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Health checkMeasurements that mean something
The accountants have long been referred to as “bean counters” – for many this has been a fair description – focused on recording history and we assume “bean” means small insignificant items. Some finance professionals only have themselves to blame as they preside over measurement systems that are complex, rigid and often of little value.
How do we judge the value? We must do this in relation to the goal or ongoing purpose of the organisation. The goal or ongoing purpose of a commercial organisation is to make more money – now and in the future. The measurements and the measurement system are of value, if and only if, they help the organisation to make more money. Sadly many measures create the opposite effect – in fact they lead to conflicting actions and modern score-cards can easily exacerbate the situation rather than improve it.
For example – take the measure that has been a prime measure in the steel industry for over a hundred years – tons per hour (or shift or day or month). [In your business it may be something else such as meters per hour, or calls per day or meals per week]. Is “tons per hour” a measure that will help the organisation make more money? – definitely not. What it will do will drive the behaviour towards getting the most tons per hour we can. So if you are being measured on tons per hour, which work do you do – the order that will get you 5 tons per hour or the one that will give you 2 tons per hour? It’s obvious. The consequences are that the smaller orders (or in some companies - the more complicated work) gets left and then we have to have a real purge – end of month syndrome – to try to recover some level of service to customers. The side effects are high work in process levels and constantly changing priorities.
How can we have measures that are more meaningful in relation to our goal?
You should adopt Throughput Accounting under which measurements are developed that drive the right behaviour. Throughput Accounting directly relates measures to the goal of making more money.
For Sales – measure them on Throughput (the value added) rather than sales revenue – the outcome is more on the bottom line.
For Operations – measure the due date under-performance by Throughput Pound Days – the outcome is that the customers who give you more value get the better service.
For Logistics – who manage inventories – measure them with Throughput Dollar Days for shortages and Inventory Dollar Days for over stock.
For more information on how to apply Throughput Accounting principles to your measurement systems contact us.
