Most organizations have many metrics.  So many in fact it becomes difficult to know what is important and what are the key priorities.  Russ Ackoff once said, "You cannot maximize every element of a whole system."  For a system as a whole to function adequately, its parts need to be in balance. 

Think of an assembly line.  Typically one station or function is the bottleneck, regulating the overall pace.  It does not matter if workstations up stream of the bottleneck get more work done.  WIP will simply pile up before the bottleneck point.  You cannot maximize the work at every workstation and have a balance.  The same is true of an automobile.  Tradeoffs exist between power, ride, suspension, mileage, etc.  You cannot maximize them independently, they need to work together.

Few key performance measurement systems take this into account.  For example, sales are often measured independently of operations.  Operations might have twenty or more metrics and are expected to maximize them all.  So where does one start?

Identify Your Key Business Economic Driver

First, organizations should know their “one key business ratio.”  Jim Collins’ book Good to Great states, "Most managers couldn't tell you the key denominator, the critical "per something" for their business.  They do not have a clear sense of that something that is super critical."  Collins’ research tracked the performance of the 1500 largest U.S. companies.  The eleven companies that moved from mediocrity to greatness had several attributes in common.  One of those attributes was a renewed sense of focus on what was important based on one carefully chosen business ratio.  Most of the companies identified in Collins’ list switched from internally-driven measures (inside the company view) to an external value driver that looked at the organization more from a customer’s perspective. For example, Walgreen’s changed their key business metric from profit-per-store to profit-per-customer-visit.  This resulted in a new perspective away from competing with other store managers to maximizing the dollars from each customer’s visit to the store.  A major mental mind shift.  Collins describes this as “Understanding what drives your economic engine and articulating a solid measurable rationale for making money over the long haul.”

This understanding is not based on a one-time achievement or realization, instead it is something that evolves over time, the product of an iterative process (i.e. proven, dependable methodology) conducted in leadership councils of the right people who engage in open dialog and often aggressive debate.  Once the key value driver metric is identified, a company can organize complementary metrics through use of a balanced scorecard. 

Utilize a Balanced Scorecard

Businesses need to maintain at least three different perspectives in their performance measurement systems.  First strategic, then operational (perhaps cell) and finally non-production processes which would include sales, operational support groups, etc.  Companies may also look at their overall value stream cost, which is really a business within the business.

The Strategic Level should drive the organization’s improvement processes.  A scorecard could be built at the strategic level with the following three columns:

Strategy     Business Initiatives to make this happen       Metrics to measure

Each major strategy would be laid out with the corresponding initiatives to make it happen and a predetermined way to measure progress on each one.  YX Charts, one of the tools from Six-Sigma methods, can provide a framework for understanding and linking KPIs between the Business Initiatives and Top-Line Strategies.  Each major strategy would be laid out horizontally at the top of the matrix (the X axis) and weighted from most important to least important.  Then each of the organization's performance metrics would be listed down the vertical 'Y' axis.  The metrics can be coded to show if they have a high to no impact on the key objectives or business strategies.  See the example below.

Business Strategies:	Speed To Market	Product & Service Qlty	Low Cost Leadership	Customer Loyalty
Supporting Metrics:
Existing customer purchases new prod.				2
Overall equipment effectiveness		2	3
Forecast accuracy		2		1
On-time delivery		3		2
Cycle time improvement	2		2
Material shortages		2	2
Engineering change order backlog	2
Safety stock maintenance		3		2

Each metric used in the business should have a relationship to the key business strategies or objectives.  They can be weighted as high, medium, low or none, or assigned a point value.  The advantage of using numbers is they can be crunched in a spreadsheet. 

People need to know the priorities.  They need to know what creates value.  Ultimately one goal or strategy has the highest priority.  In Six-Sigma language this is the "Big Y."  the other goals or strategies are still important but they need to be prioritized.

Emphasize the Upstream Process Control Indicators

Refer to the techniques used by Six-Sigma and other methods that focus on the cause-and-effect relationships between upstream causal functions (especially process management issues) and downstream business results (including financial measures).  The upstream measures, like Walgreen’s sales per customer visit, may be most important since they focus the entire organization on what needs to be improved.  How to do it is naturally a complex equation that may be practically unsolvable from a central-planning perspective, yet is amazingly doable when left to the devices of the broad range of employees that can have independent impacts on the many individual factors working to maximize the one key measure.  (The explanation for how that happens comes from complex adaptive systems theory (CAS), but that’s a subject for another day.)  The key is to let everyone know what that one key indicator is so they can include it in their daily thinking about how to make their functions better, faster and cheaper in support of that one KPI.

To get started today or for additional information contact Rainmakers at 847/251-3327