Real Numbers

by Orest J Fiume

  A common trap in separating non-value activities is to classify most of them as required. Before a non-value added activity is classified as required, the question “Required by whom?” must be asked. If the answer is internal to the enterprise, there is a good chance that it is not a requirement but a policy, and policy can be changed.

  Even if the answer to that question is external to the enterprise (e.g. a customer requirement), it should not be blindly accepted. It still might only be a policy of the external organization and not a real requirement. For example, some of Lantech’s distributors always ordered machines in groups of five. When pressed, the distributors explained that, in the past, Lantech was not producing quick enough for the end customer. As Lantech dramatically reduced lead time, the distributor was able to eliminate the batch ordering system, and as an added bonus, give customers the specific options they really wanted. The distributor could reduce their inventory of equipment and options. Admittedly it is harder to get an external organization to change policy, but not impossible, especially if that organization is the customer and it can be demonstrated that the customer’s non-value added policy is adding to the product cost. Most of the time, however, organizations find that non-value-added activities are strictly internal to the company and can be changed.

  In order to eliminate waste, physical change must occur; there is no way around this. As manufacturers become lean, some of the common physical changes include:

  Production grouped by product family

  Process layouts radically altered to facilitate flow production

  Internal stockrooms eliminated

  Material stored at the work cell in order to reduce movement

  Set-up time slashed

  Eliminating waste requires an organization-wide mindset that:

  1. Admits all processes contain waste

  2. Puts tools in place to identify it in a non-blaming environment

  3. Allows employees to eliminate it

  The barrier to the first mindset is something akin to pride of authorship. We ask, “How could I, a good and talented engineer, have created something bad?” The barrier embracing the second mindset is a culture of killing the messenger, and the barrier to the third is resistance to change.

  Now that we have a good understanding of productivity and waste, we need to identify the performance measurements that will motivate the right behavior in order to achieve the desired results. Because each enterprise has some uniqueness, specific performance measures will differ between companies. Therefore, it is useful to identify the attributes of a good performance measurement system that can be applied to any organization. (Following this list, see our explanations for each rule.) All performance measures you select should:

  Support the company’s strategy

  Be relatively few in number

  Be mostly non-financial

  Be structured to motivate the right behavior

  Be simple and easy to understand

  Measure the process, not the people

  Measure actual results versus goals

  Not combine measures of different things into a single index

  Be timely, e.g., weekly, daily or hourly

  Show trend lines

  Be visual

  Support the company’s strategy: This is particularly important as the company transitions to lean business practices. Traditional metrics were created to support the traditional batch and queue business. Because many of the business practices must change dramatically in order to be lean, many of the traditional metrics will be misleading. If reduced lead time is key, make sure a metric about lead time is easy to collect and is reported frequently.

  Be relatively few in number: Depending on the size of the organization, measurements need to be developed at various levels. At the lowest level are measurements that any employee can directly relate to. At the highest level are measurements that give information about the total enterprise. The number of intermediate levels will depend on the size of the organization. However, at each level the number of measurements should be few in number and focused on the activities that will yield the greatest results. The key is to focus on the process and produce reports that offer the most relevant information to the reader.

  Be mostly non-financial: Since everyone in the organization needs to be involved in eliminating waste, and doing so requires physical change, most metrics should measure physical change. These metrics measure quantities, not dollars.

  Be structured to motivate the right behavior: There are three ways to get better figures. First, you can improve the system. Second, you can distort the system and get the demanded results at the expense of other results. Third, you can distort the figures. In an organization where employees feel powerless to change the system, it is human nature for people to do whatever is necessary to make a metric appear to be improving, even if they do something that hurts the organization’s performance in another area. A good example was an attempt to measure the productivity of pickers in a company’s shipping department. The metric was in boxes picked per hour, for each picker. Many of the company’s products are in boxes that are very small, but some are quite large. There was no control placed over how orders were picked, so each picker went through the orders and selected the ones with lots of small boxes. Naturally, the customer orders that had large product kept floating to the bottom of the pile. The productivity measure went up, but to the detriment of some customers. In the process of developing meaningful metrics, careful thought must be given to see if they could cause dysfunctional behavior. In other words, avoid the law of unintended consequences.

  Be simple and easy to understand: If we expect employees to participate in waste elimination, the measures we establish must be meaningful to them. People must be able to relate an improvement in their work to an improvement in the metric. That means each and every person who is part of the process should know how to be part of the solution. If an employee does something to make the process better, it should show up in the measure.

  Measure the process; not the people: Recognizing Dr. Demings’ depiction of the “willing worker” and the belief that bad processes —not bad people —create waste, the measurements must focus on the process. Once we try to measure people, we are sending a message that we are trying to affix blame and will send people running for cover and making excuses. By focusing on the process, employees can readily participate in identifying waste in a non-threatening way.

  Set ambitious goals and measure actual results: To say simply that we want to improve does not give people an understanding of how far they need to go. Setting a goal for modest improvements allow people to achieve those levels by doing what they currently do a bit better. In order to get people to understand that they must dramatically change they way they work, management needs to establish stretch goals and measure actual results against those goals.

  Do not combine measures of different things into a single index: It is easier for people to understand what they have to do if the measure is not bundled into a complex equation and each element that goes into a ratio is measured separately and has separate goals. If the metric has too many elements going into it, it loses its meaning and employees no longer understand what must be done to improve.

  Be timely; e.g. weekly, daily or hourly: One of the primary uses of performance measurements is to trigger management to take corrective action when it becomes apparent that a goal is not going to be met. For example, it does not help customer service if we know tomorrow that we didn’t make today’s production schedule. By measuring production against a plan based on takt time, and identifying reasons throughout the day for any shortfall —hourly or more frequently —management can take corrective action before the day is finished.

  Show trendlines: One of the underlying themes of continuous improvement is that it is, of course, never ending. We want to perform better today than we did yesterday. Thus, every performance measurement chart should show not only the actual results and go
al for this period, but also the trend over a longer period of time to demonstrate continuous improvement.

  Be visual: If it is worth measuring, it should be displayed in a way that everyone can see. When management walks into any work area, it should be readily apparent what is important for that area by what they measure. Management should also see, at a glance, where the area stands against its goals, any improvement over time and reasons for a shortfall in performance —all without asking questions. The most commonly used analogy is that of a sporting event, where everyone’s eyes return again and again to the scoreboard. Visual displays of the performance measures are our scoreboards.

  Performance Measures: Categories and Explanations

  Earlier we discussed the need to develop metrics that would have a positive impact on ROI, which employees could relate to within their specific jobs. Since we have now defined the attributes of a good performance measurement system and recognize that different businesses may identify different things to measure, we can offer a kind of deli menu of performance measurements. Just remember as you read the following chart that every business should only choose to measure that which is critical to the strategic objectives. Measure too many things at once and the system becomes swamped.

  Customer Satisfaction & Responsiveness

  Customer Satisfaction Index: Each company’s index will be different, based on what value they uniquely bring to the customer. For a computer maker like Gateway or Dell, for instance, important values would be delivery times, ease of ordering and repair turnaround. A major hotel chain would look closely at how many guests return each year.

  Customer Return Percentage: This tells manufacturing how products fare in the field, indicating the health of the process.

  Delivery Performance: This is an external measurement, showing on-time delivery rates.

  Average Quoted Lead Time: Becoming lean means slashing lead time. Keeping track of this number reveals whether all aspects of the business are taking new capabilities directly to the customer.

  Late Shipments, Measured in Dollars, # Parts Affected, # of Customers Affected: Wiremold uses all three measures. The number of parts affected and number of customers affected reveals total impact in the market. Measurement in dollars shows management precisely why revenue was not achieved this month.

  Abandoned Customer Phone Calls Percentage: Program your phone system to measure how many callers hang up before reaching a representative. When the abandon rate crosses an acceptable threshold, your customers are probably frustrated. Consider tracking the questions asked, looking for similar questions that might be answered up front. Also reassess which calls get priority.

  Call Back Percentage: What percentage of questions does not require a call back from a client services representative? This is a good indicator of whether your representatives have the most useful information at hand.

  Custom Quotes Completed Within 24 Hours Percentage: Most companies take days or a week to tell their valued customer how much a custom solution costs. Become dedicated to giving true customer service and providing it within 24 hours.

  Flexibility & Responsiveness

  Defects Per 1,000 Units: For high-ticket items, such as capital goods, you might track this by Defects Per 100 Units. This is most effectively tracked when producers have good after-sales contact with customers.

  Performance to Takt Time: This is an internal measurement, reflecting how well the organization performs to takt time.

  Percentage of Time Each Cell Meets Takt Time: Tracking on an hourly basis how effectively each cell is meeting the customer requirements (i.e., within takt time), will help pinpoint problem areas more precisely.

  Average First Pass Yield Percentage: This highlights process problems and allows managers to focus improvements.

  Raw Material Inventory Cost: Are you ordering too much of one thing from your suppliers? Are you paying extra warehousing fees when you could receive smaller, more frequent shipments? Keep an eye on this data to find out.

  WIP (Work In Process) Inventory Cost: Search for your process bottlenecks in the amount of work that piles up between processes.

  Finished Goods Inventory Cost: Are you really producing to customer demand? Is your forecasting wrong or your shipping process broken? This metric will alert you to questions that need to be asked.

  Total Inventory, Days on Hand: As this dollar figure shrinks, you are liberating cash to be used in other, more important areas: innovation, new products, acquisition or grabbing new market share.

  Product Development Lead Time: Anyone making products for consumers knows how critical this measure is, showing how quickly you can get new ideas to market.

  Cost & Productivity

  Rate of Productivity Growth: A lean company shoots for 8-15 percent productivity growth per year.

  Constant Dollar Sales Per Employee: Strip away the fluctuations of price and keep a constant measure. This is a common view of real productivity.

  Absenteeism: This is not just a financial measure, but also an emotional one —telling you if your employees are engaged and taking personal responsibility. If you want the trend line to go upwards with good news, call it presenteeism.

  Unplanned Downtime: Keeping good data at the cell level —with hour-by-hour charts, for instance —maintains a steady vigilance on this important metric.

  Safety & Ergonomics

  Injuries: Accidents are also defects. Work accidents create waste such as lost time and medical bills, not to mention physical suffering for the employee. As with a defect, when an accident occurs we must perform a root-cause analysis to determine the real cause and avoid it in the future.

  Medical Costs Per 100 Associates

  Lost-time Accidents: This should separate the serious accidents from the everyday hurts.

  Financial Performance

  Net Sales

  Operating Income as Percent of Sales: An efficiency measure, to be tracked on a continuum.

  Research and Development Cost as Percent of Sales: Are you investing in the future?

  Percent of Sales from New Products: Keep an eye on whether R&D efforts are paying off.

  Capital Investment as Percent of Sales: This number alone would not tell an organization enough about trends. But break down capital investments for new products, capacity and safety or environmental costs, and you’ve got real information. As a company goes lean, there should be a dramatic shift over time toward capital investment in new products. In the early years, investment in capacity should drop impressively while kaizen activities free up unused capacity.

  Working Capital as a Percent of Sales: As cash is more effectively utilized, this percentage will decrease. This percentage can also be used as a macro number for cash planning. For example, if sales are expected to grow by $1 million and the working capital percentage is 20 percent, then expect to raise $200,000 in cash to support working capital.

  The goal of performance measurement should be to manage processes, not results. In organizations that manage results, we find behaviors that accommodate the symptoms of problems by adding more non-value added activities, distorting the system and achieving results at the expense of other areas. In most cases, managing results creates self-deception. In the worst cases, organizations go as far as creating false financial statements.

  Once an organization changes its orientation from managing results to managing processes —and is supported by an intelligent performance measurement system —employees will feel free to publicly identify defects and waste without fear. This is not about simply generating reports. This is about establishing a robust mechanism for instituting process improvement and creating an environment in which true long term improvements can be achieved.

  4

  Streamlining the Process

  In order to achieve the position of valued business partner, we first must gain our freedom from drudgery. So let’s move on to the action-oriented activities that will get us there. The ideas we offer here for eliminating t
he waste of time and energy that goes into transactions chasing have worked well in businesses of different sizes. Whether they will work in yours depends partly on business strategies, partly on commitment. At the end, we hope to turn those triangles from chapter two upside down.

  In any career, taking action and making change can be the most fun and fulfilling part of the work. When it’s fun, it’s also contagious. Like a chain reaction, change and continuous improvement catch on and become not only accepted in the workplace, but expected.

  Change can take place in many forums. Each of the following forum types share vital ingredients: a designated place and time where an open exchange of ideas is encouraged, where there is a sense of importance to the work and a knowledge that whatever comes out of the forum will be taken seriously.