Industryweek 14593 Next Generation Newsletter White Bkgrnd

Management by the Numbers

April 25, 2014
Very few companies are setting purchasing performance goals that will lead to having lean supply chain performance.

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 with particular companies relative to how employees are managed and how individual functions are regarded. For instance, companies that assign extreme numbers typically do so in the hope that employee effort will be increased. Sometimes it does result in this, at least over the short term. At other times extreme goal numbers dampen employee morale and effort 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 having 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 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. 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 has seen dynamic changes. For instance, 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 these metrics? The answer obviously should be “yes.”

Supplier quality, on-time 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. 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?” The answers to these questions are “yes” and “yes” and their discussion will be the content of the next several editions of this blog.

You may be wondering how my young colleague did 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 that company 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.

More performance goals are not set such that their achievement will allow a company to drive itself out of business. But many companies set performance goals that lead to non-optimal business results. Do you work at one of these companies?

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