APICSacramento
Be Careful What You Measure!
By Ed C Mercado, CPIM, C.P.M.
It is said that businesses have to be careful what they measure. Measures are a clear and unambiguous indication of what management considers important. For a business to prosper, its operations have to be well managed. A vital part of any type of management is monitoring various measures that indicate performance. Different values of the measures indicate good or poor performance. Depending on the result of various measures, management then takes action to identify causes of poor performance and develop ways to improve processes to achieve better results. It is clear that measures are extremely important. However, not just any measure will suffice. To be effective and meaningful, the selected measures should be valid, prompt and accurate.
- Validity
The measure should give a meaningful insight into the situation being measured. It should monitor the overall process, not just a part of it. For example, in basketball, the measure "Assists" by itself is not valid without a comparison against another measure "Turnovers." A basketball player may have made a lot of assists but if there also are a lot of turnovers, we cannot really say that the number of assists - by itself - indicates good performance. Similarly, in tennis, the measure "Aces" is meaningless without looking at the number of "Double Faults." - Promptness and Accuracy
Depending on the flow of operations, measures should be available in good time to allow for proper action. Information that is late is usually dubious because the opportunity to take corrective action may have passed. Also, one could wonder if the process of producing the information may have rendered it inaccurate due to sheer complexity involved in its creation. With the capabilities to today's computers, pure number crunching and report dissemination can be a simple and quick process. It is a wonder how many companies still have dozens of people manually handle data from various computer sources to produce periodic reports, especially when data is constantly being updated.
- Measuring net income is meaningful when it is compared against the total amount of capital employed to generate said income. That is, a net income of $10 from capital of $100 is better than a net income of $10 generated from capital of $1,000.
- Low inventory levels, by itself, would be meaningless if it results in substantial expedited freight and delayed shipments to customers.
- Measuring the dollars spent on customer claims, by itself, means little if it is not coupled to the number of orders or general level of business. That is, $20 spent on claims against total shipments of $1,000 can look better than spending $18 on shipments of $800 - even though the $18 figure is indeed less than $20.
We have to be deliberate on what measure we monitor because we may unwittingly feel we are getting ahead when, in fact, we could actually be losing ground in some other part of the business operation.
Ed is Materials Manager of a leading pre-engineered firm. He is the author of a newly published book "Hands On Inventory Management" © 2008, Auerbach, ISBN-10 0849383269. He is an avid tennis enthusiast and plays local tournaments when the sun is not too hot.
