I’m a big fan of the McKinsey Quarterly. From time to time there’s a post that everyone in manufacturing should read. That’s the case of a recent post that highlights a struggle that plagues nearly every industry – measurement.
It tells the story of a manufacturing plant in an all too familiar circumstance. The CEO challenged the plant manager to explain why the plant was incurring higher labor costs as margins were slumping. This proved to be a very difficult task given the complexity of the plant’s operations, and required the plant manager to analyze multiple dynamics affecting overall costs, given recent shifts in product mix and volumes.
Interestingly, the plant manager was able to show that production volumes rose substantially for a product that required costly materials and minimal labor, and that productivity in the plant had actually increased. This was nearly the opposite of what the CEO and finance department had suspected, based on a cursory analysis.
This case illustrates several important principles that can be difficult to swallow.
- The C-level will always evaluate performance based on financials. Don’t fight it. Learn to measure this way
- Good measurement techniques are complicated, but essential to the successful operations of a business
- Each company is unique and will require a customized approach to measurement; companies that only use simple financial analysis and cost-of-goods sold accounting to measure productivity and output, will have an incomplete picture of all the dynamics involved, which can in turn can lead to poor business decisions on how to produce and price products
Measurement isn’t just an additional source of overhead. It is a critical requirement for evaluating actual productivity while being a challenging science we should all seek to master.