What gets measured gets managed.

I am sure you have read articles about ‘managing by the numbers’ and as one who commenced his career as an industrial engineer, numbers have been a large part of my life. But the question to ask is what are the numbers there to do?

In worker incentive schemes that were popular fifty years ago, the objective was clear; measure the steps within a process and calculate a standard time for a worker to complete that task. When the actual time was less than standard, a bonus was paid. This was called payment for results.

Of course, the downside was that if a worker or a team consistently exceeded the standard time and workers at the next stage did not (for many valid reasons), then additional WIP inventory was the result. So, the overall need of having a steady flow of items was not met, because variability in the system was not identified and improved.

For the past twenty years the measurement driver has been key performance indicators (KPIs), used as a means of measuring the performance, and often the pay, of managers. However, the features I find most common with these schemes are: far too many indicators and managers not sure what indicators of the many are ‘key’.

Because numbers are seen as real, they are too often accepted as fact without knowing why the measurement was initially implemented and what were the assumptions and limitations on which the measurement is based.

Measure what the customer wants

For example, a 3PL distribution business will tend to be labour intensive. So, on what basis should the managers be measured – what is key? The immediate response is to measure the performance of labour, because as the output per work hour improves (that is productivity), then profitability of the business could also improve, although there is not an automatic linkage.

However, internal measures are not the way to go. The first rule of measurement is that everyone serves a customer; starting with the external customer – what do they want? The elements that customers of 3PL providers have most interest are delivery focussed:

• on-time delivery
• order accuracy
• order turnaround time and
• inventory accuracy

These are measures of planning effectiveness – customers are not interested in internal measures of optimal labour efficiency. Now that the KPIs are in place for the business, each can be broken down to sub-measure KPIs for each management layer.