1 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Cost Management Cost Management [formerly Journal of Cost Management] Archive January/February 2008 LEAN PERFORMANCE MANAGEMENT (METRICS DON'T ADD UP) LEAN PERFORMANCE MANAGEMENT (METRICS DON'T ADD UP) RICHARD J. SCHONBERGER RICHARD J. SCHONBERGER is president of Schonberger & Associates. Originator of the term and concepts of world-class manufacturing, Mr. Schonberger was a practicing industrial engineer for eight years, followed by fourteen years as a professor in management information systems and operations management at the University of Nebraska, during which he was designated George Cook Distinguished Professor (chaired); then Affiliate Professor, Management Science, University of Washington. Mr. Schonberger is consulting editor for Benchmarking and is on the editorial boards of the Cost Management, Journal of Operations Management, Journal of Quality Management, International Journal of Strategic Cost Management, and Target. Currently, he is director of the Global Leanness Studies and the World Class by Principles international benchmarking project. This article examines how metrics are understood specifically, how the practical business of internal management reveals more here-and-now metrics issue concerns. Greg Hacket, said to have ushered in modern benchmarking/best-practice management, has a new message: Forget about metrics. In this time of rapid change, he explains, someone needs to be on the lookout for what is going to kill the company. If the bulk of your resources are still being spent crunching numbers, there's not a lot of time for looking over the horizon. 1 By the sound of it, Hacket is addressing the big-picture side of the current-day obsession with metrics: While your leaders fuss over numbers, will competitors, technologies, globalization, climate change, and other mega-forces send your company reeling? A close look at the practical business of internal management reveals more here-and-now metrics issues to be concerned about. KPIs as a Distraction In performance management, what we have today in most companies is a jumble of redundancy. Old modes, which never worked well, are still there and in some quarters, more prominent than ever. I refer to management by KPIs (key performance indicators) and numeric goals. The new mode is process management and improvement, which
2 includes dozens of well-tested and respected concepts, techniques, and tools. It is wideranging: improve the process of product development; of supplier selection; of product costing; of employee training and development; of collaboration with customers; and of pipelining from suppliers and to customers. In operations, improve the mix and arrangement of equipment; scheduling and flow of work; flexibility of human and physical resources; designed-in productibility of parts, products, and services; handling of materials; and processing of orders. In everything, improve quality and safety and reduce variation and uncertainty. All in all, we are not talking about small change but wholesale betterment. While the two modes are generally treated as complementary, in actuality the KPI regime is out of step and should be in a state of decline. That is, process management, if intensive and thorough, should be replacing most elements of performance management by metrics, including its surging popularity in the form of electronic, color-coded dashboards. Once, measuring what happened and comparing it with some numeric goal was all we knew. Management had no other systematic way to look for and address competitive faults and weaknesses. Now, where improvement in the processes has taken root, the former and still reigning mode is not only redundant, it gets in the way. It distracts and detracts from real process improvement. It is unlean and engenders backlash behaviors. This is no indictment of numeric measurement. Both management by KPIs and process management rely on numbers. The difference is this: KPIs are twice or more times removed from the processes. An actual-to-goal gap says that some thing has gone wrong; assign some one to gather data to find out what and make the necessary correction. In process management, data on what goes wrong are continually collected, analyzed, and acted upon. There is no waiting for a KPI gap to be revealed; process improvement is already underway. Lean performance management One of the common justifications for retaining management's goals-and-metrics system has to do with strategic coherence the idea that actions, decisions, tactics, pursuits, goals, and so on must bind to the strategy of the firm. Yes, of course. (Unless the dominant strategy is, for example, to line the pockets of a few who sit in power positions, which has been known to happen.) In the conventional mode numeric goals cascade downward to ensure coherence, or, goal reconciliation occurs up and down the hierarchy. With that mode entrenched, along comes process improvement, which is centered at the processes themselves. The coherence tenet still looms, so process managers dutifully affix numeric goals and monitor them to ensure no conflict with high strategy. But wait! How could any kind of process improvement be at odds with strategic dictates? Will reducing cycle times, making the work force more flexible, standardizing parts, codesigning with customers, and partnering with suppliers go against any company's aims, policies, purpose, or mission? Will the firm's competitiveness be compromised by finding defects early, making equipment reliable, and keeping facilities orderly and squeaky clean and transferring responsibilities for the same from highly paid overhead functionaries to first-line operatives?
3 Maybe the question should be turned around. Are strategies of the firm conflicting with process improvement? Conflicted guidance For several reasons numeric goal-setting and performance metrics tend to interfere with effective process improvement. Here are five brief examples: 1. Most goals come from outer space. The goals and metrics are too highly aggregated to pinpoint what to do when goals are unmet. 2. The goal-setters are the wrong people. Those who know the most about the processes and whose jobs revolve around them are mostly out of the KPI loop. Setting and monitoring one's own goals is more realistic and effective than having to respond to those levied by higher or other authority. 3. Mid-range and higher goals and KPIs get monitored and acted on (assigning responsibilities) too frequently. Monthly is much too often to assess complex programs and initiatives. Doing so ensures what W. Edwards Deming called tampering, which means reacting to variations that are random and quite normal. 4. Most KPIs are outside the zone of influence of the work-center team in the front lines. The work force cares about the big three cost, quality, and service but has relatively low influence over the many factors that govern them. Dr. Deming told us that eighty-five percent of mishaps in operations are the fault of the management system, not the work force Gresham's Law states: When there is a legal tender currency, bad money drives good money out of circulation. Like Gresham's Law, the bad, or less effective focus on management goals and metrics tends to drive out the good, or more effective focus on process data. Process data are just once removed from the reality of what goes wrong in the processes; KPIs are twice, three times, or more removed from that reality. Keys to improvement: metrics weak, data strong The present overheated interest in goals and KPIs detracts from the main key to improvement: process data. Kaoru Ishikawa (famed for developing the fishbone chart and also for fathering quality-control circles) told us to employ seven basic tools for collecting and categorizing process data. First is the process flowchart, of which there are many variations including today's widely admired value-stream mapping. The other six are check sheet, fishbone diagram, Pareto chart, histogram, scatter diagram, and Shewhart process control chart. 3 These tools pin down what needs attention. Moreover, they prioritize so that the most severe process weaknesses stand out. A cost study could do the same thing, but cost (even if activity-based) is a wobbly representation of any reality. And costing out the alternatives for improvement is itself costly. Without data, process improvement can still proceed, though haltingly. Not Visser, general manager at Upright Ireland in the 1980s, made daily rounds talking to the work force. To each associate he asked, What have you changed since yesterday? 4 This admirable management practice yielded plentiful improvements. Were they targeted at the firm's most severe problems and greatest improvement opportunities? That depends on whether plentiful process data were routinely gathered, plotted, and available in the work centers so that the operatives could respond to Visser's query with data-based answers.
4 We frequently hear managers intone something like, If we just listen to our employees, we'll get good ideas. It's a dubious statement, because usually process data are missing. Engineers and kaizen or six-sigma project teams start out with the same handicap: no data. So an early step is data collection (e.g., the second step, measure, in six-sigma's DMAIC routine). Improvement projects are far better served when, in all work centers and departments, part of everyone's job is to track flows and record all mishaps. Then, at an improvement project's outset much of the data collection has taken place. Data are there, already sorted out. In advanced cases, process teams would have been gathering cross-functional data so that more complex projects (e.g., six-sigma) have bottom-up, data-based origins. Does this continuous data collection sound familiar? It should. It was not that long ago that Drs. Deming and Juran were business heroes, employee empowerment was a business basic, and statistical process control was everywhere. Where did all that lore and practice go? It faded under the regressive onslaught of KPI management, which allows managers to operate at a distance from real processes. Trends are dynamic Process improvement is supposed to be continuous. Tracking performance metrics against goals is intermittent: usually monthly, sometimes weekly. Where's the rub? There is the well known hockey-stick frenzy at end of period to book orders, ship, get the inventory count right, clean up the place, and meet targets in general. The result of all that scrambling and shortcuts are undesirable shortcomings, such as shipping products of dubious quality. Further, it allows slack and substandard behaviors early in the cycle while spacing off what should be done continually. There is a better way to monitor performance: trend charts. There is no specified goal other than direction: complete shipments up, up; defects down, down. A trend chart measures your unit's performance against itself over time. Best-of-breed trend charts are owned and kept up by those doing the work. Those charts are large and prominently displayed, so that anyone walking by managers, technical support, customers, peers in other work centers will notice and react. A good trend is prideful for the process team, and it prompts the passersby to chime in with encouragement and reinforcement. A wrong-way trend scolds and embarrasses; it calls for the process team to investigate and act, and for the technical and management staff to be available to help. Cracked dashboards While trend charts are dynamic, dashboards with their scorecards are not. As Richard Bassett puts it, scorecards are almost always static, and markets and circumstances change faster than scorecards do. 5 But the electronic dashboard has become the hightech centerpiece of management by KPIs. When the management team meets, the dashboard display of latest scores becomes the main agenda. Exhibit 1 is a segment of such a dashboard (adapted from a small number of actual company examples). Three typical, mid-level KPIs are included; a full dashboard would include several more. Commonly, this dashboard would be electronically linked to a higher-order (executive) one and to lower-order (department/function) dashboards for action at those levels. Exhibit 1.
5 Segment of an Electronic Dashboard In light of earlier discussion on KPIs and goals, what may be said about this dashboard? First, each goal is simply a hope. The goal may be a basis for paying bonuses or a contractual obligation, but it is still a hope. Second, the KPIs are highly aggregated. The causal factors that make up each may number in the high hundreds in a single day. Here we have an entire month reduced to a single KPI score. As if that weren't already too much, the scores for a given month are further reduced to a single combined score and score-to-goal gap. The management team comes together at the end of January to review the month's scores against the goals. The numbers say that the combined score and gap are okay. As for the contributing KPIs, complete and on time and the cost index are fine, however, the quality index is of concern. But given the multitude of underlying factors, the chance that the number for a single month holds content validity is slim to none. Third, even if a month's number were valid, it does not point to anything close to a root cause. Roots of a good or poor score are needles in a haystack.
6 Fourth, electronic downlinking, zeroing in on sources of an errant (shaded or underlined) score, is a poor substitute for a system of continual display of process conditions in all work centers. If we examine the full segment, all six months of data, we do see one redeeming feature of the dashboard matrix: The trend for complete and on time is getting worse, which, finally, suggests the possible need for high level intervention. If there is sufficient alarm, that intervention might feature a full-scale audit of the target processes plus the system of process improvement, which appears to be faltering. The role of metrics (numbers) You get what you measure, so they say. Some of what you get is actually valuable, too. Much of it is not, because of gaming the system and backlash effects. Given a red cost number, drilling down fingers an in-the-red work center. The supervisor will do what is necessary to turn the red number to green. It won't be difficult or take long. The supervisor will reduce costly overtime (never mind the late orders); schedule longer production runs (directly contrary to lean's drive for one-piece flow); and put off maintenance and training (leading, unfortunately, to equipment malfunctions and quality problems). This scenario is no revelation. Management by metrics has always induced this kind of perverse coping behavior, and everyone except novices knew it then and knows it now. But even hard-headed, highly experienced business people routinely gloss over what they know and fall into patterns that do not make business sense. A good analogy is unit cost. We always knew that cost accounting under-costed the low-volume specials and overcosted the high-volume standard products and services. (Even the assembler on the shop floor knew as much.) Yet we acted on the biased costs, using them for unsound pricing, bidding, go/no-go decisions, and performance management. We finally did something about it: developed activity-based costing. Revision Now it is time to do something about KPI management namely, replacing it with process management. Doing so requires a renewed commitment to continuous process improvement. That entails a sharp shift from KPI numbers to numeric process data, which are the chief raw material for process improvement. A main virtue of and reason for metrics management's endurance is that it readily becomes systematic. It develops a regular rhythm, engaging managers in predictable ways with assigned responsibilities. Process management can do the same. Specifically, the broken performance-management system may be fixed, and systematized, through adherence to the following advisories: Priority management. Any business has multiple objectives competing for resources. It is right for management regularly to consider their competitive impacts and thus to arrange those objectives in priority order. It is wrong to wrap those objectives in suffocating static goals. Trend-watching. The valid business goal is continuous improvement and the measure of it is trends, systematically displayed on trend charts. (Static personal goals and team goals are an exception since they are mostly self-contained and motivationally beneficial: they induce people to exert themselves, innovate, and even cooperate.)
7 Measure but don't manage. Measure the monthly KPIs and plot the scores on trend charts, but let the scores lie fallow unless and until scores over a number of periods are clearly trending the wrong way. Then intervene. To counter the urge to manage every deviation, treat the trends as statistical process control charts: points falling between the upper and lower control limits represent normal variation and are off limits for tampering. Do this figuratively or even literally. In the late 1980s a Baldrige Prize winning company, Zytec, actually monitored its financial forecast on SPC charts with formal upper and lower control limits. 6 Track the flaws, record the mishaps and frustrations. All employees in all processes must, as part of their normal jobs, be flow trackers and daily plotters of data on everything that goes wrong or is frustrating. (Employees' worst frustrations tend to revolve around factors that prevent them from doing their job, which is exactly in tune with the main targets of process improvement.) That provides the feedstock for process improvement, in which each employee is regularly involved. Go to the data. Backing away from the KPI system jerks managers and technical support people out of their accustomed practices. But under process management, they retain a vital responsibility for overseeing the business. What changes-greatly is the modus operandi. It entails frequent, regular visits to the processes to keep tabs on process weaknesses and the state of process improvement itself. 1 2 Joseph McCafferty, Lose the Yardstick, CFO, July 2005, p. 15. W. Edwards Deming, Out of the Crisis (Cambridge, Mass.: MIT Center for Advanced Engineering Study, 1982), pp At one time Ishikawa's seven tools, included stratification but not flow charting (Kaoru Ishikawa, David J. Lu, trans., What Is Total Quality Control?: The Japanese Way (Englewood Cliffs, N.J.: Prentice-Hall, 1985, p.198). Later, however, flow charting replaced stratification in many lists of the seven tools. 4 Noel Visser, invited address, World Class Manufacturing conference, London, October 23, Richard Bassett, Scoring Scorecards, in Letters, CFO (March 2007), p. 14. Richard J. Schonberger, Building a Chain of Customers: Linking Business Functions to Create the World Class Company (New York: Free Press/Simon & Schuster, 1990), p Thomson/RIA. All rights reserved.