How to effectively measure performance at your plant

Most companies have a system in place for tracking a variety of financial and non-financial measurements. Modern systems such as your CMMS and any integrated applications have a wealth of reports and analytical tools due to the sheer volume of data points that can be tracked. The biggest problem today seems to be the inability of management to prioritize which data to track, as well as taking decisive action due to results. 

Thus, maintaining balance in preparing a performance scorecard can be a daunting task in today’s world of never-ending mergers and acquisitions, fast-paced technological change, and heavy competition on an international scale. Senior management must find ways to link lofty strategic goals promising high performance, to measurable actions that are meaningful to the people in the field and on the shop floor.

A Performance Management Scorecard (PMS) helps manage performance in a balanced, systematic, and consistent manner. It is a management system that translates vision and strategy into a tool that effectively communicates strategic intent, and motivates and tracks performance against established goals. The PMS helps you implement your plan and control performance by presenting, in a simple fashion, many of the seemingly disparate elements of a company’s agenda.

The PMS should be forward-looking. It should extract maximum value from historical information and operational experience, while challenging you to plan for and into the future. Thus, systems such as your CMMS are required, not only as a depository for historical data, but also as a planning tool.

The PMS helps pull together all the performance measures into a coherent system, from both the financial and non-financial dimensions. This is critical for support areas such as asset management because financial measures are so far removed from the reality of day-to-day operations. By using the performance management scorecard in conjunction with the CMMS, asset managers have a means to translate the long-term strategy expressed in primarily financial terms (e.g., increased Return on Capital Employed) into tactics and actions expressed in more meaningful non-financial terms (e.g., downtime reduction).

The PMS measures across the following five dimensions:

1. Customer dimension — To achieve our vision, how should we appear to our customers? The customer dimension considers the business through the eyes of its customers. In a manufacturing environment, customer measures are tracked using software applications such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and sales automation. For a service like asset management, customers can be external (e.g., service depot or maintenance outsourcer) or internal (e.g., shared service such as facilities management).

There are three ways to increase customer-based revenue, primarily relevant to external customers. The most popular approach taken by companies is through customer acquisition. Measures include number of new customers, proposal win rate, and so on. The next most popular approach is through customer retention. Sample measures are percent of repeat business, number of customers, churn rate, and other such measures. A third approach is to increase the size of the product basket, i.e., the number and volume of products sold to each customer.

Another category within the customer dimension is market share. This describes the percent of a given market to which a company sells, in terms of dollars, units, number of customers, etc.

A fifth category into which customer measures can be grouped is customer satisfaction or loyalty.  This category is also relevant to internal customers. Examples of specific measures are customer work effort, number of complaints, and abandon rate. Lastly, customer profitability refers to the measures of profit associated with a given customer or customer group.

2. Internal business process dimension — To satisfy our customers, what business processes must we excel at? The internal business process dimension maps the most efficient and effective processes possible, in order to maximize value creation. In turn, this satisfies customer needs and maximizes shareholders’ return.
Internal business processes can be grouped into three categories:

Development processes are critical to identify a market and develop products or services to meet the needs of the customer. Cost, quality, and time measures are used for this category. If customers are primarily external, measures include number of new products/services developed, time to market, and percent of revenue from new products/services.

Operations processes can be defined as those processes required to build and deliver the product or service. This includes processes related to the maintaining of assets such as production equipment or facilities. A CMMS can assist in tracking key measures such as the total cost of ownership of the assets, equipment availability and utilization, response time, and even cost per unit of output. An ERP system is the primary source of production measures such as production cost, throughput time, inventory turns, percent defects, and volume output.

Post-sale services processes encompass those processes that service the customer following a sale, such as installation, implementation, maintenance, and returns. Sample performance measures are percent returns, average repair time, response time on customer calls, and average warranty cost.

3. Innovation and growth dimension — To achieve our vision, how will we sustain our ability to change and improve? The innovation and growth dimension provides the necessary infrastructure on which the organization builds, in order to meet targets set in the other four dimensions. The enablers of innovation and growth stem from three key sources as follows:

Unquestionably one of the most critical building blocks to this dimension is employee capability. Without enough well-trained people with the right attitude it would be very difficult to perform, innovate, or grow. Employee-related measures cover skill levels, employee productivity, training levels, employee retention, employee satisfaction, and so on. A CMMS and other systems integrated with a human resources module, can be used to help track these measures for the asset management function.

Systems and technology are also key in providing proper infrastructure for a given organization. Examples of appropriate measures for this grouping are information systems expenditure per employee, level of technology spending versus the industry average, strategic information availability, and number of computers per employee.

The third grouping in the innovation and growth dimension is the company’s motivation, empowerment, and alignment. Measures include number of suggestions made by employees and implemented, improvement program results and activity, number of employees involved with improvement activities, and number of managers and employees using the performance management scorecard. Note that although this grouping reflects enablers that are essential to the performance of the organization, it is somewhat subjective and therefore requires less traditional measures.

4. Financial dimension — To succeed financially, how should we appear to our stakeholders? The financial dimension reflects the value of the company to its shareholders.  Financial performance measures should indicate whether a company’s strategy is optimal and executed properly. Objectives and measures in the other dimensions will be linked to achieving the objectives defined in the financial dimension. There are four categories defining the financial dimension as follows:

Shareholder value focuses on maximizing shareholder return using measures such as return on equity, return on investment, return on capital employed, market capitalization, and net income after expenses.

Revenue growth and profitability looks at increasing sales from new products, services, customers, and markets, while increasing profit margins. Sample measures are sales growth rate, percent of revenue from new products/services/customers, customer and product line profitability, and earnings before interest and taxes.

Cost reduction and productivity improvement is a critical focus, in order to keep the cost of goods and services to a minimum. Asset management can play a huge role in contributing productivity improvements, and the CMMS can help track results. Measures in this category include cost reduction rates, unit costs, indirect cost as a percent of sales, revenue per employee, and cost versus industry benchmarks.

Asset utilization and investment strategy is another area where the asset management function can provide a significant contribution. The focus in this category is on reducing working capital levels, obtaining greater utilization of the fixed asset base, utilizing resources more effectively, and disposing of non-performing assets. Applicable measures are return on capital employed, working capital ratios, investment as a percent of sales, and R&D as a percent of sales.

5. Environmental, social, and governance (ESG) dimension — To succeed in the eyes of our shareholders and the public how should we appear? The past 20 years has seen a rise in the collective consciousness of all stakeholders regarding ESG impacts, including issues such as climate change, net zero, sustainability, the pandemic, ethical supply chains, corporate transparency, and so on.  Examples of applicable measures are greenhouse gas emissions, (clean) energy consumption, percentage recycled versus waste, lost time injury rate, percentage spare parts sourced locally, and percentage suppliers that support board diversity.

This story originally appeared in the March 2022 issue of Plant Services. Subscribe to Plant Services here.