After more than a few years in and out of manufacturers on the lean journey – and especially after launching my 1Day Assessment tool – I have learned that the quickest way to judge whether a company is seriously on the lean path or not is to take a look at their metrics. The first inclination of most management teams is to use lean as a set of tools to optimize the same old, wrong things.
An out of the way publication called Bicycle Retailer ran a story about a company called Chariot Carriers from up in Calgary. According to the Bicycle Retailer folks, Chariot has "embarked on a Lean Manufacturing journey to improve the performance of its Calgary production facility." The boss at Chariot, Frank McCurry, says that "Lean Manufacturing focuses on the removal of non-value added activities and the improvements of material flow". So far so good, but then he goes on to say, "This initiative, combined with the addition of more automation in our fabrication department, has lead to an increase of more than 15 percent in labor efficiencies in less than two years. As a portion of our staff’s compensation comes from the company’s productivity, this progress is clearly a win-win." I don't want to pick on Chariot – they are probably new to the lean game (but I will pick on them because they chose to share their lean thinking with the world); but labor productivity is a lousy metric in any case, and a particularly bad metric to base staff compensation upon. You can't take productivity to the bank – my bank, anyway, will only let me deposit cash.
Contrast that with Scott Rupprecht, the CEO at a machining and sheet metal outfit called Star Precision in Colorado. He has tapped into some grant money and the Colorado MEP to take advantage of the slow economy and train his people in lean concepts to take them to a level beyond wherever they currently are. “The more you can upgrade your staffing at this time, it’s beneficial to the company down the road,” he says. I don't know what Star Precision's performance metrics package looks like, but I doubt the "staff’s compensation comes from the company’s productivity" like they do up at the Chariot factory.
The best way to understand metrics is to view the business as a black box.
Anything happening inside the black box is important and worth measuring only to the extent that it impacts what is coming out of the box, but at the end of the day, all that matters are quality, delivery and lead times to customers, and the profit and cash flow to the owners. Doing well according to some metric like productivity is cold comfort to owners of an unprofitable business, or to customers whose shipments are late. Compensation and performance should be based on the outputs, only, and subordinate metrics of what is happening internally are not really metrics – they are management tools that provide limited insight into what might be affecting the real, relevant metrics.
Everyone in manufacturing knows there are plenty of ways to drive a productivity measurement up – and many of them are not particularly good for the organization. Looking the other way at borderline defects helps productivity, as does keeping people busy building an inventory of stuff no one has ordered. They trash the customer's quality and the owner's cash flow, but if the company wants high productivity, production managers can certainly give them high productivity.
To become lean, a company has to keep focused on the big picture, output metrics, and keep all of the other subordinate stuff in perspective. It is metrics like 'productivity' or anything that singles out people, machine utilization, or the busy-ness of any single resource that leads to dumb decisions.
Milind Mohile says
Not linking company strategic goals to sale and/or cost is the biggest blunder senior level management can commit. Typically, individual performance at factory level is driven by these strategic goals. So, a slight mis-direction in setting higher level goals may result in gross deviation at factory level. I like the black-box approach and as you rightly pointed out everything happening inside that black box is fine for building motivation, but if it doesn’t contribute to top or bottom-line, then it should not be given any significant importance.
Imagine run charts of these five metrics rather than idiotic comparisons of last month, quarter and year! Now that would give you a picture of your business.
Paul Todd says
I think this big-picture view of metrics and the accompanying graphic are very helpful. The bankruptcy of Delphi really began in earnest the soul-searching of what it means to be lean, and for me the journey has been about linking lean initiatives with business goals. I have learned to ask the question “Why do you want to be lean?”
Scott Edwards says
I concur that “labor productivity is a lousy metric in any case, and a particularly bad metric to base staff compensation upon”. We are observing this now after having recently “improved” productivity this year. The sites that tried to tie compensation to productivity have not been able to sustain it at all. Sites that took the time to invest in effective continuous improvement training and value the ideas of its people are the ones showing sustained higher levels of performance.
Interesting post Bill. It’s going to be hard to change top manager’s mind to more clever metrics.
Mark Graban says
Run charts are a very powerful and overlooked tool. Two data point comparisons to last year or last quarter don’t help as much as the information that’s in a run chart, or better yet an SPC chart.
Check out Donald Wheeler’s book “Understanding Variation” for the seminal treatment of this method.
Rick Bohan says
I, too, have found that manufacturers typically have the wrong metrics,i.e., too much focus on “costs” that don’t really tell managers or employees anything about how well they are actually turning raw materials into stuff customers can use, e.g., efficiency, budget variances, and so on.
You’ve got the primary output measures above. Some “subordinate” metrics are needed to help managers answer questions like, “How good is the stuff we make? How long does it take to make it? Do we get it to the customer when the customer wants it? Do we always have the resources available when we need them to make stuff? How well did we do all this today?”
What is the difference between Delivery and Lead Time? Seems to me these would mean the same thing to customers and the right side of your chart should be Quality, Price (Value), and Lead Time.
Bill Waddell says
Lead time is how long it takes you to deliver – a company might promise to ship in 2 days, 2 weeks, etc…
Delivery is the percentage of time you actually deliver when you promised.
You might have a 48 hours lead time – ‘we will ship within 48 hoursof the receipt of order’ – and your delivery performance might by 95% – 95% of the time you meet that 48 hour promise.