance report and said she doubted the packaging department could ever achieve the current labor standards.
"Our negative labor variance has grown this month to $80,000", said the plant accountant. "The standards must be wrong."
The production manager said he thought the standards reasonable and that there were some opportunities for improvement, but did not know where to start or how improvements could be measured.
The discussion occurred shortly after we were called in to help develop improvement programs and performance measurements systems.
Unfortunately, such discussions are not unusual today as more and more companies struggle with the need to improve efficiency but do not know how to relate a financial performance indicator (conformance to a labor standard) to their operations. More importantly, senior management does not know the cause of poor labor efficiency and is unable to develop plans to achieve improvements.
At the food products company, some interesting things came to light as we worked with the company to improve their performance measurement systems.
A divisional general manager said all employees knew the importance of working together to maximize profits but admitted he had some concerns. Quality had slipped and inventories of finished goods had been creeping up, but a number of key accounts had been short-shipped.
"With margins as slim as they are, we have to find new ways of doing business at a lower cost, particularly administrative costs," said the general manager.
Why was this company having performance problems even though management and employees were highly qualified and supported efforts to improve profitability?
The reason was the company's performance measurement systems were inadequate and, as we discovered, the key rules to performance measurement were being broken.
This was preventing them from attaining significant improvements in performance and achieving their potential to be a world-class manufacturer.
IDENTIFY CRITICAL SUCCESS
The first rule in performance measurement is to understand the critical success factors of the company. Speaking to the general manager we discovered that the company had a number of worthwhile initiatives under consideration including:
* Empowering employees to identify raw material quality issues before the manufacturing process takes place
* Becoming a more customer driven organization
* Improving performance and efficiency of sales and broker management
* Reducing total administrative costs
* Implementing a cross-docking distribution facility.
We discovered that these initiatives had been pushed back and forth within the organization for a number of years. The general manager described the progress of these projects by saying "They're in the hopper and we're working at them." Through further discussion we learned that these initiatives were in fact tied to the company's critical success factors:
1. Quality (defect-free) delivery of product was the most important factor contributing to the company's continued success. Through the initiative of empowering employees to identify raw material, quality issues management was able to identify raw material deterioration as the root cause of their quality problems.
2. Customer service was one of the factors critical to the success of the consumer products division's penetration of the consumer market. Becoming a more customer-driven organization was key because of management's decision to expand this division.
3. Resource management had become critical to the competitiveness of the company. Improving performance and efficiency of sales and broker management was initiated in response to a benchmarking study that revealed their major competitor's total sales cost as a percentage of sales was one percent lower. In addition, it was apparent that their competitor's sales effort was more effective as evidenced by their improved market share over the past few years.
4. The cost of administration had been a concem of management for a number of years. Tougher competition domestically and the introduction of new competition from the U.S. had made it imperative that the company become a low-cost producer and distributor in order to survive.
5. Flexibility was becoming more important in attaining a competitive advantage. Implementation of a cross-docking distribution facility was how senior management hoped to be more responsive to their increasingly diverse customer base. The company's objective was to deliver at a cost that would allow them to profitably service as many markets as possible.
Though management was initiating the right projects consistent with their critical success areas, ie. Quality, Customer Service, Resource Management, Cost, and Flexibility, their objectives were not well communicated throughout the organization. As a result, managers responsible for implementing these initiatives were unable to rank the many projects they were managing.
Measurement to Critical
The second rule in performance measurement is to link performance measures to corporate objectives. The general manager was not clear about the progress of the projects he mentioned even though they were thought to be critical to the success of the company. The reason was that the projects were not formally incorporated into the day-to-day performance targets of managers and supervisors and there were no systems in place to measure progress.
After working with members of management and supervisory staff in one plant division, work teams of managers and supervisors put together logical performance chains for each of the critical success factors. Figure 1 shows how performance measures could be linked with the company's critical success factors at all levels of management.
As an example, for the key success factor, Quality, daily indicators of customer delivery could now be measured at the lowest level of management and unsatisfactory performance could be acted upon quickly. Middle management could now receive weekly indications of the plant's progress in attaining customer service targets.
These indicators enabled them to identify weaknesses in the customer delivery process, take corrective action and measure the results. Senior management could now measure improvement in customer service on a monthly basis, provide new direction to managers and reward superior performance.
Overall, linking performance measures to critical success factors ensured consistency of purpose among all levels of management. Managers understood the impact of their day-to-day actions on these measures and those higher level measures being reviewed by senior management.
Measure Only Those
Factors that can be
The third rule of performance measurement is to measure only those factors that can be controlled. In the food products company, the main performance target of plant managers and supervisors was plant profitability. Plant managers, however, had little influence on the price of product they delivered nor the activities of the sales force effecting the volume or mix of product sold. Although they were conscious of plant profitability, both managers and supervisors had difficulty making the connection between their activities and plant profit.
As a result, plant managers and supervisors were not focused on the factors they could influence, such as labour productivity, material yields and adherence to production schedule. Instead, they spent a considerable amount of time resolving inter-divisional transfer pricing issues that had no impact on company profitability.
Recognizing the need for change, senior management reorganized the plant's reporting and accountability structure. Plant managers were given targets to achieve in four areas: Quality, Delivery, Cost and New Product Introduction.
The sales and customer service area was reorganized as well. Sales and customer service managers were given performance targets for obtaining orders and negotiating prices, ensuring error-free billing and collecting receivables. New performance measures were implemented for the plant and the sales organization and performance targets were reviewed at monthly management meetings.
Holding managers accountable for only the key profit variables under their control enabled the company to improve management participation and enthusiasm, reduced the time they spent pointing accusing fingers and disputing the reasons for poor performance, and increased the amount of time spent by employees working toward performance improvement targets.
Attainable Target Setting
The final rule to performance measurement is to set targets that are achievable. Remember the discussion between the plant accountant and the production manager regarding their ability to achieve labor standards. This is a common problem in many companies looking to achieve higher levels of performance. What appears today to be an unattainable level of performance often proves to be well within the range of normal operations once the department has discovered and eliminated those factors inhibiting performance improvement.
The process of changing from a current state to a significantly improved future state is one of management's most challenging endeavors. The effort is a learning experience where managers and employees discover the reasons for poor performance as they go along and they typically resolve poor performance issues as they come across them.
For this reason, short-term and less ambitious targets should be set. The benefit of setting smaller more manageable targets is that managers and employees build on their short term successes, and become more motivated and imaginative with their problem-solving. After implementing this method of target-setting, the organization found that teams of employees quickly achieved the next level of performance and moved very quickly to higher levels.
By far the most difficult part of improving performance measurements is getting a company to let go of traditional performance indicators. Although company strategies change to meet a new business environment, performance measurement systems initiated years ago to support the director of the company at that time are often left untouched.
When does a company know it has implemented performance improvements systems meaningful to performers? When its managers describe the plant's performance in terms of manufacturing cycle time against target, reject rate against target, and attainment of production schedule.
When sales and customer service managers participate in these discussions and talk about customer discounts against target and progress toward achieving a zero billing error rate. At this point the company knows it is on the leading edge.
Ernst & Young is a leading integrated professional services firm employing approximately 64,000 people in more than 100 countries, including 4,200 people in 35 offices throughout Canada. The firm's businesses include audit and tax services, management consulting, actuarial benefits and compensation consulting, mergers and acquisitions, insolvency, human resources consulting, forensic and litigation services and information systems and technology consulting.
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|Author:||Taylor, Larry; Convey, Stev|
|Date:||Sep 22, 1993|
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