Make Sure You Reengineer People, Too
People should manage the methods and not the other way around.
JIT doesn’t work in large geographies (Japan vs US).
Typical symptoms of process problems – data redundancy (a symptom of process fragmentation), inventory buffers (dealing with uncertainty).
Focusing on describing mistakes expands understanding; prescribing (recipe, process) limits it.
Six Sigma has origins in machine control, doesn’t apply to people that much.
Most business problems are human problems. Operator errors, poor maintenance have roots in people.
Many business processes are really a reflection of human processes and are human-dependent.
If something’s wrong with a business process – there’s always someone who knows what exactly is wrong (or several people know the bits and pieces).
Data-heavy processes have a tendency to ignore asking people questions.
People are both the problem and the solution.
What’s wrong with business processes
Mistrust – the biggest one. Siloed environment with limited communications lead to misunderstanding of what’s going on elsewhere in the company. The root cause of the bullwhip effect (alongside fear and hope). Customer don’t trust that they’ll get their demand filled, so they ask for more and cancel the extra portion closer to delivery.
Conflicting goals and working at odds – functional silos have goals conflicting with other functions’ goals. Ex: stock levels (Sales vs Inventory Management), compliance (Marketing vs Regulatory), standardization of processes vs office-level customization.
Impatience – becomes more of a problem with ever increasing pace of work. More projects – less of them get completed. Sacrificing important analysis before implementation.
Fear of looking foolish – NPD (new product development) problem. Perfecting the pitch wastes time, while showing work in progress has a chance of spotting bad seeds.
Metrics Are the Means, Not the Ends
Everything Gets Measured All the Time
Balanced Scorecards (BSC) – nice, but too high-level and don’t answer how employees should achieve something that quite wishful.
But BSCs can be broken down into KPIs, which could be broken into “cascading” KPIs (decomposition of higher-level KPIs).
One doesn’t make money in consulting by trusting managers to do their jobs, otherwise why do they need consultants?
No one doubts that you need collecting and monitoring metrics / measurements.
Started with exec dashboards with progress against key metrics.
Employees: also upwards and downwards SMART goals and metrics.
Now every department has their own sets of dashboards to monitor measures.
What Could Go Wrong and Why Are the Targets Always Met?
The key issue is that the system tries to control and command people who don’t want to be commanded / controlled.
Setting up a goal almost certainly will make it be met, at the expense of non-measured business goals.
Incorrect motivation of sales force (focus on target revenue numbers, not profitability) is the most well-known example.
Another evil is unachievable goals that actually can be achieved at a huge cost to the company later on. [MK: that’s my pet peeve]
Most metrics can be hacked, and (especially in customer service) – usually at the experience expense to the customers and the reputational expense to the firm.
o focus on profitability – aggressively sell high-margin items instead of what the customer needs —> customer buys from a competitor;
o focus on customer satisfaction —> no need to focus on margins anymore, selling at or near cost increases volumes AND satisfaction.
o optimize all three (revenue, margins and satisfaction) —> see the increase in returns. Optimize the returns —> … you get it.
The focus shifts from strategic goals into short-term measurements; detrimental long-term effect.
Measures Create Conflict Where There Normally Is None
It’s not too hard to end up with conflicting metrics. Instead of tracking aggregate metrics (orders must be filled as quickly and accurately as possible), different functions have different conflicting goals.
Salespeople are known for creating a bullwhip effect by creating artificial spikes in demand closer to the end of quarter. Rebates used to create this demand further exacerbate the problem.
Order entry and processing focuses on quality (to avoid mistaken orders), but double-/triple-checking creates longer lead times.
Warehousing – getting the balance of storing the right amount + safety stock. But this costs money (manufacturing, storage, risk of obsolescence). Penalizing for stockouts (i.e. not enough supply on hand when needed) —> order more goods than needed —> have to use promotions to sell the leftovers later on.
Manufacturing – the lowest fixed costs are near full machine utilization, so there’s incentive to produce as much as possible, regardless of the need for it.
Distribution – the lowest cost per kilo is when trucks are full —> increased lead time for shipping.
Such incompatible goals force the company to choose which goal is more important and align around it.
How can measures become incompatible?
Only measuring delivery and customer satisfaction —> manufacturing, warehousing and distribution costs would he unacceptably high.
People can only be measured (rewarded and reprimanded) on things under their control, but this may be at odds with the company’s goals.
All measures become important —> strategic goals are ignored.
The end result is the same mess, plus more time spent on tracking measurements and less the opportunity to turn to people to fix the conflicting priorities.
Take a Goal You Want and Turn It into Something You Don’t
Introducing measures for employees makes them self-interested at the expense of the firm’s interests.
Targets may lead employees to cut corners but rationalize it with the “greater good” of meeting the goal. Removal of human judgement from the process.
Using directions (not directives) helps employees better judge what to do.
Measures are supposed to help manage, not becoming the way to manage.
The BSC and other metrics don’t help achieve the main goal, they replace it with the goals you don’t want.
Much easier to focus on measurable goals (vs soft goals) and creativity gets the back seat.
Replacing management with measurement is a recipe for disaster. And that’s why competent managers matter.