Читать книгу Supply Chain Metrics that Matter - Cecere Lora M. - Страница 11

The first step of the journey, for a guy like Joe, is to define operations excellence. The second is to identify the right metrics. The metrics chosen need to reflect all of the elements of the complex system. It is not easy. Putting together the metrics framework requires a clear definition of strategy. There are no cookie-cutter answers. The answer is slightly different for each company.

Figure 1.1 shows how the process for metrics maturity can be iterative. For teams like Joe's, there are five steps. Progress requires continuous learning, refinement, and renewal over many years. It takes a year-over-year focus and discipline by the executive team. Change happens in small increments, not leaps and bounds.

Figure 1.1 The Metrics Journey

The first step is awareness of the need to change. The stimulus is often failure. It could be a missed earnings call, surprises at the end of the quarter, loss of market share, a market downturn, or the loss of business. When this happens, bad news moves like a lightning bolt through the organization. The gap in performance is a wake-up call. Normally, good news will travel fast in the organization while bad news moves slowly. It is only when there is a crisis that bad news travels fast. When the organization recognizes the need for change and is ready for alignment on the metrics that matter, there is an awakening and a call to action.

The second step is metrics definition. This decision needs to be based on business strategy. It needs to be a conscious and a set of deliberate choices. The challenge is selection of a few meaningful metrics that represent all of the elements of the complex system. Most companies measure too many things and are not clear on which metrics matter. Gaining clarity is a part of the journey.

The third step is driving organizational alignment on the metrics system. This requires building a guiding coalition with a clear vision that needs to be cross-functional. In this step, functional metrics are aligned to corporate metrics frameworks, and targets are established to drive incentives.

The fourth step is to build organizational potential. A look at industry performance and accomplishments of industry peer group leaders helps to ground the discussion. The organization can then craft a road map for performance improvement.

The last step, and a very important one, is to refine and adjust the metrics to drive strength, balance, and resiliency, over time, in corporate performance.

It is a journey, not a sprint, and it is ongoing. Patience and discipline are essential. Most of the average Joes work in large matrixed organizations within a global company. Progress needs to be measured in millimeters, not meters. Substantial progress happens over the course of many years.

Metrics That Matter at FMC Agricultural Solutions

In the process of writing the book, I have sent the chapters to industry leaders to get feedback. Throughout the book, I will share perspectives from these leaders. Here is an excerpt from an interview with Marty Kisliuk of FMC Agricultural Solutions:

If you don't measure the right things, you will not get better. However, if you measure them, it does not mean that you will get better. There is always tension. If you are not struggling with metrics, then you probably are not using them.

When I think about the metrics that matter, I start my thinking with business strategy. I ask myself, “What is it? And, how will we measure the success of this strategy?” I don't think that any leadership team can deal with more than five to seven metrics at the same time. There is an issue of focus and selective strategy. It varies by industry.

The metrics that matter are going to be the ones that you can take action on. There are two important words implied in the word actionable: action and able. I don't think that any organization can take action on all the metrics simultaneously. We need to start with two or three metrics and move them together.

After being chosen, the metrics cannot align organizations, but they can misalign them. It is only the action by leaders that can drive alignment.

A classic discussion for me is cost versus value. I want to sell value, and I define value as benefit over cost. Cost is only one side of the equation of value. As a result, you cannot have the operations team aligned for cost and the go-to-market teams of sales and marketing driving value. This is nonsense. We have to do it together.

Marty Kisliuk, Director of Global Operations, FMC Agricultural Solutions

Conquering the Effective Frontier

Joe asked me to come back the following week and we continued our talk. The BHAG discussion was still uncomfortable. He had gotten some tough feedback from his team.

As I worked with him, it became clear to me that he, like other executives I work with, was battling a list of ever-changing goals for growth, profitability, and cycles in the face of rising complexity. When this happens, frustration reigns. Arguments abound and tensions are high. Leadership teams want to do the right thing, but it just isn't clear what to do to move forward. The obstacles are large, and the benefits are many. Each organization has a unique potential as defined by the Effective Frontier in Figure 1.2.

Figure 1.2 The Effective Frontier

As we sat in Joe's office the next week, I tried to explain the concept of the Effective Frontier. “In our last conversation, you asked me about balance. Today, I want to share with you some insights from our research. We find that each company has its own unique potential. The frontier is defined by the interrelationships of growth, profitability, cycles, and complexity. The potential of the company on the Effective Frontier is determined by products, processes, technologies, markets, and channels. Within a company, there are finite trade-offs between interconnected metrics. While there are many definitions and possibilities of metrics for each part of the model, the most commonly used are these four.”

I then turned and wrote the following definitions on the whiteboard in his office:

1. Growth: Year-over-year revenue improvements

2. Profitability: Operating margin (OM), cost of goods sold (COGS), and earnings before interest, taxes, depreciation and amortization (EBITDA)

3. Cycles: Cash-to-cash, inventory turns, and order cycle times, days of receivables, days of payables, and production cycle times

4. Complexity: Increase in products or channels

After replacing the eraser in its holder, and laughing with Joe about my poor handwriting on the board, I said, “Joe, companies want to power a profitable growth strategy, but often find themselves trapped at the intersection of operating margin and inventory turns. It is a battle of cost versus cash. Leaders like you must forge the operating strategy to help others understand the trade-offs.”

“As complexity rises, the potential of the organization decreases. To maintain the status quo, you must constantly redesign operations. As you know, there are many elements that affect operating complexity, like product proliferation, platform complexity, and changes in manufacturing operations.” I then paused and looked him in the eye. “As you know very well, these impacts on complexity usually have a negative effect on revenue per employee, return on assets (ROA), return on net assets (RONA), or return on invested capital (ROIC).”

Joe nodded in agreement and said, “This is our struggle. We are constantly being asked to reduce costs and improve working capital, and do more with less, while complexity escalates in the organization. We have no way to push back and manage the metrics that matter. We are not thinking about it holistically as a complex system.”

About the Effective Frontier

It is important to note that the name of this model is not the Efficient Frontier. Readers who have taken economics courses may have even read it as the Efficient Frontier when speed-reading the page. This mistake is common. Often when I share this model in a lecture, someone will come up and try to correct me.

It is deliberately not named the Efficient Frontier. Why? The efficient organization is not necessarily the most effective. This is an important principle that underlies the research of this book. A singular focus on productivity or cost management can throw an organization out of balance. (An efficient organization is usually defined as one with the highest productivity per employee or the lowest cost per case.)

I had hit a nerve. I started the conversation by passing a piece of research to Joe that is shown in Table 1.1, and saying, “Today, nine out of ten companies are stuck. As shown in the table, when we analyze corporate balance sheet data for companies sorted by Morningstar sector, we find that nine out of ten companies have been unable to move forward for more than three years of sequential improvements on these two metrics. They are not stuck in a good way like a label to a bottle; instead, they are stuck in a bad way like a car in a massive traffic jam going nowhere. They may have made progress on a project, or a focus on singular metrics, but not in the delivery of a balanced metrics portfolio.”

Table 1.1 Percentage of Companies Demonstrating Consecutive Improvement on Both Operating Margin and Inventory Turns for 2000–2012

Source: Supply Chain Insights LLC.

Joe flashed his contagious grin and said, “This is certainly the case in my organization.”

“Take a look at how industries have changed,” I said, shuffling a sheaf of papers and handing to Joe what is shown in Table 1.2. “Growth is slowing; and as growth slows, organizational tension for metrics improvements increases. Balance and resiliency on the Effective Frontier is tougher with slowing growth. This has been the struggle of many companies in the past three years.”

Table 1.2 Industry Growth Patterns

Industry Average comprised of public companies (automotive industry: NAICS 336112), (brand apparel industry: NAICS 31522 %, where % is any number from 0 to 9), (combined food & beverage industry: NAICS 3112 %, where % is any number from 0 to 9, 311320,311520,311821,311941 & 312111), (chemical: NAICS 325188 & 325998), (consumer packaged goods: NAICS 3256 %, where % is any number from 0 to 9), (grocery retail industry: NAICS 44511), (hospital industry: NAICS 62211), (mass retail industry: NAICS 452 %, where % is any number from 0 to 9), (medical device industry: NAICS 339112), (pharmaceutical industry: NAICS 325412), (retail apparel industry: NAICS 44812 %, where % is any number from 0 to 9) reporting in One Source with 2012 annual sales greater than $5 billion.

Source: Supply Chain Insights LLC, Corporate Annual Reports 2000-2012.

“Okay, I get it,” said Joe. “But what do I do? What is my call to action? My organization is clearly stuck, and I see that you are saying it's a mistake to focus on only a single metric like inventory. Help me with the next step. What do I do now?”

I loved Joe's natural curiosity and openness to learn. It was something that I do not see often. I leaned forward and continued, “Getting unstuck requires the management of the Effective Frontier as a system. The metrics are interrelated. There are finite trade-offs. As you learned firsthand in your meeting the other day, the organization must resist the temptation to focus on piece parts, or a singular metric in isolation.” I shook my head, “The Effective Frontier needs to be managed as a complex system with complex processes with increasing complexity. As the business increases in complexity, the system needs to be continually redesigned.”

“As a leadership team, you must keep a focus on outputs, not just inputs. To drive change, one of the first distinctions that you need to adopt as a leadership team is the difference between functional and corporate performance metrics. This is important if you are to determine the sustainable metrics framework to improve cross-functional success.”

Joe nodded in agreement. “This is one of our major issues. We are so entrenched in functional metrics that it's hard for us to also focus on corporate performance. Our incentives are based on what is good for the function. Our sales leader, Frank, is focused on volume while I am incented on cost; and every time that I engage with Lou, our controller, the discussion is about cash. It is impossible for us to maintain a steady course and be balanced. We want to do the right thing by our corporate objectives, and we talk about these at quarterly and annual meetings, but we are not incented to make progress on what you call the Effective Frontier. Shouldn't this be cross-functional as a team?”

“Yes,” I said, “You are not that different from other companies that I work with. Trust me, I understand.”

“For best-performing companies, it is a series of conscious choices to improve capabilities and push to a new level of the Frontier. However, it happens slowly. It is only after achieving balance and resiliency in the current state that companies can push to a new level of performance. I define this as increasing ‘organizational potential.’ For this reason, the decision to move to a new level of the Effective Frontier is the last stage in the model,” I said, while pointing to what is shown in Figure 1.3.

Figure 1.3 Moving from One Frontier to the Next

“When a company moves from one frontier to another, it requires a different type of thinking. To effectively make the transition from one level to another, companies have to adopt new mental models. They have to tackle change differently. It could be a new channel strategy or embracing new technologies and processes. Currently, the options abound. The challenge is choice, and working together to build potential cross-functionally.”

Joe interrupted. “I have a question. After selecting the right path to move the company to the next frontier, how do companies manage change? The people component is the toughest for us. If others are anything like our organization, the organization is hardwired for incremental, and continuous, improvement. The adoption of a new mental model flies in the face of conventional continuous improvement programs. We are good at the process methodologies of Six Sigma and Lean because they focus on gradual continuous improvement. How do you get the leadership team to risk disruption, to break some eggs, and then put the processes back together again to move to the next level?” Joe asked. “It sounds risky, and as you know, it's hard to get people to agree to risk putting their job on the line.”

“People put their jobs on the line all the time, especially by not taking action when action is required,” I said. “That's even worse, and plenty of people have lost their jobs because they failed by not even trying. You were the victim of a layoff because the management team did not have the courage to make tough choices.”

It was obvious that this point resonated, as Joe quickly retorted, “This is easier said than done. If you are stuck in the management of vertical metrics, you cannot see the big picture.”

“This is the secret to building systems with the Metrics That Matter,” I said. “You need to engage the entire team in a manner that not only gets mutual buy-in, but paves the future to deliver success. With incremental improvement, oftentimes one metric will win over another metric. Functional areas will become winners and losers. This is the power of defining a new frontier – you are all moving toward a common horizon that you've identified is desirable and attainable. To help you, I would like to share an interview that I recently completed with Marty Kisliuk of FMC. See if this resonates with your team…”

“Good idea,” said Joe. “Why, don't we have lunch and continue the discussion?”

The Journey of Managing the Effective Frontier

As leaders, we must move the frontier. It must be done strategically. Many times we get trapped to move one or two metrics instead of the entire frontier. To do this, we must see progress in the metrics that we measure. The rest will be victims of entropy.

To make progress, we have to be good at root-cause analysis. The organization must find the root cause and act quickly.

We must resist the temptation to focus on one or two metrics in isolation. When we do this, we cannot move the frontier to the next level. Instead, as a leadership team, you must find balance and then push to the next level of the Effective Frontier. It is a strategic activity. It is not a week-to-week or a month-to-month initiative. It needs to be focused end-to-end throughout the organization from the customer's customer to the supplier's supplier on an annual basis.

I don't think that we as business leaders recognize that we are on a frontier early enough. It is a paradox. It is the AND. You must move the metrics together while in balance and then redefine the process. Most organizations are not operating at full potential on their frontier and can make continuous improvements. However, when you reach full potential on the frontier, you must force a disruption and change the mental model.

Marty Kisliuk, Director of Global Operations, FMC Agricultural Solutions

The Efficient Organization Is Not the Most Effective

Over faded gray trays in the company cafeteria, I continued. “Computing power and connectivity made greater productivity possible. Over the course of the past decade, the average global multinational company invested 1.7 percent of revenue on information technology.” I pulled a recent research study from my purse and pointed to the data (see Table 1.3). “The impact was a dramatic improvement in employee productivity, as defined by revenue per employee, in all manufacturing sectors.

Table 1.3 Industry Progress over the Past Decade

Industry Average comprised of public companies (automotive industry: NAICS 336112), (brand apparel industry: NAICS 31522 %, where % is any number from 0 to 9), (combined food & beverage industry: NAICS 3112 %, where % is any number from 0 to 9, 311320,311520,311821,311941 & 312111), (chemical: NAICS 325188 & 325998), (consumer packaged goods: NAICS 3256 %, where % is any number from 0 to 9), (grocery retail industry: NAICS44511), (hospital industry: NAICS 62211), (mass retail industry: NAICS 452 %, where % is any number from 0 to 9), (medical device industry: NAICS 339112), (pharmaceutical industry: NAICS 325412), (retail apparel industry: NAICS 44812 %, where % is any number from 0 to 9), reporting in One Source with 2012 annual sales greater than $5 billion.

^″ Calculated from 2001–2012 due to data availability;

^* Calculated from 2002 to 2012 due to data availability;

^{^} Calculated from 2003 to 2012 due to data availability;

NC = no change.

Source: Supply Chain Insights LLC, Corporate Annual Reports 2000–2012.

“Technology was an enabler. For many, it was a disruptor. It permitted and empowered companies to increase potential and move to new levels of the Effective Frontier. Today, the belief that the efficient organization is the most effective defies conventional wisdom. The historic focus was to improve efficiency. The belief was that increasing efficiency would lower costs and improve performance.” The reduction in labor did not translate to an improvement in operating margin. As I showed him the chart, I said, “However, as shown here, this singular focus had an adverse effect on operating margin and inventory cycles in 7 of the 11 industry sectors.” Joe's eyes sparkled. He loved data, and motioned for me to continue.

“In some industries, costs were shifted. Three out of the 11 industries grew sales and general administration (SG&A) expenses. In an effort to spur growth, there was a shift in spending from the back office (manufacturing, distribution, procurement and logistics) to the front office (sales and marketing). There was a belief that we could save money in the back office, and move the money to the front office to fuel growth; however, this level of thinking was flawed. It was not that easy. Teams need to align to win together. Functions need to build potential on the Effective Frontier jointly as a strategy.”

Joe asked, “So, since most companies went for improving employee productivity, why didn't margins improve at the same time?” As I stirred my black coffee, I saw that it was as opaque as the answer to his question. “I like this line of questioning. This is something that I am doing more research on, but right now, I believe that it was a misaligned emphasis on the input metric (revenue per employee), not a focus on the output metric (operating margin). Most companies can put data into systems, but they cannot get data out to measure progress. As a result, the focus is misaligned to concentrate on input, not output. That's why metrics matter so much! Would you agree?”

The Need to Focus on the Right Metrics as a Complex System

On the walk up the stairs back to his office, Joe stated, “I get it. Companies want to increase, or accelerate, inventory turns and reduce cash-to-cash cycles. Improving inventory turns and decreasing cash cycles improves working capital; but, an increase in complexity will decrease margin and reduce inventory turns. They are connected and interrelated. Working these metrics as a complex system while on the effective frontier enables companies to build a road map to drive business strategy. The freeing of capital enables investment. Right?”

I nodded while laughing. Joe walked up the stairs two at a time leaving me out of breath as I struggled to keep up with him while continuing the dialogue. “In the past decade, the use of technology improved the results of large companies greater than $5 billion in revenue. While companies thought that the overall results would be greater, they improved efficiency, not the overall results that they hoped. As we discussed at lunch, it did improve revenue per employee. The adoption of processes and technologies has been slower in mid-market companies with less than $1 billion in revenue. Whew…” I said, as I leaned my hand against the wall at the top of the stairs to get my breath.

Joe laughed and said, “Sorry, I get carried away. I am so used to the stairs and taking them two at a time that I didn't mean to make you winded. I guess it's just easier for a tall guy to take these stairs fast. Let's take a moment to catch our breath. I appreciate you explaining this to me.” We stood on the stair landing for a couple of minutes and talked about his challenges.

Moving Forward, Not Backward

As we walked down the hall, we continued the dialogue. Joe's questions were getting more intense. As he peppered me with them, I stated, “Today, there are more challenges to managing metrics trade-offs while on a frontier than earlier in my career. The pace of change is rapid. Think about it. Today, businesses are larger and more global. Organizations are not aligned. As a result, there is a greater need for focus and conscious choice.”

Joe agreed. “I cannot speak for everyone, but I know for us the past decade was turbulent. Demand and supply volatility increased. Markets became more competitive. Merger and acquisition (M&A) activity was rampant. To meet the expectations of financial markets, we pushed costs and elongated the cycles of suppliers. This improved our cash-to-cash cycle by lengthening payables, but is starting to impact margin.

“It is easier to shift costs than improve internal operations,” Joe continued. “Over the past year, I had a lot of pressure from my finance team to lengthen payables. However, I keep telling them that it is a penny-wise and pound-foolish strategy, but this is hard for them to see. Pushing costs and waste backward to suppliers and lengthening payables will give short-term benefit; but, I am now seeing that it can cause longer-term issues.” The conversation had been as fast as our walk, and we were now back in Joe's office.

Moving to the Next Level on the Effective Frontier

“While this makes sense to me conceptually, it is difficult to orchestrate. As a leadership team, here, we are focused on functional metrics. The concept of the Effective Frontier is a new concept. How would you suggest that we go about adopting the methodology?” asked Joe.

I thought hard and leaned back in my chair. I paused for a moment, and said, “Each organization that I work with has its own unique potential, and is operating on its own frontier. Within each organization, the functional areas also have their own unique potential. The goal is to first recognize it on a corporate level, and then on a functional level, and then define the frontier that best realizes corporate objectives at all levels. The second goal is to know when to move to the next level. This takes training.”

“I think that I am getting it. I am trying to absorb the concepts, but it is like drinking from a fire hose,” Joe said.

“I know. It's for this reason that most organizations are treading water. It's hard to get the attention of the leadership team. With the rise of complexity in the last decade, most organizations have made unconscious trade-offs,” I stated.

“What do you mean?” asked Joe. “Tell me more about unconscious trade-offs.”

“Sure, let me explain,” I continued. “As complexity increased – products proliferating and service expectations rising – the impact on the metrics portfolio and the potential of the organization is not known. While it can be modeled today using new technologies, most companies do not. It is not a conscious choice. The increase in complexity makes it harder to achieve the same level of operating margin and inventory turns,” I said while looking at my watch.

“Why do companies not model it and drive the outcome to maximize potential?” asked Joe.

I shrugged my shoulders and shook my head. “Isn't it ironic that companies design factories, and work for years on the development of those factories, but do not model corporate performance systems? I think that it is because it is a new way of thinking,” I stated and stood up and started to gather my papers and pack my briefcase.

“In the face of this challenge, there is a need to drive conscious choice on metrics trade-offs. I can work with you and your team to help you understand how industry leaders that did not modify business processes and assets to drive strength and year-over-year improvement in performance have struggled to deliver a balanced portfolio with resiliency. Joe, do you think that this would be possible?” Joe nodded his head yes, and motioned for me to continue as he said, “I know that you only promised to stay an hour, but I would like you to continue. I am finding this discussion to be very helpful.”

“Okay,” I said. “Let me make a phone call. Let's take a quick break, and we can work together for a couple of hours.”

Getting Off the Plateau

“Thanks for staying,” said Joe. “It's just that I don't get a lot of time to think strategically, and I am finding this helpful. Can we pick up where we stopped? Why are companies stuck?” asked Joe.

“The leader of operations knows that inventory cycles and costs need to be managed together. Each industry has a different set of rhythms and cycles. When complexity increases, these change. It is an industry-specific response. Over the past decade, the progress of industries has varied. Most companies are plateaued. Progress in corporate performance is stalled. Companies in the consumer electronics and consumer packaged-goods industries have made the most progress. Other industries, like apparel and automotive, are going backward and losing ground,” I said as I showed him Figure 1.4.

Figure 1.4 Performance Plateau

Source: Supply Chain Insights Metrics That Matter Series (www.supplychaininsights.com).

“It is easy to slip,” Joe said as he gazed into the parking lot. The sun shone brightly as the bus stopped to let children off onto the sidewalk across the street in front of his office. “One of our issues is alignment. Every meeting is like the first day in school where we're trying to find our place. We have similar tasks but we are competing with each other.”

“Yes, I know,” I said following his gaze out the window. “To drive organizational alignment, companies need to understand the trade-offs, and what is possible, while defining the Effective Frontier and managing it as a complex system. It's like knowing what needs to be done to graduate to the next grade. They also need to choose the right metrics. It requires going back to school to rethink the basics of business.”

“These trade-offs cannot be determined just by setting up a spreadsheet. It requires the use of more advanced analytics. The use of modeling techniques allows companies to determine the appropriate targets in each metrics area to align against potential. To understand the concept of metrics balance, my research team has been evaluating the progress of each industry based on peer group metrics from each of the areas of the Effective Frontier,” I said, while pushing the sheet shown in Table 1.4 across his desk. “These are available from corporate balance sheets and income statements; but we find that there are few repositories of this data to enable analysis of multiple years of data and to capture the patterns, so we've put together a unique data repository of our own from our research.”

Table 1.4 Financial Ratios Analyzed to Understand the Effective Frontier

Source: Supply Chain Insights LLC.

“Yes,” Joe said. “I'm glad the metrics are available, but I'm too busy to try to sort out what's relevant to us. I'd like to take a look at what you've put together on this so we can do some benchmarking.” The discussion then turned to a review of the research and what we could do together with his leadership team to build a guiding coalition to support the company's expansion into Brazil. I gave him an excerpt from a new book I was writing about the Effective Frontier to read when he got a minute.

Defining the Research Methodology to Understand Progress on the Effective Frontier

The definitions of ratios most commonly used in the analysis of corporate performance in this book are provided in the Appendix.

This book is the culmination of a three-year research project to understand effectiveness. To write this book, we built a database using public sources of information. We then grouped the data by NAICS codes, and began plotting the intersections of the Effective Frontier manually using orbit charts to understand the trends. We then began to review the patterns of the plots with industry leaders to gain insights into the drivers of the trends.

An orbit chart may seem abstract at first – like a modern art painting of wavy lines – but we have found that it is the best way to study the patterns, or progression, of operational metric performance over time.

Let's take a closer look. Figure 1.5 is an orbit chart example. This is the pattern, or progression, for Walmart for the period of 2002–2012 at the intersection of two metrics: inventory turns and operating margin. The averages for the period are shown in the box along with the stock ticker symbol. In each orbit chart, because the metrics can get confusing, we identify which corner of the chart points toward the best scenario. Note that Walmart has made great improvements on inventory, but not in margins. As we will see later, Walmart is an example of a company that has made great strides in improving the efficiency of operations, but not in driving overall effectiveness.

Figure 1.5 Example of an Orbit Chart

Source: Supply Chain Insights LLC, Corporate Annual Reports 2000–2013 from One Source.

I continued, “Joe, as we have mined the data, we find three intersections of the financial ratios to have the most interesting patterns. Each offers a distinctly different view, and you cannot assess improvement without looking at the three together.” I wrote the three intersections on the whiteboard in his office:

1. Inventory turns versus operating margins

2. Year-over-year growth versus return on invested capital

3. Revenue per employee versus inventory turns

Joe hurriedly scribbled them down. As I worked with Joe, I found that he was writing more and more notes to himself in his black notebook. His intensity amused me. He was such an eager and willing student.

Details Matter: The Nitty-Gritty of the Analysis

“It's hard work,” I continued. “In fact, we underestimated the amount of work to do the analysis of corporate balance sheet data and the determination of the Effective Frontier. When we started the analysis, we used absolute numbers, but we ended up using financial ratios. This shift enabled the comparison of companies across currencies and enabled us to better understand the trends of companies of differing sizes. After plotting the trends, we partnered with an operations research team at Arizona State University to help define the methodology to determine balance and resiliency. The data is complex, and we wanted to define a simple methodology to translate abstract patterns into meaningful insights.”

“I have difficulty doing this type of analysis, but when I see your research, I love it. I am a fan,” said Joe. “It's one thing to talk about corporate performance, and another to understand how it transforms a balance sheet. When I get to the point when I understand this, I will feel real pride.”

I smiled and nodded in agreement. “Let me share some insights. One of our first big insights when we started looking at performance results was the danger of using compound metrics in a vacuum. Let me explain: A compound metric is the result of a combination of individual metrics. For example, the two most commonly used compound metrics that one finds in corporate measurement systems are ‘cash-to-cash’ and ‘perfect order.’ Let's take cash-to-cash.” I then turned to his board and wrote, “Cash-to-cash (C2C) = Days of receivables (DOR) + Days of inventory (DOI) – Days of payables (DOP) outstanding.”

Continuing, I said, “So, when you look at progress in C2C, as a leader, you must ask a series of questions:

• What drove the change?

• Did we change the policies with our customers, resulting in a change in DOR, or did we make the terms longer with our suppliers, increasing DOP? Or did we make improvements in inventory (DOI)?

• How have these three elements changed over time?”

Joe agreed, “The answer could be one, any, or even all of them. I see how a compound metric might make it hard to compare one company to another, because they could be getting a similar result for very different reasons!”

“Yes,” I said. “For example, we found that the most common driver of cash-to-cash improvements was lengthening the days of payables and paying suppliers later.”

Joe rubbed his hands and smiled, and said, “That sounds familiar. It worked for one quarter before it caught up with us. This is a difficult discussion to have with our financial team. When the push for cash is on, it sounds so simple to increase payables; but, I know that we end up eating it when our operating margin rises a couple of quarters after the change.”

“Another compound metric is the ‘perfect order.’ Do you use this for customer service?” I asked.

“We tried it a couple of years ago, but dropped it because it was too hard,” Joe said.

I continued, “I understand. This metric lacks an industry-standard definition, and varies from company to company, but many companies try to use it. The most common definition is based on an equation using three metrics.”

I wrote on his whiteboard:

I spun around and continued, “Similar to the cash-to-cash discussion, if there is a change in the perfect order, the answer is not obvious. Instead, companies have to ask:

• What drove the change?

• How have these three elements changed over time?

• What affected the performance in the three components of this metric over time?

As a result, companies should use caution in using compound metrics and absolute numbers. Compound numbers can drive the wrong conclusions and absolute numbers do not allow the level of comparison needed for benchmarking between companies.”

Joe was now pacing. “So much to learn. So much to do. How do we get started?” he asked.

Benchmarking Companies over Time

“There are many ways that we could work together,” I said. “The methodology doesn't just apply to the benchmarking the whole company. It can also yield valuable insights at a finer, more granular level by benchmarking divisions. In our work with clients, we find that segmentation of the business by division, and by geographies within the company, yields valuable insights. When we do this more detailed analysis – analyzing divisional and geographic data – the concepts are more quickly grasped by the team.”

Then, I showed him an example of this type of analysis as illustrated in Figure 1.6.

Figure 1.6 Example of an Orbit Chart Comparing Two Businesses within a Corporation on Inventory Turns versus Operating Margin

Source: Supply Chain Insights LLC, Corporate Annual Reports 2001–2012 from One Source.

“See, Joe, in this example, the patterns of the two divisions of this company are very clear. Division 1 is operating at a higher potential and making year-over-year improvement, while Division 2 is struggling to make clear headway. The use of root-cause analysis to discover the ‘why’ can help the organization drive continuous improvement and maximize the potential of Division 2 on the Effective Frontier,” I said.

Joe then said, “I love it. I would like to talk to you about doing this type of analysis for all our divisions and geographies. I think that it could help our team. Let's talk about how we could do this. We've put so many systems in place already to try to see patterns in our data, yet we've still not got any insight.”

Rethinking Metrics: Using Technology to Manage the Organization in the Information Age

I looked at my watch and said, “I know we only have another hour together, but let me give you a short answer of why I think this has happened, and maybe we can pick it up when we meet again. The ability to drive data-driven decisions has improved through the use of technology. Dashboards, scorecards, in-memory reporting, and visibility technologies make it easier to manage metrics within a company, but companies have to be clear on the metrics strategies. This is the challenge for every Joe like you.”

With that, Joe laughed. “So, I am not unique? Do other organizations have the same problem?”

I nodded, saying, “Many times companies will leap to improve metrics through technology without doing the hard work of figuring out which metrics matter and how to align the key performance indicators into a metrics strategy.

“There is also an issue of functional myopia. The views of operations and finance do not easily align. One of the problems is that financial metrics are backward-looking and transactional, while operational metrics are forward-looking based on flows. But the metrics you get from technology are based only on historical data. It's like trying to drive a car on a winding road at 60 miles an hour while looking in the rear-view mirror to steer. Closing this gap requires descriptive, predictive, and prescriptive analytics. While descriptive analytics enable reporting and data analysis, predictive and prescriptive analytics enable the management of operational flows. In contrast, predictive analytics enable operational alerting while prescriptive technologies recommend actions to take. Robust analytics are essential to ensure metrics alignment and are an important step in driving success on a metrics journey.”

“This has certainly been one of our issues,” said Joe. “We have a guy on the sales team who's really smart and can put together spreadsheets so we can analyze all kinds of things, but they're all about what's already happened, and the sales forecasts… Well, you know, they're really only good about three or four months out, and the sales team always inflates the numbers. It's an ongoing problem.”

“When embarking on a project to improve metrics, the average Joe, like you, will need to work with the information technology (IT) department to build measurement systems. This includes self-service reporting, dashboards and scorecards, and alerting systems. Analytics technologies are closely woven into a metrics project to make progress possible. It should be easy, but it is not. I would like to tell you more, but right now I really must be going. As much as I have enjoyed the discussion, I am late.” I then suggested that Joe read the article that I had just completed, “Managing Metrics in the Information Age.” We agreed to discuss it at our next meeting.

With that, we shook hands and I left my article on Joe's desk. Some excerpts are offered in the following feature.

Managing Metrics in the Information Age

Today, business leaders live in the Information Age. Technologies make new ideas possible. Data flows quicker and computational power enables quicker assessment of complex problems. Decisions can be more data-driven and real-time information enables new capabilities. More and more, metrics can be measured. Targets can be assessed more quickly. However, this only adds value if the technological advancements can be successfully aligned with business outcomes. This is the challenge.

Why is there a problem? Simply put, companies are new at it. We are only 40 years into the Information Age. The adoption of technology in the Information Age followed the Industrial Revolution. The Industrial Revolution was all about mechanization. There was a shift from making things by hand to the mechanization and adoption of manufacturing processes. The focus was on the management of physical assets. It was all about the control of financial assets and liabilities.1

The Information Age started in 1975 with the widespread adoption of computers. The practices and policies were a stark contrast to those of the Industrial Revolution that stretched from 1850 to 1975. It makes possible global connectivity and new forms of analytics to drive business insights. Today, most organizations are retiring leaders from the Industrial Age while trying to maximize the potential of the Information Age. This changing of the guard is not easy.

Impact of the Information Age on Metrics and Corporate Performance

This shift was a fundamental change at the core of the organization with intense repercussions:

What drives value. In the Information Age, companies are wired differently. Products and services are enhanced by data. OnStar differentiated General Motors while Pandora redefined the music experience. Around us today, digital data transmission improves the value of molecules and atoms. As a result, manufacturing is more information-intensive with less labor and capital dependency. Ironically, workers are more productive today, yet their wage rates are less. Market drivers are constantly changing. Metrics are more complex.

Redefinition of management principles. In the traditional management models of the Industrial Age, investments in people were the primary predictors of a new venture's future performance. This is not so today. It is now possible for a group of relatively inexperienced people – as demonstrated by Facebook, Microsoft, and Twitter – with limited capital, to succeed on a large scale. Metrics help to ignite groups of people to action.

Global workers. As connectivity has removed the friction from borders, workers now compete in a global economy. For example, in the United States, from January 1972 to August 2010, the number of people employed in manufacturing positions fell from 17,500,000 to 11,500,000 while manufacturing value rose 270 percent.2 In the next decade this pattern will continue. Metrics have different definitions in different countries. With language and cultural issues, it is critical that the metrics are simple and clearly communicated.

Redefinition of the office. More and more employees telecommute. The water cooler is now a virtual experience. In 2012, 2.6 percent of the U.S. employee workforce (3.3 million people, not including the self-employed or unpaid volunteers) considers their home as their primary place of work.3 As a result, it is more important for companies to have metric dashboards. Leadership teams have to focus more energy on the communication of goals and results. Organizational alignment is more difficult.

Management of the global company. Over the past decade companies have become global. However, companies define “global” differently. While each organization we study defines global governance models slightly differently, they will all agree that the management of a global organization is growing increasingly more difficult. The definitions of regional/global governance, and the evolution of KPIs for a global organization, are critical elements to manage a successful global organization.

Processes that have not caught up with the change in technology. Our technologies are digital. Our processes are not. While the cost of computing has moved from $222 to $.06 per million transistors and storage costs have moved from $569 to $.03 per gigabyte of storage, and Internet bandwidth has improved from $1,245 to $23 per megabits per second, the organization's operational processes remain relatively unchanged.4 Most companies have digital technologies with analog-based processes. We have not redefined metrics based on what is possible. New possibilities abound. The impact of less data latency and increasing capabilities of mobility and sensor data offer a wealth of opportunities.

Proliferation of data and a need for insights. We are living in the Information Age. Data abounds. Global connectivity transcends borders. Third-generation analytic systems improve workflows. Real-time data is now possible. Yet, as shown in Figure 1.7, companies struggle to use data. Employees cannot get the data that they need. It is their number-one business issue. As a result, metrics need to be defined very clearly while understanding the limitations in data availability.

Figure 1.7 Employees within Corporations Struggle to Get the Right Data