When you go to the doctor for your regular checkup, the doctor takes your pulse, electro cardiogram and other tests to determine if you have any health problems. However, the doctor does not stop at just determining if you are currently having a problem, the doctor also performs tests to tell if you are heading in a direction that can cause problems in the future. For example, the doctor performs a blood test to check your cholesterol level because it might become a problem in the future. But, just knowing the results of the tests is not enough to keep you healthy, you also need to monitor external factors that can cause problems. For example, if you have allergies you need to know the pollen count.
The same is true with your business. You need to monitor your business to determine its current health and to predict its future health. This is especially true today when the economy is on a downward curve. Businesses use performance indicators for this purpose. You need to accurately measure performance indicators to determine if your business needs medication to survive and prosper.
Internal performance indicators help businesses assess themselves and decide what action to take if there is a problem. Some, like sales and units of production, are used on a daily basis to determine what happened the previous day. Others, like profitability are reported on a monthly bases. The problem with internal performance indicators is that many companies do not use the right ones, or they use too few. Even worse, sometimes the performance indicators drive the wrong behavior. For example, a steel mill was using ‘tons produced’ as its main performance indicator. This performance indicator caused the mill to produce the maximum number of tons per day. To do so they would run the heaviest material and increase the lot sizes in order to reduce the “wasted time” of setup (down time to change the equipment to make different size material). Although this was good for manufacturing, it was not good for the company’s customers and therefore the company as a whole. The mill did not produce what the customers wanted when they wanted it. In the end, the customers went to the mill’s competitors who could meet their committed ship dates.
Most businesses only look at internal performance indicators. However, external indicators can also help anticipation. For example, the “Purchasing Agent’s Index” will warn you of an economic slowdown. If you are purchasing material from a foreign country, monitoring foreign exchange rate, it tells you if prices are going up or down.
As you can see, you need to choose performance measures that will alert you when there are problems that need to be addressed and future conditions for which you need to take action now. Since you will be judging people’s performance against these measurements, you need to ensure that they drive the right behavior. Remember there is no value in reporting a performance measure if it cannot drive action.
It is surprising how many companies use only the basic performance indicators (profitability, units produced and shipments). Companies must utilize performance measures that are tied to their own “core competency.” The Value Discipline defined in The Discipline of Market Leaders by Michael Tracy and Fred Wiersen identifies three areas in which a company can concentrate. These areas, called “core competencies,” are:
Product Leader companies should have performance measures dealing with how many new products are being produced, such as product life cycle and percentage of product less than two years old, etc.
Operational Excellence companies should have performance measures dealing with the company’s operations efficiency and quality, such as cost per transaction and number defects, etc.
Customer Intimacy companies should have performance measures dealing with customer satisfaction.
Companies must use the right internal and external performance indicators to determine: how well they are running, to anticipate future problems and to have the entire organization driving toward a common goal.
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