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TOC-Measurements

By Paul Lawson,2014-12-01 16:19
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TOC-Measurements

Tell Me How You Will Measure Me

    It has been said; “Tell me how you will measure me, and I will tell you how I will behave (1).”

    The measurements in any organization are the No. 1 formal feedback system in that

    organization. So let‟s start with measurements in order to better understand our current

    approach to business, and to help us do that let‟s also return to our simple model that we first saw in the introduction.

    How would you be measured in such a system? If you recall it was likely that you were in work up

    to your eyeballs. Is that an issue? It certainly shows that your position is important and necessary and that you have lots of work to get through. If others have even larger piles of work it might lead you to believe that they are not as efficient as you are. Is relative efficiency an issue?

    It would seem so.

    Near-the-endBeginningMiddleEnd

    What if it was actually another department or section that wants the work next or that should have provided you with the work by now, rather than someone from your own department. Somehow

    the issue is always greater or at least a great deal more noise is generated when one department is waiting upon another. Does that every reach a stage from time to time that might be described as frustrating? Probably around about the time one department is yelling at you to provide something that is still stuck in another department somewhere else. The matter is essentially beyond your control and yet, somehow, you are apparently responsible none-the-less.

    Does this frustration ever look like becoming despair? Well probably annually if your company has performance reviews. Maybe even more frequently if you are accountable for departmental performance. Accountability for departmental performance might be some derived efficiency

    report, it might be some sort of derived profit or cost report.

Reductionist / Local Optima Approach

    The whole internal business performance measurement system is based upon local optimization, either in the form of departmental utilization/efficiency measures or as departmental cost/profit

    performance measures - or both! And we don‟t need to limit ourselves to departments within a business. It could equally be businesses within a company, or companies within a corporation.

    It takes some conscious effort to realize that the formalization of local efficiency measures through the activities of “scientific” management Taylorism is only about 100 years old (2, 3).

    Scientific management is such a seductive idea because it legitimizes the actions that we as

    individuals find so effective in our local settings (family, friends etc) and applies it directly to our work processes.

    We assume that the total performance of the system is the sum of all the local performances. In fact it is so common that we probably don‟t even give it much thought.

    This approach then is the reductionist/local optima approach; departmental cost or efficiency is just a symptom or an output of this method.

    Let‟s look at local profit centers a little closer.

    ExpensesExpensesExpensesExpenses

    ProfitProfitProfitProfit

    BudgetBudgetBudgetBudget

    Each department has a budget, representing a flow of money into the department (even if it is only a credit in a set of numbers in a management account somewhere). Money also flows out of the department in the form of expenses (again, even if it is only a debit to those same management

    accounts). The difference is the profit for that department. At the period end if you “make your numbers” there is no problem. If you don‟t make your numbers there is no other problem. We assume then that the sum of the profits for each department is the same as the total profit for the system as a whole.

    However there is condition that must be met in order to sum the local profits as we have just done. The condition is that there is independence between departments. Let‟s examine that condition.

    ExpensesExpensesExpensesExpenses

    ProfitProfitProfitProfit

     InputInputInputInput

    Output Output Output Output

    BudgetBudgetBudgetBudget

    In order to sum the local profits, indeed the local optima, the inflow of work into each department must be truly independent of the other departments. An independent input and output has been

    drawn in. If I owned a franchise for a no-names fast food shop in several different towns, then I would meet these conditions and I could sum the local profits because my input/output (customers) are geographically isolated from each other. Does this reflect reality for most

    process systems? Probably not. Let‟s have a closer look.

    ExpensesExpensesExpensesExpenses

    ProfitProfitProfitProfit

     Input Input InputInput

    Output OutputOutputOutput

    BudgetBudgetBudgetBudget

    For most systems that we are thinking of there is no real independence of the work flow from department to department. Oh, we might fool ourselves, and say yes, we have so much

    work-in-process that the work flow behaves as though it is independent (as we have drawn above) but we all know that when that urgent job needs to move through the system there are dependencies for sure. So, let‟s draw the system as it really is.

    ExpensesExpensesExpensesExpenses

    ProfitProfitProfitProfit

     Input

     Output

    BudgetBudgetBudgetBudget

    This is quite a different diagram to the earlier one. We have in reality full dependence; we can‟t sum the local profits to get the profit of the system because each department is coupled by the work flow. This is why we suffer frustration, we want to do something, but we can’t because

    we depend upon someone else doing something else first. Moreover, the output from this

    system is always less than we expect that we are capable of given the sum of the local outputs.

    Of course we can always fudge this to some extent in our annual budget round by under promising in order to ensure that we perform adequately. Overall, however, if we are measured against some standard that assumes independence such as efficiencies or cost/profit centers then the

    frustration will turn to despair.

So, How Do We Measure Success Here?

    We typically determine success in several ways. In absolute terms by net profit, in relative

    terms by return on investment, or in survival terms by cash flow (4). But how do we relate our

    on-going operational decisions our departmental decisions to overall system success? How

    do we bridge between our operational decisions and system success? Goldratt and Fox have coined this bridge the “cost” bridge (4).

    Let‟s draw it.

     IncreaseIncreaseIncrease

    Net ProfitReturn on InvestmentCash Flow

    Cost Bridge

    Local Actions

    An