Control or Performance?

The four principles of the Executive Command Center™ (speed, cash-flow, profitability and capacity) represent opportunities to increase company value using both control and performance related metrics. According to my brother-in-law, who spent over 30 years in the US Air Force piloting high performance aircraft, control and performance are the two main functions of a plane’s dashboard indicators.

What’s the difference?

If you want to conserve energy, hold a steady course, and fly a long way, control maximizes resources. Control instruments are used most during times when the pilot can’t see – known as instrument flying – and include the attitude indicator, which tells you if you’re upright or dipping your wings.

If you want speed and maneuverability, look to the performance instruments. They provide information that allows the pilot to rapidly adjust to changing circumstances like high-speed interception or dogfights. Performance instruments tend to be used under visual flight rules and include the heading, altimeter, airspeed and vertical velocity gauges.

A balance between control and performance leads to a successful flight. In business, your company’s long-term mission is control-based, while short-term goals are performance-based. As you develop the dashboard for your company, you’ll include both control and performance functions. Performance-based metrics include shipped on time, order lead time, units/packaged shipped per day, revenue per day, back-log, back-orders and stock outs. Control metrics include labor as a percent of sales, scrap, overtime, gross margins, and actual to budget financial performance.

With the market trend of having operations and supply chain report to the finance function, many mid-size companies tend to over control and under perform. With appropriate metrics you can develop strategies and trust (control) to allow your management team (the pilots) to respond to the changing conditions of the moment (performance). To use another analogy, you can’t drive a racecar with your foot on the brake and expect to win the race, yet at the same time you need to avoid the wall.

Three things you can measure to help determine if control and performance are in balance are:

  • Value
  • Capacity to deliver
  • Cash flow

A recent client’s supply chain team reported to the CFO. The CFO had the foresight to ask his team to improve service levels to their network of retail stores while reducing inventory. The stores had a history of stock outs, and store managers had tried to solve the problem by increasing inventory. This approach ran counter to the CFO’s goals of improved cash flow and profitability.

Performance was vital within the normal constraints of internal controls since the company was public and fell under the rules of Sarbanes Oxley. Over the period of a year, the supply chain team (with my guidance) implemented an auto replenishment system that cut inventory in half and elevated service levels to over 99%. The ultimate result was a successful sale of the division for over $300 million. Afterwards, the CEO said that if the supply chain team hadn’t accomplished their goals, the sale couldn’t even have been considered.

Value is often calculated based on EBITDA, which is a combination of profitability and use of assets. Operation’s capacity to deliver can be a function of leverage of fixed costs and application of technology. Cash flow is primarily a combination of inventory, receivables and payables turnover. Small changes to any of the forgoing can result in a big change in company value.

Are your control and performance measures in balance? Does your management team act like fighter pilots applying speed and maneuverability to your business? Take a look at the Executive Command Center™ as an approach for dramatic improvement in your business and your wealth.

© 2015 – Rick Pay – All Rights Reserved