Management Metrics vs. Operational Metrics
The metrics that companies should depend upon are those that dictate the decisions between cost control and customer satisfaction.
Ken McGill, senior manager, Harbour Results Inc.
Our team at Harbour Results does more than 60 business assessments a year for small to medium sized companies. This 2-day process reveals an incredible amount of common trends across manufacturing operations. During this process it is common for Harbour Results to question whether companies are “Keeping the Score of the Game” properly and measuring performance appropriately as all data sources roll up into the ultimate score cards of the profit & loss (P&L) and balance sheet. The list of metrics that are typically used are voluminous and, in some cases, not the behavior changers necessary to drive flexibility needed in today’s rapidly changing business environment.
Sometimes companies use the same metrics for both operational and management scorecards (for example, some method of measuring throughput). This may or may not result in the desired initiatives or actions. Labor hours as an operational metric may conflict with labor costs on the P&L, especially when a portion of the labor hours involve premium or overtime pay.
This can happen in those times of high vacation rates or absenteeism.
After the P&L, the next level of metrics tends to be those that measure and support a monthly performance review of the health of a company. These are what we call “after the fact metrics” that typically are used for strategic direction in future accounting periods. These metrics are sometimes not sufficient to turn an organization on a dime to meet the 1-to-1 supply and demand model. We often refer to these metrics as management metrics, and they include things such as: detailed profit and loss statement, balance sheet, cash flows, hit rate and backlog.
The metrics that companies should depend upon for rapid daily changes in behavior are those that dictate the decisions and balance between cost control and customer satisfaction, the result of which effect management metrics of on-time/correct quantity and overtime costs. Sources of waste metrics, for example, safety issues, scrap sources, downtime, are typical operational metrics calculated daily and in some agile organizations, hourly, to adjust in meeting the demand, never losing sight of cost. In some organizations we sometimes refer to these metrics as operational metrics.
This is not to infer that there is specifically recommended management or operational metrics for each and every organization or business. Management and operational metrics for manufacturing vary greatly from those in service-oriented business. Metrics in manufacturing are based on physical sources of waste; metrics in service are transactional waste driven.
Management metrics are typically stable and not changed often, allowing trends in organizational performance to be tracked over long time frames. These high-level metrics can be a roll up from the operational metrics or departmental inputs to plant inputs.
Operational metrics can change based upon the impact expected or the desired behavior change at the closest point to the operation. For instance, why continue to measure a very stable process or function with very high capability when there are still opportunities to improve and focus on other areas. It is OK to have pride in and celebrate your 100-percent, on-time delivery rating. However, if you have maintained this level of performance without measuring the seemingly insignificant MRO costs, then you may want to drop the on-time metric for one that focuses the organizations’ resources in an area that can be improved.
If there is the one best metric for both management and operating personnel alike, it would be a daily understanding of the revenue generated by the number of people associated with producing or servicing this revenue. This is a metric that applies to all organizations and can be modified to reflect revenue sold, produced or shipped. This daily metric combined with the future visibility of revenue is a driver of both tactical and strategic nature.
Clear differentiation between management and operational metrics will drive your business to new heights. If your organization assures management metrics are meaningful and insightful to managers, and operational metrics are easily understood by all levels of the operation, continuous improvement will result. All metrics drive behavior, so measure away, meet consistently to review results and hold your organization accountable and create sustainable results.