This is the first of a three-part series on performance metrics and goals. This article will focus on general background, while the next two will then discuss metrics and goals from an OEM’s, and then a supplier’s, perspective.
You probably already realize that the metrics used to assess the status of a business and the goals — organizational, functional and personal — set in those metric areas are important to business success. You may not realize how complex the discussion of them can get.
I’ve always believed that the foundation of all business success is based on a three-legged stool of stakeholders, as follows:
1. Customers. If you don’t meet customer wants/needs you will not be successful in the marketplace.
2. Employees/Suppliers.* If you don’t have motivated, top-notch employees/suppliers involved in your business you will have trouble competing over the long term.
3. Ownership. If ownership does not receive an adequate return on its’ investment, funds needed to support the business will not be available.
*Note: I sometimes get push-back when I add suppliers to the more “traditional” employee stakeholder category but if you compare the roles employees and suppliers play in organizational success, you will see that they are quite similar.
“Focusing on metrics that will establish a balance in performance goals across stakeholder categories is crucial. Failure to do so usually leads to less than optimal business results.” –
Focusing on metrics that will establish a balance in performance goals across these three stakeholder categories is crucial. Failure to do so usually lead to less than optimal business results. On the other hand, when such metrics and performance goals align well, they can lead to a competitive advantage in the marketplace. Regardless, though, if metric areas appropriate for your business are not selected your organization will struggle, regardless of how well balanced stakeholder needs are.
As previously stated, the choice of which metrics to use in monitoring organization health is critical. For instance, I don’t think many people would agree that profitability should be the driving metric in health care, but it is not uncommon to hear about health provider organizations that compensate physicians based on the amount of revenue they deliver. An emphasis on profitability by health care organizations usually takes focus away from patients which, if you think about it, is pretty much where we are in this country, today. Although a profitability focus can lead to improved financials — at least in the short-term — it is not unusual that in the health field they will eventually lead to a reduction of overall patient well-being and even death, which leads to highly negative financial consequences over the longer haul.
For OEMs, the Big Picture is a Better Indicator
The same type of misguided focus happens in manufacturing. For instance, if you are a regular reader of my column, you’ll note that I firmly believe that using material variance (year-to-year piece-price), as the primary indicator of purchasing impact (both departmental and employee) will never lead to a competitive advantage. Why? For a variety of reasons.
First, piece-price focuses only on one leg of the three legged stakeholder stool — the owner. This implies that customers and suppliers/employees will not be given equal emphasis.
“If you want to get better pricing than the competition you had better have a working relationship with suppliers that invites collaboration and be prepared to offer some form of Supplier Development assistance.” –
Second, because in the piece-price game it is an unrecognized truth that competing companies usually perform comparably! A lot of time and effort is put into negotiations to squeeze the last penny out of piece-price when realistically this focus generally doesn’t really lead to more than an anthill (at best) — rather than a mountain — of competitive advantage. As I said in the last column, if you want to get better pricing than the competition you had better have a working relationship with suppliers that invites collaboration, and be prepared to offer some form of Supplier Development assistance.
Instead of piece-price, companies should be measuring purchasing impact based on overall supply chain performance-related organizational cost reductions and — an important “and” — the supply chain’s ability to support increased revenue. These two areas will be discussed in detail in the next two articles in this series.
Actionable Metrics Lead to Lasting Impact
In selecting metrics it is important to understand that there are two main metric types — snapshot and driving. The first provides a snapshot of status. Return-on-Assets (ROA) represents this type of metric since it tells you how you are currently performing financially. ROA-type metrics are considered tactical because (as stock market advisors like to say) past performance is not an indicator of future results. I often get push-back on this assertion since most companies like to point to trends in status as an indicator of future projections — for instance, when ROA has been increasing year-to-year. But in the example above, a more actionable metric would be one that focuses on the underlying cause(s) that positively impact ROA figures. In other words, the driving factors.
“Not to beat a dead horse, but a good piece-price trend in one year tells you nothing about how pricing will go in the succeeding year. Piece-price is a snapshot metric, and should never be a driving metric.” –
These types of metrics are called driving (or primary) since they provide an indication of future performance. In others words, they drive results and because of this are actionable and impacting them will impact status. For instance, being able to support sales above what was forecast, i.e., responsive order fulfillment capability, will lead to increased revenues and better ROA. Because driving metrics are actionable, progressive organizations focus on them when setting performance goals.
Again, not to beat a dead horse, but a good material variance record (piece-price trend) in one year tells you nothing about how pricing will go in the succeeding year. Piece-price is a snapshot metric. Better would be to have a performance goal in a metric that measures the process used to achieve lower piece-prices. And if you can’t measure the effectiveness of your process — for instance, negotiations — that should tell you something about the methods you are relying on to achieve your goals.
Please keep in mind the above discussion in reading the next two parts of this series. The next part will focus on OEM metrics and performance goals.
Learn more about Paul Ericksen and his 40+ years in the manufacturing industry here.