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| Performance metrics play a vital role in guiding and shaping organizational behavior. Based on our experience with "World Class" organizations, several elements are important factors in the selection and maintenance of performance measurements. The effectiveness of performance metrics is frequently related to the organization's ability to integrate several approaches: First, the matching of measurements with business strategy. Second, the balancing of product, process, and financial measurements. Third, creating metrics that relate and correspond to every level of the organization. In the current metrics environment, the metric process is characterized by the following ingredients:
It is our belief, organizations that are successful implementing performance metrics deploy a strategy that reflects business factors that are critical to meeting the needs of the marketplace they serve. Organizational behavior is, therefore tied to a strategy that is directly linked to end users or customer expectations. In return, the strategy acts as a conduit between the needs of customers and a guide to workforce performance at all levels. In the computer industry (e.g. Dell Computer), time to market and customization are the over-riding factors that drive business strategy. Likewise, low cost production drives the strategy in markets like raw materials and automotive suppliers. In either case, it is management's responsibility to recognize and assess benefits and results driven by the customer base in each market. Examples of business strategies and industry requirements are further detailed in Table I.
During the 70's and early 80's, business objectives were driven by a production strategy that produced as much product as the marketplace could handle. Performance metrics were focused on operational features like cost of labor, raw materials, functionally related overhead, and production output rates based on sales projection or forecasts. In the current business nvironment, decision making and organizational behavior based on information from narrowly defined operational factors could be disastrous. The past ten years has seen a remarkable change in technology, communication, and customer expectations. Every business strategy has been challenged to meet a marketplace that desires low cost, high quality products, and immediate on demand. The web market made it possible to review and transport products and services quicker than ever. Faced with major changes, performance metrics and management strategy, spawned movements like Total Quality Management, which in turn obsoleted traditional paradigms and models. The adoption of Total Quality Management practices has markedly shifted an organization's focus (Table II) and the subsequent results to a more process-based approach. The focus within an organization is now on what the objectives are, rather than on how the workforce is to achieve its goals. (Table II represents the issues and results in a traditional business approach). A process driven approach describes efficiency, cycle-time and quality of a series of activities. They tell us how well an activity or series of activities perform rather than how a workforce performs. The process view reflects the need that organizations have for a category of information about cause of work and how well that work is completed. A typical list of core processes that constitutes those activities and work are reflected in Table III. Aside from the cultural implications between the "how" and "what" approach, a shift from a traditional, functional, and results-driven strategy to a process focused, causal strategy has taken place. Striking a balance between results and causal drivers is now the underlying philosophy that drives performance metrics in support of business strategy and critical success factors.
Before going much further, it is important to discuss the structure that supports this balanced approach. By balanced approach, we mean the dual view of results and monitoring metrics, and the successful integration of financial, process, and product enhancements measurements. With respect to "dual view", we emphasize that some traditional results-based metrics are valuable, and play a vital role in a meaningful performance metrics approach. As discussed, corporate strategies are changing. Measurements must support business strategy, while metrics packages are to be diverse and cross-functional and used to managed the "what's" of organizational behavior, rather than the "how's". The structure that supports and keeps a balanced approach is characterized by the following:
When used as a management tool in support of a balanced view, organizations must breakdown processes at their lowest levels. The linkage to tier one (or dashboard) emphasizes the need to clarify the characteristics that underlie a robust metrics process. All performance measurements packages must include a focus on customer satisfaction, short and long-term goals, an internal/external scope, be linked to benchmarks, and can be used for training and shaping behavior. While these characteristics are important, the elimination of non-value added activity is one of the more prominent factors in the concept of "Lean Thinking". We defined Lean, in our first article as, "a continuous flow of value-adding activities" … "a value adding activity is , any activity that adds value to the product as defined and paid for by customers". Therefore, "leanites" are on an endless search for a process that gets from one point to another; in the quickest most effective manner. Unlike, activities littered with non-value added activity (i.e., wait time, distance/travel, storage, handling, expediting, paperwork) are the prime targets for elimination by a Lean Measurements Process. Adhering to the "Value Chain" requires a Lean metrics package that includes the following characteristics, where metrics are typified by being:
Similar to most critical success factors, there are several basic measurements that are predominant in support of a Lean Metric System - 1. Quality, 2. Cost, 3. Delivery Reliability, 4. Lead-time, 5. Flexibility, 6. Employee relationships and 7. Safety.
The Lean Approach considers 3-4 metrics as key. At the tier one level (dashboard), operations metrics include customer satisfaction index, cost of quality, new product development cost, and shareholder measurements like ROI, EBITDA. These performance measurements set in motion the foundation for tier two and tier three level metrics (Figure 1), and are structured in a hierarchy that has consistent reporting format, measurements definitions, is visible across all functions, graphically displayed and is used for training. At the plant or tier two levels, when creating Lean performance measurements, an organization must keep in mind the difference between a traditional and process focus approach as outlined in Table IV.
Conversely, defining Lean performance measurement from a process point of view can take the form as depicted in Figure 1. The distribution between outcome and diagnostic metrics, cross-functionality, results and outputs, internal/external scope, and balance are more pronounced and are shown in Table V. In either approach, we suggest that you consider Leading or Lagging metrics as well. We define the distinction between the two below in Table VI. As we move from Tier-One metrics through to Tier-Three (Shop-Floor) Level, performance measures are prominently displayed in the work areas in the form of boards, charts, or graphs. Common display formats are:
We suggest that those being measured should be the ones who produce the measurements. For example, if we are measuring customer service on cycle-time per order entered then one of our customer service representatives should produce the daily measurements (Figure 2). If another department generates these metrics, it is guaranteed that your metrics will mean nothing to those being measured. The reps will question its validity and accuracy.
Employ manual signals, the simple the better. Use ones that the staff can maintain and understand and explain to anyone - Flashing lights, Red, Green, and Yellow work well (Figures 3, 4).
The key to any performance measurement system is the ability to monitor and shape behavior. Linking measurements to the corporate vision provides an organizational roadmap all can understand and follow. The inter-relationships and dependencies between departments as depicted in Figure 1 provides us a visual understanding of how the system works. A successful development of performance metrics meets the needs of finance, customer requirements, business strategy, and innovation and learning factors, at all levels. Metrics address the questions, "where are we going-", "how will we change to meet our business needs-", "what are our critical success factors-", "what is our target performance-", and "where is performance improvement required-" Remember, "If you don't measure it, you can't improve it" and "if you measure the wrong thing, you will get the wrong result….behavior."
Part 3 of the Lean series, "Decision Making Process in the Value Chain" will be published in the next issue. For question or comments to the article or lean tools and techniques, please e-mail authors. TOP
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