Ultimate guide to performance measurement

© GRA 2014 www.gra.net.au
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YOUR ULTIMATE GUIDE TO
ACHIEVING TRUE
PERFORMANCE MEASUREMENT
A presentation by GRA Supply Chain Consultants

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About GRA and the Authors
Carter McNabb
Partner
GRA Melbourne
GRA is Australia’s premier, expert consulting firm specialising in
supply chain & logistics strategy, and execution. We offer consulting,
professional services, supply chain planning systems, training &
education and benchmarking across a broad range of industries.
Nathan Singhavong
Consultant
GRA Melbourne

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Why should you focus on Performance Measurements?
Improving Revenue. Reducing Costs.
Organisations are driven by generating more revenue, and bound by operational costs. The
difference between these two figures is a fairly good indication of an organisation’s health.
Determined to be able to accurately gauge their cash flows and margins, what do organisations
employ?
Numbers. Statistics. Records. Ratios. Percentages.
These numbers and records are then broken down and combined with others to create ratios and
percentages that have meaning at their respective organisational levels. Executives will focus on
operational cash flow, supply managers will focus on DIFOT and stock turns, planners will focus on
sales to forecast. They are essentially built on the same set of data – just represented differently.
Performance Measures are developed to track each individual facet of the organisation, and
teams/departments/individuals are graded on the back of these measures – which when used
correctly, facilitate innovation and identify improvement opportunities.

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What is the purpose of Performance Measurement?
Information is everywhere, and it’s cheap
With the growth in technology, knowledge is more accessible than ever and big data is becoming cheaper and
cheaper to store. Coupled with intensified market competitiveness and the need for constant evolution, the
investment into the development and analysis of Performance Measurement indicators is on the increase.
What is the purpose of Performance Measurement?
At the core, the purpose of Performance Measurement indicators is to present a perspective – a perspective on what
has happened, what is happening, and what may happen. We can often fall into traps where the perspective becomes
unclear, or worse, misinterpreted and misused, which can result in:
• The rewarding and encouraging of wrong behaviour
• ‘Gaming’ of indicators – where individuals knowingly interfere with input data to produce desirable (and often
untrue) results
• Incorrect decision-making

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Where do we focus?
Understanding what Performance Measurement indicators, both individually and collectively, is the first step
towards driving real improvement, and real results.
By keeping indicators simple, and not overcomplicating the definition and the visual representation, the
‘perspectives’ become much less varied and open to interpretation (or criticism).
This presentation is not designed to dictate what should be measured, but provide a holistic understanding of
how to go about developing indicators that are of most value, including:
• Developing Foundations for Performance Measurement
• Understanding Measurement Characterisation
• Understanding Performance Maturity
• Knowing the Focus Areas

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Part One

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Developing Performance Foundations – Indicators and Goals
What is an indicator?
“Develop customer base whilst improving customer satisfaction levels.”
• The above is a forward-facing target that you’d typically see, but is it a true indicator? The answer is ‘no’ – it is, in fact,
a ‘Critical Success Factor’ (CSF). CSFs are events that assist organisations to achieve their goals, on which
Performance Measurements are created.
• Is it a true CSF? Again, the answer is ‘no’, however...
“Increase customer base from 35% to 40% of the market share, and improve overall customer satisfaction to 95%, by the next
EOFY.”
• The above is now a SMART (Specific, Measurable, Achievable, Results-based, Time-bound) CSF – one with tangible,
numerical targets and restricted by time. By designing SMART CSFs, true Performance Measurement indicators can
be bound.
• Example indicators that are able to provide visibility on this CSF include: Percentage Market Share, Customer
Satisfaction Survey Results, and Customer Reorder Rate.
Each Performance Measurement indicator needs to related to a goal.

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Developing Performance Foundations – Processes (WWWWH)
Why?
Why does this indicator exist?
What is the goal? (Outlined in the previous slide)
Who?
Who ‘owns’ the indicator, and makes decisions based on
its information?
Who collates the data? Reviews the data? Is able to see
the data?
When?
When does the input data need to be ready? When does
the indicator get updated?
When does the indicator need to be reported?
What?
What does the indicator visually look like? What trends
are typically observed?
What are the related indicators, and how are they
interlinked?
What filters/assumptions are in place?
How?
How should the indicator be interpreted?
Don’t be afraid to ask questions. Without this
information documented, it will be more difficult to gain
alignment later down the track.

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Part Two

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Understanding Characterisation – Lagging vs. Leading
Tells a story of:
What actually happened
Tells a story of:
What could happen
Reactive:
Learning through Root Causal
Analysis to understand anomalies,
and put in place preventative
measures to avoid repeats
Proactive:
Understanding changes to the current
environment that will have an operational
impact, and put in place short-term actions to
eliminate (or at least minimize) risks
Lagging Indicators without Leading Indicators:
Restricts visibility as to how
outcomes will be achieved
Leading Indicators without Lagging Indicators:
Restricts visibility as to whether or not the
outcomes were achieved
Lagging Indicators
Leading Indicators

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Understanding Characterisation – Lagging vs. Leading
Tells a story of:
How well the activities are run in
attaining the result
Tells a story of:
How well the result is aligned to what
was intended
Improves Repeatability:
Fosters a culture of efficiency – where
individuals have a high level
understanding of the internal flows
Improves Quality:
Fosters a stronger relationship with the
customer – increasing satisfaction levels
Process Indicators without Outcome Indicators:
The likelihood of process
experimentation is reduced, making it
less likely to garner an even better
outcome
Outcome Indicators without Process Indicators:
The likelihood of standardising processes
is reduced, as case-by-case exceptions
begin to become the norm
Process Indicators
Outcome Indicators

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Most indicators are Lagging/Outcome
• Need to move out from Quadrant 2 to focus on repeatability
and predictability!
Process
Outcome
Leading Lagging
- Stock Turns
- Aged Analysis
- Excess Stock
- Actual vs. Budget
- Service Level
- Recommended vs.
Approved Orders
- Forecast vs. Reviewed
Exceptions
- Forecast Changes within
Lead Time
- Projected Out of Stock
- Projected Excess
- Projected Inventory
Investment
- Recommended Orders
- Forecast Exceptions
1
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4
Understanding Characterisation – Example Indicators

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Tells a story of:
How an organisation perceives itself
Tells a story of:
How an organisation is perceived by the
‘outside world’
Increased Efficiency:
Allows for the evolution of the ‘in-
betweens’ – what the customers don’t see
Increased Growth:
Allows for the evolution of the ‘ends’ – what
the customers see
Internal Indicators without External Indicators:
Diminishes an organisation’s ability to re-
evaluate itself against the market, and
reduces it’s capability to predict upcoming
trends
External Indicators without Internal Indicators:
Diminishes an organisation’s ability to
understand it’s end-to-end process, treating
what happens between Ordering and
Delivering as a ‘black-box’
Internal-Facing Indicators
External-Facing Indicators
Understanding Characterisation – Internal vs. External-Facing

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True
Performance
Measurement
Focus Areas
Understanding
Maturity
Understanding Characterisation
Developing Measurement Foundations
Part Three

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The 8 Aspects of Performance Measurement
• There are 8 key aspects to measuring performance, which can be broken down
into 3 maturity levels
1. Build – Budget, Evaluate, Control
• When organisations are asked why they have Performance Measurement
indicators, typical responses revolve around:
• “To track budget and delivery. To evaluate progress and performance. To
control costs.”
• The above responses only provide a view into what is measured, and does not
answer the question of why they are measured. It is crucial to understand the
underlying factors – the needs and the ambitions of the organisation – not just
what sits on the surface.
Build
Excel
Sustain
Understanding Performance Maturity – The 8 Aspects

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2. Excel – Learn, Improve
• There are only a few organisations that will respond along the lines of:
• “To identify the areas where there are gaps, and seek
opportunities to learn and improve.”
• This mentality allows organisations to further develop themselves,
passing benefits to their customers, who experience higher service levels
and better quality products and service.
3. Sustain – Promote, Motivate, Celebrate
• The organisations that best use their indicators will not only learn and
improve, but promotes the application of best practices and builds a
strong sense of motivation among staff.
• Finally, successes need to be shared and celebrated amongst those who
made it happen! A jovial & collaborative environment develops even
higher motivation levels, and opens the doors to new improvement
opportunities.
Build
Excel
Sustain
Understanding Performance Maturity – The 8 Aspects

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True
Performance
Measurement
Focus Areas
Understanding Maturity
Part Four

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There is more power in
unity than division
– Emanuel Cleaver
Focus Area #1

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Step 1:
Build top-down
indicators on the
same data-sets,
enabling the ability
to ‘drill-down’
KPIs must be linked to the organisation’s high level strategy
• The ability to flow down through each level of the organisation
is extremely important – from the executive level, down to
middle manager, down to team leaders and members
Whilst vertically traversing indicators are good, horizontally
traversing indicators are better
• A one team culture is developed, where all parties work
towards a common goal – rather than having conflicting goals
and measures across each department (the ‘silo effect’)
General
Manager
Demand
Manager
Marketing Sales
Supply
Manager
Purchasing Distribution
1
2
Step 2:
Convert these to transversal indicators,
with cross-team collaboration
Focus Area #1: There is more power in unity than division

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KPIs in Isolation
• Inventory Turns is typically used as a measuring stick for
performance. More often than not, organisations are continually
aiming to drive up this measure.
• Reviewing the Inventory Turns calculation used yields:
• From the above, it is clear that there are two methods to drive up
the number of Inventory Turns:
• Increase sales, or
• Decrease inventory
• The quickest and easiest method is to simply decrease inventory –
ordering fewer quantities, or even stopping the ordering process!
Whilst the inventory may turnover quicker, you will soon see sales
and service levels plummet, due to stock outs, and as a result, the
Inventory Turns measure will nosedive.
KPIs in Collaboration
• Each Performance Measure needs to have an equal and opposite
measure, for a complete view
• For example, Inventory Turns can be tied together with Service
Levels, measuring efficiency, whilst maintaining servicing by the
Supply team and fostering innovation within the Marketing team

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It isn’t just about uniting information, but people
• Of course, it is quite easy to put two indicators together, but how about
putting two different teams together and getting agreement? How about
three or four teams? On paper, the processes and systems may be top
notch, but it requires people to keep it together – and it’s all about
allocating the right tasks to the right teams.
My team should own the forecast, because I trust them more
• Supply Chain wants to own the forecast – in order to gain tighter control
over their production facilities
• Finance does – so that they can align it to their financial targets
• Marketing too – because they help to drive the demand
• But who should?
• Supply Chain are not close enough to the customer to understand
their needs, and may under-forecast
• Finance are pressured by budgets and margins, and may create
difficult to use forecasts
• Marketing are close to the customer, but may create overly
optimistic forecasts
• Demand Planners? They’re unbiased – but they are still too distant
from the customer
• What about Sales?
• They have the greatest impact on future sales, and are the closest
to the customer – and are able to understand their needs
• They will in turn pass on forecasts to the Planners for statistical
modelling, Finance for reporting, Marketing for growth and Supply
Chain for execution

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The more I see, the
less I know for sure
– John Lennon
Focus Area #2

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Try not to dilute the KPI register
• It is better to have a small handful of indicators rather
than a large catalogue
• The more indicators there are, the less importance will be
placed on each of them
More KPIs  each becomes ‘just another’ Performance
Indicator
• Individual interpretations and understandings
• Individuals ‘pick-and-choose’ what works best for them
• Strategic alignment lost
Fewer KPIs  each becomes a ‘true’ Key Performance
Indicator
• Definition and purpose is understood through the
organisation
• Hidden savings in data collection and maintenance costs:
• Labour time to generate reports
• Labour time to analyse indicators
• Data storage
Of course, it is unrealistic to have a ‘one-fits-all’ indicator
• Whilst there is no ‘ideal’ number of KPIs to hold, there
certainly needs to be an upper limit that creates a
balance between visibility and focus
Focus Area #2: The more I see, the less I know for sure
ImportanceperKPI
Number of KPIs
KPI Importance Curve
Few Many
Low
High
KPI becomes
‘true’ KPI
KPI becomes
PI

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Focus Area #2: The more I see, the less I know for sure
New year, new objectives, new measures
• In preparation for the new year, the Leadership team has run a workshop to
discuss departmental objectives. At the conclusion of the workshop, it was
agreed that each department would have a handful of new KPIs to develop
and track, totalling 20 in number, to be fully deployed by the end of the first
quarter
• By the end of the 1st quarter, 3 of the 20 KPIs had been developed. By the
end of the 2nd quarter, an additional KPI was added, and motivation around
the initiative had slumped, which had long dropped off the priority list
• The individual departments had lost clarity on the main global objectives,
and had reverted back to the day-to-day activities
• The Leadership team ran another workshop, to review why only a small
fraction of their KPIs had been developed
What went wrong? Each GM only had 2 to 3 KPIs
• Whilst each department had its own objectives, the Leadership team had
created for the wider organisation a wide spectrum to concentrate on
• In retrospect, the Leadership team conceded that 2 to 3 business objectives
(and KPIs) should have been defined. Additionally, it was acknowledged that
having individual departments owning their own KPIs was perhaps not the
best approach, and that having cross-departmental interdependencies would
have been far more beneficial

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Difficult things aren’t
easy, but they’re worth
it
– Mia Love
Focus Area #3

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Focus Area #3: Difficult things aren’t easy, but they’re worth it
Performance
Measurement
Critical
Success Factor
Business
Objective
High Level
Strategy
Avoid deploying indicators just because ‘it’s easy to measure’
• There is an inbuilt human instinct to do things in the most convenient
manner – but is the most convenient method always the best method? For
example, almost every organisation will have some form of an action
register – and typically, an associated measurement observed is the ratio of
Actions In : Actions Out
• What is the value add for the measure? What insight is gained?
• The answer is that an action is put in place to close (or drop)
actions. It may sound silly, but it happens.
Link it back to a requirement from a goal
• Great indicators are derived from a requirement, whether it be internal or
external. When the requirement is unclear and things are easy to measure,
a ‘need’ is often synthesized to retrofit a hastily developed indicator
• As displayed below, the flow needs to be from left to right, not right to left

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Effort vs. Reward
• It is especially important to note that benefits gained does not hold a
direct relationship with the amount of time/effort invested, and is
realised towards the end
• The Effort/Reward curve is broken up into three stages:
• The Start-up:
• Early quick wins due to the new task
• Enthusiasm builds
• The Dip:
• Slows down, and can reverse due to delays/issues
• Motivation decreases as there are no visible benefits
• KPIs are often discontinued, and the objective is
discarded
• The Reward:
• Any recalibrations to the objective and/or the KPI are
made
• Realignment occurs and objectives can be tracked to
fulfilment
• Organisations in the ‘Build’ state of maturity often stop during the ‘Dip’!
Reward
Time/Effort
Effort vs. Reward
1
2
3
Focus Area #3: Difficult things aren’t easy, but they’re worth it.

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Understand the customer
• The essence of any organisation is to provide a services and/or goods
to a customer. Without the customer, there would be no-one to
service, and hence no need for the organisation!
• An organisation’s offer (and their policies) must be centred around
what is most important to the customer
• Is it high service levels? Extensive product range? Short
delivery lead times? Low ordering costs?
Understand the competition
• No organisation is in an industry by themselves. Without an eye on
the competition (i.e. benchmarking against the market), it becomes
more difficult to gauge how customers perceive one’s organisation
against the rest
• It also provides an avenue to predict shifts in the market, and to
know what the customer wants before they know it themselves
Company
Cost
Competition
Customer
Focus Area #3: Difficult things aren’t easy, but they’re worth it

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It’s qualitative, not quantitative? How can I measure it?
• The question is often asked how thoughts/feelings can be measured -
the basis for a measurement is real, objective data, not subjective
opinions!
• An example Performance Measure is Customer Satisfaction – which
can be built from something as simple as a survey. Whilst the concept
may sound simple, the true effort lies in establishing the correct suite
of questions, developing a proper process and timeframe to collect
results (not too often, yet not too far apart), and not just measuring
satisfaction levels, but actively finding ways to improve it and being
transparent enough to share the results back with the customer
• As a rule of thumb, use 4-level ratings (Strongly Disagree, Disagree,
Agree, Strongly Agree)
• Avoid having a middle-ground
• You’ll find the majority of results hovering around
‘Neutral’ or ‘Medium’
• Fewer than 4 makes it difficult to see improvements in survey
results
• Decreases from ‘Very Good’ to ‘Good’ will still be seen
as ‘Good’
• More than 4 makes it difficult for the customer to fill out
• Out of 10, what’s the difference between 6 and 7?
Focus Area #3: Difficult things aren’t easy, but they’re worth it.

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Awareness without
action is worthless
– Phil McGraw (aka Dr Phil)
Focus Area #4

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Focus Area #4: Awareness without action is worthless
Indicators need to inspire action
• Great indicators are used to drive change and improvements,
not just for reporting up the chain. An indicator should not be
tracked because ‘we were told to’ – but because it adds value
to the business
• Without actions, whether it be corrective or lessons learnt, the
Performance Measure and its associated CSF becomes
devalued, and can often result in another year of missed
objectives
Performance Measurement & Process Ownership
• As previously mentioned, there needs to be a clear owner for
each objective, and its associated KPI and process
• Ideally, the owner is a single individual, rather than the
collective department. This ensures clear responsibilities, and
avoids the ‘Oh, but I thought he was working on it’

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Focus Area #4: Awareness without action is worthless
Visualisation & interactivity
are excellent techniques
Instead of burying Performance Measurements in soft-
copy reports, consider employing a physical, visual
dashboard (on wall spaces, whiteboards, etc.) in a
centralised area. Its transparency expresses to the wider
organisation the importance that management has placed
on the objectives, but also improves update and review
frequencies.
By holding cross-team stand-up discussions (as opposed to
sit-down meetings) in full view of dashboard, new ideas
will surface, and can be captured on ‘Parking Lots’ next to
the dashboard itself – which can lead to further gains
down the track.

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Allow the review/actioning process to become a habit:
• Initially, the process of reviewing and analysing these indicators to produce noteworthy actions and learnings will
take time – however, recall Focus Area #3. It will take time, and it is difficult, but it is most definitely worth it.
For lagging indicators:
• If performance was not satisfactory one period, great questions to ask include:
• What were the root causes?
• What actions are we putting in place to learn from our mistakes and prevent repeats?
• Who is responsible for the action? Do we need an action team? When is the action due?
For leading indicators:
• If we forecast a potential issue down the track:
• What options do we have to eliminate (or minimize) the impact?
• Could we have seen this issue earlier?
• Who is responsible for the corrective action? How long will the strategy take? Can it be implemented in
time?
• Are there any communication channels we need to be active in?
Focus Area #4: Awareness without action is worthless.

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True
Performance
Measurement
Focus Areas
Understanding Maturity
Summary

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Linking to a Business Objective:
• Why is it required?
• Identify the strategy and objective that needs to be met
• Identify the Critical Success Factors and how they will be measured
Develop a Process:
• What is being measured?
• Who is accountable for decisions? For data collection?
• When should the process occur?
• How should it be interpreted?
Performance
Measurement
Critical
Success Factor
Business
Objective
High Level
Strategy
Why
What
Who
When
How
Piecing it all together

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Understand how measures are characterised:
• Lagging and Leading indicators:
• Where are we tracking to be next month? What about in 6
months’ time?
• Did we achieve what we forecasted?
• How many forecast adjustments were made, and why?
• Process and Outcome indicators:
• Is the outcome as expected?
• If the same processes were undertaken, would the same outcome
be achieved?
• What incremental process changes can be made to get an even
better outcome?
• Internal and External indicators:
• How do we think we are performing?
• How does the outside world think we are performing?
• Are there any internal adjustments to be made to keep ahead of
the market?
Lagging Indicators
Leading Indicators
Internal-Facing
Indicators External-Facing Indicators
Process Indicators
Outcome Indicators

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Understand the stages of maturity, and how to progress:
• Build  Excel
• Requires implementation of root causal analysis and lessons learnt
• Excel  Sustain
• Requires a shift in the organisation towards a one-team culture
• Promotion of good behaviour and sharing successes
• Will result in improvement and innovation ideas appearing as a part of day-to-day life
Build
•Budget
•Evaluate
•Control
Excel
•Learn
•Improve
Sustain
•Promote
•Motivate
•Celebrate

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Keep in mind the focus areas:
“There is more power in unity than division.”
• How can the same dataset be transformed so that it suits the needs
of various reporting levels?
• How can the information be shared meaningfully across departments?
“The more I see, the less I know.”
• Is there an existing measure that can be used for the same purpose?
• Keep a balance between visibility and focus
“Difficult things aren’t easy, but they’re work it.”
• Understand that the most reward comes at the end, when all
processes are integrated and communicating effectively
“Awareness without action is worthless.”
• Don’t get stuck in the details of the accuracy of the information – this
will often result in no action
• Spending more time on reporting = less time for actions
• Actions result in change

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The treasure is
located at
45.342°S,
167.234°E
The treasure is
under the large
palm tree on the
corner of Cart St
and Wagon St
The treasure is
80m south, and
160m east from
the cove exit
The treasure is
100 paces south,
and 200 paces
east from the
cove exit
The treasure is
under the large
palm tree on the
island
And finally, avoid over-complication!
• As humans, we love detail, but always be mindful of what level of detail works best
We keep becoming more detail driven when finding new ways to measure things. It is important to take a step back to
understand what level of detail means the most to you.
• Can you visualise the latitude/longitude co-ordinates in your mind?
Which tree?
There are so
many around!
Reference point
exists! But the
unit of measure
is not standard.
Standard units
of measure! But
what if there are
two exits?
What about the
exact location?

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Take action
GRAis Australia’s premier, expert consulting firm specialising in supply chain & logistics strategy,
planning and execution. We offer consulting, professional services, supply chain systems, training &
education and benchmarking across a broad range of industries.
At GRA we understand the complexity of Performance Measurement.
We design and implement performance reporting and management systems
for our clients. We can help businesses from feeling overwhelmed by too
much raw data. We use our powerful tools and visualisation techniques to
distil and analyse your data to build your performance management tools to
help you drive improved performance from your business.
To find out more, call (03) 9421 4611 or visit www.gra.net.au

Ultimate guide to performance measurement

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