People-Centered Performance Measurement
Some years ago, I was the new director of materials for a company suffering from poor inventory accuracy – probably because we had no performance measurements for inventory accuracy and none of the areas generating inventory transactions reported to the director of materials.
One day, while I was in the President’s office, his coveted performance measurement landed on his desk. He rushed through the remainder of our conversation. His eagerness to view these latest reports gave me an idea. Because he wouldn’t surrender control of those areas generating most of the inventory transactions, would he, I asked, consider adding inventory measurements to hold appropriate supervisors accountable? He said yes.
I needed a performance measurement that would identify responsibility even if we didn’t know the cause of the error. I decided to copy a measurement I had heard about. A few days later, the president explained the measurement in a shop floor supervisor meeting.
Every part number traveled through at least two of their areas, he pointed out. A purchased casting, for instance, traveled through receiving in the machine shop. These two supervisors will be attached to that part number. And he meant “attached”. Via routings and bills of materials, we would assign supervisor codes to each part number. Every part number would carry the codes of those supervisors involved in its material handling and production process. We would also start a cycle count program – under my supervision.
Every cycle count would be classified as a hit or miss with A parts, B parts, and C parts, having progressively more liberal variances allowed. The new performance measure would assign hits and misses to each supervisor as parts carrying their codes were cycle counted. A “hit” count on a casting would result in a hit for the receiving and machining supervisors. A “miss” on the machined part number resulted in a miss for machining, stock room, and one of the assembly supervisors.
End-of-year bonuses could be substantial for the shop supervisors. For the current year, a supervisor would need a hit rate of 95 percent, and anything less would result in zero bonus. But those who achieved 95 percent would get 150percent of their bonus. And, if the year-end inventory accuracy reached 95 percent across the board, they would all get 200 percent of their bonus. Cycle counting would start after physical inventory – giving everyone 30 days to clean up their act.
Although the supervisors’ response was negative, for the next 30 days, they trained employees and suggested improvements to inventory procedures. Their work was impressive, but they didn;t yet appreciate that simply assuring all necessary transactions were done would probably raise inventory accuracy to the high-80 percentile.
At the end of they year, the performance measurements had been in place for seven months. Seven supervisors hit or slightly exceeded the 95 percent target, and the others just fell below the goal. The overall inventory accuracy was 94.2 percent, just under the 95 percent required for 200 percent bonus. But when the final summary was posted, the year-end number showed 95 percent, not 94.2 percent. The supervisors appointed a spokesman to tell the president that the final number should be 94.2 percent, not 95 percent.
The president sat back and spoke slowly” “You will tell the other supervisors that there was an error in math. The final number was 95 percent. Two hundred percent bonus checks will be distributed next week. If it wasn’t a math error, people would accuse me of violating my own bonus plan – possibly because your work effort was extraordinary, because you embraced the problem as your own, because yoou became obsessive about inventory accuracy. I don;t want to be accused of violating my own standards. Do you understand?”
The spokesman stood up and reached across the desk to shake the president’s hand. “Yes sir, I understand. And we would like you to understand that next year’s accuracy will be around 98 percent – and no math errors will be involved.”