This is the second of my blog series on Performance Measurement Governance. In my first part, I shared the challenges and root causes in the area of performance measurement. I also introduced the concept and framework of Lean and Agile Performance Measurement Governance”. In this part, I will dive into the first key element of this framework, which involves identifying three sets of performance metrics at different organizational and process levels. Below is a break-down of best practices:
Identifying the Right Business Metrics at Different Organizational Levels
Business metrics can be defined as a measure to gauge some quantifiable component of a company’s performance. They involve a context and targets, based on legitimate data, and they lead to action or improvement. Metrics need to be identified at different levels of the organization.
Tier I Metrics: Assume a company defines metrics at three levels; the first level will have end-to-end cross-functional executive metrics or Key Performance Indicators – KPIs. Metrics at this level should be aligned to corporate goals and strategies. They should be accepted by senior management and have meaning at all lower organizational levels. Some tips when defining company KPIs (Tier I Metrics) are:
- Select only a handful (5 – 8) of KPIs that are most critical to the business and aligned to corporate strategy and objectives.
- The selected KPIs should allow benchmarking with others. Stay close to industry terms and definitions.
- The KPIs should not be restricted to the financial ones, but should also measure the success of the organization to be lean and agile.
- The KPIs should not be based only on the company’s point of view but also on customers’ perspectives. On Time Delivery performance based on customer request date (CRD) is a good example for a customer’s perspective KPI. It is also good to measure reliability and flexibility (agility elements).
Tier II Metrics: The best method to identify Tier II metrics is to conduct root cause analysis (or “Analysis Paths”) on the KPIs and brainstorm the potential reasons that might prevent the company from achieving a certain target for a certain KPI. For example if the target for the On-Time Delivery performance KPI is not achieved, the root causes might be 1) lower forecast accuracy, 2) lower safety stocks, 3) lower 3PL delivery performance or/and 4) lower warehouse processing time. Therefore, all these measures should be considered to be part of the Tier II metrics list.
If a new root cause is identified later down the road, the performance measurement governance should be agile to add the new metric to the list. This is an excellent way of identifying Tier II metrics from hundreds of available metrics. Tier II is typically defined at the process level.
Tier III Metrics: These metrics can be identified using the same “Analysis Paths” method on Tier II. For example, if forecast accuracy target (Tier II metric) is not achieved, Tier III metrics will explain the root causes like: system forecast accuracy, forecast accuracy for new products (NPI), inadequate training for certain demand planners, etc. With Tier III metrics, managers can take informative corrective action or trigger continued improvement initiatives when necessary. Metrics III are typically defined at the sub-process or individual level.
Best Practices to Consider
A comprehensive set of metrics should be considered because improvement in one area is sometimes achieved at the expense of another. That said, not all measures should be represented as metrics to avoid waste of time. It is a balancing act. This is one of reasons why metrics identification should be given adequate thought and efforts.
A metric must be well defined, so that there is no dispute about it. No individual, manager, or an organization (internal or external) can interpret it only in the way that works for them to get their bonuses or commission. Adequate thought should be given so metrics can drive good behavior and not a reason for conflict and blame game.
Which business metrics are key priorities for your company? Are they considered important because they contribute to the bottom line? To increasing customer satisfaction? To reducing inefficiencies? All of the above?
In my final blog, I will explore the last two key elements of the Lean and Agile Performance Measurement Government approach. Stay tuned and let me know if there is anything else I can address regarding this framework.