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Effective Performance Measures (Cont)

These effective performance measures are developed by using a process focus. Only when a process is fully under­stood can effective measures be developed. After the process has been understood and documented, measures are developed that support the overall strategic initiative of the enterprise in its market. This strategic direction can be developed using the SWOT analysis (Strengths, Weak­nesses, Opportunities, and Threats) The internal strengths and weaknesses are identified by the management team given an understanding of the current market environ­ment. Strategic initiatives are developed to seize the perceived opportunities in the market by utilizing these identified strengths while minimizing the weaknesses, keeping in mind the external threats to the organization. In short, performance measures should give real informa­tion about what needs to improve.

Many measures are available; financial, local, global, infor­mational, motivational, strategic, tactical, coordinated, and isolated. Typical financial measures are profit and revenue. Bankers and other investors look at traditional measures like return on assets and their other invest­ments. Comparing inventory turns is a favorite conversa­tion at many APICS dinner meetings. These inventory turns can be calculated using the traditional formula of the cost of goods sold divided by the average inventory, but this overall measure does not mean much to the purchasing manager that only has control over raw material. Breaking the inventory turns down into sub-component pieces allows each piece to be manageable. Turns can be calculated for raw material, work in process, and finished goods in addition to the overall inventory turns. To calculate raw material turns, divide the cost of sales by the average raw material inventory level. Progress is tracked over a period of time. The trend of the measure is more important than the raw number. When each of these sub-component inventory turns increases over time, the overall inventory turn measure increases. Another financial measure that is commonly used are cost variances. These variances pro­vide information about the largest area for possible im­provement compared to the plan or budget. Currently, a typical company spends 60-70% of their cost of goods sold dollar in material. Focusing on the process of inventory control and efficient utilization can yield big benefits.

Flexibility can be measured by supplier lead times, avail­able excess capacity, cross training for the work force, supplier quality, cash availability, and yields for inventory and process. The most important measure for flexibility is lead time. Having a short time to market for new products or product innovation can be the difference between suc­cess or bankruptcy for a company or product line. Customer's expectations are rising at an increasing rate. The company that can innovate new products and produce these products in the shortest lead time are the long term market winners. In fact, a premium price can usually be charged for the first product on the market. Measuring the components of the total lead time can be very enlightening. Usually 80% of a product's lead time is time waiting in queue. Think of the dramatic improvement to a process if just the queue time is removed and nothing else is changed!

Delivery reliability can be measured a number of different ways. Selecting the appropriate metric that matches the business's needs must be done carefully to encourage appropriate actions. Possibilities are on time to promise or request, master schedule performance, first time pick percentage, expedite hours per week, supplier delivery performance, number of changed delivery promises, unplanned overtime or subcontract hours. When selecting delivery reliability measures, keep in mind that the final end goal is to provide what the customer wants when wanted. A common pitfall is to measure delivery against the company's fiscal calendar rather than the customer's expectation. There is a big difference between providing a product when it was promised and providing a product when it was requested. Excellent performance against the master schedule may still not satisfy customer expecta­tions. Beware.

To be Continued