Key Performance Indicators (KPI – 2 of 2)

As noted in the first KPI segment – Revenue is one performance indicator; Net Income is another performance indicator – what drives these measures and what defines successful company performance?  In this second segment I’m going to look at the importance of including non-financial measures in the Key Performance Indicator set of metrics.

Use of financial measures for monitoring company performance has a long history, but became disassociated from underlying processes in the mid to late 1970’s as noted by Johnson & Kaplan (1987)1.

After 1925 a subtle change occurred in the information used by managers to direct the affairs of complex hierarchies.  Until the 1920s, managers invariably relied on information about the underlying processes, transactions, and events that produce financial numbers.  By the 1960s and 1970s, however, managers commonly relied on the financial numbers alone (pp. 125-126).

The problem with reliance on financial numbers without additional non-financial metrics is due to the fact that financial indicators are typically lagging indicators resulting in longer feedback times.  The ability to effectively respond with appropriate corrective action is compromised with increased feedback time, as is evident with the example of adjusting water temperature from a faucet vs. a shower.

Feedback is circular: we feel the temperature at a faucet relative to desired temperature; adjust; receive new feedback; and adjust again until desired temperature is reached.  The same circular process occurs in a shower, but because of the increased delay in feedback time the tendency is to adjust before full feedback is received, resulting in over-correction and additional iterations of the feedback/adjustment cycle.

Based on this premise Fowke (2011)2 hypothesized that increasing use of non-financial measures with the reduced feedback time would result in improved company performance.  Results from the study show that though increasing performance was correlated with increasing measures from both categories, the rate of increase of use was much greater for use of non-financial measures:

Average Number of Measures Used Relative to Performance

In addition, non-financial measures were more correlated to firm value than financial measures with the high performers’ (Kruskal-Wallis) mean score for non-financial measures being higher than for financial measures.  By contrast, medium and low performers exhibited the opposite:  higher mean scores for financial measures than for non-financial measures [p ≤ 0.05 for non-financial measures and p ≤ 0.1 for financial measures] as exhibited in the following graph (p. 146):

The study included survey results from 76 publicly traded companies representing 29 different 3-digit NAICS categories. Company performance was ranked low, medium, or high (standardized by 3-digit NAICS category to eliminate cross industry variance) based on percent change in 1-year rolling average stock price (to eliminate seasonal or year-end variance) over a 5-year period.

Using KPI metrics that provide rapid feedback from a broad scope of business functional areas is correlated to improved performance!

References:

1Johnson, H. T., & Kaplan, R. S. (1987). Relevance Lost, The Rise and Fall of Management Accounting. Boston: Harvard Business School Press.

2Fowke, R. (2011). Performance Measures for Managerial Decision Making: Performance Measurement Synergies in Multi-Attribute Performance Measurement Systems. (Doctoral dissertation, Portland State University, © 2010).  ProQuest-CSA, LLC, Ann Arbor

Attributions:

By Phoenix7777 [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Dropping Faucet by Ángelo González from Dodro, España licensed under the Creative Commons Attribution 2.0 Generic       license.

 

 

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Key Performance Indicators (KPI – 1 of 2)

Revenue is one performance indicator; Net Income is another performance indicator – what drives these measures and what defines successful company performance?  What key indicators should be used to monitor and drive company success?  Among the myriad of performance measures that can be used to track and improve company performance, some broad based categories have been shown to provide significant improvement.  In this first KPI segment I’m going to briefly discuss, and present evidence validating, the Balanced Scorecard model proposed by Kaplan and Norton in their seminal work1.

Kaplan and Norton recommend using performance measures from four categories: 1) Customer; 2) Financial; 3) Internal Business Processes; and 4) Learning and Growth. This makes intuitive sense: by including measures from four perspectives, a well-rounded (balanced) comprehensive set of measures is promoted, helping drive well-rounded balanced health for the organization.  Fowke (2011)2 compares this balanced monitoring system for organizations to a system used by living organisms as follows:

The ability to change quickly in a world of change is essential for survival and the organism has a need to monitor feedback from all parts of the system for health and longevity.  In living organisms, the comprehensive network is exhibited by the autonomic nervous system.  In this study, this “autonomic” comprehensive feedback network is considered analogous to the Balanced Scorecard concept of maintaining total organization health by monitoring not only financial, but also customer, internal business process, and learning and growth metrics… (p. 65).

Does company performance increase with increased use of these categories, or does it simply “make sense” with anecdotal evidence?  Fowke provides statistically significant evidence* that using multiple categories of measures from the balanced scorecard model correlates to higher performance:

Balanced Scorecard Utilization by Performance Category (p. 159)

[click image for clearer view]

In the cited study, survey results from 76 publicly traded companies representing 29 different 3-digit NAICS categories show increasing performance with increasing use of the four categories. As exhibited in the graph, responding high-performing companies in almost all cases use measures from all 4 Balanced Scorecard categories [Company performance was ranked low, medium, or high (standardized by 3-digit NAICS category to eliminate cross industry variance) based on percent change in 1-year rolling average stock price (to eliminate seasonal or year-end variance) over a 5-year period].

As a final comment, it is important to not only measure and monitor metrics from multiple categories as indicated above, but to also take corrective action based on the information derived from these measures.

*Statistical significance: p = 0.06; inclusion of the 2 respondents indicating -0- categories results in p = 0.009

References:

1Kaplan, R. S., & Norton, D. P. (1996).  The Balanced Scorecard. Boston: Harvard Business School Press.

2Fowke, R. (2011). Performance Measures for Managerial Decision Making: Performance Measurement Synergies in Multi-Attribute Performance Measurement Systems. (Doctoral dissertation, Portland State University, © 2010).  ProQuest-CSA, LLC, Ann Arbor

Attribution:  By Phoenix7777 [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

 

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Is Your Office Lean?

Source: LeanSigmaInstitute.com

Lean originated in manufacturing and is often thought of only in the context of manufacturing processes.  Lean also, however, offers great opportunity for improvement in service and administrative office settings regardless of the industry, manufacturing or otherwise.

Atkinson (2004)1 discusses the potential gains of lean implementation in service office settings as follows:

We think the Lean concept has an incredible opportunity for improvement in most service organisations. In his early 1980’s rewrite of ‘Quality is Free’ Philip Crosby highlights estimates that as much as 40% of staff operating costs of businesses can be wasted. This illustrates how Lean could benefit service type organisations (p. 20).

Process Excellence Network2 suggests even higher potential gains for implementing lean in an administrative office setting:

Hard figures on how much of the administrative processes are classed as waste under the lean principle – those which provide no added value to the end user – are difficult to come by. Yet with some experts suggesting it could be 80 percent or higher, the area is clearly one which needs attention (para. 3).

The tools for lean initiatives in an office are identical to those for manufacturing, but elements to observe and measure regarding wastes are different.  Here is a summary excerpted from Nichole (2011)3:

Examples of Waste In An Office Setting

  • Transportation = movement of the work.  Transportation of electronic files is particularly insidious because it frequently results in multiple, varying copies of the work, which must eventually be reconciled.
  • Inventory = work that is waiting to be processed.  Inventory can be found in e-mail or work order in-boxes, to-do lists, product development pipelines, and resource assignment charts.
  • Motion = people moving or working without producing.  Meetings are motion in the sense that they are work without producing, unless a decision is made or information is produced during the meeting.
  • Waiting = people waiting for information in order to do work.  This is another common result of multi-tasking, and also the primary cause of multi-tasking.  Unfortunately, when the one thing finally becomes ready, we tend to finish what we started before getting back to it.
  • Overproduction = producing unnecessary work or deliverables.  Overproduction shows up in multiple copies of information, producing reports that aren’t read, writing formal documents or content where only the table is read, reply all.
  • Over Processing = unnecessary effort to get the work done.  Over Processing shows up in additional signature approvals, data entry or data format changes.
  • Defects = any work that did not accomplish its purpose or was not correct the first time.  Defects include late work, incorrect information, conflicting information.
  • Underutilized Skills, Ideas = capabilities of people that are not used or leveraged.  This happens frequently in large organizations where the skills and backgrounds of everyone are not common knowledge.

Consider all aspects of your organization when implementing lean initiatives.

 References:

1Atkinson, P. (2004). Creating and Implementing Lean Strategies. Management Services (18-33).  Retrieved from: http:/www.philipatkinson.com/CM_Lean_Strategies_TQM_Toyota_Production_System_5S_TQM_15.pdf

2Process Excellence Network (n.d.). An Introduction to Lean Office. Retrieved from:  http://www.processexcellencenetwork.com/business-process-management-bpm/articles/an-introduction-to-lean-office/

3Nichole, A. (2011). Lean in the Office: 8 Wastes. Business Wisdom Within. Retrieved from: http://www.bizwizwithin.com/2011/04/lean-in-office-8-wastes.html

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Lean Thinking – The Power of People

Power of People

This graphic demonstrating Two Pillars of the Toyota Way emphasizes the importance of people in Lean Thinking initiatives.  It is easy to become focused on the pillar of continuous process improvement and ignore the people element.  In my consulting practice I have found that the best ideas often come from those employees intimately involved in the process – the subject matter experts.  They are the ones that know what works, what doesn’t work, and when approached with a collaborative attitude will often share ideas they have for improving the process, which assures they are vested in the improvement initiative when it is time for implementation. 

 What does it mean to show “respect for people” and how do we tap into the power of people?  James Womack1 reviewed the approach used by top managers at Toyota summarized as follows:

 Step 1: Ask what the problem is the way things are currently being done, and then challenge the answers to find the real problem.

 Step 2: Ask what is causing the problem identified in Step 1 to find its root causes.

 Step 3: Ask what should be done, and why their proposed solution is the best (of alternatives)

 Step 4: Ask how managers and employees will know when the problem has been solved (relevant Key Performance Indicators).

 Step 5: Involve employees in implementation of the agreed solution

 What is the difference in respect shown based on these problem solving steps as opposed to giving the employees control, empowering and trusting them to solve problems on their own, and congratulating them on the results?  The referenced article summarizes the value of this approach as follows:

…this problem-solving process is actually the highest form of respect. The manager is saying to the employees that the manager can’t solve the problem alone, because the manager isn’t close enough to the problem to know the facts. He or she truly respects the employees’ knowledge and their dedication to finding the best answer. But the employees can’t solve the problem alone, either, because they are often too close to the problem to see its context and they may refrain from asking tough questions about their own work. Only by showing mutual respect – each for the other and for each other’s role – is it possible to solve problems, make work more satisfying, and move organizational performance to an ever higher level.  (para. 9)

A collaborative approach with those directly involved in processes under review is the best way to find, and implement changes to improve organizational performance.

References:

 1Womack, J.. The Toyota Concept of ‘Respect for People’. Lean Enterprise Institute (LEI), Cambridge, MA.Retrieved from:  http://www.reliableplant.com/Read/9818/toyota

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Lean Thinking – The Power of Pull

Pull

What is pull – and where does it fit in Lean Thinking?

 Womack and Jones (1996)1 identify Pull as one of the fundamental principles of lean thinking — in addition to Value, Value Stream, Flow, and Perfection.  Pull “in its simplest terms means that no one upstream should produce a good or service until the customer downstream asks for it” (p. 67).  This is in contrast to our long term mass production “Push” paradigm of producing parts to send downstream based on Master Production Schedules and MRP, while striving to keep the backlog of raw material/parts waiting for our process to a minimum (if its waiting to be processed, process it). 

Pull, when implemented in the physical and informational relationship of process, is compatible with the Value Stream as defined in the Business Efficiency Consulting blog entitled “Supply Chain or Value Chain – What’s the Big Deal?” which includes a quotation from Feller, Shunk and Callarman (2006)2 “In common parlance, a supply chain and a value chain are complementary views of an extended enterprise with integrated business processes enabling the flows of products and services in one direction, and of value as represented by demand and cash flow in the other” (p. 4).  In pull systems we physically manifest and embed that concept into the process – demand information as expressed by signals (kanban) of required product from downstream is passed up the value stream to initiate production of materials to flow downstream only as needed!                                           

 What are the advantages of Pull?

One of the advantages of using pull systems is that inventory is minimized through the use of kanban supermarkets where minimizing inventory levels between decoupled processes is the goal, though as noted by Liker and Meir (2006)3 it is preferable to use flow (by coupling processes – another lean principle) over kanban inventory points as indicated on the following graphic (p. 108):

flow continuum

[click on image for clear view]

Laksham (2006)4 provides an excellent description of the pull process and its value as follows (para. 7):

 Because a series of well-timed interconnected loops develops between the preceding and succeeding processes, buffer inventory, usually maintained at tier-transaction points, can be substantially reduced. Material replenishment levels and continuous information flow provides visibility for suppliers and customers. Demand signals flow continuously through the supply chain and are delayed at each tier only as long as it takes to consume or ship material. Due to kanban’s high visibility and predictability, intermediate tiers and buffer stock in customer and manufacturer supply chains can be eliminated.

The end result of using a pull system is: Reduced cost, Reduced floor space requirement; Reduced inventory and WIP; Reduced rework and scrap; and Reduced waste, ensuring that we have what we need, when we need it, and in the amounts it is needed!

References:

1Womack, J., Jones, D. (1996). Lean Thinking: Banish Waste and Create Wealth in Your Corporation. New York: Simon & Schuster.

2Feller, A., Shunk, D., & Callarman, T. (2006).  Value Chains versus Supply Chains. BPTrends, 1-7. Retrieved from:  http://www.bptrends.com/publicationfiles/03-06-ART-ValueChains-SupplyChains-Feller.pdf

3Liker, J., & Meier, D. (2006). The Toyota Way Fieldbook: A Practical Guide for Implementing Toyota’s 4Ps. New York: The McGraw-Hill Companies, Inc.

4Laksham, N, (2006). When Push Comes To Pull, Kanban Wins. Manufacturing.Net. Retrieved from: http://www.manufacturing.net/news/2006/07/when-push-comes-to-pull-kanban-wins

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