Productivity - Measuring What Matters
In the 1936 Charlie Chaplin movie “Modern Times”, we see several hilarious attempts by the Management of Electro Steel Corp at raising the productivity of their factory workers, ranging from speeding up their assembly line to deploying a robotic feeding machine to keep them working even during lunch. While the movie is exaggerated to prove a point, it reminds business leaders to be thoughtful before they implement productivity enhancing programs that may end up having unintended consequences.
Let us take the simple example of an organization with R&D, Manufacturing and Sales functions. It is common to see functional leaders use productivity metrics such as revenue per salesperson, manufacturing cost per unit sold and number of scientist-months per product developed. While these metrics are valid in isolation, they are exactly that – isolated. For instance,
- Focus on revenue per salesperson / account / product would keep sales cost low but could drive behaviors that compromise profits through poor pricing or high inventory demands.
- Focus on manufacturing cost per unit sold drives profitability but could discourage allocating manufacturing time for absorbing new technologies of the future because short-term benefits are not visible.
- Focus on minimizing R&D effort per product developed could unintentionally encourage “quick and dirty” product development which could result in future quality issues.
So how should we measure productivity without driving isolated incentives?
If we step back, the productivity imperative is driven by the need to maximize output from a given quantum of resources. Resources are typically either capital, human, raw materials, or other operating expenses. An excellent metric that encompasses all these input resources is Return on Capital Employed.
One might then consider three principles while defining productivity metrics -
1) Link productivity metrics to drivers of ROCE
2) Align productivity metrics across functions
3) Cascade productivity metrics from ROCE to the most granular unit of operation in a way that employees are clear about their respective productivity objectives
The emphasis on the words “link”, “align” and “cascade” is deliberate, as these are easy to miss unless consciously addressed.
Let us now look at these in the context of the simplified organization from earlier. For commercial organizations which tend to restrict their focus on revenues and sales and marketing costs, linking productivity to the above formula reveals metrics that commercial teams can take responsibility for. For instance,
- Evaluating profit per unit manufacturing capacity versus absolute profits while developing new business opportunities not only links to ROCE but also aligns to manufacturing productivity maximization in capital intensive manufacturing industries.
- Days Sales Outstanding (DSO) is a powerful and yet underutilized productivity metric which can directly impact the working capital component of the ROCE formula.
While manufacturing productivity is a much better researched subject, the biggest impact is created by cascading metrics to the shop floor:
- Visual tracking of total production volumes (per day / week / month, net of quality defects) has perhaps the most motivating influence on production staff across industries.
- Production takt times and cycle times which drive fixed asset productivity are easily relatable to shopfloor staff who are best positioned to participate in Kaizen drives to reduce the same.
R&D productivity is a bit more challenging to measure, given the multi-year durations and scientific uncertainties involved. As a result, there is often a tendency to measure effort (e.g. number of experiments conducted) rather than outcomes. Some ways in which outcomes and effort can be better measured are
- Cascade end outcomes down to granular milestones whose completion can be tracked at a quarterly or half-yearly frequency. This approach not only keeps all teams aligned and motivated, but also provides enough information to take “kill or continue” decisions on projects that are not making progress.
- With regards to measuring effort, several studies have shown that scientists spend less than a third of their time in activities that actually move the problem forward. Therefore, rather than measuring and improving how much gets done during that one third of their time, it would be more impactful to reduce the amount of time spent on non-value-added activities. Simplifying processes, automating manual workflows, data processing & reporting, centralizing less technical or non-technical activities, and of course, doing things right first time and avoiding rework are all ways to maximize actual value-added time.
I have been part of several productivity transformations over my years in management consulting and Pharmaceutical R&D / manufacturing operations which can be related to these principles:
- At a pharmaceutical manufacturing plant, cascading sales targets to the shop floor in the form of “batches per month” helped galvanize manufacturing staff to increase monthly plant output across commercial and new products by 50%.
- At an automotive component manufacturing plant, the shopfloor staff gave ideas to reduce takt time from 10 seconds to 9 seconds that helped increase production capacity by 10%, thereby eliminating need for investing fresh capital in a new production line to cater to a blockbuster new car model.
- At a pharmaceutical contract manufacturer, evaluating business opportunities in terms of contribution margin per unit of manufacturing capacity helped revise the pricing model to be more competitive with the market as well as invest in additional capacity at the right scale and cost.
- At a software development firm, tracking and reducing the frequency of invalid bugs reported significantly improved development productivity by eliminating non-value-added time spent on resolving these.
- At an R&D organization working on several dozen multi-year projects, dividing each project into milestones until launch and tracking number of milestones completed on time every six months helped reduce delays while also enabling taking timely go/no-go decisions on continuing funding for projects. Within three years of adopting this approach, this organization was able to triple the number of products developed per year with the same level of staffing and funding.
- In a Contract Research Organization (CRO), cascading the targets across teams, planning, tracking and simplifying the daily workflows enabled to increase the compounds delivery per scientist by 30%.
Improving ROCE and productivity requires comprehensive and detailed efforts. Organizations that drive piecemeal and superficial efforts are often unsuccessful, and resort to the only apparent lever in their hands – cost reduction. While this is a valid lever and gives an immediate boost to the numerator of the ROCE equation, its indiscriminate use can lead to unintended consequences such as losing top talent, compromising long-term product pipelines, and diluting efforts towards customer satisfaction. Measuring what matters, on the other hand, creates a positive energy in the organization of measuring and achieving metrics that every employee feels empowered and motivated about, all functions are aligned about, and ultimately, drive superior company performance.