In my last post I presented why Deborah Smith  believes that it’s always a challenge to construct a system of local metrics that:
- Encourage the local parts to do what is in the interest of the global objective.
- Provide relatively clear conflict resolution between and within the local parts.
- Provide clear and visible signals to management about local progress and status relative to the organizational objectives.
I also presented Deborah Smith’s  “simple set of six general measurements” that all assume that a valid TOC model has been implemented. These six measurements are:
- Strategic Contribution
- Local OE (i.e. Operating Expense)
- Local Improvements/Waste
And finally, in my last post, we focused on stability, because getting control of the stability metric presents a huge opportunity for improvement. In today’s post we will complete our discussion on performance metrics by discussing their important functions and why it is so important to select the correct ones.
Although I've posted a similar piece in a past post, it’s worth repeating why it’s important to emphasize the key components of what makes a good metric. I say this because your choice of performance metrics is critical to your company’s long term and short term success and survival.
Performance metrics are intended to serve some very important functions as follows:
- Performance measure should de designed and selected based upon the behaviors you want exhibited in your organization. Goldratt told us, “Show me how you measure me and I’ll show you how I’ll behave.” Based upon my experiences, truer words were never spoken.
- Performance measures should reinforce and support the goals and objectives of the organization or company.
- The measures should be able to assess, evaluate, and provide feedback as to the status of people, departments, products, and the total company.
- Performance measures should be objective, precisely defined and quantifiable.
- The measures should be well within the control of the people and/or departments being measured and not some abstract number.
- Performance metrics must be understood and utilized by the organization as a whole and they must positively impact the system and not just individual parts of it.
This last function, especially that they must be understood and impactful to the system and not parts of it, is very important. If people don't understand the metric, they simply won't understand the behaviors that are required to move it in the right direction. I also believe that companies should develop a hierarchy of sub-metrics so that even people at the lowest rung in the organizational ladder will understand how their behavior drives the metric in the correct direction. Let's look at an example.
Suppose your company has selected the performance metric efficiency and you are a production manager. You're told that your performance appraisal is based upon how high your production unit's efficiency is. If this was your mandate, how would you make this happen or what behavior would you exhibit to reach your highest performance? And remember, your personal appraisal is based upon how high your unit's efficiency is.
If it were me in this position, I'd probably tell my boss that this isn't a good metric to measure me by. But most people would look at the metric and say to themselves, "If I want higher unit efficiencies, then I must run all of my process steps as fast as I can." So what would that do to the unit? Well, for one, it would drive efficiencies higher and put me in a position to get a good appraisal. But what would it do to the organization as a whole? Think about it.....if I run all of the process steps as fast as I could, what would be the organizational impact? Would we produce and ship more product? Would we spend less money? What would happen?
Quite simply, if you run all process steps as fast as you can, the net effect would be as follows:
- Your unit's efficiency metric would move to its highest level.....good for you and your personal appraisal.
- Work-in-process (WIP) inventory would grow larger and larger and become unmanageable.
- As inventory grows higher and higher, cash reserves would grow smaller and smaller because unsold inventory ties up your cash until it’s sold.
- Because WIP grows larger and larger, your cycle times become extended.
- Because cycle times become extended, on-time deliveries decrease proportionally to the level of WIP.
- Because on-time deliveries have decreased, customer satisfaction levels fall.
- Because customer satisfaction levels fall, sales will decrease.
- Because sales decrease, profitability decreases proportionally to the revenue decline.
- Because profitability decreases, your company’s long term survival is in jeopardy!
Need I go any further? Yes my friends, selecting the "right" performance metrics is critical to your long term survival so reason them out before you select them and above all else, make sure the metric has the total organization in mind. As you can see, if the right performance metrics aren’t selected, the organization’s behavior will not be what you want to have happen. So consider the six important functions of performance metrics listed above before you select your company’s metrics.
In my next post, we’ll begin a series of posts on how, in four short years, your profit margins could very well equal your current sales dollars. This concept goes under a couple different names depending upon the author, but the two most popular names are, Viable Vision and Mafia Offer. As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.
Until next time.
 The Goal – A Process of Ongoing Improvement 3rd Revised Edition, Eliyahu M. Goldratt and Jeff Cox, The North River Press, 2004.
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