A survey of businesses found that 52% never or rarely developed and used performance measurement or key performance indicators (KPIs) to evaluate their processes. This is a critical gap because a solid performance measurement process provides the feedback loop needed to drive strategy and a profitable bottom line. It is key for effective performance because it provides quantifiable performance data for decision-making and driving improvement. To put it simply, “you manage what you measure.”
From Strategy to Execution: Driving Alignment and Accountability
In organizations of all sizes, converting business strategy into effective short-term execution can be difficult. Some think this problem exists only in large corporations but it can be an even bigger issue in small companies that are used to operating based on the gut instinct of the founder. Small and medium companies’ performance measurement can only be in the minds of the leaders and unavailable to everyone else. Alternatively, they have never take the time to put in systems to effectively gather and present performance data.
An effective Performance Management System, with a few key indicators, reduces ambiguity and drives accountability. Used broadly and consistently, performance measurement helps create organizational alignment and drives improved performance so that strategic objectives and departmental goals do not conflict. For companies that struggle with alignment, implementing this framework in conjunction with organizational change management, such as Lean Process Improvement, is highly effective.
Our Consulting Approach to Performance Measurement
At Supply Velocity, performance measurement is one of our fundamental consulting services and is included with most improvement, strategy, and change management projects. We also apply it to our own firm. When we begin a project, we benchmark our client’s business performance.
Post-implementation, we verify the effectiveness of our services by reviewing performance data against those benchmarks. We use KPI feedback to inform decision-making and help our clients attain the desired level of operational excellence and customer satisfaction.
Our goal is to make the performance measurement process simple to implement. Our philosophy is that “few measures in the hands of the many are more powerful than many measures in the hands of the few.” Our expertise helps you identify the right metric for each key operation. Scorecards that are developed from the performance measurement implementation process will have 3, 4 or only 5 metrics. We like to think that you need to know your performance measures and data when you are driving home. No one can do that with 10 or more KPIs.
The Transformative Impact of Clear Measurement
Implementing performance measurement will help companies that are already profitable achieve the next level of improvement. Having clear, balanced scorecards is the way to implement continuous improvement.
For companies that are struggling, the transformation is simple, rapid, and dramatic. This management framework is effective across all industries, including manufacturing, professional services, distribution, retail, non-profit, and government.
Clarity of the Performance Data and Definition
To be transformative each performance measure must be well understood. We require our Clients to know where the data is kept that will be used to calculate the measure. It cannot be something that is not tracked or is impossible to track accurately. We look to systems to find this performance data. In addition the person tracking it cannot be the person who owns this scorecard. Self-measurement doesn’t work over the long-term because it creates incentives to mis-represent the data.
We also require a defined formula for each measure that is a ratio. A good example is On-Time-Delivery. We can define it as the number of shipments that met the confirmed ship date divided by total shipments in a month. Or it can be the number of shipments that meet the standard (for example 3 day) lead-time divided by total shipments. There must be clarity and agreement from everyone on what is being measured and how.
Red-Yellow-Green Performance Ranges
You will often hear executives and managers talk about performance goals. However, the idea of a goal with anything lower as a failure and anything higher as a great success is flawed. We use performance ranges. Red performance targets define the difference between unacceptable and acceptable. Green performance targets define the difference between acceptable and outstanding. Yellow is better than red and worse than green, or acceptable. You should expect to ‘be in the yellow’ most of the time. If you are in the red you should have an action plan to improve.
If you are in the green you should know why, and not just be happy. What drove that performance? Was it an improvement or luck?
For example we can use On-Time-Delivery. The Red target at 89% means that 89% or lower is unacceptable and needs to be improved. The Green target at 97% means that you are operating at near world-class levels. 90 – 96% is acceptable and where you can expect to be operating most of the time.
Using Action Plans to Turn Scorecards into Improvement
It is critical that your Performance Scorecard also have an Improvement Action Plan connected. The action plan should have the measure it is improving, a description of the improvement, the action item owner and expected completion.
Using the On-Time-Delivery example, if the company’s operating at 84% on-time-delivery, and action item could be to review forecasting accuracy and recalculate safety stock. This may be the responsibility of the Planning or Supply Chain Manager and be completed in one month, before the next Action Item Review Meeting.
The 5 Key Categories of Performance Measurement
We have developed 5 key categories of measures to ensure the Scorecard is a balanced scorecard. These categories are: Financial Performance, Operational Efficiency, Customer Success, Employee Satisfaction and Innovation. The purpose of these categories are to get the team who is creating the scorecard to think in a balanced way and not over-weight the scorecard with financial or internal (operational) metrics.
Monthly Management Performance Scorecard Meetings
We recommend starting with a monthly scorecard review meeting. These meetings are short, 15 – 30 minutes with each scorecard owner, to review actual to the goals and improvement action item completion. The scorecard owners can then take these scorecards and meet with their teams more frequently, weekly, to drive more tactical improvements. Supervisors can then take these measures and use them as part of a daily management board that communicates daily to their team – the people that do the work.
The monthly – weekly – daily process ensures alignment up and down the organization.
Your Journey Starts with a Performance Measurement Assessment
Do you feel like your workforce is not aligned or effective? In our 25+ years of consulting, we have seen executives blame their people but not provide quantitative feedback. Without this feedback, your people are working in the dark. They don’t know if they are performing well or poorly, except for verbal feedback when financial or accounting results are strong or suffering. This is no way to enhance efficiency. You can find out by asking, “What makes a great day, week or month?” Their answers will be enlightening but also likely vague.
Symptoms of a Vague Performance Measurement System:
- Your business strategy remains a plan that is never implemented.
- Performance improvement is ad hoc, with no clear priority.
- Sales and operations are working at cross-purposes – no alignment
- Employee problems, including high absenteeism and turnover, are common.
- Customer complaints are high and loyalty is low.
- Management is based on gut-feel, trading data for intuition.
Our firm’s comprehensive Assessment provides a targeted review of your performance versus strategic and tactical goals. The Assessment contrasts perceived performance with available performance data and reports. We then deliver a road map for developing and executing this system using hierarchical Performance Scorecards.
The Assessment Process: Gaining Clarity and Insight
Over the years, we have honed a cost and time effective Assessments. It is quick and impactful by focusing on the 20% of issues that drive 80% of the problems. Our recommendations are supported by performance data and direct observation, providing a framework for the implementation steps, timing, requirements, and return on your investment.
A typical Assessment is a two-day process involving:
- Interviews with key personnel (executives, managers, and individual contributors).
- Analyzing financial and operational performance data.
- Facility tours and direct observation.
The onsite portion is very hands-on. We consult directly with personnel to ensure they are involved and comfortable with the overall process.
What Our Assessment Uncovers:
- How key performance indicators are used in the organization.
- How well measures are understood and how accessible the data is without specialized software.
- What meetings are used for communications, alignment, and ongoing monitoring.
- If poor performance leads to action items to close the gap.
- How consistently high-level measures are understood across the organization.
- How well the company is performing versus its own measures.
- If measures align and complement across departments.
- If measures are leading or lagging indicators of success.
- If measures include both internal (business) and external (customer) requirements.
Even companies that invest effort to develop scorecards are sometimes surprised that their system is not as effective as it could be. Supply Velocity works collaboratively with your organization to get an accurate Assessment, and then we show you the path to making it effective through innovation and proven best practices.