Lean Metrics for Performance Management
Lean is about your customer, culture, people, processes and place. It is about business renewal, growth and transformation. For any lean journey to be truly successful you must take time to strategically plan your progress, link it to your overall business strategy, and put measurements in place. Lean is a “leap of faith”. You know waste exists and eliminating that waste will increase value added activities. The cost of exposing and eliminating that waste will take time and will initially have a negative influence on the income statement. Lean is about commitment, investment (time and money) and sustainable business improvement. “if you can’t measure it, you can neither manage it nor improve it,”
What is Performance Measurement?
Performance Measurement can be best understood through considering the definitions of the words ‘performance’ and ‘measurement’ according to the Baldrige Criteria:
- Performance refers to output results and their outcomes obtained from processes, products, and services that permit evaluation and comparison relative to goals, standards, past results, and other organisations. Performance can be expressed in non-financial and financial terms.
- Measurement refers to numerical information that quantifies input, output, and performance dimensions of processes, products, services, and the overall organisation (outcomes). Performance measures might be simple (derived from one measurement) or composite.
The challenge for organisations today is how to match and align performance measures with business strategy, structures and corporate culture, the type and number of measures to use, the balance between the merits and costs of introducing these measures, and how to deploy the measures so that the results are used and acted upon.
The Need for a Range of Performance Measures
Organisational control is the process whereby an organisation ensures that it is pursuing strategies and actions which will enable it to achieve its goals. The measurement and evaluation of performance are central to control and mean posing 4 basic questions:
- What has happened?
- Why has it happened?
- Is it going to continue?
- What are we going to do about it?
The first question can be answered by performance measurement. Management will then have to have far more useful information than it would otherwise have in order to answer the other three questions. By finding out what has actually been happening, senior management can determine with considerable certainty which direction the company is going in and, if all is going well, continue with the good work. Or, if the performance measurements indicate that there are difficulties on the horizon, management can then lightly effect a touch on the tiller or even alter course altogether with plenty of time to spare.
As to the selection of a range of performance measures which are appropriate to a particular company, this selection ought to be made in the light of the company’s strategic intentions which will have been formed to suit the competitive environment in which it operates and the kind of business that it is.
For example, if technical leadership and product innovation are to be the key source of a manufacturing company’s competitive advantage, then it should be measuring its performance in this area relative to its competitors. But if a service company decides to differentiate itself in the marketplace on the basis of quality of service, then, amongst other things, it should be monitoring and controlling the desired level of quality.
Whether the company is in the manufacturing or the service sector, in choosing an appropriate range of performance measures it will be necessary however to balance them, to make sure that one dimension or set of dimensions of performance is not stressed to the detriment of others. The mix chosen will in almost every instance be different. While most companies will tend to organise their accounting systems using common accounting principles, they will differ widely in the choice, or potential choice, of performance indicators.
Characteristics of Good Performance Measures
- Provide a way to see if our strategy is working
- Focus employees’ attention on what matters most to success
- Allow measurement of accomplishments, not just of the work that is performed
- Provide a common language for communication
- Are explicitly defined in terms of owner, unit of measure, collection frequency, data quality, expected value(targets), and thresholds
- Are valid, to ensure measurement of the right things
- Are verifiable, to ensure data collection accuracy
Examples of Performance Measures
- Customer: Lead Times and Cycle Times, Order Fulfilment, On-Time Delivery
- Quality: Cost of Quality (scrap, rework, defects, warranty claims etc), First Pass yield
- Cost: Productivity or Throughput, Inventory (raw, WIP and finished goods), Working Capital
- Delivery: Reliability (on time and accuracy), Schedule Attainment, OEE (Overall Equipment Effectiveness)
- Organisation: Safety, Turnover, % Staff Engaged in Continuous Improvement
Summary
Performance measurement is fundamental to organisational improvement. The importance of performance measurement has increased with the realisation that to be successful in the long-term requires meeting (and therefore measuring performance against) all stakeholders’ needs including customers, consumers, employees, suppliers, local community stakeholders, and shareholders. While the importance of performance measurement is difficult to quantify it is evident that performance measurement plays a central role. It is worth noting that performance measurement is a requirement for benchmarking and business excellence.
Next Steps
Contact Vishnu on Vishnu@pslglobal.net for any assistance in implementing a performance measurement system.
