Performance Measurements: Fact or Opinion

by
Don Rice

Performance measurements have become a critical tool for improving manufacturing companies supply chain processes. A major U.S. manufacturing company has had a long and successful history. It is considered one of the leading companies in its market. One of the reasons that they are a leader is because they’re constantly challenging the level of performance in their key business processes. Currently, their internal education process focuses on improving the quality of the output from its sales planning process. In a recent business process review discussion (ongoing education session) on sales planning, the data in Figure 1 was reviewed.

Sales Plan

-5	-4	-3	-2	-1	Curr	+1
600	600	600	600	600	600	600	Plan
520	650	500	685	725			Actual
-80	+50	-100	+85	+125			Variance
-80	-30	-130	-45	-80			Cum. Variance

As you can see, in each of the last five months the actual sales was different from the planned sales. Sometimes sales are up, sometimes sales are down, however, for the last two months sales have been greater than planned.

The facilitator of the business meeting started the discussion with a simple question, " Based on the information on this chart, is there a serious business problem with this sales plan? Regardless of your answer you must explain why you chose your answer."

Some of the responses were:

“Looks like we might need to increase the sales plan for the next few months"- Sales Manager

"Wow, it's all over the map"- Customer Service Manager

“There’s too much variability for me to use this data.” – Purchasing Manager

"Overall it's not to bad. But what are we supposed to do about hiring people?"- Human Resource Manager

"We can't make shipments on time with those kind of numbers."- Manufacturing Manager

These were just a few of the comments from the participants as the discussion started. The facilitator quickly got the group focused on the question at hand; "Based on the information on this chart, is there a serious business problem with this sales plan?”

"Yes, based on the last two months we should either increase this month’s and maybe next months sales plan."

"Yes, because it's all over the map. We've got to get a better plan."

"No, if you only look at the last month it distracts from the total picture. Overall the sales plan is within 3% of actual sales for the last 5 months."

"I don't know. What did we do last year? How have we done for the last 12 months? I need more information."

The comments kept coming with about an equal number of yeses and no's and a few “I don't knows.” The facilitator asked the group to define a good sales plan. Quickly, someone said "when what we sell is greater than the sales plan, which to me still looks like a forecast." At this point the facilitator sprang a surprise on the group. "If we keep this up someone will invoke

“THE SECOND RULE OF MANUFACTURING COMPANIES: "In a discussion of opinions, the person with the most stripes wins.”

Everyone in the meeting had the same set of facts, the sales plan for the last five months and the actual sales numbers for those months. One key piece of information missing was "What did the business expect to happen?" In other words, how close did they expect to get to the sales plan each month, each quarter, and every six months? The result was they were just reacting to opinions and playing with the numbers. Because they didn't know a fundamental piece of information, they were left to rely on individual opinions. At that point the only thing that matters is who has the most power or clout in the discussion. This is one example of how using performance measurements improperly may lead to doing the wrong things.

If a set of performance measurements with reasonable tolerances were established, understood by everyone, and could be supported by the business capabilities, then the business discussion would focus on facts, root causes of problems, and corrective actions. Then you could skip the discussion of opinions and immediately answer the key question, "Is there a serious business problem in this process?"

The result will be a focused discussion on the few key business process problems and less time wasted on the less critical issues. No longer will the business process owners have to be focused on what might be said or done based on unknown opinions and subjective evaluations, but these process owners will become stronger managers using facts and objective evaluations to take control over their business processes.

More Details

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