Performance Measurements #2

Last time I blogged about the differences we find between traditional and lean focused performance measurements.  I summed up my own experience implementing these in many different companies in a simple statement:   In the traditional company, the department dictates performance to operations, in the lean company the value stream dictates performance to the department.

 

So, now let’s take a look in detail about how simple performance measurements can add up to a better way to manage and improve a lean company and make more money.

Simple Performance Measurements

 

Let’s start with a basic assertion:  lean performance measures have to be simple for two reasons. First, these measures will be reported frequently – hourly, daily or weekly – so they cannot take a long time to calculate.  Second, simple measures which are timely and easy to understand will focus teams on identifying the root causes of poor performance.  This is fundamental to driving productivity improvements.

Productivity = Flow + Improvements

I believe that creating Flow in value streams is a critical first step to unlocking the financial potential of lean.  An important outcome of Flow is productivity improvement. But creating Flow is not a one-time result; Flow has to be continuously improved through kaizen events and smaller continuous improvement projects.  The value stream thus becomes better and better at what it’s designed to do.

Lean companies achieve Flow and improvement by measuring the aspects of value stream performance that take them in the direction of their lean strategy.  So the lean company doesn’t need to measure everything; it just needs to measure the right things.  If the right measures are used, the expected outcomes will occur, and more opportunities for lean continuous improvement will present themselves … and so on … until the only way to improve the measures is to practice lean all the time.  That’s pretty much what lean companies aim to do.

What to Measure?

Now, I recognize that different companies are different, and no list of specific measurements will always fit every company.   But my experience has been that most companies – especially when they are starting with lean performance measurements – can use these simple measurements to drive substantial lean improvement and make much more money from Lean.

Here is what I think you should measure (along with some reasons why.)

Flow – creating flow in a value stream will first drastically reduce and then limit the inventory present in the value stream.   The best measure of Flow is related to inventory velocity – turns, days, or dock-to-dock time.  Creating Flow will allow more demand to flow through the value stream and will drive revenue growth. Improving Flow creates more capacity to meet additional demand without increasing costs, and that spells opportunity for making more money.

Quality – Poor quality interrupts Flow and causes late deliveries, lowers customer satisfaction (especially if they discover the defect) and negatively impacts productivity. Who does the quality work and when it is done also impacts operational performance.  Truly Lean practices build perfection into processes. This is the reason for “quality at the source” where operators building the product inspect their work immediately, or where designated quality people are assigned to value streams and their work is incorporated into the Flow.

If quality at the source is standard work in the value stream, then defects will be discovered quickly, root causes will be easier to identify and continuous improvement will ultimately reduce defect rates and reduce spending on materials.

Reducing defects will improve productivity because the time wasted creating defects is instead being used to create good product. Labor and machine spending per product will be reduced.  Improving quality also improves customer satisfaction by improving such things as on-time deliveries, reduced returns and warranty costs, and lower inventories. Perfect quality product is one value proposition for every customer in every market.

Delivery – delivering on-time to the customer request date has the potential to set your company apart from the competition. Many companies use the customer service or sales functions to negotiate with customers on delivery dates, or promise dates. Then they measure on-time delivery against these.  And guess what? The percentage of on-time to promise date is always very high which tells the company that they are performing well and there is no need for improvement.  The whole process of negotiating delivery dates is waste.  You are basically measuring what you know you can do anyway, and providing no incentive to stretch goals.

Measure on-time delivery against customer request date. Period. Meet your customer needs in terms of delivery and you will create value, which will drive growth in demand and revenue. And if you can be the first company in your industry to do this, you will set yourself apart from the competition.   Once more, and that spells opportunity for making more money.

Order Fulfillment Lead Times – lead time is the total time from receipt of a customer order to delivery of the product to the customer. From a lean viewpoint lead time = total cycle time + waste time. Total cycle time is the value added time to make a product. Reducing lead time requires elimination of the waste, which is accomplished by establishing Flow and using a continuous improvement system.

And No, we are not talking in circles.  Lead time is an excellent performance measure precisely because it requires looking at how the value stream performs as a system, rather than just looking at the individual process steps of the value stream.  Put another way:  Reducing lead time requires elimination of the waste time, which you can only do creating Flow and using a continuous improvement system. Trying to eliminate waste using any other method simply won’t work.

Why does this make more money for the company?  Easy. Short lead times create value for customers. If customers know your lead times are short, they can reduce their inventory levels and free up cash. Additionally they can reduce their delivery times to their customers.  If you have the shortest lead times in your market, you will gain a competitive advantage. Demand and revenue will increase.

Productivity – The definition of productivity is output divided by input. Lean companies define input as resource and output is simply shipments to the customer. If lean practices are in place and delivering value to customers every day, everywhere – then demand will be increasing. Likewise, if lean practices are eliminating waste, then you will be able to sell, make, and ship more products and services without increasing the spending in the value stream. Your company will rapidly move to unprecedented profit and cash. Many lean enterprises increase their productivity by 10-20% every year. Pretty impressive!

I know that some of you are thinking there is nothing new here. Your company already uses these measurements and that’s probably true for some. But I think it is important to ask yourselves these two questions. ‘Are these the only measurements?’ and ‘Are we using these measurements to motivate and drive substantial lean improvement?’

Bottom Line: If you want to drive substantial lean improvement in your value streams, then you need to limit the measurements to those critical few that focus the value stream team on their lean objectives. Also, if you are already using these measurements, ask yourself: ‘Are you just reporting your results to managers.’  Or, are you really using your measurements to DRIVE LEAN FORWARDS? You may be using these measurements, but are they leading to 15% productivity improvement this year?

Performance Measurements #1

In some recent blogs, I’ve been writing about some of the unique attributes of the CFO in lean companies – the “Lean CFO.”   Let’s continue this discussion.

One the Lean CFO’s primary responsibilities is to understand business performance and explain financial results to all levels of stakeholders in the business, and especially to readers of the company’s financial reports.  After all, these people will be involved in making decisions about the company going forward; they need the best and most meaningful information the Lean CFO can provide.

A Lean company challenges the CFO to explain financial results in a way that meshes with the lean strategy deployed in operations and to show how the company’s finances are really being impacted.  Truly lean companies will have put a top-to-bottom integrated framework in place and will create performance measurements that are driven by key performance indicators (KPI’s.)  Such measurements are also used throughout the company to measure on-going performance.  Usually, these measurements are non-financial.

Today, I want to spend some time exploring why “traditional” operational measurements don’t work as well in a Lean company and why Lean measurements do.

 

Traditional Operational Measurements

Most traditional measurements share two common characteristics – they are financially based and developed around the vertical structure of the organization. Financially based measurements (any numbers with dollar signs in front of them) are automatically backward- looking. Sure, the root cause could be identified, but there’s nothing that can be done to change the outcome, because it’s already happened. In traditional manufacturing companies, performance analysis is often based around comparing the actual performance with standards set in a standard costing system.

Companies that create more operationally-focused measures also tend to do so by the vertical structure of the company. Their goal is to maximize each department’s performance. So on top of financial performance, a plant has to contend with measures relating to Quality, Supply Chain, Operations, Human Resources and so forth.  Even when these measures are outside their ability to do anything about them!

These traditional measurement systems cause a few problems. First, there are usually way too many measures.  I’ve seen plants that have upwards of 50 -100 performance measures. Even if the measures are good, it is impossible for a plant location to try to maximize performance in that many areas, and it forces the plants to make trade-offs. Second, these measures are often disconnected from the real operational issues affecting a plant because they are decided upon by top management and dictated to the plant.

Lean Approach to Measurement

When it comes to operating performance, lean companies employ an entirely different philosophy; measurements are designed so people can understand the present situation in order to change the future. This forms the basis for making improvements. Changing the future will require specific actions and changes to the operating processes.

Lean companies also recognize that optimizing the entire value stream flow is the primary goal because it leads to improving value to the customer. And this goal must take precedence over any departmental goals.

The Lean CFO recognizes that performance measurements must change to become aligned with lean economics. The operational goals of all value streams are to deliver value every day, all the time to the customer, and to continuously improve productivity.  The Lean CFO understands that this will lead to financial success because customer value plus productivity equals increased revenues, profits, and cash.   Lean-focused performance measures make a whole new way to control operations through the value stream  possible.

Existing performance measurements that are not lean-focused must be eliminated as lean controls take root or else conflict will occur. Performance measures that are based on the vertical structure of the company must be eliminated or modified and refocused on the value stream. This means that department measurements, such as quality or supply chain, will measure the department’s ability to support the value stream. Often these departments are often fused into the value streams themselves.

In the traditional company, the department dictates performance to operations, in the lean company the value stream dictates performance to the department.