How to Tell Your Partner They’re Screwing Up
Two keys to strong partnerships are (1) knowing what is expected, and (2) knowing how you’re measuring up to those expectations. Whether your partnerships are internal or external, feedback is important to building strong relationships. In addition, feedback needs to be a two-way street where both sides measure the other’s performance. I’ve seen far too many situations where one party thought everything was fine, while the other party was ready to jump ship.
Why Measure Performance?
Measures help communicate what is important and whether those objectives are being met or exceeded. When partners know the score, they can push for improvements that benefit everyone, which continues to build trust and communication, the foundation for strong partnerships.
Most people like to be part of a winning team, and to know if they are winning, it helps to know the score. For employees, knowing how they’re performing not only helps them improve, but it also removes the stress of uncertainty. If things aren’t good, they usually know either how to correct the situation or that management needs to provide guidance. When companies openly communicate their overall performance score to employees, they can reduce turnover by squelching any rumors that might drive turnover and, in many cases, can avoid unionization.
The same is true with suppliers. If they know how they’re performing, they can make improvements that could reduce costs, improve delivery performance and quality, and potentially increase their revenue and profitability as well.
Knowing What’s Important: Setting Objectives
Any partnership, whether internal or external, has to have objectives that are common to both parties. For instance, if the partnership is between operations and sales, meeting the promises made to the customer has to be important to both parties. Coming together to achieve the objective creates a solid relationship, like a husband and wife who both want to raise the kids well and thus share the load, perhaps doing different things that help achieve the overall objective.
As discussed in Chapter 2, the memo of understanding with your suppliers does just that. It clarifies the objectives and how each side is expected to contribute. For suppliers, the three key performance criteria are usually quality, delivery, and cost reduction (we’re looking for cost improvement, not necessarily the lowest possible cost). For operation partnerships with engineering, the key criteria might be meeting/exceeding the customer’s needs, designing a product that can be manufactured at a reasonable cost and lead time, and making sure the products can be successfully transitioned into production. For partnerships with accounting, criteria might be timely and accurate reporting, assistance in understanding and resolving issues with the financial statements, and strong metrics for accountability.
Setting expectations happens at the beginning of the relationship. For an employee, expectations might be listed in an employment agreement or the employee handbook. For suppliers, a certification process during the qualification phase may lay out and measure the supplier’s key attributes, which will be reassessed regularly. The objectives for the relationship might include
Reduce costs
Increase quality
Improve customer service
Raise operating efficiency
Lower total inventories
Eliminate/minimize inspections
Eliminate scrap and rework
If partners are measuring different things or one side isn’t measuring anything at all, the relationship is out of balance; one partner thinks it is doing just fine while the other partner is worried. For example, a client company produced a medical supply item and thought their shipped on time was about 60 percent, which is not good. Several important customers were starting to look elsewhere for supply. When I went in, I found that my client was measuring shipped on time based on order line items. Using this system, if there were 10 items on the order and 9 were shipped on time, their score was 90 percent. However, the customer was unhappy because one of the items was late. Because each side measured shipped on time differently, they were not seeing eye to eye, and the company was at risk of losing valuable customers.
At another company, the order line items were part of a residential lawn sprinkler system. If one item was missing, even if it was a low-cost and seemingly less important “C” item, the system as a whole could not be installed. My client found that when they had a shortage, the installer often went to the competitor for the entire system, not just the one missing part. The client did not measure order fulfillment and they certainly did not measure lost sales. It turns out they could have increased revenues by 5 percent to 10 percent by simply performing better, but first they had to realize they had a problem.
My philosophy of shipped on time was that either the order was shipped complete and on time, or it was a complete miss. At the medical supply company, when we measured shipped on time on that basis, we discovered it was a dismal 24 percent. No wonder the customers were so unhappy. As it turned out, the VP, Operations, knew that the shipping performance was that bad, and he sandbagged the numbers. When that came to light, the CEO fired him. Amazingly enough, when we began measuring shipped on time properly, the problem became obvious and within a month, the real performance moved to 80 percent and eventually to 98 percent. Many times, people simply need to know what the real score is in order to improve it.
What Measurements Accomplish
Measurements are intended to improve performance and change behaviors. Other than supplier scorecards, most measures are internal and many are based on the financial reporting system. However, a set of objectives between partners should have defined measures so that both parties know if the objectives are being met. The objectives should be the business outcomes that benefit both partners. It is important to develop measures that look at both historical perspectives and forward helping to predict the future. There are two reasons to start measuring as soon as possible in the relationship:
Often the biggest improvement happens at the beginning of the relationship.
When people see that the relationship is working early on, they’re motivated to continue, which helps overcome doubt and inertia.
Many measures are designed as the gauges of a process, telling people if the process is under control and producing the expected results. Other measures are designed to improve productivity and hold people accountable for results.
The best measures reinforce discipline in the organization, which requires well-defined systems and processes. Then measures reinforce behavior and accountability, which promotes adherence to the rules of the systems and processes (see Figure 6.1). Overall, strong operations discipline leads to an environment of continuous improvement, which fosters evolutionary change over time.
Figure 6.1 Operations discipline
What Gets Measured Gets Managed
“What gets measured gets managed” is the watchword in partnerships. By letting people know the score, behaviors change, and performance and communication improve. Over the years, I’ve seen many suppliers react with great surprise when we presented them with a scorecard of their performance. They thought they were doing fine when we thought they were one of the worst suppliers we had. Agreeing on how performance will be measured is a key item in the memo of understanding that serves as the foundation of the relationship.
There are four areas of measurement that are important for suppliers:
Quality
Delivery
Cost reduction
Customer service and responsiveness
Quality measures should be a function of the total failures, both incoming and in-house (as used), as a percent of the total parts received. Delivery should be a function of late (or exceptionally early) items as a percent of total received, to calculate an on-time percentage. Cost reduction is a function of the total cost reductions the supplier has suggested. Customer service and responsiveness, an often overlooked measure, can be a function of how easy the supplier is to deal with on invoice problems, late orders, emergency situations, shipping/packaging quality, and so on. Often, the input for these measures may come from other departments in your organization such as accounting. Not only should the raw scores in each area be traced and reported, but also the trend should be monitored and reported to show whether improvement is occurring.
The Supplier Self-Inspection Program is a great way to measure supplier performance. Its goal is to assure the customers that the product would pass an incoming inspection. Again, it is critical that the measures be the same on both sides as laid out in the inspection requirements so that both parties measure the same way. Then if the supplier has a certified measuring process, the customer does not need to do an incoming inspection at all. Simply tracking field failures and on-line failures will tell you whether the supplier should remain certified or not. If so, the receiving party doesn’t need to do further inspections, saving time and expense. The ultimate supplier partner is one that meets expectations on all of the performance criteria including a self-inspection program.
A program of supplier reviews and audits can boost your supplier partners’ performance over the long term. Your company should conduct face-to-face meetings with key suppliers three to four times per year. It is best to alternate the location between your facility and theirs so that both parties can see how the other operates. During these meetings, you should review
Monthly performance reports
Performance as measured by the on-site audit
Any new product development or changes that impact the supplier
Forecast performance and changes
Action plans to increase the value provided by the supplier
The elements of total cost of ownership (TCO) and elimination of waste
The status of the overall relationship
It is useful to have company executives sit in on a couple of these visits each year to help develop the relationship at the top. Those relationships can be useful if there are ever problems that require higher-level intervention.
Measures can drive performance improvements in many kinds of relationships. In my job as VP, Operations, we used sales forecasts as part of our operations and supply chain process. For years, we had tried to get more accurate forecasts from sales, but they did not see the value in providing them; so when they did, they were often highly inaccurate to ensure that they could meet or beat their numbers. Then one of my managers came up with an idea: create a competition among the sales-people to provide better forecasts and reward the winner each month with lunch. I doubted that a lunch by itself would drive change to the degree we needed, so we decided to post the results each month in the lunchroom. By using peer pressure and tapping into salespeople’s competitive nature, the forecasts became more accurate very quickly. The measure was simply actual as a percent of forecast, and the person closest to 100 percent won. We measured that way because a low miss and a high miss were both just as bad. We knew we would not get to perfection since accurate forecasting is an oxymoron, but we got much more useful forecasts than before.
Another thing we measured internally was the number of days from month end to publication of the financial statements, which at many companies takes 20 to 30 days. Our CFO drove improvement to the point that the accounting department published the financial statements four days after month end. Even though financial results are backward-looking measures, getting them promptly helped the VPs and managers improve performance throughout the company. Then, combined with other changes in our cost-accounting system, we could access our performance results weekly or even on demand. I had daily information on shipments and weekly data on overtime, scrap percentages, supplier performance, and whether suppliers were missing their due dates. In many cases, all I had to do was walk around and review the scoreboards in each department to get a sense of how things were going. This allowed us to make changes well before month end to correct any issues.
Sample Measures for Internal Scorecard—Higher Level
Executive level
Revenue growth
Profit growth
Cash flow
Sales
Sales to plan
Percent of sales from new customers
Cost of sales as percent of total sales
Accounts receivable days
Customer accommodations
Operations/supply chain
Order lead time
Shipped on time/perfect order
Labor as a percent of sales
Inventory days
Warranty as a percent of sales
Design engineering
Revenue from new products
Days to first revenue from new products
Products successfully transitioned into production
Projects completed on time and on budget
Accounting
Number of days to close
Accounts payable days
Most measures should be tracked over time so that you know if things are getting better or worse, especially if you have a continuous improvement culture in your organization. All of our key measures were displayed with a trend line showing change. It is important that the measure be calculated so that an upward trend line shows improvement. Psychologically, people understand that lines that go up are good and lines that go down are bad.
The chart in Figure 6.2 shows how materials cost is performing. Since materials costs are almost always variable, it is important to measure them as a function of sales/revenue. As sales increase, one would expect materials cost to increase in real dollars as well, but is it increasing as a percent of sales (which is bad)? Since there is the potential for product mix to influence that, the timeline should be relatively long. Most of the items above the gross profit line such as materials, labor, cost of sales, commissions, and warranty (your variable costs) should be measured as a percentage of sales, not as a raw number. For instance, if labor this month was $500,000 and last month it was $450,000, is that bad? You really don’t know until you know what shipments were and how much labor should have been spent to make those shipments. If sales last month was $4,000,000 and sales this month is $5,000,000, the $500,000 labor number is actually better (11.3 percent vs. 10 percent).
Figure 6.2 Material % trend
The chart in Figure 6.3 shows the performance of a fixed cost element, operating expenses. Because those costs are not relative to sales, an uptrend is bad, as indicated by the upward arrow. In this chart, the trend line is going up, which is also bad. Without the trend line, it would be hard to tell in this case whether things are getting better or worse, but the trend line makes it very clear.
For items below the gross profit line, comparison should always be made to budget. The items below the line should be largely fixed costs and they should meet expectations based on company size and performance to plan (budget). For example, if the administrative function is designed to cost $600,000 for a $50,000,000 company, then monthly comparisons should look at budget versus actual spend, considering a planned cost of $50,000 per month.
Employees should also know how the company is performing. Many middle-market company owners are afraid to reveal the company’s financial performance to the employees out of fear that if the company is making too much money, employees will expect raises or that if performance is poor, employees will leave. Over the years, I’ve found that employees appreciate the openness, and they expect the company and its owners to make money. Many people, even at the lower levels in the organization, understand risk and reward and feel that the owners deserve a reasonable level of reward. If you try to hide that performance, trust evaporates. It benefits the company as a whole to share basic sales, costs, and profit before tax with your employees.
Figure 6.3 Operating expense