Performance Measurements #1

In some recent blogs, I’ve been writing about some of the unique attributes of the CFO in lean companies – the “Lean CFO.”   Let’s continue this discussion.

One the Lean CFO’s primary responsibilities is to understand business performance and explain financial results to all levels of stakeholders in the business, and especially to readers of the company’s financial reports.  After all, these people will be involved in making decisions about the company going forward; they need the best and most meaningful information the Lean CFO can provide.

A Lean company challenges the CFO to explain financial results in a way that meshes with the lean strategy deployed in operations and to show how the company’s finances are really being impacted.  Truly lean companies will have put a top-to-bottom integrated framework in place and will create performance measurements that are driven by key performance indicators (KPI’s.)  Such measurements are also used throughout the company to measure on-going performance.  Usually, these measurements are non-financial.

Today, I want to spend some time exploring why “traditional” operational measurements don’t work as well in a Lean company and why Lean measurements do.

Traditional Operational Measurements

Most traditional measurements share two common characteristics – they are financially based and developed around the vertical structure of the organization. Financially based measurements (any numbers with dollar signs in front of them) are automatically backward- looking. Sure, the root cause could be identified, but there’s nothing that can be done to change the outcome, because it’s already happened. In traditional manufacturing companies, performance analysis is often based around comparing the actual performance with standards set in a standard costing system.

Companies that create more operationally-focused measures also tend to do so by the vertical structure of the company. Their goal is to maximize each department’s performance. So on top of financial performance, a plant has to contend with measures relating to Quality, Supply Chain, Operations, Human Resources and so forth.  Even when these measures are outside their ability to do anything about them!

These traditional measurement systems cause a few problems. First, there are usually way too many measures.  I’ve seen plants that have upwards of 50 -100 performance measures. Even if the measures are good, it is impossible for a plant location to try to maximize performance in that many areas, and it forces the plants to make trade-offs. Second, these measures are often disconnected from the real operational issues affecting a plant because they are decided upon by top management and dictated to the plant.

Lean Approach to Measurement

When it comes to operating performance, lean companies employ an entirely different philosophy; measurements are designed so people can understand the present situation in order to change the future. This forms the basis for making improvements. Changing the future will require specific actions and changes to the operating processes.

Lean companies also recognize that optimizing the entire value stream flow is the primary goal because it leads to improving value to the customer. And this goal must take precedence over any departmental goals.

The Lean CFO recognizes that performance measurements must change to become aligned with lean economics. The operational goals of all value streams are to deliver value every day, all the time to the customer, and to continuously improve productivity.  The Lean CFO understands that this will lead to financial success because customer value plus productivity equals increased revenues, profits, and cash.   Lean-focused performance measures make a whole new way to control operations through the value stream  possible.

Existing performance measurements that are not lean-focused must be eliminated as lean controls take root or else conflict will occur. Performance measures that are based on the vertical structure of the company must be eliminated or modified and refocused on the value stream. This means that department measurements, such as quality or supply chain, will measure the department’s ability to support the value stream. Often these departments are often fused into the value streams themselves.

In the traditional company, the department dictates performance to operations, in the lean company the value stream dictates performance to the department.

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One Response to Performance Measurements #1

  1. Dave Kilbourn says:

    Excellent article. I like these bite-sized informative papers.

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