The Power of Scoreboards: Key Performance Measures That Get Results

Key performance measures serve to increase accountability and should include a scoreboard to make the results visible. When I do evaluations for companies, one of my favorite questions to ask is, “At the end of the day, how do you know you did a good job?” The most common answer by far is, “I didn’t get in trouble.” Clarifying expectations for employees is essential to getting them out of this “Avoid getting in trouble” mindset. When a clear plan for the day is in place, employees know if they met their goals or not.

Scoreboards

One client saw output skyrocket after putting up scoreboards in the work area showing the goal for the day and updated actual results every two hours. Quality stayed high as well. At my previous company, I used to post the sales forecast and the actual revenue by salesperson in the sales department. We took the salesperson whose actual revenue most closely matched their forecast out to lunch, and we started getting reasonably accurate forecasts.

In my next post I’ll talk about tracking shipped on time and inventory turns.

© 2012 – Rick Pay – All Rights Reserved

Communication as an Element of Forecasting

I can’t overemphasize the importance of communication with Sales. When I was VP of Operations at a manufacturing company my production managers did the planning, and I required them to meet with their sales manager every Monday morning to convey the past week’s results and to update the forecast for the coming week and month. Sales managers know if a major retailer is planning a sale, or if they’re about to get a really big customer. Communication with Sales offers Operations a glimpse into the future.

Likewise, Sales needs to know what Operations is doing. Are machines breaking down? Are there labor problems? Currently I have a client with 180 positions, 30 of which are open because they can’t find qualified workers. That has a tremendous impact on output, so communication is key.

Communication doesn’t end at the front door – we also need to communicate with the supplier base. At my former company the buyers visited our top 10 suppliers twice a year, and those 10 suppliers visited us twice a year, so we came face to face once each quarter. A client of mine, who has one buyer, keeps running out of inventory and the buyer refuses to talk to the suppliers, even on the phone. How can this buyer possibly know what’s happening or what’s coming down the pike?

© 2012 – Rick Pay – All Rights Reserved

A Forecast is One Element of the Operations Plan

In S&OP planning, if you don’t have a forecast, I say make one up. It’s probably more accurate than the one you’ll get from sales, simply because of how salespeople are evaluated. Unfortunately the system drives them to predict lower sales than what they can realistically deliver, which generates a forecast that is too low, forcing you to scramble, work overtime, expedite incoming parts, etc. A reasonably accurate forecast is one of the inputs for an Operations Plan.

In order to come up with one that is usable for Operations Planning, you need a number of inputs including production and sales history, company-wide projections and what I call “professional gut feeling.” This will be as accurate as you can get. Don’t rely solely on a forecast; look to your experience.

For more information on creating a forecast, check out my post from May 2011.

© 2011 – Rick Pay – All Rights Reserved

Creating a Forecast: The Unit of Planning

A forecast is a prediction of the future. Back when I worked at one of the Big Eight accounting firms we dealt with projections, which are different from a forecast in an accounting environment: a forecast is an educated guess, while a projection is legally binding. In this post we’ll be dealing with forecasts.

My years as VP of Operations and then as a consultant have shown that forecasts are difficult to create, and in many cases they don’t exist at all. When we talk about creating forecasts, we need to identify a Unit of Planning, which is of interest to Sales and Operations. For Sales, the unit of planning is dollars. For Operations, the unit of planning might be pieces, hours, etc. How do you convert a Sales forecast from dollars into pieces or hours, short of using a dartboard and a blindfold?

You could do some quick math to determine the cost per unit, but this won’t work if you ignore profit and cost of sales. Cost of goods sold – labor, supplies, etc. – is different from cost of sales, which is commissions, give-backs, and advertising allowances: things you give to either your sales people or to the customers. A free retail display stand, for example, is a cost of sales. Miscalculating these costs for a manufacturer, most of whom have a profit before tax of 7 to 8%, can be devastating.

© 2011 – Rick Pay – All Rights Reserved

Keeping Operations Out of the Critical Path

I remember in college, which was longer ago than I care to admit, studying a technique called PERT. PERT stands for Program Evaluation and Review Technique. It is a method for controlling and analyzing a system or project using critical path analysis. Usually there are multiple paths through a project, with each step of each path requiring a certain amount of time and money.

Think of building a house. There is framing, plumbing, electrical, finishing etc. One of the paths takes the longest and is thus known as the critical path. Unless you shorten that specific path, you don’t change the completion date of the overall project. Managing the critical path is the key to improving the results of the process or project.

To me, a key objective of Operations is to not be in the critical path. Operations should not be the element that delays performance for customers. By creating and maintaining a flexible, Lean, effective Operation and Supply Chain, some other area of the organization becomes the critical path. Ideally, it should be Sales. That way, revenue and profitability can be maximized. So, a key objective for Operations is to be as flexible and effective as possible thus keeping Sales in the critical path.

© 2011 – Rick Pay – All Rights Reserved

Your Capacity Is Larger than You Think

Many Operations executives spend a great deal of time trying to figure out what the capacity of their operations is. I suggest it is always much more than you think. I found this out through an experience at my prior company.

I was VP, Operations, and one day the VP, Sales came into my office and told me that our biggest competitor was experiencing a major product failure. If we could almost double our output for 120 days, we could scoop up a number of major accounts, shutting our competitor out of a key segment of the market. His question was, “Can we do it?” I said “of course,” and then when he left, I thought, wow, how are we going to do that?

We named this challenge “Project 45.” We had to go from 25,000 units per month to 45,000 units for three months, then ramp back down to 25,000. We thought that our capacity was in the neighborhood of 25,000 units. We did three key things that helped achieve our target.

  • First, we went to the employees and explained what we needed to do. I had gone to the CEO and CFO and got them to agree that we would pay a bonus to the employees of a percentage of the added gross profit above 25,000 units. We would also need a lot of overtime and would have employees from other parts of the company help on the production lines.
  • Second, we created a measurement system much like the United Way thermometer to track our progress and make it visible to everyone.
  • Third, we went to our key suppliers and explained what we needed and the great opportunity for them if they could quickly ramp up while maintaining quality and on time delivery.

The project was a resounding success. We actually had suppliers work Thanksgiving Day for us. We hit 64,000 units the last month and we won a number of major accounts, effectively crippling our completion. While we knew that 64,000 units was not our true capacity (it was a one-time flex), we knew our capacity was much higher than 25,000 and the employees believed in their ability to produce beyond expectations.

The best part was when the project ended just before Christmas, I got to put on a Santa Claus hat and pass out bonus checks to the employees equal to a month’s pay. It made for a very Merry Christmas for all of us!

© 2011 – Rick Pay – All Rights Reserved

Safety Stock: When Do You Need It and How Big Should It Be?

Safety stock requires a balancing act between the cost of carrying extra inventory and the cost of potential lost sales due to lack of inventory. I’ve recently published a one page tip sheet on my website that examines how much safety stock a company needs, risk factors in inventory systems, and ways to reduce safety stock. To read the complete tip sheet, click here.

© 2011 – Rick Pay – All Rights Reserved

No Sales Forecast? – Make One Up!

Many inventory and production planners rely heavily on a sales forecast as the foundation to their inventory planning and MRP process. In fact, an accurate forecast is one of the three keys to MRP success, the other two being accurate Bills of Materials and accurate inventory balances. The only problem is that accurate forecasts are an oxymoron at best, and at worst, sales doesn’t produce one at all.  So what does the planner do? I say, make one up.

Making a Plan in the Absence of an Accurate Forecast

Wait, do I really mean just make one up out of the blue? Of course not. There are three approaches to developing an accurate plan when a forecast is not available.

1. Go talk to sales.

Now I know that seems to be dangerous ground, but sales really does have the best interest of the customer in mind, and if they can help provide the means to ship on time, it is in their best interest. Go talk to them and see what the market is doing. See if it is possible to get forecasts from key customers, and get at least an estimate as to whether sales levels will be growing this year and by how much.

2. Take a look at the past.

History will tell you a lot about sales flow, whether there are spikes or seasonal demand, and how much growth there has been. A simple stacked line graph of the past 36 months revenue will tell you a lot about sales history.

3. Establish flexibility.

It is your job to ship on time, regardless of the quality of the inputs you have. Therefore, if you don’t have a forecast, you need to develop flexibility in the supply chain so you can respond to the surprises that come your way.  Having short supplier lead times, flexible production or warehouse operations, and the ability to flex your labor using temps and overtime all contribute to flexibility.

For more on managing labor for maximum flexibility, check out my podcast here.

Go With Your Instincts

Finally, you can use a dash of professional gut feel to finalize your plan. You see the day-by-day goings on and your key team members will have input that can help you. If you make up a forecast, I would expect it to be pretty close to what actually happens. That, along with communication with sales, a look at history, and flexible supply chains will result in the plan that can provide a high level of customer service.

© 2011 – Rick Pay – All Rights Reserved