what's the point?

Editor's Note: No two successful performance management programs are the same, but all successful performance management programs share common principles. To shed some light on what separates a good company from a great company with regard to performance management, DC VELOCITY will publish a column on one of the 12 Commandments of Successful Performance Management each month. This month we drill into the fourth commandment: Beware.

The Fifth Commandment
Beware: Know the point of your metrics and be careful not to get sidetracked

The scenario is all too familiar: Tired of fielding complaints from customers about poor service, senior management decides to crack down on the DC staff. It gathers the supervisors, planners and expeditors together to announce that it expects everyone to pull together to improve delivery reliability. As an incentive, it's establishing a bonus program; workers will be rewarded based on their performance against a standard metric, say, the DC's fill rate.

In the following days, managers draft "expedite" lists and workers spend hours chasing orders that are due to ship in hopes of achieving world-class performance. What they don't realize, however, is that the company will never achieve world-class performance by focusing on an isolated metric—be it fill rate, inventory turns or order cycle time.Worldclass performance is a result of world-class process—devising a system for perfectly executing not a task like getting a box to the dock, but a comprehensive multi-step process, like order fulfillment.

Focusing exclusively on one small task is like painstakingly caulking a window frame while the ceiling collapses around you. Nonetheless, companies fall into this trap all the time.What follows are a few true-life examples (with identifying details changed) of how companies have gotten sidetracked from their main mission by a metric (in this case, fill rate):

• Company A receives an order for a printer cartridge on Monday but holds off sending the order to the DC because that particular cartridge is out of stock. When the cartridges are finally restocked on Thursday, the order is forwarded to the DC for fulfillment on Friday. By now, the impatient customer has had to wait five extra days for the cartridge. Nonetheless, Company A, which measures fill rates by how quickly the order is filled once it hits the DC (not from the time the order was received), proudly reports a 100-percent fill rate.
• Company B receives an order for a truck engine on Monday. Though its normal cycle time is two days from order to shipment, the company quotes the customer a five-day cycle time because it's experiencing unusually high demand.When it ships the engine out on Friday, Company B reports that it has achieved a 100-percent fill rate because it shipped the product when it said it would (but not when the customer needed it).
• Company C, a videogame manufacturer whose plant runs 24 hours a day, ships games to DCs nationwide. The cutoff for trucks leaving the plant is usually 9 p.m. During the peak demand period, production falls behind and an order misses the truck. However, the plant continues assembling the order and finally sends the carton to the shipping department at 10 p.m. Shipping clerks fill out the manifests and send the carton to the dock—where it sits until the next evening. Though the carton languishes on the dock for nearly 24 hours, Company C's computer system shows the order as "shipped" and reports a 100-percent fill rate.
• Company D boasted of stellar fill rates (98.5 percent) for books shipped from its DC to retailers.Nonetheless, customers were constantly on the phone complaining about lousy service. An investigation revealed that though the books left the DC on time, they rarely arrived at the customer's receiving dock during the scheduled delivery window. When they failed to show up, the retailer was forced to reschedule the delivery, which meant delays of up to three days.
• Company E's delivery performance had slumped, with fill rates dipping into the low 70th percentile. Management stepped in to offer bonuses if workers could raise that to 99 percent. In short order, they were hitting the target regularly. What no one noticed was that a spike in expedited shipments had cost the company over $1 million.

Are your orders perfect?
It's safe to say that claims that a company regularly achieves a 100-percent fill rate or ships products "on time" is no guarantee that the customer will receive the goods on time. Nor does it mean the customer will get the products it ordered in the quantity ordered or that the box will arrive undamaged and with a correct invoice. It simply tells you that the company has found a way to hit one particular target consistently.

To measure what's truly important to the customer, you must turn to the Perfect Order. Though slight variations exist, the Perfect Order is usually defined as an order that's delivered on time, complete, damage free and accompanied by the correct invoice.

And it's not even that complicated to calculate: You simply multiply scores for the various component measures. For example, if a company reports that it has a 95.0-percent performance record for on time deliveries, fill rates, correct invoices and damage free shipments, the resulting Perfect Order index would be 81.4 percent (95% x 95% x 95% x 95%). Had each of the scores been 90 percent, the Perfect Order index would drop significantly—to 65.6 percent.

The lesson is simple. Manage your business with process metrics, and evaluate your business using results metrics. Used properly, process metrics drive the desired results.