Mar 14, 2014 | Posted by Matt Elson
(To Take Your Organization to “Next Level” Performance)
What’s in a metric? They can be used for good and for ill, and I’m sure that we’ve all had negative experiences around metrics that don’t make sense (why not drop us a comment here or on our LinkedIn page and tell us your story!). Whether it’s OEE (what’s the point of this metric, by the way?), Indirect/Direct Ratio (I hate that one in particular!) or Sales per Salesperson (?), metrics can make or break you and your business. So which ones make sense?
By using what we call in the Toyota Production Ssystem “The Big 5″ metrics, you keep things simple and effective.
Unlike traditional, “accounting” based measurements, this metric asks the question: “Does the operation run when it has to?” In other words, is the operation available to produce what the customer wants? We’re not interested in machine utilization, as that can lead to over production, which is the biggest (and most common) waste in operations.
OA simply measures the number of good units of output versus what the customer demand is, and expresses it in terms of a percentage. When the OA % is below target, we have to ask ourselves some questions: ”What happened? What is the impact on the customer? How are we going to recover?”
Note that in knowledge or service based work, this metric is equally useful…every process has a customer, so just figure out what that customer demand is and measure your ability to meet it! It can be number of student registrations, number of patients seen at a clinic or number of vehicles moving down the assembly line…doesn’t matter!
Number of bad units (you do have a standardized, measurable way of checking quality, right?) versus your output. Done.
Same as above, if you’re not in a production or manufacturing environment, you still have quality standards for your customer right? (i.e. total wait time to speak to a customer service agent, was the insurance claim form filled in correctly, etc.). You have to measure your quality compared to your customer expectations no matter what industry you’re in!
You just spent a $1,000,000 on some new equipment (or hired more customer service agents, or installed two more checkout lanes at your grocery store, etc.), so you want to make sure that you’re getting a return on your investment right? Well simply compare the actual demand to the new capacity, and your get your RO, expressed as a percentage. In a way, this measures how well you are using your investment.
CAUTION: If your RO is low, don’t blame operations! It’s not their fault that you don’t have enough sales (customers, demand, etc.)…you better have a talk with your sales and marketing folks to increase demand. (Also, you should ask the question: ”Was my demand forecast accurate when I made the decision to buy this additional capacity?” or “Why didn’t we increase our capacity incrementally, as demand increased?”….you did use a demand forecast to determine you needed extra capacity, and didn’t base the decision on your ability to EXECUTE, right? Because that would be silly!)
(Yes, I did spell that labour correctly…that’s the Canadian spelling!)
This metric measures the amount of actual work content that a process puts out. In other words, it measures the value added of your work. Don’t be fooled by other “efficiency” measurements (there are many)…folks love to create efficiency metrics that don’t really mean anything; mostly to hide problems.
Another note…it’s IMPOSSIBLE to have more than 100% efficiency. You can’t get more than what you put into a process…not possible. Check out the Laws of Thermodynamics for more on this.
Whats lead-time? Simply put, it’s your ability to react to and deliver to your customer. It can be a production process (what is your production lead-time) or customer service lead-time or knowledge based process lead-time (how long does it take to fill in that insurance claim form?).
Since lead-time and inventory are equivalent to each other, by measuring any work in process that you have in your work, you can then reduce the lead-time by reducing the WIP (or queue).
Remember, true north is zero lead-time and zero inventory, so we do want to reduce our lead-time! Also makes us much more competitive when we can do things faster than the other guy!
So when it comes to metrics, KEEP IT SIMPLE! By using these Big 5, you’ll go a long way to improving your business!