Ehap H. Sabri, CFPIM | September/October 2012 | 12 | 5
Performance measurement and governance make the difference
Effective performance measurement and governance are crucial, as many companies measure too much or too little—or are measuring the wrong things. Unfortunately, supply chain performance measurement remains a major challenge for most firms for many reasons:
- There are too many choices, which causes difficulty when identifying metrics that will yield the most information for the least investment of time and effort.
- Isolated metrics are functional or departmentally oriented and not aligned to corporate strategy.
- There is a need for new metrics in today’s business to complement traditional metrics. Firms require metrics that can measure lean, agile environments.
- Professionals cannot understand the trade-off and interrelation between metrics when coming up with a comprehensive list; for example, an increase in fill rate can be at the expense of inventory levels and cash cycle time.
- There is difficulty understanding root causes when key performance indicator (KPI) targets are not achieved. This can be a result of not tracking tier 2 metrics and unstructured governance for conducting root cause analysis or corrective action. In this case, the measurement itself can become a source of waste.
- There is lack of clear ownership for metrics and inability to drive good behavior.
- Consistently clean data are unavailable, which results in lack of confidence in the output.
- Due to a weak economy, there is an urgent need by senior management to review the quantitative business case or return on investment in order to approve the improvement program budget. But middle managers are unable to use metrics to come up with the business case due to previous challenges.
One of the tools I use to evaluate an organization’s performance measurement process and governance is a 2007 article by Michael Hammer, “The 7 Deadly Sins of Performance Measurement (and How to Avoid Them).” He explains that
- vanity is using metrics that will inevitably make an organization and its managers look good and get their bonuses
- provincialism enables organizations to be measured only based on what they own or fully control, which results in suboptimization and conflict
- narcissism is defining metrics based on one’s own point of view, rather than from the customer’s perspective
- laziness is defining metrics without adequate thought or effort
- pettiness is defining a partial list of metrics, which leads to measuring only a small component of what matters
- inanity is defining metrics without thinking about their implications on employees’ behavior and company performance
- frivolity is not being serious about metrics in the first place.
Performance management systems have evolved in the last two decades with the increase of software reporting applications and a huge volume of captured data. A new field of business analytics has replaced traditional reporting spreadsheets with new analysis tools that turn data into usable information. But the challenge is to interpret the information and link it to corporate strategy. Furthermore, firms often don’t effectively capture key business metrics such as customer satisfaction. Nor do they properly find the root cause and related action item for which the target is not achieved.
An effective performance measurement framework should address these challenges and offer a structured way for companies to identify and address performance issues at various levels of the business and across the value chain. The framework should enable executives and managers to effectively analyze the impact of improving individual processes on the overall performance of the value chain, to propagate objectives and metrics down to the operational level, and to determine the success of corporate strategies. In short, an effective framework achieves four key objectives:
- Identify the right KPIs.
- Establish root cause analysis and ownership.
- Systematically track KPIs and metrics.
- Establish governance for KPI and metrics reviews as shown in Figure 1.
Identifying the KPIs
It is important to highlight the difference between a KPI, a metric, and a report—and to provide a common understanding of the three. Not every report is used in a metric. To become a metric, a report or several reports must have context and target, be based on legitimate data, and lead to action or improvement.
A KPI is a metric, but a metric is not necessarily a KPI. To become a KPI, a metric must support organizational goals and strategy, be accepted by senior management and displayed on executive dashboards, and have meaning at all lower organizational levels.
Following are three considerations for defining KPIs:
- Avoid the seven deadly sins previously mentioned.
- Focus on a handful of KPIs that are most critical to the business and align them to corporate strategy and objectives.
- Define a target performance level for every KPI based on benchmarking with other companies or based on the company’s own goals.
Fairchild Semiconductor, a computer components manufacturer in San Jose, California, performs a supply chain metrics review annually and engages a consulting firm to conduct a comprehensive SCOR (Supply Chain Operations Reference) model assessment. The company uses this annual review process to identify performance gaps and solutions to close those gaps, as well as to prioritize improvement initiatives and investments.
Figure 2 provides a template for aligning corporate objectives and supply chain KPIs. It shows typical corporate strategic objectives and goals for improving revenue and increasing customer satisfaction and margin. The proposed KPIs need to be aligned to supply chain strategic goals and should be able to measure their successes. For example, forecast accuracy can assess the success of an effective sales and operations planning meeting mechanism. Inventory turns can measure the success of network and inventory strategy.
Because it is impractical to measure every activity, identifying a reasonable number of metrics (tier 2 metrics) that have a direct linkage to KPIs (tier 1 metrics) is a necessity. The best way to identify tier 2 metrics is to conduct root cause analysis on the KPIs and investigate potential reasons for not achieving a certain target for a certain KPI in the future. This is an excellent way to identify tier 2 metrics from hundreds of available metrics. Ownership is easily established and corrective actions are typically taken at this level.
Root causes can be grouped into two categories: process design issues and policy (process enforcement) issues. In the case of a process design issue, the design of the operating process or system simply does not allow it to operate at the target level. Therefore, a process or technology innovation enabler might be the right solution to reach the target. In the example, a holistic redesign of the process is needed as corrective action.
On the other hand, policy issues such as poorly trained or unmotivated workers can be resolved with effective change management. It is important to mention that process redesign will not help and will be a waste of money and time. In addition, tracking metrics is not the goal; the goal is to enable improvement.
A metric must be well defined so there is no dispute about it. Otherwise, managers tend to interpret it in ways that work well for them but that might lead to conflict. For example, if not clearly defined, an on-time delivery performance metric can be interpreted by the supplier to be a shipping date, while the customer might assume the same metric represents a receiving date.
A comprehensive set of metrics should be considered because improvement in one area is sometimes achieved at the expense of another. Also, metrics should stress results instead of activities. Getting more detailed information about the status of a shop order in a factory is good, but unless this is translated to quantifiable financial or operational benefits such as customer satisfaction or inventory reduction, these data might be a waste.
The steel group at Timken, a provider of friction management and power transmission solutions, does a good job defining the right performance metrics at all levels. The company sees metrics as a pyramid, with each element getting segmented and more detailed as it moves down each level. Timken uses a balanced-metrics approach because company leaders know they can’t just view metrics in isolation. On the top-level scorecard, they balance throughput, inventory, on-time delivery, lead times, and cost.
Systematically tracking KPIs and Metrics
Identifying what needs to be measured is just the first step; finding the right way to measure and track is the next. Measuring at regular intervals is useful for baselining the performance prior to a major transformation program and for getting a clear picture of the impact of the change on performance. Implementing a system that will create dashboards on a periodic or as-needed basis to sustain KPI tracking also is highly recommended. In addition, the frequency of capturing and communicating and the cost of its capture should not outweigh the value of the data. Consider assigning a dedicated person or a team to review data quality.
Figure 3 illustrates the parameters that enable companies to achieve effective tracking for metrics and KPIs. It also provides an example of some metrics and related parameters.
The final step
The last procedure when working toward effective performance measurement is to establish governance for KPIs and metrics reviews. There are several best practices to consider when creating effective governance for reviews. First, establish a governance process to set targets. KPIs or metrics with no target means no skin in the game. Next, capture all key parameters for KPIs and metrics regarding governance. In addition, it’s necessary to establish governance processes that enable proper review of people’s performance and that take corrective actions and enable continuous improvement. Review meetings need to be scheduled and a format should be published ahead of time.
The highest level of maturity in establishing governance for measurement is to develop predefined corrective actions for when targets are not achieved. It is in this way that firms achieve sustainable gains and surpass the competition. Effective performance measurement and governance are at the heart of lasting success.
Ehap Sabri, CFPIM, is strategic services director with JDA Software and an adjunct professor with the University of Texas at Dallas. He has 14 years of industry experience, having served in a variety of advisory roles and provided consulting services for several Fortune 100 companies. Sabri may be contacted at firstname.lastname@example.org.
To comment on this article, send a message to email@example.com.