Anybody that’s been in management has probably at one time or another had to deal with two performance goals that ran counter to each other. In my engagements with original equipment manufacturers (OEMs) I see this construct a lot. In trying to understand why it occurs I’ve come to the conclusion that people with responsibility for setting goals don’t anticipate how interactions between two different desired end-results can be detrimental to each.
Many times this relates to the setting of functional area goals within the framework of what are supposed to be over-riding organizational goals. Conflicting goals create dilemmas for managers. In the following article I’ll discuss an example from industry. At the end I’ll tie it in to how I’d recommend managers deal with such mixed signals.
A colleague of mine once worked at a company with an over-riding enterprise goal of maximizing return on assets (ROA). Maximizing ROA is relatively straightforward, i.e., either raise revenues or reduce investments. I really like this goal since it provides a clear-cut North Star-type guide to employee actions. Assets can be more predictably managed than revenues so they usually are the primary focus of OEMs wanting to increase ROA.
My friend’s employer had multiple equipment divisions, one of which needed to support a very different type of market demand than the others, i.e., sales of its products were highly seasonal and variable such that customer fill rates relied on very responsive order fulfillment. Each division had a semi-independent purchasing organization yet was tied informally to a centralized purchasing organization.
Several years ago this company installed a new vice-president of that central procurement organization who felt that the company wasn’t maximizing the advantage of the low piece-prices he saw available from low-cost country (LCC) suppliers. Along these lines one of his favorite sayings went something like: “Our company has what can be considered a world-class supply base if the ‘world’ is comprised of only states from the upper-Midwest United States.” This VP had influence, of course, in the setting of enterprise supply management performance goals, and to address his LCC sourcing concern he subsequently implemented an annual goal that a minimum percent—almost 1/3—of all newly-sourced material by each division needed to be awarded to LCC suppliers.
There were two major problems with this LCC sourcing goal. The first was that its impact ran against the company’s over-riding ROA goal, which I’ll describe shortly. The second was that that if implemented, it would likely have a negative sales impact on the division needing responsive order fulfillment. Again, I’ll describe this in detail below. This second problem should not be surprising to anyone since broad-brush goals that aren’t carefully thought out usually do create conflicts. My blog from December 2014—“Supply Management Strategies to be Avoided”—describes how I feel about setting broad-brush goals.
The ROA-related conflict was primarily around the issue of safety stock raw material inventory. This company, as many companies do, held safety stocks of purchased parts to account for inconsistencies in both supplier production and logistics. LCC sourcing means increased lead-times for OEMs who assemble in North America. The reality of longer supply chains is that those inconsistencies cited above increase, creating a need for more safety stock. Inventory of any kind is an asset and will work to reduce ROA. The goal conflict arises since bringing on LCC sources increases assets, and any piece-price reduction comparisons needed to take those costs into account (along with a lot of other Total Cost-type things!).
The negative impact on sales was related to the longer lead-times associated with LCC suppliers negatively impacting customer fill-rates for products of that “outlier” division. So, additional raw material above even the LCC-increased safety stock levels would be needed to try to anticipate market demand. And since forecasts always have errors in them, that pre-built/pre-positioned raw material would always fall short of supporting the customer fill rates delivered by shorter supply chains. Huh?!? Well, what about those “apples-to-apples” piece-price comparisons I mentioned? Were the LCC supplier piece-price benefits large enough to offset the added assets and lower revenues due to negatively impacted customer fill rates? At best, the answer for this company was “not always.”
The company being discussed really did have a good selection of “upper-Midwest U.S.” suppliers, many whom had been provided extensive supplier development support. As such they were truly “world class” in terms of production efficiency and cost. Some of them, unfortunately, supplied the type of parts attractive to and targeted by LCC manufacturers, i.e., those not requiring significant investment.
Following a path of least resistance, one of the OEM’s divisions met its overseas sourcing goal that first year by resourcing from one of these “upper-Midwest U.S.” suppliers—a supplier who had, in fact, recently earned that division’s Supplier of the Year award. And in the end, the re-sourcing of this supplier’s business to new LCC sources was a piece-price neutral transaction. In other words, the new LCC supplier didn’t offer lower piece-prices. Talk about doing “dumb things.” On the other hand, the division met its LCC sourcing goal and I’m sure this contributed to higher performance ratings for their purchasing managers.
That “outlier” division had the same option available since they also had a significant amount of business with this same supplier. It, however, didn’t resource that business to LCC sources and this contributed to it not meeting its LCC sourcing goal. As a result, the sourcing managers in this division ended up getting “dinged” on their year-end performance reviews. So which division’s managers made the right decision? What decision would you have made?
What’s to be done when managers are given conflicting goals, some of which don’t make business sense? First, raise your voice and point out the inconsistencies. See if exceptions can be granted based on probable negative business impacts.
Second, regardless of whether your concerns are addressed or not—and this is an important point—do what is best for the overall business, regardless of whether this means you will underachieve in one of your performance goal areas. I know that this can be a hard pill to swallow for someone who strives to achieve—or even overachieve—as most managers today do.
I’ve always felt that if performance could be explained in terms of having done what is “best” for the business—and the assertions could be backed up by business results—a focus on prioritizing some goals at the expense of others could be explained. Good executives at good companies understand that sometimes goals shouldn’t be blindly pursued. I guess it can also boil down to personal motivations and ethics. I hope that by the time most people reach positions of authority within an organization that they are more concerned about the “general good” than personal impacts.
My next article will discuss the value and differences between ideas and results.