Measuring Performance the Right Way

World class manufacturers continually measure the performance factors that really make a difference, including: order to delivery cycle time, throughput, inventory levels, operating expense, and customer satisfaction. Problem is, too many manufacturers are focusing on the wrong performance issues, according to management consultant Mike Donovan. These companies could, however, with the correct measurement system, improve performance by leaps and bounds.

"You can't effectively redirect what you don't properly measure, and the key word is properly," stressed Donovan, president of R. Michael Donovan Inc. (Natick, Mass.), a firm that specializes in helping manufacturers reengineer business processes. "The pressure to focus energy on the right functions or activities must come from the highest levels of a manufacturing enterprise. Senior management can talk all it wants about the need to improve quality and better serve the customer, but unless the right performance factors are measured and rewarded, nothing will change. The axiom is that whatever management asks for, which means measures, is what they really will get."

Two of the most prevalent problems Donovan has found in the past 20 years are:

Companies will manufacture products simply to absorb overhead expenses and create artificial numbers;
Purchasing departments will stress purchase price variance cost savings at the expense of supplier quality and delivery performance.

When manufacturing's goal is to absorb overhead, the result is often a bloated inventory and poor customer service," Donovan said. "In purchasing, getting the lowest possible price is important, but ensuring an uninterrupted supply of needed material in order to maintain the production schedule and meet customer deadlines is much more important.

"The best purchased material value is a result of price, quality and on-time delivery, because ultimately, these factors combined are one of the primary drivers of overall operating costs," he noted. "Just measuring something like purchase price variance is very singular and often leads to higher overall costs that are never visible in traditional accounting systems." Donovan emphasized that management must direct all levels of their organizations to focus on customer satisfaction. World class companies focus on the process involved in meeting customer needs, and not simply on individual functions.

Why Do You Need Performance Measurement?
Performance measurement systems, according to Donovan, should enable managers to precisely communicate performance expectations to subordinates, to know how the organization is really performing, to identify performance gaps, and to effectively make and support decisions regarding resources, plans, policies, schedules and business process redesign.

Does your performance measurement system focus the organization's efforts on those areas critical to your success? A good performance measurement will benefit the entire organization by letting them know exactly what is needed and expected, by providing a way for them to monitor their own performance and create their own feedback, and by identifying areas for improvement. According to Donovan, "Companies that want to achieve world class performance need to define a comprehensive set of performance measurements based on the success factors needed to win.

"The bottom line," Donovan asserted, "is that companies that do business the same old way get the same old results. World class manufacturers have a competitive edge because they approach things differently. These world beaters have refocused their organizations by measuring and rewarding the performance factors that really count. In manufacturing, what counts is on-time performance, cycle time reduction, throughput, lower operating expenses, inventory reduction, quality and ultimately, cash flow."

Are You on the Right Track?

Carefully and realistically consider each of the following questions and candidly answer them to determine if your organization is on the right track when it comes to manufacturing performance measurement:

Do the perfomance measures you use put pressure in the right directions for improvement?
Does management understand that micro performance measurements (e.g., purchase price variance, etc.) can distract from and decrease performance?
Does your top management understand that maximum motivation for improvement will result in the areas that employees believe management really considers critical?
Does your current performance measurement system help to integrate your company's functions for better overall performance?
Are your primary performance measures focused on quality, cycle time, operating expense, inventory investment, throughput, on-time perfomance and cash flow?

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