First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  March 9 , 2012  
     
 

Supply Chain Metric Strategies and the 50 Percent Problem

  
 

A few weeks ago, I wrote a column on supply chain metrics, with this as the basic thesis:


Many if not most companies, certainly the larger ones, have developed very sophisticated processes for both setting goals/KPI targets and proactively monitoring performance against those goals. If you as a supply chain executive or manager don't hit those goals, it won't be very long before you are "looking for other opportunities," as they say.


Gilmore Says:

If there was a way to actually get at goals and KPI targets across companies, I suspect that it would look much like a bell curve. And the KPI curve naturally enough becomes the performance curve as well, does it not?

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Since I do not see massive turnover in the supply chain ranks, I assume most companies/managers are in fact hitting their targets fairly consistently. Yet, there are a lot of companies overall that are underperforming in the supply chain versus their competition, and study after study has shown a large (and in many cases growing) gap between top and bottom performers.


My logical conclusion therefore was that either those companies are:


1. Being rigorous around the wrong metrics. They are hitting their metrics, but they are the wrong measures.


or


2. The right metrics are largely in place. But the targets are set at the wrong levels.

I said it was probably primarily the latter. Companies set targets that are below what is attainable, often because they just don't know what they could/should be. (See Metrics Strategies and Supply Chain Performance.)

That column generated quite a bit of excellent feedback, enough so that if we get a few more good responses today (hint, hint) I can probably put a "Readers Respond" column together on this, one of my favorite things ever, since it means I don't have to work too hard that week.

Now, clever readers may have seen that this whole line of thinking is just another side of what I have called the "50 Percent Problem." What is that, you ask?

It is the absolute fact that a strong majority of companies and managers almost always think that there performance is better than average, when in fact by definition half must be below average.

I noticed this first when I was back doing real work for a living, and company after company I was trying to help sell something to or offering my advice and counsel would invariably say something like "We may not be the very best in [put your area/metric here], but we are probably in the top 20%."


Almost every time.

There were two exceptions. One is when a new executive took over, and he or she might talk about all the problems they were inheriting, and what needed to be fixed. Come back a year later, and they will have been miraculously solved.

The other was when a company was angling for funding for new supply chain technology, and naturally enough the argument goes we can't compete without, and implicitly or explicitly fesses up a bit when showing where they are now versus where they can get to with the improved software or hardware.

That somewhat anecdotal evidence has since been support more quantitatively many, many times since then, based on how companies respond to various studies. Below is an example I used on this topic in 2009.

 

This data came from the well known Trends and Issues in Transportation and Logistics study presented each year at the CSCMP conference. You will note the mean/average response from companies rating themselves against the competition across all four of these categories, on a scale of 1-7, is right around 2.0; whereas, in fact, the mean ought to be around 3.5. If it was 3.2 or something, I would say fine, but from a statistical perspective (and this report had 800+ survey respondents), average scores near 2.0 are simply totally out of whack. Like the parents of the children in Garrison Keillor’s Lake Woebegone, everyone believes they are well above average.


I have seen many other studies showing the same type of result time after time.

And how can this be? The natural and maybe unavoidable tendency we almost all have of thinking we are better than we are in our personal and business lives is surely at work. But could it also be that we think we are performing better than average because, going back to the initial point above, that we are consistently hitting our goals and objectives?

Maybe so. If there was a way to actually get at goals and KPI targets across companies, I suspect that it would look much like a bell curve. And the KPI curve naturally enough becomes the performance curve as well, does it not?

Another Perspective

My thoughts on metrics targets being set too low as a key factor in the supply chain performance differences between companies came upon me a couple of months ago, and somewhere along the line I bounced the idea off my friend Dr. Jim Tompkins, CEO of Tompkins International.

He largely agreed with me, but as usual had his own unique perspective on this. He said companies can come at metrics from three levels:

1. Internally focused metrics and KPIs


2. Measure your own performance based on the metrics your customers use to measure you (which one very well known company is sort of doing but which for now I have agreed to not talk about it publicly).


3. Jointly develop and track metrics with your customers, which Tompkins believes is the absolute right way to go and will lead to the greatest long term supply chain success.


In support of my overall argument, Tompkins told me that the process often works like this: transportation costs are going up at Acme Inc. Directives to reduce transportation costs are issued. The director of transportation suggests and agrees to goals in some area that seem directly related to transportation costs that he or she is highly confident can be obtained and which will seem to indicate that real improvement has been made.


The point is that maybe these targets should have been in place at the beginning. And that focusing on some specific measures may actually cause problems in other areas or not really get the company where it wants to go.


Tompkins says it is critical that KPIs should "get the right focus on "the big things,” and that too often, supply chain KPI’s tend to look only a "the small things."

"For example, a DC Manager gets given the goal of shipping 98% or all orders on time. The on time definition in the company is if the orders are in by 4PM they must go the same day," Tompkins said. "The DC Manager accomplishes the goal of 98% but the customer expectation is not the same day shipment and the way the DC Manager accomplishes the goal is by working 20% more overtime than budget. The result is the DC Manager gets a bonus for achieving their KPI, but the company does not hit budget. Etc."

He says there are hundreds of examples of these types of broken KPI’s, and that it is the norm to see multiple, conflicting objectives.


"We must guide organizations towards profitable growth and not towards some myopic view of short sighted KPIs," Tompkins added.


So that is another view, and it's hard to argue that conflicting goals and KPIs could be at the root of the issue too.


But I'll still argue the 50 percent problem is alive and well, and that companies need to do more benchmarking to better understand where their targets should really be set.

What are your thoughts on the relationship between metrics, reporting, and performance? Do you agree with Gilmore's conclusion that the key difference in performance between similar companies often may be that the targets set are very different? Let us know your thoughts at the Feedback button below.
 
 
     

Recent Feedback

As they say Dan, if you’re not moving forward, you’re probably being passed but not in a good way. 

You mentioned “change” of senior level persons within a company, where issues mysteriously seem to vanish within one year. Change is not just as good as a rest, its also a huge motivator in improvement. I’m not suggesting that people be changed but I am suggesting that the way we look at the supply chain be changed. Each of us has a unique talent. Those of us trained within our part of the SCM industry should be searching for better ways to improve our supply chain and improve it. Sometimes we will fail, which should be expected, where we can always go back to a reset. However, sometime we will see a complete evolutionary supply change metamorphosis. Go back to the concept of Jim Tompkins’ book, No Boundaries (Supply Chain Synthesis) to see what I mean, with KPI’s and open dialog, communication within the total supply chain is required.


Tom Napier
Sr. Account Manager
PSI Engineering
Mar, 10 2012

Dan:

As usual you hit an important issue square between the eyes with the 50% problem.  I am reminded of the saying   "Only the Mediocre are always at their best"  Jean Giraudoux.


Thomas A. Moore


Mar, 10 2012

Dan,

Great article...One of the best that I've read.  Thank you.

In this metric driven world we have rarely involve our customers, either
because of "top down" driven expectations, or "bottom up" driven fears of
comparisons.  Of course, we will always find outliers who will receive more
credit or blame depending on who's expectations are being addressed.....but
in the wiser companies that don't necessarily expect the instantaneous
gratification achieved by the "hare" and his immediate sprint for public
consumption, but encourages the tortoise in his steady improvement and
understanding of the road to navigate (including involving the expectations
of the customers), those are companies that really do achieve the level of
success that everyone else keeps reporting but are rarely accurate.

Sorry, a little to philosophical on a Friday afternoon.....but I really did
appreciate the article and look forward to the next.

Sincerely,


Tom


Mar, 10 2012

What does KPI really mean?  I saw a definition on the white board in a DC manager’s office years ago “KPI = Keep Pushing Idiot!”  Surrounding that were about 10 different measures that the DC Manager said were irrelevant to his operation, but he had to calculate and send to corporate.

I suggested that he change the “Idiot” to “Information” – as in “Keep Pushing Information”, just so his opinion did not reach the pointed hair boss.

Could it mean Knowledge Power and Image? 

Being a student of that old man Peter Drucker, I look at measurements as a form of manager self-control. Drucker teaches us that the greatest advantage of management by objectives is that the manager controls his own performance. Now Drucker always considered the word control to be in ambiguous word. In his mind it meant that the manager had the ability to direct one's self and one's work. Drucker stressed that the major contributions of management by objectives is that it allows management by self-control to replace the practice of management by domination.

A manager needs to know more than what his goals are. He must be able to measure his performance and results against the goal. Many think that is where KPI’s come into place.  For this practice to work well, you have to set hard, achievable and time bound goals that challenge the manager. Drucker argues that you set a managers goal in a broad sense – something that means something real to the company, and something that the manager understands contributes to the success of the company. I argue that a specific increase in Operating Cash Flow (OCF) is the perfect measurable goal. Frankly, I don't care what the manager does in detail to measure his himself as long as he understands that the only measure I am going to use for him is how he contributed to company OCF.   

Go ahead and argue that operating cash flow is too broad of a goal, or too hard for a manager to understand. I will just give you a blank stare of contempt.  Operating Cash Flow is not hard to understand, and a good leader will help a manager understand what activities a manager does that delivers positive OCF.  Yes, there's a whole variety of detailed measures that have an effect on operating cash flow.  It is the duty of the managers to figure out how to measure the details of their operation that helps them manage and control the functional area to create more OCF! 

Too often KPI’s are created by the bosses, or by the engineers, delivering a greater world of dueling goals – goals that are in apparent conflict. An example is the need to increase productivity and reduce error rate. Both can contribute to OCF,  but there is no guarantee if managers don’t make the effort to leverage the gains. I have witnessed countless productivity improvement projects that just created more free time for ways to waste, not adding any profitability because managers chose not to pay attention to the monetization of the KPI improvement. 

Perhaps KPI means Key Panacea Image? Companies that engage in benchmark measurement and metrics not to improve but for their ego’s, to show how well they are doing against other companies. The annual WERC DC Measures could be considered an example of the "my numbers are better than your numbers" process. Before anybody gets up in arms, I believe that the WERC metrics and benchmarking process is a worthwhile effort, as long as you keep a very large grain of salt handy. Other benchmarking efforts, including Mr. Tompkins Supply-Chain Consortium, the transportation cost benchmarking Chainalytics provides, and a whole host of other industry segment benchmarks have their place.  These are positive activities for supply chain managers to engage in as long as the managers make a commitment to use the data with a worriers commitment to victory!  A well done benchmark effort will deliver imagery of the company's imperfection and operational impotence, highlighting the possibility of improvement as long as management doesn't engage in the insanity of inaction. 

 

Maybe we could use the term Kindred Perfection Influence for benchmarking exercises. As in you must make sure that you measure yourself against the kindred company, that you measure perfection the same way, and that you make the commitment to be influenced by the results to take action. 

Returning to the teachings of Mr. Drucker, I think it is very hard to argue against Operating Cash Flow as a measurable goal.  OCF is a clear measure of success or failure of the business enterprise. OCF doesn't work very well when comparing one business to the next, but definitely is a great measurement for an individual enterprises performance. Following Drucker's mandate of self-control of the manager, it is incumbent upon the functional manager to determine not only the performance of his realm, but how his performance contributes to the collection of the gold. 

 

 

At YOUR Service,


David K. Schneider

David K Schneider & Company, LLC
Mar, 10 2012

Dear Dan,

 

Thanks as always for a stimulating article. Looking back on my operational career in the light of what I now know as an educator and trainer in SCM and Logistics I’m more convinced than ever that we need to spend more time on identifying what is effective, i.e. doing the right things and secondly on then being efficient – doing them right. This applies just as much to metrics and what we measure as anything else.

 

Best Regards,

 

David


David

My Broadband
Mar, 15 2012
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