Elephants, Moles and Metrics
By Joe Tillman, Supply Chain Visions
An ancient Indian parable about an elephant and six blind men goes something like this: each of the blind men touches a different part of the elephant and then describes what it is - one says the elephant is a wall, another a tree; the others say it is a spear, a fan, a rope or a snake. They don't identify it correctly because they can't see the elephant; they have only a limited perception based on the parts they have touched.
Many companies fall into a similar trap - a measurement trap. They have many performance measures but fail to link them to actionable plans that drive progress towards the company's goals. Or they establish measures for the sake of measures, but have not thought through how they will be used to manage the business. Either way, they're unable to see the elephant, in other words the big picture, or end up playing a nonstop game of whack-a-mole - addressing problems "willy nilly" as they appear without any real strategy.
Service level agreements (SLAs) are necessary. The company has a minimum expectation of service, while its service provider must deliver to that expectation. This is why many outsourcing agreements focus on a myriad of SLAs without focusing the big picture. In order to be successful, we must think beyond a blur of simple short-term results and move towards a better model for managing performance.
To do so, focus on the three pillars of performance management: 1) Process, not functional or task-focused measures, 2) create a balanced set of measures, and 3) have a measurement process and culture.
Process, Not Functional or Task Focused
Task or results-oriented metrics, sometimes referred to as service level agreements (SLAs), are the primary focus of most functional areas in the warehouse. This portion of the contract is where companies typically spell out the expectations they have of their service providers. The problem is that SLAs are not typically aligned to the company's desired outcomes. One element of this is called the Outsourcing Paradox. When companies attempt to develop the "perfect" set of tasks, frequencies and measures (even though they outsourced the activity to the experts), they drive innovation out of the process. The focus becomes, "That is what the company that is outsourcing requires per our statement of work," leaving little authority for the service provider to exercise its own initiative to carry out the work.
So what can we do to see the entire elephant? Let's consider the Figure 1 pyramid. At the bottom of the pyramid are SLAs because they are operational in nature and only measure one aspect of a process. Since SLAs are so narrowly focused it takes several SLAs to measure just one process. If these measures are left unchecked, they will cause less than optimal performance.
Process measures are typically cross-functional in nature and are usually companywide or customer focused. They measure the total effect of a process and drive overall optimization of costs and customer satisfaction.
At the tip of the pyramid we have key performance indicators or KPIs. KPIs are those critical few measures that track progress towards strategic objectives or desired outcomes.
To drive this home, let's consider the Perfect Order. The Perfect Order is a good example of how metrics must align in order to see the big picture. Many organizations use the Perfect Order as a KPI. The individual processes of the perfect order – on-time, complete, correct documentation, and damage free - are the process measures. Each of the individual process measures have their own set of metrics that track to a service level agreement. On-time order management, on-time order fill, and on-time transportation are individual components of the on-time process for the Perfect Order.
Create a Balanced Set of Measures
Metrics should provide a balanced, holistic perspective. When you think of a pilot in the cockpit of a plane, he has a good balance of metrics that helps him monitor the plane's performance - such as altitude, speed and direction. If your pilot was flying the plane using only one of those, you would be in trouble. To reach your destination safely, the pilot must be attentive to all three areas.
At a minimum a successful performance management initiative should focus on three areas - quality, service and productivity. Metrics that measure quantifiable activities, such as picking accuracy, shipment accuracy, and proper labeling, may be monitored to drive quality operations. Service can be monitored using metrics that measure lead time, lost sales or fill rates.
The third focus area is productivity. A better name for this might be profitability because this area focuses on measures that align to corporate financial goals. Metrics such as throughput, asset turns, or metrics that measure inventory productivity (inventory turns, days on hand) are good examples for this area.
Measurement Process and Culture
The third pillar is embedding a measurement process and culture in the organization. Having a measurement process in place ensures frequent, constructive reviews of the metrics. This enables individuals, teams, and units to make timely course corrections. When used properly, measures can become the communication between the customer and supplier.
It is easier said than done, but following a few simple rules can do it. The key is to show workers how their performance affects the overall business, then work with them to facilitate the selection and implementation of the measures. We call this five step process Validating the Value Add or VVA for short. VVA is establishing metrics that support the overall corporate objectives and goals. This is accomplished by linking accountability to achieve goals to where the work gets done. When used properly, VVA can create an environment where people use the metrics to drive positive change in the business.
Step 1: Clearly define company objectives.
Companies should determine their desired outcomes and strategy and then articulate them, such as "We want to achieve a 10 percent improvement in shipping accurate orders." Make sure to link operational and functional tactics back to the overall strategy. Follow-up to make sure everyone understands the strategy and what their role is in helping to achieve it.
Step 2: Develop the validating the value-add statement.
Create value-add statements that are under your team or department's control. Essentially, how does the team or department add value in achieving the company's (or customer's) desired outcomes? Be sure to have a measurable performance goal. For example, "Our team adds value by maintaining 99.4% or better accuracy on order picking."
Step 3: Measure the progress against VVA.
Once clear expectations have been set, measure the team or department's progress against their goal. Make it easy to see that goals are indeed being met by summarizing data so that the results are obvious. Also, be sure to include historical data to track trends. Step 3's focus is for employees to easily understand and track their performance against the company's desired outcome.
Involve your employees in creating and displaying the information. It creates buy-in by giving employees ownership of the measures.
Step 4: Build a Pareto of reasons for not meeting the goal.
Create a process for a root cause analysis and development of corrective action plans. For example, a Pareto chart (80/20) will show where to focus your efforts. The obvious problem is usually not the root cause and in order to keep the problem from recurring, the team must drill-down to find the underlying reasons for the problem. A good technique is to ask "Why?" five times.
To further increase ownership by employees, give them the time to explore and research when goals are missed.
Step 5: Take action - Fix the problem.
This is where results begin. By outlining the steps you are taking to correct problems that have been identified in Step 4 emotions and finger pointing are mitigated. Plus, taking action will help drive change to improve performance. However, if you are not willing to do something about it, all of the work to this point means nothing.
Where to Go from Here?
Companies planning to outsource should reconsider their process. They should ask themselves "Why are we outsourcing?" It may be no surprise to hear, "Lower costs and to achieve better levels of service." But really this answer revolves around the fact that the company outsourcing doesn't have the expertise to efficiently manage the activity in-house. Unfortunately, many companies simply cannot let go and end up creating too tightly written statements of work, hindering the entire reason for outsourcing.
A new model, Vested, is sweeping the outsourcing world by storm. The premise behind Vested is that the company outsourcing collaborates with the service provider to achieve the company's desired outcomes and then ties in key incentives to the achievement of those outcomes. This gives the service provider the authority to perform the work in the most efficient way possible and to drive innovation for the company. When the company outsourcing and the service provider work together to achieve the company's desired outcomes, both will win.
To read more about Vested, please visit www.vestedway.com.
Joe Tillman, Sr. Researcher, Supply Chain Visions
Joe Tillman, Sr. Researcher, Supply Chain Visions, is a co-author to the Warehouse Education and Research Council's annual benchmarking survey "DC Measures."