Measuring Business Performance – the Only Three Ratios You Need

A business can thrive forever if it has happy customers, happy employees and happy investors (all at the same time!). Here are three ways to measure how you’re doing:

  • Happy Investors: Return on Capital Employed (ROCE) or Return on Net Assets (RONA)

If you think this is too simple and you’re determined to have lots of Key Performance Indicators (KPI’s), you might want to add some of the following:

  • Operations: Value-Added Ratio or Throughput Efficiency (ratio of Value-Added Time to Total Lead-Time (Dock-to-Dock))
  • Operations: Overall Equipment Effectiveness (OEE)
  • Finance: Return on Sales (ROS) or Net Margin
  • Innovation: Percentage of sales turnover generated by products or services  developed in the last x years (x=2 is common)

The Balanced Scorecard approach has a lot to commend it – a balance of measures including Financial, Operational, Marketing/Sales, and Learning and Growth / Innovation. See  http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

Lean – How, What and When to Improve

Whatever stage you’ve reached on your Lean journey, you need to know how and what you should be improving.  We’ve all encountered (been guilty of?) the “Too busy to improve” syndrome, but what exactly should you be doing when business is flat-out, and what should you be concentrating on when things are quiet? Well, now that we’re talking strategy you won’t be suprised to hear that there’s a two-by-two grid for that! I’ve attached a PDF copy here: Improvement – How, What and When,  [opens in a new window] so let’s run through what it means – the How, What and When of Lean.

As you can see the two sides to the grid are (a) “Busy” (lots of orders) -vs- “Quiet (few orders), and (b) “Inefficient” – vs- Lean. So we have four combinations or boxes to look at:

1. Inefficent and Quiet. You definitely don’t want to be starting from here! If you are then you might simply have left it too late. If you can rescue the business then you need to take massive turnaround action. From a Lean perspective you’ll probably want to focus first on quick cost-reduction, and cash-generation. Areas to consider include: Easy, High Impact ideas to reduce cost, ways to reduce stock and work-in-process (lead-time reduction, SMED to reduce batch sizes), 5S sort-out’s to convert unused assets into cash.

2. Inefficent and Busy. As we’ve said the biggest danger here is falling into the “Too busy to improve” trap. “Busy Fools” is the common description – you’re putting in lots of time, effort and energy but you have very little to show for it and you’re often making little or no profit, or even running at a loss. The most important thing is to tackle the worst areas of inefficiency as quickly as possible, and to do it in a way that takes up as little time and resource as possible. Look for rapid employee engagement to generate Quick Wins: Easy, High Impact ideas to reduce all forms of waste, with a particular focus on tackling those that waste the most time and money.

3. Lean but Quiet. You’ll already have addressed those areas that actively lose you business – customer complaints and non-conformances – so the key focus of Lean here should be on increasing Value-Add. In other words, finding ways of providing more and more value for your customers, and actively selling the value of what you offer, rather than the cost. Areas to focus on include: cross-functional teams to visit customers and spot value-add opportunities, Voice of the Customer exercises, and use of the Kano Model.

4. Lean and Busy. This is where it gets really good – you’re working flat-out and throwing off cash as you go! The main focus here (apart from sustaining Lean)  is to ensure that you re-invest, you innovate (to ensure you continue to succeed) and you look for opportunities to inspire excellent performance. Success generates success so it’s time to think about some of those “what would you do if you knew you couldn’t possibly fail” ideas! It’s time to think about larger investments to achieve a step-change in performance – increasing your capability not just your capacity. You probably also need to check that you’re up to date with current technology – unless you’re a technology-led business you probably don’t need to be at the cutting-edge but you do need to make sure that you’re making best use of proven, up-to-date appplications.

How to Sustain Lean – the Discipline of CANDO (5S) …

It takes Leadership and Discipline to build a great company. And it takes Leadership and Discipline to sustain the Lean journey.

Back in 2oo6 at the AME Conference in Dallas, I heard a keynote presentation by Jim Collins, bestselling author of “Good to Great”.  I can’t do justice here to what was an outstanding presentation, but you can guess the main thrust of what he said: “Of all the things that helped companies go from being good performers to outstanding performers, Leadership and Discipline are by far the most important”.

Previous blog posts here have talked about Leadership, so let’s have a look now at Discipline, and why it’s a critical element in sustaining the Lean journey.

Put simply, Discipline is about doing a small number of important things consistently – day in, day out, week after week, month after month, year after year. So you can immediately spot why most organisations and most people never achieve greatness.

Let’s take an example that will immediately be familiar to  most manufacturers – Workplace Organisation.

Workplace Organisation is most commonly known as “5S”. Sometimes – particularly in the automotive industry – it’s referred to as 5C. Far less common but the one that I prefer is the acronym “CANDO”. The “D” stands for Discipline, so you can see where I’m going with this.  Most organisations don’t find it too difficult to complete the first three steps of CANDO- Clear out unwanted items, Arrange everything in the right place, then ensure Neatness. The next two steps are far harder – Discipline and Ongoing improvement. It’s often said that CANDO is above all a test of management discipline. That’s why the Japanese regard it as probably the first and most important building block of Lean. Put simply, if managers and leaders don’t have the discipline to sustain CANDO then they probably don’t have the discipline to sustain any worthwhile improvement journey. More importantly, they don’t have the discipline to create a great business.

The tools and techniques needed for sustaining CANDO are well known – agreeing and setting the standard, implementing checklists, standard operating procedures, measures and audits, etc, etc. Where most organisations fall down here is that they don’t build it into the day job and make it a habit.

So here are some ways of achieving the necessary Discipline:

  • Ensure that Line Managers / Team Leaders are held personally accountable for maintaining the agreed standard in their area
  • Train and encourage them to ensure that every employee works to that standard every day
  • Check and record performance hourly or daily
  • Audit performance weekly or monthly
  • Apply PDCA to find and address the root causes of non-conformance

In future blog posts we’ll look in more detail at Discipline and “how to build Lean in” – as always, your comments and experiences are very welcome!