Review of Measurements for Effective Decision Making, Part 2
In the second installment in this series, I continued my coverage of effective decision-making measurements that enable manufacturers to guide their companies toward profitability. I identified the “price of admission” customer measures that  Srikanth and Robertson tell us are effective attributes to rank according to each company’s priorities. Once you have ranked the following externally focused measures accordingly, your company can begin to design a set of measures that will drive improvement, usually without considering any pricing changes:
- Product features
- Delivery reliability
- Lead time
I also discussed two important categories of measures known as customer external measures and operational measures. I concluded with a description of the three basic measures of throughput accounting: throughput, inventory, and operating expense.
In today’s post, I will continue to focus on performance measures by examining another category referred to as “constraint measures.” Again, much of what I will present in this series of posts is taken from a book I highly recommend,  Measurements for Effective Decision Making, by M. L. Srikanth and Scott A. Robertson.
The customer external measures and operational measures indicate where a manufacturer is winning and losing, and help identify opportunities for improvement. They are also useful as cumulative “scores,” to mark intermittently and to help measure progress over time.
Yet as effective as these measures can be for these purposes, they fall short of telling why the company is losing and showing which corrective actions to take. This is why we need “local” information that ties the performance of a specific local area or work center to the overall performance of the entire organization. In other words, we must ask ourselves, “Which part of the organization must be improved to generate more profits?” That answer is what we call the “system constraint.”
By definition, a constraint is any aspect of the organization that limits the financial performance of the entire organization, so it is imperative that it be identified and acted upon. Identification of constraints absolutely requires a complete understanding of the interdependencies of the entire business. In the context of a manufacturing organization, Srikanth and Robertson explain that constraints are identified by answering the key question, “What specific area, aspect, or process limits the business’ performance from a customer, competitor, or profit point of view?” So the notion of constraints helps management to focus on activities that provide the potential to gain maximum leverage.
The authors  tell us that identifying constraints is not a trivial exercise for two major reasons:
- Manufacturing businesses are composed of highly interdependent and complex activities.
- The effect of the identical action taken at different points or areas of the business can be very different.
There are two aspects of constraints to consider: (1) their position in the flow and (2) the characteristics identifying them as constraints. Once the location and nature of the constraint have been identified, the measures to monitor performance of the constraint can then be developed. These are referred to as the constraint measures.
The authors tell us that constraint measures are more important than all of the other measurements for effective decision making because they are the key to improving overall system results. Constraint measures should absolutely replace budgetary variance items. Variances, particularly as calculated by the standard cost system, have very little bearing on the overall performance of the company.
Coming in the next post
In the next post, I will continue this series on performance measures by discussing another category of measures referred to as “constraints measures.” As always, if you have any questions or comments about any of my posts, leave a message and I will respond.
Until next time.
 Measurements for Effective Decision Making, M. L. Srikanth and Scott A. Robertson, 1995 Spectrum Publishing Company
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