don't look back

Editor's Note: No two successful performance management programs are the same, but all successful performance management programs share common principles. To shed some light on what separates a good company from a great company with regard to performance management, DC VELOCITY will publish a column on one of the 12 Commandments of Successful Performance Management each month. This month we will drill into the sixth commandment: Anticipate.

The Sixth Commandment
Anticipate: Look to the future, not the past

For the medium-sized third-party logistics provider (3PL), the future couldn't be brighter. Not only was it ramping up to serve several major contracts, but the division was performing superbly and it had the metrics to prove it. Take the monthly financial reports—sales revenue was up 40 percent over the previous year, and the distribution cost per case shipped had dropped. Operations reports showed equally solid results: 97 percent of orders were being delivered on time and lines shipped per employee were running well above projections. The four-month safety stock the company had maintained as part of the ramp-up agreement had been trimmed to one month's worth. And by bringing new suppliers on board, the company had cut raw materials prices by an average of 12 percent. Life was as good as it gets.

At another medium-sized 3PL, the outlook couldn't have been more different. This one too had several major contracts ramping up, but here, trouble loomed. To begin with, the ramp-up had stretched personnel far too thin. As a result, employee turnover was up 10 percent, and the DC had just lost two key department heads. And the problems weren't confined to labor; the purchasing department had worries of its own. Like the first company, it had a month's worth of inventory, but here managers were running scared. They were working with a stable of new suppliers of unproven reliability, and they feared widespread out-of-stocks if suppliers didn't begin shipping replenishment orders soon.

The strange part is, these companies are one and the same.

How could a single company's future look so bright and so gloomy at the same time? It's a matter of which metrics you look at. Many times companies track their performance using traditional financial and operations reports gathered from their ERP and WMS systems. That's a mistake. These systems may be great sources of data, but they tend to provide "lagging indicators," detailed records of what happened in the past that tell you nothing about the future.

That's a bit like cruising down the highway at 90 mph without headlights. Drive that way and sooner or later, you'll end up in a ditch. It's no different with business. Without headlights—something to illuminate your path and warn you of upcoming danger—you're courting disaster. A recent study that compared stock prices before and after the reporting of a major supply chain glitch showed that once the blunder was made public, stock values tumbled more than 30 percent on average.

Instead of relying on those lagging indicators, make sure your metrics also include "leading indicators," measures that are predictive of future results and can be adjusted before it's too late. Leading indicators might include any of the following: supply base performance, process quality, motivated workforce, service-level quality, customer satisfaction, overtime costs, average order size and average open order size, discounted units, inventory average cost, average inventory age, lost sales and manufacturing DPPM (defective parts per million).

You'll be glad you did. With a set of good leading performance indicators to serve as "headlights," you're less likely to miss areas of opportunity and more likely to have time to swerve in the face of oncoming danger.