Investing in the future - Part 6: Measures - Performance
Any investment was made to improve something and if it wasn't then why was it made? This is self evident yet few companies carry out the final step in the investment process of analysing the effectiveness of the investment.
Before making any investment you need to define what it is you want to improve. It may be production effectiveness, inventory reduction, throughput, staff effectiveness or any one of the other key factors for your success. Having decided what you want to improve you can then establish the base line or current situation. This is the first step in investment assessment appraisal. These measurements are recorded and analysed to decide on the best way forward. The next step is to act on your investment plan and to implement the investment. The final step is to measure the results of the investment to make sure that it has really been effective.
This investment cycle should be part of the normal business of the company and is based on the standard Quality Action Cycle for quality improvement. The cycle is shown below and provides a standard method for most business processes.
The cycle provides a logical method for any improvement programme in a company and if you are not investing to improve something then why are you doing it?
Measure what you want to improve before and after the investment to assess the effectiveness of the investment.
Assessing the implementation effectiveness is necessary to check that it was effective and to see how it could have gone better. Understanding problems or failures in implementation will help you to do it better next time. The assessment needs to be carried out without searching for the guilty party to punish him - in any case only the innocent will fail to have an alibi prepared!
Investment effectiveness raises the question of what we measure in order to assess the effectiveness. A major problem with investment appraisal is that sometimes the measurements used are inappropriate for the investment. The standard investment appraisal methods provide the financial basis for assessment but are not designed to deal with the more intangible measures. In the first article of this series I considered the two classes of investment i.e. the traditional investments and the strategic investments.
With traditional investments any accountant can assess an investment from the hard accounting numbers based on efficiency improvement, labour reduction and generally doing tasks faster or with less material/labour. All of these measurements were designed for a manufacturing environment where direct labour and machine utilisation were important and don't consider if you should be doing the task or not. You can be the most efficient slide rule manufacturer in the world but that won't help you if the market has moved on to pocket calculators and efficiency in making aluminium windows will not help you if the market is for PVC-U products.
If our company and market needs high quality and reliability, short lead times and low inventory and yet none of these is being measured in our investment appraisal then there is might be something wrong.
Perhaps we should be concentrating on measures of real effectiveness which directly affect our success in the market place? Investment appraisal can be improved by including some more relevant numbers so that operators and managers can concentrate on creating improvement and not on creative accounting.
There are new performance and effectiveness measurements are more relevant to manufacturing and can drive the production process. These new measurements relate directly to survival in the market place.
These measures share some common characteristics shown in the box:
Investment to improve this type of measurement will drive a factory much more effectively than pure financial numbers. When these numbers are right then the financials will fall into place for both the short and long term.
People react to what you inspect and not to what you expect.
The choice of measurement to be used depends on what is it that you need to be good at to improve or maintain your business. If quality is vital to your business then you should include a measure of quality in your performance. If customer satisfaction or service is important then you need to develop a measure for this in your system.
Some examples of measures that fit the requirements are:
- Supplier delivery performance: supplier lead times, quality of incoming goods, supplier certification,
- inspection only for new suppliers.
- Cost of quality.
- Inventory accuracy: 95 - 99% target on a reduced inventory.
- Customer satisfaction: Surveys, complaint recording, repeat sales, service calls.
Customer Time Measures
- Number of products delivered on schedule.
- Value of products delivered on schedule.
- Lead time reduction improvement.
- Total processing time.
- Distance travelled.
- Set up times.
- Machine down times.
- Number of handling operations.
- Material availability.
- Waste rate: amount of product scrapped or reworked.
- Direct labour productivity: value of finished products divided by number of hours to make.
- Work in Progress (WIP) turns.
- Inventory turns.
- Non value-added production steps.
These are just a few of the possible measurements that you can use. Investment should be made selectively in the areas where you need to improve and then always measure the improvement that you have achieved. If you are in doubt about where you could improve then ask your customer, they will always have some ideas!
This is the final section in Investing in the Future, I hope you have enjoyed reading it and that the series has provided some food for thought. Happy investing and good luck.
Investing for the future is designed to challenge your concepts and ideas on investment for the future. Various aspects of investment are considered and discussed. The series is:
Part 1: Introduction
Part 2: Machinery - Plant & Equipment
Part 3: Materials - Products
Part 4: Methods - Procedures and Processes
Part 5: Manpower - People
Part 6: Measures - Performance (This section)
Last edited: 11/03/10
© Tangram Technology Ltd. 1998
Our standard disclaimer regarding Internet data applies.