Performance metrics can boost business

Our industry has experienced a tough couple of years. It is more important than ever to identify, measure and improve the variables that affect your bottom line. It has been said, “If you don’t measure it, why do it?” In many businesses, factors that are critical to success are not identified or measured.

Measuring performance to improve results is based on involving the people doing the work, identifying the key indicators, determining how to measure results, establishing goals, tracking how employees are doing relative to the goals, providing feedback to the employees and acting on the results for continual improvement. Remember, activity does not equal productivity.

Too often managers or owners of small businesses view performance subjectively and make decisions based upon emotions and supposition instead of measuring and evaluating with data. Many small business owners tend to measure by the bank account at the end of the month. While the money is vitally important, it is also important to know the critical factors for your business that can be monitored and improved.

Key terms

Measuring performance in small shops as well as large businesses will usually involve some type of productivity measurements. Since some terms have become buzzwords they need to be clarified and understood.

Productivity is typically defined as output divided by input, such as a yield percent for an order or product line. Productivity can be defined as “yielding or furnishing results, benefits or profits.” Note the emphasis on results and profits. A measure in our industry could be the yield on a particular product or order, considering only acceptable production as output. The actual scrap on an order versus the anticipated scrap could also be a measure of results on an order.

Activity is what people often think of when considering productivity, but activity is simply what we do at work, productive or not. Activity is “vigorous or energetic action.” For example, attending meetings, making sales calls, talking with a customer or cleaning the shop floor are all activities. A productivity measure would be the result of the sales calls or the reduction in cycle times due to having a clean and orderly shop.

Efficiency is usually considered a good thing to measure and involves doing the right things to get the job done. Efficiency is “production without waste, typically a comparison of production with cost.” A shop can go broke producing low-cost products if the products fail to meet the customer requirements. It is obvious that something more than efficiency is needed.

Effectiveness can be defined as doing the right things better or producing a desired result. This begins moving toward continual improvement.

Results are “beneficial or tangible effects.” Results are what should be measured. There have been many philosophical conversations in meetings and trade shows about the latest fads in business, but measuring results is a foundational principle that never goes away. Perhaps measurements can be refined with technology, but the basic premise remains the same. Measure those things within the control of the employee, not external factors beyond their control. Know what’s important, measure it and act on the information.

Measurement is the “the process of estimating or appraising against a certain criterion.” It involves knowing and monitoring the key indicators of productivity and performance on a given frequency and reporting the results. The information is used to drive improvements. Too often, businesses do a good job of measuring, but a poor job of communicating and acting on the information.

Combining the two terms “productivity” and “measurement,” we have productivity measurement, which can be defined as “yielding or furnishing results, benefits or profits as appraised against an established criterion or target.” Productivity measurement is based on results and not activity-driven. Keeping score of results is the basis for effective productivity measurement and improvement.

Measuring productivity and performance

First, involve the owners (in the case of small shops), managers and employees in clearly identifying the work to be done or expected results in each area of the business or operations.

Second, identify the key indicators that are the results that must be obtained for the business to succeed. Include the measurement units and frequency of measurements.

Third, measure controllable results. In our industry, there is inherent scrap in almost every operation. The goal would be to keep the scrap at the expected level for the particular operation and perhaps begin looking for ways to get even better than expected.

Fourth, use the information to continuously improve your operations.

Establish individual targets

People generally work hard to meet targets or goals they are responsible for achieving. Measuring results involves establishing individual performance targets for employees. Without such targets, people might not understand expectations and certainly cannot see how their work contributes to the success of the business.

Many times in smaller shops this is overlooked or considered as unnecessary bureaucracy. Don’t fool yourself with this attitude. Set targets or goals that make sense for your business. A simple process that builds on the four steps outlined above will bring this to the individual and work-group levels:

• After identifying the key factors, establish the baseline, or “where you are,” using actual data for several months if it is available.

• Set targets to monitor and evaluate performance using the data and information from the process.

• Make the data visible to provide effective feedback for individuals and the team.

A business owner in the custom stairway industry mentioned that the number of crews had been reduced and they were able to complete as many or more installations with less people by ensuring that all required materials were on the job site before beginning. This is a simple, but powerful, lesson learned through establishing targets and measuring results. Intuitively, we know having materials available at the job and on time can improve productivity, but are we doing it and measuring results?

Productivity improvement case study

Recently, a client was experiencing a decline in productivity. After discussing the situation, baseline productivity data was determined for each operator. All employees were included, not just the production personnel. It was a bit challenging to identify measurable factors for some of the folks, but all were included.

Next, simple graphs were developed to show actual performance for each person relative to the baselines and targets.

In the production shop, the average productivity increased from 68 percent to 79 percent in one month and up to 85 percent within two months. They set a target of 75 percent and awarded the folks with a luncheon if the overall team averaged 75 percent and no individual was below the baseline of 68 percent. This was simply because of monitoring and providing feedback. The shop manager made a habit of reviewing the graphs and making notes on them. The graphs were posted so that everyone could see them. This provided individual and team peer pressure as well.

Action steps

1) Identify the five to seven factors critical to your business success and involve the employees in this step

2) Identify the units of measure at the individual and group level

3) Determine the frequency of measurement

4) Clarify how the information will be communicated

5) Establish a way to make the information visible and readily available

6) Provide simple, tangible rewards for meeting goals

7) Implement corrective actions when the desired targets are not met 

Davis M. Woodruff is the founder and president of Management Methods Inc., a management consulting firm based in Decatur, Ala.

This article originally appeared in the January 2012 issue.