A few years ago, I wrote about a very basic business issue: namely, metrics and goals and how they can influence the financial health of an organization.
Organizational goals should span a spectrum from short-term (tactical) to long-term (strategic) goals. And goals to measure employee performance should include both. My experience is that all too often, employee performance goals focused on the next financial month, quarter, etc. rather than the strategic future of a company.
As part of IndustryWeek’s Supply Chain Initiative, we are updating this article—as its ideas are still relevant to our audience today.
A young colleague I had once mentored telephoned me one day to tell me about a job he had just landed with a high-tech company. In his description of the company, he told me that their internal slogan was, “We always hit our numbers.” He asked me what I thought of this. Hmmm.
Managers in most companies are given numeric performance goals—their numbers—by which they will be personally measured. These numbers are set with the thought they will be leading indicators of company financial performance. So, the thinking goes, if managers can hit their numbers a company should thrive.
The numbers assigned to managers often tell a larger story relative to how employees are managed and individual functions are regarded. For instance, companies that rely on tactical metrics and set extreme goals within those metrics typically do so in the hope that employee effort and performance will be increased. Sometimes it does result in this, at least over the short term. At other times extreme goal numbers dampen employee morale as they are seen as unobtainable. Extreme performance numbers in a particular function—such as purchasing—can indicate executive management feeling that the function in question has been undermanaged. My personal observation is that setting extreme goals is rarely successful as an ongoing strategy.
A bigger issue relative to management by the numbers is whether the goals are targeted on the best leading indicators of company financial success. Specifically, are companies setting purchasing performance goals that—should they be achieved—will lead to lean supply chain performance? My opinion on this is that it is the rare company that is doing so.
The “big three” performance metrics in purchasing have always been supplier (as-delivered) quality, on-time delivery and price. In other words, purchasing personnel are measured on whether they source with suppliers capable of producing usable products as needed, at the lowest price. They are then measured on whether these sources can achieve the customer’s annual price reduction goals.
You might ask, “What can be wrong with such an approach? Aren’t these the three performance areas where purchasing can best contribute to overall company financial health?”
My answer to that is that managing to these three traditional metrics does not lead to lean supply chain performance, which should be an overriding business goal of all companies. If a focus on these three performance areas was correct, all supply chains should already be lean as purchasing personnel have focused on these metrics for decades, if not generations.
Over those same decades and generations, while purchasing performance metrics have remained static, business and manufacturing have seen dynamic changes. For instance, both the Toyota Production System and lean either weren’t widely practiced or didn’t exist a generation ago. Doesn’t this change in context merit a review of the adequacy of the current trinity of purchasing metrics? The answer obviously should be “yes.”
Supplier quality, delivery and pricing are important, but they are not primary metrics of supplier performance. In other words, non-lean suppliers are able to “game the system” to produce lean-looking results through wasteful processes. And buyers can, too. For instance, suppliers can hit customer quality performance goals through extreme inspection and sorting of their finished product. And buyers can meet their supplier delivery goals by ordering parts before they are needed for product. Both of these practices introduce waste into the supply chain—and in the “big picture, ” are counter-productive.
So these three metrics should be seen as “necessary but not sufficient.” The next obvious questions are, “Do we know the additional performance metrics that are needed to produce Lean supply chain performance?” and “Can we convince executive management to adopt them?” These questions are at the heart of how purchasing is current practiced and must be answered if purchasing is to evolve in the manner of other business functions.
You may be wondering how my young colleague fared at his new company—the one that “always hit their numbers.” Within a couple of years, he was looking for a new job, and shortly thereafter, his former employer went broke. And it was true that until its demise the company did “always hit its numbers.” The unfortunate reality, though, was that their performance goals were set in the wrong areas.
Most performance goals are not set so that their achievement will drive a company out of business. But many companies set performance goals that lead to non-optimal business results. Do you work at one of these companies?
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.