Your company has been gaining traction and is growing. It’s time to make a step change to becoming a world class supplier. To become and remain competitive in today’s global marketplace, suppliers must develop performance measurements that will reveal current baseline values, highlight opportunities for improvement, and drive operational strategies. This article will focus on meeting the objectives of understanding the need for performance measurements, identifying overall performance measurement targets, and utilizing specific measurements to achieve world class goals.
UNDERSTANDING THE NEED FOR PERFORMANCE MEASUREMENTS
Performance measures are not new. We have been aware for some time that you cannot effectively manage that which you cannot measure. What is new is the recognition that improved performance is necessary for the continued survival of many companies. Today’s global competition mandates that manufacturing suppliers strive for excellence through continuous improvement in order to remain competitive. Current trends of continuous improvement include viewing inventory as a liability that covers up underlying problems, changing to a more flexible workplace, considering rejects as unacceptable rather than inevitable, learning to respond immediately to customer demand changes, and eliminating all waste.
Why measure? Customer requirements are more stringent than ever, placing tremendous pressure on everyone within the organization. Higher quality, lower prices, rapid product development and reliable service are changing the way we perform. Achieving “best of class” has become the focus for many of us, but how do we answer the question, “Are we there yet?”
Performance measurements are the yardsticks that tell us how we’ve done, where we are, and where we need to arrive. They help us make decisions on what to change, and on what to change to. They are a checkup on the vital signs of the organization, and serve as communication mechanisms for expectations downward, and results upward.
Performance measurements also motivate us to improve. If a company chooses to measure a process, it is placing priority on that activity, and people will concentrate on improving the process. It is foolish to assume we can continue to repeat the same activity, yet expect to get different results. By measuring performance, feedback is provided to keep us from running into the same walls again and again.
Taking measurements identifies and focuses attention on those areas that need improvement. Changing the mindset that uncovering problems is good, not bad, and is the responsibility of management. Once this is achieved, the work force should begin to support the idea of being measured. Everyone reacts to how they are measured, and relating a performance measure to an organizational goal helps people better understand the purpose of the measure and why it is important.
Another reason for establishing measurements is to ensure support of an objective. The first step in the process is to establish that goal or objective, then arrive at a strategy that drives the organization toward achieving the goal. Performance measures ensure continuing progress toward that goal, encouraging actions that are consistent with the company’s strategic direction, as well as identifying unnecessary activity which can be eliminated.
Whatever the impetus behind the measurement, the relationship between performance measures and the strategies they are intended to support should be clearly understood by all. How can performance be measured when the company’s operational strategies are known only by one or two individuals? A formal system allows everyone to work toward a mutually understood goal.
STEPS FOR IDENTIFYING PERFORMANCE MEASUREMENT TARGETS
How does one build a set of performance measures that are consistent with the strategic goals of the firm and provide feedback on the activities critical to the business?
- Determine what is needed to manage the business successfully. Focus should be on those activities that contribute to the success of the vision, and measurements of those activities should be consistent with, and support, those policies and practices that will achieve company objectives. Ask “why” five times to make sure the measurement is far enough into the process to facilitate improvement.
- Decide on the source of information to be used, and the who, what, when, where and why of collecting the data. Selecting measures that are easily attainable assures that they can be started quickly, and continued without difficulty. Clarify and simplify the measures. There should be a clear understanding of what is expected and agreement that the measure is meaningful. The process should be made as mistake-proof as possible, and the process of measuring made simple to ensure results can be generated easily and consistently. A process that is not well understood by everyone is difficult to measure and improve.
- Involve or co-develop the measures with the people who participate in the activity being measured. Actual participants usually have the best feel for what activities would be improved by measuring. Managers should be made accountable and delegate resources and authority to those doing the measuring. The workforce must take ownership and responsibility for the measurement
- Relate local, or functional, measures to global measures, to ensure the activity is consistent with strategic goals of the firm. The measures should be integrated throughout the company so various functional areas are working together for the good of the organization.
- Establish performance goals that are out of reach, but not out of sight, both short term and long term. People respond to challenges, not impossibilities. Milestones should be set that demonstrate progress made toward the ultimate goal. Achieving milestones validates change and improvement.
- Collect information for a trial period, and evaluate its effectiveness at both local and global levels. This ensures that data and a collection procedure are available. If the information being collected is not meaningful, change it.
- Examine every process and activity that is being measured. Ask the following questions: Does measuring contribute significantly to control of the process or improvement of the activity? What would happen if we discontinued this measure?
- Celebrate achievements of every milestone and goal, resetting the goal to the next level. Successes should be rewarded, and failures coached for success in the future. Seeing progress toward a goal improves morale, garners support, and increases total participation in all improvement activities.
EVALUATING PERFORMANCE MEASUREMENT EFFECTIVENESS
Once the performance measurement system is in place, it should be tested to ensure its effectiveness. World-class organizations use the following characteristics to evaluate performance measurement systems.
- The cost of the measurement should not exceed the benefit derived.
- Measurements must be simple and easy to use, understand and report.
- Those being measured should clearly understand the relationship between measurements and goals, and should be involved in the selection of the measures.
- Feedback should be provided in a timely manner to both operators and managers, in order for performance to be adjusted toward goals.
- The measurement should convey meaningful detail that can be used and understood at all levels of the organization.
- Measurements must be based on readily and continuously available data, and usable at all levels of the organization.
- Measurements should provide physical as well as financial measures.
- Measurements should be easy to change as needs change.
- Measurements must focus on improvement and corrective action, rather than monitoring or control.
- Measurements should always be expressed as a positive, such as yield of good product rather than reject rate. People are more motivated by upward trends.
World-class organizations are finding it necessary to change baseline values to determine appropriate, meaningful measurements. Examples of a few of these changes are:
Quality measurements, coupled with a drive toward a decrease in the cost of quality, focus on a goal of continuous improvement. Monitoring quality improvement costs in conjunction with quality performance data gives a truer picture of the quality progress. Quality measures are also reflecting goals of perfection and customer delight, rather than status quo and just getting by.
Today’s trends reflect measuring total productivity, rather than drawing traditional lines between direct and indirect, salary and hourly. Measurements focus on getting the most output from current levels of input.
Inventory makes up a large part of working capital, many times amounting to one-half to two-thirds of the total investment base. Measurements such as inventory turns are some of the best short-term measurements of utilization, as no credit is given for what is produced, only what is sold.
Reduction of time elements, such as customer response time, manufacturing cycle time, process control feedback time, supplier reorder lead time, and transport time, enable an organization to be better able to respond to dynamic demands
Measures in innovation indicate the ability to achieve and maintain a competitive advantage by introducing more new products, faster, at lower cost and more reliably than competitors. Cheaper, better, faster is becoming the motto for the next century.
Customer satisfaction has emerged as a strategic goal for many organizations today. Indicators such as customer retention rates, referral rates, repurchase rates, market share trends, complaint rates and satisfaction survey trends are being used to gauge satisfaction levels.
In order to thrive, or even simply survive, as a supplier you must establish, review and update comprehensive performance measurements. These measurements are the vehicle that drives a company to achievement of its operational goals. Due to the current trends in world-class organizations to develop and sustain customer satisfaction, as well as achieving ongoing improvement, measurements should be designed to drive the improvement process and achieve customer delight.
Often the difficulty is to select measures that satisfy the criteria of meaningfulness, acceptance, reliability, ease of reporting, and consistency. Performance measurements must fit an organization’s individual needs, not that of a competitor or another facility. The measurements must be meaningful to the organization using them to achieve strategic objectives.
For more information on what specifically you might want to measuring in your company read our article about Stepping up your Performance Metrics.
About the Author:
Jeff Hollingdale has significant experience in Quality Management. Having worked within both the service and manufacturing sector assisting clients with facilitation and implementation of Lean / Agile / TOC and ISO standards, i.e. ISO 9001, ISO 14001, Energy and Asset management. He has international certification in APICS (CPIM), Lean Manufacturing, TPM, TQM, SPC. Lean /Six Sigma and various ISO accreditation and auditing requirements including ISO 9001, ISO 14001, OHSAS 18001, ISO 31000, ISO 50001, ISO 55000.