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What are the "right" Metrics?

by Debra Smith & Chad Smith

Einstein once said, "The significant problems we face cannot be solved at the same level of thinking as when we created them." When it comes to the metrics that most of industry uses the problem that we face is insidious. It permeates nearly everything we do as manufacturing and supply chain entities — it has everything to do with the way we think and behave as organizations. Thus we cannot simply jump into the "right" metrics without first addressing a much deeper issue, the reason why we will fail to see what the "right" metrics are.

Much of industry has lost its way in this more complex and volatile world. Read Demand Driven Performance - Using Smart Metrics and you will discover when and how the way was lost. Furthermore, you will find a different way to think, design, operate and measure a system in a more complex and volatile world, a way that is both simpler and smarter.

Metrics tell us how we are doing based on what we want to achieve. Yet it seems most companies struggle to define what they really want to achieve. In the "for profit" world it should be relatively simple — the maximization of shareholder equity. The insidious problem referred to above is the route most organizations assume is the way to get there — a route that is totally and unequivocally wrong.

A Deep Truth lies at the heart of how we perceive reality and how we behave in light of that perception. It is simply  what we know. Challenging a Deep Truth is extremely difficult, even perceived as crazy. The Nobel Prize-winning physicist Niels Bohr once said the evidence to replace a Deep Truth must be so compelling, so obvious that people must let go of their attachment to the status quo. In other words, once you see a deeper truth, you simply can't go back. "It is the hallmark of any Deep Truth that its negation is also a Deep Truth."

Today in industry we have a Deep Truth. It permeates all of our operational decision making and behavior. That Deep Truth is the assumption that Return on Investment (ROI) is maximized through and directly corresponds to the minimization of unit cost. Challenging this deep truth can career limiting. Today, who would stand in front of the CEO and the Board of Directors and say, "We absolutely should not direct our people to minimize unit cost?"

Everything from curricula approved by academia to the approaches and solutions offered by consulting firms to the major ERP software providers is a part of this Deep Truth. Indeed entire corporate careers have been built around it and devoted to promulgating it. Exposing today's Deep Truth would be threatening to many who are invested heavily in the old and they will act accordingly.

What if today's Deep Truth is totally, completely, unequivocally false?

• What if the whole idea of a least unit product cost is simply "bad math" — an inappropriate use of an equation that both economics and even physics would reject?
• What if legislation created a reporting requirement that has become the focus of accounting information and replaced, almost by accident, the real definition and rules for relevant information for decision making and product costing?
• What if all of our information systems are hard-coded to compile cost reporting and resource area measures from the wrong or misapplied rules and assumptions about how costs and revenue behave?
• What if unit cost has become such a Deep Truth that an entire discipline about what defines relevant information has been all but lost?
• What if even those who know what relevant costs should be operate inside a system that is not capable of providing relevant information in a relevant time frame to act on?
• What if people no longer question taking actions they know will lead to predictable and dire negative consequences that they must deal with later?

Answering these questions is the journey Demand Driven Performance — Using Smart Metrics is designed to take the reader on. The bottom line is that our operating methods and measures lost their way AND have failed to adapt to significant changing circumstances. That failure has left companies with little relevant information at all levels of the organization.

© Copyright Debra Smith & Chad Smith 2014
(Reproduced with permission)