In the book “Mastering the Cube,” we emphasize the idea that all aspects of an organization must be aligned to strategy for a company to be healthy. One of the components of strategy alignment is how well an organization utilizes metrics to determine what is working and not working. For many people and organizations, using data to understand performance is becoming more important than ever, but many still find it difficult. To keep things simple, when working with leaders, I reflect on three basic questions that shed a surprisingly bright light on how the right measures can drive business performance and strategy alignment.
Question 1: “What is a defect?” To answer this question, you have to understand the customer’s requirement for performance (e.g., cost, quality, speed, etc.). It is hard to do something wrong, if you don’t know what wrong is. As I have asked this question in the organizations where I work, I commonly hear people tell me that there isn’t a right or wrong way of doing the work they do. By understanding customer’s expectations, you will know what constitutes a violation of their expectations. That violation becomes a description of the defect. For internal customers, these could include the time to create and deliver training, the expectation to provide a report by 10 am, or response time. External expectations could include delivering a product on time, solving a customer problem, or providing a quality product. Every time an outcome is not met, that is a defect.
Question 2: “How often do they happen?” Once you have identified what activities result in a defect, you are ready to measure the frequency of that defect. Even in a world dominated by data, we don’t always use that data to measure performance and the frequency of miscues. A very simple question is: how many defects did we have today? The more frequently a defect is happening the more you can be certain you have a systemic problem that needs to be addressed. A systemic problem is one that will fix a sizable number of the defects. These defects should be monitored and included in an organization metrics scorecard. Now that you have nailed what your customers are expecting and how often you are not meeting those expectations, it is time to move to Question 3.
Question 3: “What are defects costing me?” I have worked in many organizations that have put a lot of thought into answering Questions 1 and 2, but the real value of these simple questions blossoms with the answer to Question 3. Knowing the costs of defects over the course of time is the best motivator for making improvements to address those defects. Every defect has a cost to it even if it is hard to calculate. Examples of costs could include hard costs such as expedited shipping and employee overtime or rework or soft costs such as a decrease in customer satisfaction or decrease in employee engagement. Once you start adding up the costs of specific defects and combine them with all defect costs across a department, a process, or company, you will see the magnitude of the problem.
Let’s look at a short case study of these questions in action. Many years ago, I managed a distribution center, and we had very good answers for Questions 1 and 2. Every day we compiled and reviewed our organization metrics scorecard of 25 key performance indicators that showed us what happened the day before. One of the measures was how many cases were shipped to the customer incorrectly. We sent out about 30,000 cases a day and averaged 200 defects a day. Said another way, our customers didn’t get 200 cases of product each day that they paid for and were expecting. In the big scheme of things that didn’t seem too bad—after all, our defect rate was less than 1%. We just chugged along accepting that defect rate. We knew what constituted a defect, and we knew how many there were, but we didn’t answer Question 3.
Then one day we decided to start answering Question 3—measuring the cost of each of our defects. It was staggering. Our agreement with our customers was that no matter what, we would somehow get their items to them on the day promised. So, if we short-shipped an item, we would make a special delivery to that store later in the day. One day, we short-shipped a $12, 10-pound item. Because of our service level agreement, we had to put the item on the only truck available – a 48-foot trailer. Because the distance to the customer was far, we had to send a team of drivers to deliver it. Because it was a frozen food item, we also had to run the reefer (freezer) in the trailer to keep the product frozen. That one defect, out of 200 a day, cost us over $2000 to deliver.
This was a big eye opener for us, and we started to think of each of those defects as costs now instead of a normal operational variance. It completely changed our distribution center overnight, and we started down the path of solving many of our operational defects – not because we were a poorly run organization, but because there were systemic issues that, if fixed, could materially improve our performance. Defect costs then became a critical part of our organization metrics scorecard and a critical path to strategy alignment.
Do you know what your defects are? Do you know how often they happen? Do you know what they are costing you? If you are serious about improving performance, go back to basics and ask these three simple questions. You may be surprised how telling the answers are.