In this series on dashboards we now look at misleading metrics. Previously we examined the benefits of dashboards for job shops and the key operational measures and financial KPIs that your dashboard should include.
In this article, we’re actually going to do something different. We’re going to discuss the metrics that job shops commonly put on their dashboards – that should NOT be there -> MISLEADING METRICS!
Metrics can be misleading and your dashboard may be telling you the wrong thing if it includes these metrics.
Misleading Metrics #5: Number of Jobs Completed
The first metric to avoid is the Number of Jobs Completed. Surely job shops should monitor how many jobs they have completed, shipped, and invoiced in a period of time, right? Wrong.
Job shops often have a wide range of jobs. Some may be 2 hours and others 1000 hours. Jobs are not equivalent so Number of Jobs Completed is a terrible productivity measure.
In addition, Number of Jobs Completed is an example of a local optima – doing what’s best for a part of the system (a metric in this case) not the system as a whole. The problem is this metric creates incentives to prioritize jobs that are easy to complete, not jobs that need to be done. Ideally jobs would be given priority based on their due date, not your ability to get them completed as soon as possible.
If your shop tracks the Number of Jobs Completed, then there is an incentive to finish five small jobs instead of one big job with much more Throughput-margin than the 5 small jobs combined, even if the large job is due before all of the smaller jobs.
And of course, if you prioritize which jobs to run based off of a bad measure, this can hurt your DDP. That is why Velocity Scheduling System does not prioritize the number of jobs that can be completed, but rather helps you get more jobs done with the same people and resources. That way you can do both – be on time and get out as many jobs as possible.
Other similar local optima metrics include tons per hours, linear foot per hour, etc.
Misleading Metric #4: OEE for Every Resource (and other “efficiency” measures)
Our second metric is OEE (Overall Equipment Effectiveness), when applied to ALL your resources. OEE is a metric that has gained popularity in recent years. OEE is an attempt to measure productivity; many times, when OEE is monitored it is done so at a local level and only results in measuring phantom productivity, not real productivity.
To illustrate what we mean, suppose your shop fabricates steel assemblies, and most, not all, of the parts that come off your laser tables and CNC machines wind up getting welded together. Would improving the OEE of your laser tables and CNC machines get more parts welded together so that you got more jobs completed, shipped, and invoiced? No, not if welding is your constraint.
In fact, if you produce more parts than what can be welded up you only create excess inventory. And what do we all know about excess inventory – it is not a good thing.
Thus, OEE at a machine level is not nearly as meaningful of a metric as people would have you believe it is. The real question with OEE is: if OEE improves does that mean you will make more money?
This is only true of the OEE of your constraint, not all of your resources. If a metric improves and you do not make more money, it does not matter. Data for data’s sake is irrelevant and worse, misleading.
Misleading Metric #3: Job Profit
The most common WRONG headed measure is Job Profit. Job profit is misleading and again, just like the number of jobs completed and OEE, a metric that can create many bad behaviors.
For example, many shops will try to run jobs on their “cheaper” machines to save money and increase Job Profit. Many times, they must wait for the cheaper machine to free up and in so doing actually delay the completion of the job. The same line of thinking applies to labor as well.
For instance, suppose you ran two identical parts on two different jobs. Further suppose that these two parts were on the same PO from a customer and that the customer was paying the same price per part.
Now, suppose the first job used a highly skilled employee and the second job used a lower skilled employee. It would not be unreasonable to find out the highly skilled worker finished quickly at a lower cost and that the lower skilled worker took more time and completed the job at a higher total cost. At the end of the day these two jobs would report two different levels of profitability: Job 1 being more profitable than Job 2.
However, is the customer paying more for Job 1 than Job 2? No. Did your total payroll change because worker 2 took more time? No. Did the shop’s overall profitability change in this time period? No, the two parts were completed, shipped, and invoiced. So if nothing is different how can Job Profit be different?
Here’s the bottom-line: We all know that a job taking longer to run is not a good thing. The problem is that it does not cost us anything.
So, if a job taking more time does not cost us anything, how can we measure the impact of a job taking longer to run? Well, that’s subject of another article (or book). But it is exactly what we do in Velocity Pricing System. We give you the tools to quantify the impact of jobs running slower than planned – and it has nothing to do with “cost”, yet it can cause your company to not be profitable, just not your jobs.
Misleading Metric #2: Cost of Poor Quality
Quality is a necessary condition, but one that has become an end unto itself. Yes, you MUST produce high quality parts, there is no doubt about it. But the reason your business exists is not quality – it is to make money, and a necessary condition to making money is producing quality parts and products. But let us not get the two confused.
Go into many shops and you will hear all about the “cost of poor quality”. The QC manager will often bemoan this as the largest obstacle to being profitable. While we agree there is a cost of poor quality, the only “cost of poor quality” would be payments made on warranties or the totally variable costs to replace a defective item. That is it.
It is not the labor that goes into the replacement part. It is not the overhead that is required on the replacement job. Those were already going to be paid, regardless of whether or not you produced defective parts in the past.
We know that having low quality creates problems. However, it is our measurement of the “cost of poor quality” that is flawed. You see, the actual real costs associated with defective items is much smaller than what your QC manager is telling you; however, the impact on your shop’s profitability is larger than even he knows.
How can the cost of poor quality be lower yet the impact on profitability be larger? We explain this in Velocity Pricing System; there we focus on getting rid of the poor quality’s impact on profitability – not the cost of poor quality.
Misleading Metric #1: Revenue
Wait a minute. Revenue?!
You may not totally agree with the notion of doing away with Job Profit, yet you recognize there is something to be said for profitability not changing based on what resources make a job. And perhaps we have a better defined “cost of poor quality”, sure. But to throw out revenue?
Yes, we are throwing out revenue. The reason is that revenue is not The Goal. Again, it is a form of local optima. We have heard shop owners in the past tell us they would like to “grow their top lines”. Our next question is, “Is revenue more important than the bottom-line?”.
We have seen shops that grow in revenue yet decline in profitability. The two are linked, but not in the way we think they are.
That is why some shops are able to have a larger bottom line yet not necessarily grow on the top line – and it has nothing to do with saving “costs”.
The reason is that different jobs produce differing levels of margin. In many cases, we find that clients use cost accounting to define this margin coming from their jobs. As a result, they are viewing their jobs’ margin in a totally distorted manner.
Suppose you knew the real margin coming from your jobs. It would be much easier to focus on selling the types of work that bring in the most margin – and they may not necessarily bring in the most revenue.
Now, let us take it a step further here. Suppose this is true – margins may be higher on certain jobs which do not necessarily have the highest revenues, would that impact any of the employees at your shop? You would not happen to have anyone on your staff who have their compensation based on hitting certain revenue targets, would you?
We have seen shops that pay salespeople and sometimes even the general manager has a bonus tied to the shop’s revenues – not its bottom-line. Think about it: What if your incentive system encouraged employees to take actions good for them (focus on revenue, not the bottom line) yet were not the most profitable actions for the company?
We find this many times with clients we work with. With Velocity Pricing System we provide you and your team the right metric to focus on: the one that leads to substantially increased Net Profit.
As Dr. Goldratt would say, “Tell me how you measure me, and I’ll tell you how I behave.”
When performance is measured with a specific metric, we tend to optimize everything to hit it, regardless of the consequences that arise. Improper metrics could:
- Encourage “gaming” the system
- Incentivize the wrong aspects of work
- Erode morale
- Harm customers
- And, hinder our profits!
It is time to stop thinking of your metrics as standalone, one-off attempts to become a “data-driven business leveraging big data to transition to Industry 4.0”. Metrics drive behaviors which drive results.
Simple, yet powerful.
If you want the results, you need the right behaviors. If you want the right behaviors, you need the right metrics. A key to getting the right metrics is to ensure you do not have the wrong metrics.
Wishing you success from the Science of Business TEAM:
- “Dr Lisa” Lang, Chief TOC Expert, Job Shop Whisperer, TOCICO Certified
- Brad Stillahn, Pricing Expert, CIPM, CIRM, TOCICO Certified, Certified Exit Planner
- Beau Ganas, Throughput Accounting Guru, CPA, CMA, CFE, CIA, CISA and TOCICO Certified
Blah, blah, blah – who cares? The key is that our clients get results! Ask us about paying based on YOUR results!
P.S. If you’re ready to go beyond looking at data, and are ready to IMPROVE, check out Velocity Scheduling System to improve lead-times, improve due date performance and reduce chaos!
P.S.S. If you ready to understand how you really make money and take your profits to the next level, check out our Velocity Pricing System (it’s more than just pricing)! It’s the ultimate jobs shop costing system – understand how, where, why you make money (or not). Understand your capacity and resources so that you can quote fast and ensure profitability.
P.S.S.S. This is Part 4 of a 5 Part series. Read the entire KPIs and Dashboards series.
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