A core concept of lean is that value is defined from the perspective of the customer, and therefore waste is as well. We are familiar with both types of muda, waste that is unnecessary and must be removed and waste that is necessary perhaps due to regulations or inspection (be careful with that!), as well as mura (irregularity) and muri (overburden). These drive the seven, or eight, forms of waste.
But how many of us have metrics that are aligned to that customer-centric perspective?
Gene Cornfield described this realignment of metrics and KPIs, which he calls CPIs – Customer Performance Indicators, in a Harvard Business Review article a couple weeks ago.
A growing number of organizations are becoming more customer-centric by adopting, measuring, and optimizing CPIs — whether their customers are consumers or business buyers. And because customers are the one and only thing that fuel growth, how well a company performs against CPIs often serves as the most powerful lever for, and the most accurate predictor of, growth.
Sure, sales is inherently from the customer perspective as it demonstrates that customers have purchased. But sales is also a lagging indicator, with a lot of components that may mask true true potential value. Do they have to buy from you because you’re the only supplier? If so, and they don’t believe they are receiving appropriate value for the price, they will be cultivating alternatives. Unless considerable effort has been spent understanding value, it’s likely that price, and hence sales, does not adequately represent value.
Similarly, first pass yield, net income or margin, click rates, and the like may provide an indirect measurement of perceived customer value and waste reduction, but are not metrics the customer itself would use.
There are two elements that qualify a metric as a CPI. Most importantly, it must be an outcome customers say is important to them. Second, a CPI must be measurable in increments that customers actually value. Time, convenience, number of options, dollars saved, or recognition of their achievements are some increments that customers value, and there can be many others depending on the context, and if they’re deemed relevant by customers.
What is important to your customers? What would be a characteristic that they’d pay more for? And just as importantly, what do you believe is important, and are perhaps spending money on to improve, that they don’t really care about? Understanding your customer, by talking with them and not making assumptions, is critical to defining value from their perspective.
Cornfield goes on to describe several examples from multiple industries. Within operations:
A U.S. grocery delivery service measures the CPI Nothing Broke (eggs or fragile foods or containers). This CPI not only impacts KPIs like customer retention and lifetime value; it also impacts company savings associated with the cost of customer service, issuing credits, and/or replacing broken items.
Sometimes it can be as simple as flipping the value vantage point.
While many organizations track Customer Lifetime Value, which is a KPI that measures the value the company derives from a customer over the duration of their relationship, some are beginning to also look at the inverse: the value delivered to customers over the same duration, which can be displayed to customers in user portals, or communicated prior to renewals. Impacted KPIs include customer retention, loyalty, and classic lifetime value itself.
Well, maybe that isn’t as simple you might think. How would you measure value delivered to the customer, from their perspective? Do you even know what they value, or are you making assumptions.
Talk to your customers, understand them and how they define value, and align your metrics to appropriately measure that value from their perspective.