The measurement of people’s efficiency has a long history in manufacturing industries. The design and production engineers calculate the time required to manufacture a product or batch of products. Each time the product is made, the “actual time” is measured and recorded. The efficiency of the production people (or the process) is calculated by dividing the standard time by the actual time.
If the actual time is faster than standard, the efficiency will be greater than 100%. When the actual time is longer than standard, the efficiency is less than 100%.
The purpose of measuring efficiency is to monitor if the people and the process are running at the right speed so that the right number of units are made according to the production schedule, and the need’s of the customers. When the efficiency measurement is significantly less than 100% an investigation is made so that the shortfall can be caught up, and the reasons for the problem identified.
Traditional approaches to manufacturing finds these measurements very helpful. The measurements were designed to support the “scientific management” developed by Frederick Taylor (and others) in the 1920’s when modern industrial methods were first standardized. These clever and innovative engineers and entrepreneurs based their methods on a few key paradigms.
- One was that the operations people in a manufacturing plant have “separation of duties”. The people should not make the whole product but each have specialized skills. The products pass through several work stations from fabrication to finished products.
- A second paradigm is that the plant must maximize the use of the operators time. Operators are an expensive resource and we need to make sure that every minute is used productively.
- A third is that making large batches of products optimizes the production time and productivity.
The outcome of these assumptions is that the factory makes products all the time, builds finished goods inventory, serves the customers effectively by having available product, and minimizing the product costs. The underlying philosophy of manufacturing management is that we need maximize the “economies of scale” and produce as many products as possible, and to harness the production operators 100% of the time.
None of this thinking works in a lean organization. “Overproduction” is one of the famous Seven Wastes articulated by Shigeo Shingo.
- Lean companies do not want their people working all the time making the products. The people need time to work on improvements in their work areas. These improvements are not the large “kaizen events”; they are “continuous improvements”. Hundreds of small improvements initiated by the people in the cells or other work areas. These many small improvements lead to huge benefit as the small improvements add up to significant change, and the people making the changes are the people with the most knowledge.
- If the company emphasizes production efficiency, then the people will work to create maximum efficiency. One way to achieve this is to shortcut the standardized work required to make the product, or other tasks the people are doing. This may lead to short-term “efficiency” but violating standard work compromises quality and consistency.
- Making larger batches increases the efficiency measurement of production but violates single-piece-flow which is fundamental to lean manufacturing.
- Another way to increase efficiency is to change the sequence of products being made so as to minimize such things as change-over or materials handling. In many cases the production sequence is important to providing the right products to the customers, and leads to shortages or delayed delivery of all the products the customer needs today.
- A more important issue is that process problems are overlooked and hidden when the people are driven by efficiency. Lean companies identify problems immediately by stopping the process and solving (or at least fixing) the problem so that it will not happen again. This is an important aspect of continuous improvement.
If Efficiency is Anti-Lean then What Do We Measure?
A common way to measure the production process in a lean organization is to use the Day-By-The-Hour chart.
The production quantities for each hour are shown in the Schedule column. The quantities completed are shown in the Actual column and the problems are recorded in the right hand column. This visual board is posted in the work area and kept up-to-date each hour. The board controls the production quantities, initiates problem solving, and ensures that the right products are made at the right time and in the right sequence.
Different versions of the Day-By-The-Hour chart are used in office, warehouse, design, and other processes to create control of the work processes.
There is a lot of truth in the old adage “what you measure is what you get”. This is certainly true for industrial companies and most other organizations. As you progress with your lean journey you will soon find that the measures you have been using for years are not only unhelpful, but actively harmful to what you are trying to achieve through lean thinking and methods. Shown below there are five keys to the design of a great lean performance measurements in your company.
This is the 7th article of our series showing how to develop a truly Lean Management System.
Key #1. Our measurements must be developed to support your company’s unique strategies.
There is no one-size-fits-all set of lean performance measurements. Each company must develop their own measurements to support their strategy, their market, their products, and their customer needs.
If you develop the measurements yourselves the measurement system will work better in your company. If you have the teams develop their own measurements then your people will understand them and know how to use them for improving their results.
Key #2. Our measurements be must designed for your company’s specific operations.
The starting point for designing lean performance measurements across your company is to clearly define your company’s strategy. This strategy may be a formal strategic plan, or it might be a less formal explanation of what the leaders of the company value in order to achieve success in their business.
The best way to develop measurements is to use a “lean performance measurements linkage chart”. Starting with the company strategy, we develop measurements that show the achievement of the company’s strategic goals. These measurements are usually easy to define if the company’s strategic objectives are clear and concise.
The next step is to link these strategic measurements with measurements at (for example) a plant level. Within the plant we link measures to value stream performance, and finally to measurements in production cells, other operational processes, and administrative processes.
As you can see in the picture (above) the linkages look at the goals at each level and the critical success factors at the lowest level. This enables the company leaders and their value stream teams to think through what is critically important and should be measured. It is this process that enables us to bring the number of measurements down to “the vital few”.
Key #3. We must work hard to use the smallest number of measurements.
The fewer measurements the better, providing you have selected the right ones based on strategy, markets, products, and customer needs. Companies that have “dashboards” containing many complex measurements created by computer system each month have a poor understanding of the business. Companies with five or six well chossen value stream measurements, for example, have their business under control because the local people in each value stream, process, and support department can understand and use these measurements.
If your people clearly understand the handful of measurements they can take responsibility to use the measurements to control their own processes, improve the processes, and increase customer value.
Lean measurements are designed to foster continuous lean improvement, not to monitor past performance. They must NOT be used – in the traditional way – to punish those who fall short. Rather they are used to motivate and empower people.
Key #4. We need different measurements at different levels of the organization.
Most companies need at least three levels of measurements; strategic, value streams, and cells/processes. You can see this on the Performance Measurements Linkage Chart example above.
The strategic level shows the company leaders the overall performance of the business each month, typically. The purpose of the strategic measurements is for the senior managers to see if they are achieving their strategic goals; operationally and financially. (See Lean Accounting in a Nutshell for more information of financial reports.)
The value stream managers and their team need to know the performance of the value stream each week so that they can use this information for the continuous improvement of the value streams. The results show the problems, the problems can be immediately investigated, the root causes understood, and changes made to create improvement.
The people working in the cells, processes, and support areas need 2 or 3 much more frequent measurements that enable them to constantly monitor and control their work so as to serve the customers well and consistently conform to standardize work.
Key #5. Our measurements must be visual and (ideally) updated by hand.
This bring us to the human side of the measurements. If you want your people to use the measurement and take appropriate action at all levels, the measurements must be displayed visually. People better understand visual measurements. Visual measurements enable groups of people to discuss issues and improvements. Visual measurements enable the teams to see the “big picture”. Visual measurements are combined with visual explanations of causes and the impact of improvements. Companies with fat reports coming from the computer system – usually monthly or later – are missing the point and purpose of the measurements. It all about the people; not the numbers.
Many companies find that they get better understanding, commitment, and results if the people using the measurements also have the task of gathering the data and updating the visual measurement boards. This is NOT a requirement, and if the work of data gathering is burdensome, then it is good to have the computers create the reports. But the more the people at all levels are actively involved in the creating their own measurements, the more likely they are to take responsibility and create improvement.
WHY IS THIS IMPORTANT?
For lean companies, operational performance measurements are just as important as the financial results. Financial results do not happen on their own. They are the results of continuous improvement of the company’s primary operational processes; sales & marketing, product design & development, operational processes, purchasing, improved quality and capacity usage, etc..
Truly lean companies integrate their operational and financial control systems so that the value stream managers have a full picture of what is needed to create customer value, grow the business, and make tons of money. The ideal measurements and financial reports are on single pages, focused, and meaningful. That is the way to create empowerment, control, and improvement. (see information about the “Box Score”)
You can not run a lean company with the traditional measurements – operational and financial. If you do, you will not be able to sustain lean manufacturing, lean product development, lean sales and marketing, etc. because your traditional measurements will “push back” against your lean hard work. Moreover, you can not have two sets of measurements; one for financial control and another for operational control.
WHAT MUST BE DONE:
- Replace the traditional measurements with performance measurements that are designed to motivate and monitor lean behaviors and improvement.
- Develop a set of measurements throughout the organization that thoroughly reflect the company’s strategy and goals.
- Post the measurements (at all levels) visually so everybody can easily see and understand the results and the causes of the results.
- Make sure that as the people work to improve their measurement results they will be actively working to achieve the company’s strategic goals.
- Make this an integral part of the lean culture you are developing within your value stream and indeed the whole enterprise.
If you are a CEO of a manufacturing company with many value streams, it’s impractical to think that you have the time to review all the performance measures of every value stream in your company. Yet you need to know the operational impact of Lean on your entire organization.
The traditional solution to this issue is to roll-up or aggregate measures so the CEO sees just a few numbers to get a pulse of performance. However, rolling up value stream measures doesn’t work because the aggregation of value stream measures really doesn’t mean anything. Each value stream is really a separate business unit with different products, customers and operational issues. Because each value stream is an independent business unit, performance should be measured against future state targets, which may be different for each value stream.
What I tell manufacturing CEO’s and executive a management team is to focus one measure – Flow, as measured by inventory days or inventory turns. I believe this is the best indicator to let the CEO the effectiveness of deploying and using lean practices, tools and methods.
When a company commits to a lean business strategy, it means that Pull Systems will be used to manage inventory from suppliers, through production to the customer. Traditional companies employ many methods to “manage” inventory. Lean companies employ Pull Systems to minimize inventory throughout the business. If your company does replace traditional inventory management methods with Pull Systems, Inventory Days will go down significantly.
What I’ve seen in many companies is that they are selective in how they apply Pull Systems in their business. The initial focus is usually reducing work-in-process inventory in production. From a lean viewpoint, this is not too difficult to do. But many companies stop here and claim “victory” over inventory. But you as the CEO see that total inventory days for your company is not going down.
The real inventory problems in many larger companies are raw materials and finished goods. And I think the primary root cause of these problems is functional silo thinking in companies. Let me explain.
Purchasing or Supply Chain typically controls Raw Materials inventory. In a functional environment, Supply Chain leadership may focus their performance measures solely on their function. This is why many larger companies still use Purchase Price Variance as a performance measure. The focus on PPV is simple – the job of Supply Chain is to reduce material cost. The result is a Supply Chain function that is disconnected from Operations. In a Lean company, Operations is the customer and Supply Chain is the supplier. Supply Chain’s job in a Lean company is to create Pull Systems from suppliers to operations and minimize raw materials inventories.
Marketing and/or Sales typically control finished goods warehouses. In many larger companies, these warehouses are regional distribution centers that are supplied finished goods by many factories (which in fact may be very Lean). In a functional environment, Marketing/Sales is concerned about availability of finished goods, so it plans finished goods levels based on sales forecasts. These sales forecasts end up driving production in the Lean factories because the distribution center places orders to factories. The result is high levels of finished goods.
There is not one solution to reducing finished goods in warehouses controlled by Sales & Marketing. Creating a Pull System from finished goods warehouses back to Operations one step. As orders are filled from a warehouse, it should send a signal back to operations to replenish the warehouse. Orders should not be placed based in forecasts.
Another step in reducing finished goods is changing the way Sales & Marketing plan finished good levels. Finished good requirements should not simply be based on a sales forecast, because that is simply an estimate of what the company wants sales to be. Lean companies plan finished goods inventory levels based on a combination of forecasts, lead times and safety stock.
The final step to reducing finished goods is what I mentioned a few paragraphs earlier – create effective Pull Systems from your suppliers through Operations to your warehouses. The faster you flow materials, the less inventory you will need.
If you are a CEO of a Lean manufacturing company, you should see significant reduction in Inventory Days. Figure it takes about one year to introduce Lean to a small company, or a division of a larger company. In first year, there is focus on training, education and getting Pull Systems in place. After the first year, you should start to see reductions in Inventory Days of 20% or more per year. This means by year 3 or 4 your inventory should be about 50% less than what it was when you began the Lean journey. If you are not seeing this, your company is not employing lean practices they way they were meant to.
Continuing my new blog series about some of the oxymorons imbedded in the “traditional” manufacturing world …
Just to remind you: an oxymoron is a figure of speech that combines contradictory terms. We hear these all the time in common speech, things like “exact estimate” or “deafening silence” or “definite maybe.”
Today’s example: Labor Efficiency
Here is one definition of Labor Efficiency from the internet:
Labor efficiency is a measure of how efficiently a given workforce accomplishes a task, when compared to the standard in that industry or setting. There are several different ways to measure labor efficiency, depending on the type of products and services being produced, and the end goal. Companies periodically assess efficiency along with other characteristics to identify weak points in the labor force and determine where they have room for improvement, with the goal of improving the overall quality of goods and services while keeping costs down.
One typical way to look at Labor Efficiency is to compare the time actually required to produce a given product or service with a “standard” or “usual” time required. If the workforce is producing products and services faster than the usual rate, it is operating with high efficiency. The thinking is that production time, and costs, are both being reduced. So far so good.
The definition of the standard time is usually subject to an interpretive definition. Who defines the standard time and exactly what is included in the standard work time? Here are a few examples:
- Is set up (or change over) time included in the standard time?
- Is the time producing scrap included in standard time if the yield rate is known?
Time studies are usually done to define the standard time, but as the above examples show, the definition of “work time” can be different.
When calculating Labor Efficiency, it’s typical to include what Lean people would consider waste (change overs, scrap) in the definition of work time because if change overs are “good” or scrap is less, then the Labor Efficiency variance will be positive.
But there are 2 things that are inefficient about using Labor Efficiency as a performance measure.
First, it takes a long time to get the information and it’s usually difficult to ascertain exactly why the variance was positive or negative. Labor Efficiency is usually reported monthly or possibly weekly at some aggregate level (department or whole plant). This level of reporting makes it very almost impossible to understand what really happened.
Second is the myth that Labor Efficiency somehow is an indicator of costs increasing or decreasing. If a manufacturing department has 5 people in it, and today they work one shift and are 50 % efficient and tomorrow work one shift and are 50% inefficient, the salaries paid each day are the same.
Lean companies want something entirely different from their people. I heard Jeff Liker speak a few months ago and he summarized it quite well. He put it this way: a lean company considers its people an appreciating asset and wants its people at all levels to do the following:
- Understand the needs of the customer
- Solve problems
- Make improvements
This means people need the right performance measures to identify and solve problems. It’s not helpful for a Lean company to look back and know that last month Operations created an unfavorable Labor Efficiency variance. The Lean company wants to know the exact reasons why there were problems with change over, scrap, rework and downtime.
Finding problems creates opportunity. Daily and weekly lean measures of quality, flow, delivery, lead time and productivity will focus a workforce on understanding the needs of the customer, because any problem in any of these areas prevents them from meeting customer needs. And the frequency and timeliness of reporting make it easier to identify the root causes of problems, which makes it simpler to solve problems.
So here’s the oxymoron: you become “efficient” by eliminating Labor Efficiency as a performance measure and implementing Lean Performance Measures.
I’ve been working with a great company recently. They make several lines of furniture which share numerous characteristics. They sell many standard products and components, but they also make-to-order customized products configured for specific sites often with very short lead times. They absolutely have to be able to promise firm delivery dates. The furniture must be on site on the day the furniture fitting team is going to be working. The company is profitable, well respected in their industry, and growing steadily each year. It has an excellent work culture and very talented people.
I have explained my enthusiasm and respect for this company because I am going to point out some misgivings I have observed there that are common across many companies. Pointing out these issues is meant to be helpful. Do you see these traits in your company?
This company has been working with Lean for 6 or 7 years, and yet the progress in their primary plant does not match the amount of time and energy they have put in. Why is this? Is something wrong with Lean? Are wrong beliefs or mental models holding them back?
Here are some observations I have made. You be the judge – in regard to your own company.
Everybody at this company keeps telling me how many different products they sell and how many materials and components they use. Of course, these are truthful statements. Behind it though, the unstated message goes something like this: “Our business is so much more complicated than an average companies using Lean methods.”
This myth is baked into the company’s culture and is 100% wrong! This sort of “we are different and we are more complicated” mindset creates complacency and resistance-to-change in many companies I have worked with. It’s a way of cutting some slack, where none is needed. Leaders allow slow, half-way or unfocussed measures of Lean continuous improvement. They miss both the point and the benefits of Lean.
Real success with Lean is driven by passionate and knowledgeable leaders. The complexity of the products, processes, and markets is irrelevant. In fact, these represent opportunities, not obstacles! Lean is hard work and every company’s Lean journey is difficult. It is especially important for the leaders to help the people keep their eyes on the strategy, embrace the change, and see the going-forward vision every day.
This company keeps telling me how long their employees have been with the company. To me this is a very good thing. It speaks well of the company and their people. But the unstated message is “We want to introduce radical Lean change, but these old timers just won’t accept it.”
I have heard these kinds of stories in many companies. But, like the complexity myth, it’s just another way for leaders to cut themselves some slack.
In fact, old dogs love to learn new tricks if they are taught by people who are true leaders and visionaries, who understand Lean, and who pass their enthusiasm along to their seasoned fellow travelers.
This notion that “some old timers are too set in their ways” is just another excuse for not making the Lean progress every employee deserves. I once worked at a large, very well-known, defense company where Lean methods were taking root. I remember one old timer who really “got” the idea of SMED; he began teaching others what to do, and soon the entire plant was making small “just do it” improvements left and right. Lean flow was taking root.
It is usually fairly easy to introduce Lean methods, practices and tools. It is very much harder to sustain them over the long haul. How can you sustain Lean improvement?
Here are a few tips.
- The changes and improvements must be done by the people working in the process. Not by specialists, not by managers, and not by Black Belts that swoop in, do the job, and swoop out again. If the people do it themselves they will do it better. They will understand it. And they will work to keep it going.
- The people doing the work must be encouraged (even required) to continue improving the process. Lean is never a one-time change. Continuous small improvements, aligned with the company’s Lean strategy, are what makes Lean work.
- The managers and leaders must be disciplined. They must to go to the Gemba every day and look at the process and continually discuss and review the improvements. This way the people working in the process will see that their improvement activities are very important, and they will keep doing it. Discipline is contagious, and good leaders will make sure everyone catches it.
This particular company has a full blown ERP system with a strong configuration module owing to the wide range of features and options of their products and the short lead times that add so much value to their customers.
But they recognized several years back that their MRPII features were based on push and were anti-Lean. So they have largely eliminated the use of MRPII on their shop-floor and they have developed some clever and appropriate methods to achieve the fast and flexible service their customers require.
This was a bold move and showed a real commitment to Lean and an understanding of Lean requirements. Unfortunately, they have kept their performance measures back in the MRP world.
The company collects detailed labor reporting against every production job in every cell, and uses this information to create labor efficiency reports. This motivates people to just keep making and making products so as to become “efficient.”
What does it lead to? Large batches, high inventory, long lead times, and shortages. The opposite of what we need from a Lean production cell.
This company’s primary performance measurements in the plant are posted on a visual board. They are neat and tidy monthly reports that tell you nothing about what needs to be improved, and are too late to control and improve anything. The accounting system produces a lot of inexplicable variance reports – again too late, and too obscure. These are reviewed by accountants, not the people who are actually doing the work. Overhead absorption variances drive profoundly anti-Lean behaviors similar to efficiency.
Should we be surprised that Lean drags its feet? The people who should be making daily Lean improvement are measured in ways that drive them in the opposite direction. For Lean to prosper it is vital that it use local, timely, Lean-focused measurements.
How About Your Company?
As I mentioned at the beginning, the company that got me thinking about these issues is an excellent company with much to be proud of. If they can grasp these fundamental Lean issues, they will become a powerhouse of Lean growth and profitability. How about your company?
Most of the time I am very upbeat and optimistic about the progress of Lean in US and European companies. I see passionate leaders and down-to-earth, hardworking people making improvement every day. But there is something that irks me and it’s been irking me for a while. It’s about performance measurements and it’s about waste.
Most companies we work with have performance measurements in their plants and offices. In fact we show them how to set up strategic measurements, value stream measurements, cell measurements, and measurements for support processes. We show them how to link all these together.
Then we show people how to use their measurements to track value stream performance and drive Lean improvement. They do all the right things. They put their visual boards in place. They set up structured meetings with agendas each day at the cells and each week across the whole value stream. I am always pleased with what I see, because I know that a company doing this can stay focused on the business strategy while using simple measurements to drive a powerhouse of improvement.
Now .. here’s the “irks” part.
It is not uncommon when I come back a few weeks later, that all I see happening are short term tactical activities. We know the purpose of Lean performance measurements goes beyond the short term. Lean performance measurements are aimed at controlling the process and improving the process itself.
Simple: I know there are four levels of true knowledge. These are data, information, knowledge, and wisdom. If a company focuses only on data and information and does not reach constantly for knowledge and wisdom, then everything they do will be for the short term. They miss the point and miss out on the opportunities Lean lays before them.
Here’s a table that illustrates what I mean
In my experience, many companies stop at information and spend their time discussing today’s little catastrophes and crises. They can not seem to move beyond the short term.
Lean organizations and Lean people are never content to fiddle with the short term. They are passionately bent on daily improvements that step-by-step create breakthrough and game-changing excellence. Having awesome looking boards or meticulously accurate measurements without the “wisdom” misses the point!
The purpose of gathering performance measurements for value streams is to drive value stream improvement. All measurement review meetings must result in continuous improvements. A one-off fix of a current problem is NOT continuous improvement because it may well happen again. We have to SOLVE the problem at its root so that it never happens again.
SO WHAT SHOULD WE DO?
A good way to overcome short-term thinking is to have your stand-up meeting once a week around the performance measurements board and have a very strict agenda that requires more than fixing immediate issues. For example, the agenda will allow 20% of the time on what has happened this week, and 80% of the time spent on progressing your Lean continuous improvement. The team would review of current CI events, review the small just-do-it improvements, and discuss what else needs to be improved this week.
These activities are a part of the famous PLAN-DO-CHECK-ACT problem solving cycle. (Here’s a short video on PDCA applied to value stream measurement. ) If we don’t push through to genuine problem solving every time we use our measurements, then we are missing out on the whole purpose for creating the measurements in the first place. In other words, if we only look at data and information and do not drive on to knowledge and wisdom, we are short-changing ourselves and the other people in the company. And……. did I mention this really irks me?
And another thing that irks me is why do they leave the tails on shrimp? You have to pull ’em off and your fingers get all gloppy and nasty …
This is Brian Maskell, signing off from the Legal Seafood restaurant at Logan Airport.
WHY STRATEGIC MEASUREMENTS?
Everyone’s measurements must drive lean thinking at every level. There are at least three levels of measurements:
The purpose of strategic measurements is for senior managers to monitor the success of the company’s business strategy and take action to stay on track. In the previous blog I showed that measurements are developed by linking them at every level to the company strategy using a “Performance Measurement Linkage Chart”. Strategic measurements assess the performance of the entire company. If you work in a large complex company, then the strategic measurements may apply to the group or division of the company you are responsible for.
The linkage for strategic performance measurements is very simple. You layout your company’s strategic objectives and then workout the measurements that address those objectives. In the posts coming up in the next few weeks, you will see that linking value stream measurements and cell or process measurements takes a few more steps.
The simple example shown here has four strategic objectives relating to the operational and financial success of the company. The senior leadership is making strategic plans to grow the business through sales growth and increased market share. They need to improve the company’s cash flow and bring down their level of debt. In order to achieve this, the company is actively pursuing a lean transformation by creating a culture of continuous improvement, and by recognizing their need to increase the level of skills within their workforce, and to keep the people within their company. (See the BMA “Starter Set of Measurements” in the previous post in this series. https://maskell.com/?p=1446)
I am not of course saying that these are the right measurements for your company. The Strategic Measurements must be developed by linking them to your own strategic goals.
These changes will not come by measurement and wishful thinking. They come by the company leadership deploying strategies that will make these objectives a reality across the company. The Strategic Performance Measurements will show if the changes are working and give the right result.
Strategic measurements are by their nature long term and dramatic. It is common to report the outcomes of these strategic changes each month in the company’s Enterprise Obeya Room. (For more information on Obeya Rooms https://maskell.com/?p=374 and https://maskell.com/?p=402 )
CONTINUOUS IMPROVEMENT OF THE STRATEGIC MEASUREMENTS
There is little point in reporting measurements if there is no formal and effective method for using these measurements to improve the business. For lean companies there is always a Plan-Do-Check-Act cycle of thinking (PDCA) when measurements are being used.
The strategy is developed by the executive team. The strategy is deployed using a formal strategy deployment process. The results of the strategy deployment are measured and posted visually in the Obeya Room. If the strategic measurements show the plan is working well, then the executive team will take action to ensure this continues. If the measurements show that the strategy is NOT being achieved according to plan, then the executive team will take action to better deploy the strategy.
Strategic measurements are usually reported each month, but the nature of strategic change is that it builds up slowly over time. While the PDCA is applied every month, many companies find that significant action needs to be addressed quarterly when there is a clear trend coming through the measurements.
Effective strategic measurements are driven by these principles:
- Relate the measurements directly to the company strategy. As the strategy changes the measurements will likely need to be changed.
- Focus on the vital few measurements. Do not fall into the paradigm of having a vast panoply of reports, charts, and dashboards. Instead do the hard work of settling on the vital few.
- Report the measurements visually. Create a visual reporting space or Obeya Room to show the results and subsequent actions.
- Focus the strategic measurements on the achievement of the company’s strategy deployment. Leave the detailed control and improvement at the value stream level.
- In larger companies there will be group and division measurements that will be driven by their own strategic goals.
- A disciplined and well designed accounting, control, and measurement system leads to a highly effective organization that is focused on the right things and is quick to respond with innovation to problems and opportunities.
Our thinking about performance measurements has evolved over the years.
Early on in my work I began to see a critical need for companies to change their thinking about performance measurement. As more and more companies responded to sharp competition by becoming agile and embracing change, “old style” performance measurements just didn’t fit. I wrote a little book in 1994 [i] about this (New Performance Measures, since out of print) making the case for radical change in how companies measure performance.
Then, in 1996, the first edition of Lean Thinking [ii] blew the doors off our thinking about traditional ways of manufacturing. We came to understand that true Lean Manufacturing demands that companies have an integrated framework for organizing and measuring what they do.
If your company uses full absorption costing or standard costing, then you know about variances. In his new book The Lean CFO [iii], Nick Katko makes a strong case that traditional financial performance numbers don’t give an accurate picture of how a Lean company is doing. Nick’s chapter “Measure Performance, Not Profits” outlines a clear and compelling reason for why you need to change how you measure what you do, so you understand how you make your money, and know better how you can make improvements going forward.
In case you still think radically changing how you measure your operations doesn’t matter much, read my blog about the “near death” experiences of Chrysler & GM
One thing’s for sure: Lean means Lean! Everything your company does has to be aligned completely with flowing value to your customers. Kaizen begins and ends with the business strategy you put in place, up and down the entire Lean enterprise.
Here’s a picture I often use to illustrate this:
The BMA “Starter Set”
When teaching companies where to begin with Lean performance measurements, we make the case that everything starts with making sure the entire Lean effort is working toward the agreed-upon strategic objectives. We use the BMA performance measures “Starter Set” as a way of showing top to bottom linkage (or alignment) of everything you measure to your company’s lean strategy.
While we understand that all companies are different, we think this “one-size-fits-most” approach helps people get the concept easily and quickly; then they are off to the races to make sure that what they are measuring is what is needed at their particular company, and that their measurements make sense according to their own company’s Lean strategy.
Here’s what the BMA Starter Set looks like:
In this series of blogs, I’ll be examining Lean Performance Measures at all levels: including the “Why?” “How Do They Work?” and “What Happens Next?” Stay tuned. Next time: Strategic Measurements for Lean Manufacturing.
[ii] Womack, James P., and Jones, Daniel T., Lean Thinking. Banish Waste and Create Wealth in Your Corporation, New York, Simon & Schuster, 1996. A second edition of this book has since been issued. Available from lean.org or Amazon.
Corporate management of a large multi-national company told its plants to become lean. So the plants began implementing lean by creating pull systems based on shipments from finished goods warehouses that were part of each plant.
Corporate conducted monthly operational performance reviews of each plant using Corporate’s reporting package, which included information such as machine utilization rates and adherence to production schedules (which were based on Corporate’s marketing forecasts.)
Guess what happened?
Corporate started questioning the plants as to why the plants’ machine utilization rates were not as high as in the past. Corporate marketing also questioned the plants as to why they were not meeting the forecasted production schedule.
As a result, plant management was very confused – they were supposed to implement lean, but when they did everything correctly and made good lean changes, the data Corporate management used to evaluate the plants was sending conflicting messages.
Senior managers – don’t do this to your company! Change the data you use to measure performance. Make it focus on what is supposed to happen during a lean implementation. Stop using data based on traditional manufacturing assumptions!