Ultimate guide to performance measurement

© GRA 2014 www.gra.net.au1

YOUR ULTIMATE GUIDE TO ACHIEVING TRUE

PERFORMANCE MEASUREMENT

A presentation by GRA Supply Chain Consultants

http://www.gra.net.au/







About GRA and the Authors

Carter McNabbPartner GRA Melbourne

GRA is Australia’s premier, expert consulting firm specialising in supply chain & logistics strategy, and execution. We offer consulting,

professional services, supply chain planning systems, training & education and benchmarking across a broad range of industries.

Nathan SinghavongConsultantGRA Melbourne





Why should you focus on Performance Measurements?

Improving Revenue. Reducing Costs.Organisations are driven by generating more revenue, and bound by operational costs. The difference between these two figures is a fairly good indication of an organisation’s health. Determined to be able to accurately gauge their cash flows and margins, what do organisations employ?

Numbers. Statistics. Records. Ratios. Percentages.These numbers and records are then broken down and combined with others to create ratios and percentages that have meaning at their respective organisational levels. Executives will focus on operational cash flow, supply managers will focus on DIFOT and stock turns, planners will focus on sales to forecast. They are essentially built on the same set of data – just represented differently.

Performance Measures are developed to track each individual facet of the organisation, and teams/departments/individuals are graded on the back of these measures – which when used correctly, facilitate innovation and identify improvement opportunities.





What is the purpose of Performance Measurement?

Information is everywhere, and it’s cheapWith the growth in technology, knowledge is more accessible than ever and big data is becoming cheaper and cheaper to store. Coupled with intensified market competitiveness and the need for constant evolution, the investment into the development and analysis of Performance Measurement indicators is on the increase.

What is the purpose of Performance Measurement?At the core, the purpose of Performance Measurement indicators is to present a perspective – a perspective on what has happened, what is happening, and what may happen. We can often fall into traps where the perspective becomes unclear, or worse, misinterpreted and misused, which can result in:• The rewarding and encouraging of wrong behaviour• ‘Gaming’ of indicators – where individuals knowingly interfere with input data to produce desirable (and often

untrue) results• Incorrect decision-making





Where do we focus?

Understanding what Performance Measurement indicators, both individually and collectively, is the first step towards driving real improvement, and real results.

By keeping indicators simple, and not overcomplicating the definition and the visual representation, the ‘perspectives’ become much less varied and open to interpretation (or criticism).

This presentation is not designed to dictate what should be measured, but provide a holistic understanding of how to go about developing indicators that are of most value, including:

• Developing Foundations for Performance Measurement• Understanding Measurement Characterisation• Understanding Performance Maturity• Knowing the Focus Areas





Part One





Developing Performance Foundations – Indicators and Goals

What is an indicator?“Develop customer base whilst improving customer satisfaction levels.”• The above is a forward-facing target that you’d typically see, but is it a true indicator? The answer is ‘no’ – it is, in fact,

a ‘Critical Success Factor’ (CSF). CSFs are events that assist organisations to achieve their goals, on whichPerformance Measurements are created.

• Is it a true CSF? Again, the answer is ‘no’, however...

“Increase customer base from 35% to 40% of the market share, and improve overall customer satisfaction to 95%, by the nextEOFY.”• The above is now a SMART (Specific, Measurable, Achievable, Results-based, Time-bound) CSF – one with tangible,

numerical targets and restricted by time. By designing SMART CSFs, true Performance Measurement indicators canbe bound.

• Example indicators that are able to provide visibility on this CSF include: Percentage Market Share, CustomerSatisfaction Survey Results, and Customer Reorder Rate.

Each Performance Measurement indicator needs to related to a goal.





Developing Performance Foundations – Processes (WWWWH)

Why?Why does this indicator exist?What is the goal? (Outlined in the previous slide)

Who?Who ‘owns’ the indicator, and makes decisions based onits information?Who collates the data? Reviews the data? Is able to seethe data?

When?When does the input data need to be ready? When doesthe indicator get updated?When does the indicator need to be reported?

What?What does the indicator visually look like? What trendsare typically observed?What are the related indicators, and how are theyinterlinked?What filters/assumptions are in place?

How?How should the indicator be interpreted?

Don’t be afraid to ask questions. Without thisinformation documented, it will be more difficult to gainalignment later down the track.





Part Two





Understanding Characterisation – Lagging vs. Leading

Tells a story of:What actually happened

Tells a story of:What could happen

Reactive:Learning through Root CausalAnalysis to understand anomalies, and put in place preventative measures to avoid repeats

Proactive:Understanding changes to the current environment that will have an operational impact, and put in place short-term actions to eliminate (or at least minimize) risks

Lagging Indicators without Leading Indicators:Restricts visibility as to how outcomes will be achieved

Leading Indicators without Lagging Indicators:Restricts visibility as to whether or not the outcomes were achieved

Lagging IndicatorsLeading Indicators





Understanding Characterisation – Lagging vs. Leading

Tells a story of:How well the activities are run in attaining the result

Tells a story of:How well the result is aligned to what was intended

Improves Repeatability:Fosters a culture of efficiency – where individuals have a high level understanding of the internal flows

Improves Quality:Fosters a stronger relationship with the customer – increasing satisfaction levels

Process Indicators without Outcome Indicators:The likelihood of process experimentation is reduced, making it less likely to garner an even better outcome

Outcome Indicators without Process Indicators:The likelihood of standardising processes is reduced, as case-by-case exceptions begin to become the norm

Process IndicatorsOutcome Indicators





Most indicators are Lagging/Outcome

• Need to move out from Quadrant 2 to focus on repeatabilityand predictability!

Process

Outcome

Leading Lagging

- Stock Turns- Aged Analysis- Excess Stock- Actual vs. Budget- Service Level

- Recommended vs. Approved Orders

- Forecast vs. Reviewed Exceptions

- Forecast Changes within Lead Time

- Projected Out of Stock- Projected Excess- Projected Inventory

Investment

- Recommended Orders- Forecast Exceptions

1

23

4

Understanding Characterisation – Example Indicators





Tells a story of:How an organisation perceives itself

Tells a story of:How an organisation is perceived by the ‘outside world’

Increased Efficiency:Allows for the evolution of the ‘in-betweens’ – what the customers don’t see

Increased Growth:Allows for the evolution of the ‘ends’ – what the customers see

Internal Indicators without External Indicators:Diminishes an organisation’s ability to re-evaluate itself against the market, and reduces it’s capability to predict upcoming trends

External Indicators without Internal Indicators:Diminishes an organisation’s ability to understand it’s end-to-end process, treating what happens between Ordering and Delivering as a ‘black-box’

Internal-Facing Indicators

External-Facing Indicators

Understanding Characterisation – Internal vs. External-Facing





True

Performance

Measurement

Focus Areas

Understanding Maturity

Understanding Characterisation

Developing Measurement Foundations

Part Three





The 8 Aspects of Performance Measurement

• There are 8 key aspects to measuring performance, which can be broken down into 3 maturity levels

1. Build – Budget, Evaluate, Control

• When organisations are asked why they have Performance Measurement indicators, typical responses revolve around:

• “To track budget and delivery. To evaluate progress and performance. To control costs.”

• The above responses only provide a view into what is measured, and does not answer the question of why they are measured. It is crucial to understand the underlying factors – the needs and the ambitions of the organisation – not just what sits on the surface.

Build

Excel

Sustain

Understanding Performance Maturity – The 8 Aspects





2. Excel – Learn, Improve

• There are only a few organisations that will respond along the lines of:

• “To identify the areas where there are gaps, and seek opportunities to learn and improve.”

• This mentality allows organisations to further develop themselves, passing benefits to their customers, who experience higher service levels and better quality products and service.

3. Sustain – Promote, Motivate, Celebrate

• The organisations that best use their indicators will not only learn and improve, but promotes the application of best practices and builds a strong sense of motivation among staff.

• Finally, successes need to be shared and celebrated amongst those who made it happen! A jovial & collaborative environment develops even higher motivation levels, and opens the doors to new improvement opportunities.

Build

Excel

Sustain

Understanding Performance Maturity – The 8 Aspects





True

Performance

Measurement

Focus Areas




Part Four





There is more power in unity than division

– Emanuel Cleaver

Focus Area #1





Step 1:Build top-down indicators on the same data-sets, enabling the ability to ‘drill-down’

KPIs must be linked to the organisation’s high level strategy

• The ability to flow down through each level of the organisation is extremely important – from the executive level, down to middle manager, down to team leaders and members

Whilst vertically traversing indicators are good, horizontally traversing indicators are better

• A one team culture is developed, where all parties work towards a common goal – rather than having conflicting goals and measures across each department (the ‘silo effect’)

General Manager

Demand Manager

Marketing Sales

Supply Manager

Purchasing Distribution

1

2Step 2:Convert these to transversal indicators, with cross-team collaboration

Focus Area #1: There is more power in unity than division





KPIs in Isolation

• Inventory Turns is typically used as a measuring stick for performance. More often than not, organisations are continually aiming to drive up this measure.

• Reviewing the Inventory Turns calculation used yields:

• From the above, it is clear that there are two methods to drive up the number of Inventory Turns:

• Increase sales, or

• Decrease inventory

• The quickest and easiest method is to simply decrease inventory –ordering fewer quantities, or even stopping the ordering process! Whilst the inventory may turnover quicker, you will soon see sales and service levels plummet, due to stock outs, and as a result, the Inventory Turns measure will nosedive.

KPIs in Collaboration

• Each Performance Measure needs to have an equal and opposite measure, for a complete view

• For example, Inventory Turns can be tied together with Service Levels, measuring efficiency, whilst maintaining servicing by the Supply team and fostering innovation within the Marketing team






It isn’t just about uniting information, but people

• Of course, it is quite easy to put two indicators together, but how about putting two different teams together and getting agreement? How about three or four teams? On paper, the processes and systems may be top notch, but it requires people to keep it together – and it’s all about allocating the right tasks to the right teams.

My team should own the forecast, because I trust them more

• Supply Chain wants to own the forecast – in order to gain tighter control over their production facilities

• Finance does – so that they can align it to their financial targets

• Marketing too – because they help to drive the demand

• But who should?

• Supply Chain are not close enough to the customer to understand their needs, and may under-forecast

• Finance are pressured by budgets and margins, and may create difficult to use forecasts

• Marketing are close to the customer, but may create overly optimistic forecasts

• Demand Planners? They’re unbiased – but they are still too distant from the customer

• What about Sales?

• They have the greatest impact on future sales, and are the closest to the customer – and are able to understand their needs

• They will in turn pass on forecasts to the Planners for statistical modelling, Finance for reporting, Marketing for growth and Supply Chain for execution






The more I see, the less I know for sure

– John Lennon

Focus Area #2







Try not to dilute the KPI register

• It is better to have a small handful of indicators rather than a large catalogue

• The more indicators there are, the less importance will be placed on each of them

More KPIs each becomes ‘just another’ Performance Indicator

• Individual interpretations and understandings

• Individuals ‘pick-and-choose’ what works best for them

• Strategic alignment lost

Fewer KPIs each becomes a ‘true’ Key Performance Indicator

• Definition and purpose is understood through the organisation

• Hidden savings in data collection and maintenance costs:

• Labour time to generate reports

• Labour time to analyse indicators

• Data storage

Of course, it is unrealistic to have a ‘one-fits-all’ indicator

• Whilst there is no ‘ideal’ number of KPIs to hold, there certainly needs to be an upper limit that creates a balance between visibility and focus

Focus Area #2: The more I see, the less I know for sure

Imp

ort

an

ce p

er

KP

I

Number of KPIs

KPI Importance Curve

Few Many

Low

High

KPI becomes ‘true’ KPI

KPI becomes PI





Focus Area #2: The more I see, the less I know for sure

New year, new objectives, new measures

• In preparation for the new year, the Leadership team has run a workshop to discuss departmental objectives. At the conclusion of the workshop, it was agreed that each department would have a handful of new KPIs to develop and track, totalling 20 in number, to be fully deployed by the end of the first quarter

• By the end of the 1st quarter, 3 of the 20 KPIs had been developed. By the end of the 2nd quarter, an additional KPI was added, and motivation around the initiative had slumped, which had long dropped off the priority list

• The individual departments had lost clarity on the main global objectives, and had reverted back to the day-to-day activities

• The Leadership team ran another workshop, to review why only a small fraction of their KPIs had been developed

What went wrong? Each GM only had 2 to 3 KPIs

• Whilst each department had its own objectives, the Leadership team had created for the wider organisation a wide spectrum to concentrate on

• In retrospect, the Leadership team conceded that 2 to 3 business objectives (and KPIs) should have been defined. Additionally, it was acknowledged that having individual departments owning their own KPIs was perhaps not the best approach, and that having cross-departmental interdependencies would have been far more beneficial





Difficult things aren’t easy, but they’re worth it

– Mia Love

Focus Area #3





Focus Area #3: Difficult things aren’t easy, but they’re worth it

Performance Measurement

Critical Success Factor

Business Objective

High Level Strategy

Avoid deploying indicators just because ‘it’s easy to measure’

• There is an inbuilt human instinct to do things in the most convenient manner – but is the most convenient method always the best method? For example, almost every organisation will have some form of an action register – and typically, an associated measurement observed is the ratio of Actions In : Actions Out

• What is the value add for the measure? What insight is gained?

• The answer is that an action is put in place to close (or drop) actions. It may sound silly, but it happens.

Link it back to a requirement from a goal

• Great indicators are derived from a requirement, whether it be internal or external. When the requirement is unclear and things are easy to measure, a ‘need’ is often synthesized to retrofit a hastily developed indicator

• As displayed below, the flow needs to be from left to right, not right to left





Effort vs. Reward

• It is especially important to note that benefits gained does not hold a direct relationship with the amount of time/effort invested, and is realised towards the end

• The Effort/Reward curve is broken up into three stages:

• The Start-up:

• Early quick wins due to the new task

• Enthusiasm builds

• The Dip:

• Slows down, and can reverse due to delays/issues

• Motivation decreases as there are no visible benefits

• KPIs are often discontinued, and the objective is discarded

• The Reward:

• Any recalibrations to the objective and/or the KPI are made

• Realignment occurs and objectives can be tracked to fulfilment

• Organisations in the ‘Build’ state of maturity often stop during the ‘Dip’!

Re

wa

rd

Time/Effort

Effort vs. Reward

12

3

Focus Area #3: Difficult things aren’t easy, but they’re worth it.





Understand the customer

• The essence of any organisation is to provide a services and/or goods to a customer. Without the customer, there would be no-one to service, and hence no need for the organisation!

• An organisation’s offer (and their policies) must be centred around what is most important to the customer

• Is it high service levels? Extensive product range? Short delivery lead times? Low ordering costs?

Understand the competition

• No organisation is in an industry by themselves. Without an eye on the competition (i.e. benchmarking against the market), it becomes more difficult to gauge how customers perceive one’s organisation against the rest

• It also provides an avenue to predict shifts in the market, and to know what the customer wants before they know it themselves

Company

Cost

Competition

Customer

Focus Area #3: Difficult things aren’t easy, but they’re worth it





It’s qualitative, not quantitative? How can I measure it?

• The question is often asked how thoughts/feelings can be measured -the basis for a measurement is real, objective data, not subjective opinions!

• An example Performance Measure is Customer Satisfaction – which can be built from something as simple as a survey. Whilst the concept may sound simple, the true effort lies in establishing the correct suite of questions, developing a proper process and timeframe to collect results (not too often, yet not too far apart), and not just measuring satisfaction levels, but actively finding ways to improve it and being transparent enough to share the results back with the customer

• As a rule of thumb, use 4-level ratings (Strongly Disagree, Disagree, Agree, Strongly Agree)

• Avoid having a middle-ground

• You’ll find the majority of results hovering around ‘Neutral’ or ‘Medium’

• Fewer than 4 makes it difficult to see improvements in survey results

• Decreases from ‘Very Good’ to ‘Good’ will still be seen as ‘Good’

• More than 4 makes it difficult for the customer to fill out

• Out of 10, what’s the difference between 6 and 7?

Focus Area #3: Difficult things aren’t easy, but they’re worth it.





Awareness without action is worthless

– Phil McGraw (aka Dr Phil)

Focus Area #4







Focus Area #4: Awareness without action is worthless

Indicators need to inspire action

• Great indicators are used to drive change and improvements, not just for reporting up the chain. An indicator should not be tracked because ‘we were told to’ – but because it adds value to the business

• Without actions, whether it be corrective or lessons learnt, the Performance Measure and its associated CSF becomes devalued, and can often result in another year of missed objectives

Performance Measurement & Process Ownership

• As previously mentioned, there needs to be a clear owner for each objective, and its associated KPI and process

• Ideally, the owner is a single individual, rather than the collective department. This ensures clear responsibilities, and avoids the ‘Oh, but I thought he was working on it’





Focus Area #4: Awareness without action is worthless

Visualisation & interactivity are excellent techniques

Instead of burying Performance Measurements in soft-copy reports, consider employing a physical, visual dashboard (on wall spaces, whiteboards, etc.) in a

centralised area. Its transparency expresses to the wider organisation the importance that management has placed

on the objectives, but also improves update and review frequencies.

By holding cross-team stand-up discussions (as opposed to sit-down meetings) in full view of dashboard, new ideas

will surface, and can be captured on ‘Parking Lots’ next to the dashboard itself – which can lead to further gains

down the track.





Allow the review/actioning process to become a habit:

• Initially, the process of reviewing and analysing these indicators to produce noteworthy actions and learnings will

take time – however, recall Focus Area #3. It will take time, and it is difficult, but it is most definitely worth it.

For lagging indicators:

• If performance was not satisfactory one period, great questions to ask include:

• What were the root causes?

• What actions are we putting in place to learn from our mistakes and prevent repeats?

• Who is responsible for the action? Do we need an action team? When is the action due?

For leading indicators:

• If we forecast a potential issue down the track:

• What options do we have to eliminate (or minimize) the impact?

• Could we have seen this issue earlier?

• Who is responsible for the corrective action? How long will the strategy take? Can it be implemented in time?

• Are there any communication channels we need to be active in?

Focus Area #4: Awareness without action is worthless.





True

Performance

Measurement

Focus Areas




Summary





Linking to a Business Objective:

• Why is it required?

• Identify the strategy and objective that needs to be met

• Identify the Critical Success Factors and how they will be measured

Develop a Process:

• What is being measured?

• Who is accountable for decisions? For data collection?

• When should the process occur?

• How should it be interpreted?

Performance Measurement

Critical Success Factor

Business Objective

High Level Strategy

Why

What

Who

When

How

Piecing it all together





Understand how measures are characterised:• Lagging and Leading indicators:

• Where are we tracking to be next month? What about in 6 months’ time?

• Did we achieve what we forecasted?

• How many forecast adjustments were made, and why?

• Process and Outcome indicators:

• Is the outcome as expected?

• If the same processes were undertaken, would the same outcome be achieved?

• What incremental process changes can be made to get an even better outcome?

• Internal and External indicators:

• How do we think we are performing?

• How does the outside world think we are performing?

• Are there any internal adjustments to be made to keep ahead of the market?

Lagging IndicatorsLeading Indicators

Internal-Facing Indicators External-Facing Indicators

Process IndicatorsOutcome Indicators






Understand the stages of maturity, and how to progress:

• Build Excel

• Requires implementation of root causal analysis and lessons learnt

• Excel Sustain

• Requires a shift in the organisation towards a one-team culture

• Promotion of good behaviour and sharing successes

• Will result in improvement and innovation ideas appearing as a part of day-to-day life

Build

•Budget

•Evaluate

•Control

Excel

•Learn

•Improve

Sustain

•Promote

•Motivate

•Celebrate






Keep in mind the focus areas:

“There is more power in unity than division.”• How can the same dataset be transformed so that it suits the needs

of various reporting levels?

• How can the information be shared meaningfully across departments?

“The more I see, the less I know.”• Is there an existing measure that can be used for the same purpose?

• Keep a balance between visibility and focus

“Difficult things aren’t easy, but they’re work it.”• Understand that the most reward comes at the end, when all

processes are integrated and communicating effectively

“Awareness without action is worthless.”• Don’t get stuck in the details of the accuracy of the information – this

will often result in no action

• Spending more time on reporting = less time for actions

• Actions result in change






The treasure is located at 45.342°S, 167.234°E

The treasure is under the large

palm tree on the corner of Cart St

and Wagon St

The treasure is 80m south, and 160m east from

the cove exit

The treasure is 100 paces south,

and 200 paces east from the

cove exit

The treasure is under the large

palm tree on the island

And finally, avoid over-complication!

• As humans, we love detail, but always be mindful of what level of detail works best

We keep becoming more detail driven when finding new ways to measure things. It is important to take a step back to understand what level of detail means the most to you.

• Can you visualise the latitude/longitude co-ordinates in your mind?

Which tree? There are so

many around!

Reference point exists! But the

unit of measure is not standard.

Standard units of measure! But what if there are

two exits?

What about the exact location?






Take action

GRA is Australia’s premier, expert consulting firm specialising in supply chain & logistics strategy, planning and execution. We offer consulting, professional services, supply chain systems, training & education and benchmarking across a broad range of industries.

At GRA we understand the complexity of Performance Measurement.

We design and implement performance reporting and management systems for our clients. We can help businesses from feeling overwhelmed by too much raw data. We use our powerful tools and visualisation techniques to distil and analyse your data to build your performance management tools to help you drive improved performance from your business.

To find out more, call (03) 9421 4611 or visit www.gra.net.au


