by Jeff Thill

The business numbers are in, and a manufacturer finds that the previous month’s performance was down. The typical response? Management hopes that things will turn around next month.

Unfortunately, this common theme plays out in companies throughout the country. Their leaders aren’t sure what caused a downturn in last month’s business, and therefore, they’re unable to fix what’s wrong in order to improve next month’s numbers.

Moreover, financial data in many businesses typically arrives at least 15 days after a month has ended, leaving little time to make corrections in existing and subsequent months. Odds are, the same issues will exist during those 15 days and will continue to be problematic until they’re addressed.

But it doesn’t have to work this way. Manufacturers that adopt performance management get access to timely, critical information about their businesses, yielding greater predictability – and influence – in the outcomes.

Benefiting from predictability

Predictability through performance management gives companies information about their business before it impacts the bottom line. By identifying challenges in real time, manufacturers can promptly implement corrective measures, taking a proactive approach rather than a reactive one.

For instance, manufacturers can identify a decline in customer satisfaction and take positive action before it begins to lose customers. Or it can recognize levels of employee engagement before they develop into a loss of valued associates. Additionally, companies can identify processes that, if changed, can yield significant gains to the bottom line.

In other words, receiving such critical information in advance of financial data gives management the ability to make decisions in time to improve bottom-line performance. It also reduces reliance on “historical” financial statements.  

Creating a platform for information

Performance management’s predictability benefits start with identifying the factors that are critical to a company’s success. These will cover a range of key perspectives, including customers, internal processes, and employees, in addition to the all-important financials.

Manufacturers must then develop key performance measurements that will quantify the levels of success in those areas they’ve identified. By establishing standards of performance for their measures, they can actively manage their businesses using the achieved results compared to the desired results.

Good performance measures share four key characteristics.

1. They’re sensitive. Automobiles aren’t equipped with “rustometers.” Why? Because such devices would not provide timely feedback. Speedometer readings, on the other hand, change as soon as a driver applies the gas or brakes. Manufacturers should seek the same kind of response from measures in their businesses. Measures should change quickly to provide timely feedback.
   
   
2. They’re forward-looking. Measures shouldn’t always be based on historical financial information. Organizations need measures that will help predict future financial results. If on-time delivery is very important to customers, for instance, a company can measure the percentage of on-time deliveries. If it sees percentages declining, it knows that it will lose customers and profits should the trend continue. Forward-looking measures let manufacturers take corrective action well before the first customer defects to the competition.
   
   
3. They’re understandable. Measures should be relatively straightforward so people can easily understand the components that may impact the measures. If a calculation is so complex, employees will have difficulty understanding either the calculation, or what’s being measured in the first place. Clear and simple measures make it easy to generate changes that can have a positive impact on the business.
   
   
4. They’re relevant. Why create an entirely new process to measure something new? Manufacturers should instead measure factors that are already within existing processes. If a company wants to measure quality, it should do so at an existing checkpoint. There’s no reason to add another step to the process for the sake of capturing a measurement. 

Establishing accountability for each measurement is important, but keep in mind that measurements should be used as positive management tools, not “big sticks.” Under-performing measures should never be used as evidence to reprimand employees or criticize efforts.

Instead, they should be viewed as opportunities for continuous improvement, thus allowing a company to benefit from the resulting predictability.

Jeff Thill is a Wipfli partner who serves manufacturing, wholesale, and retail clients ranging in size from large widely owned companies to smaller family-owned businesses.  Please contact Jeff at our St. Paul office at (651) 766-2862 or e-mail him at jthill@wipfli.com.