The numbers don’t lie, as the saying goes, but Ilaria Raniero knows some tell the truth better than others – and many more aren’t worth listening to.
Raniero (pictured, right), a visiting scholar to the Ohio State University Fisher College of Business from the Polytechnic Institute of Milan (Politecnico di Milano) in Italy, recently conducted a wide-ranging research project with several Center for Operational Excellence member companies as part of her graduate thesis. This sweeping look at a wide variety of industries uncovered some promising trends in how lean evolves in organizations over time and sheds light on how the successful ones select the right metrics.
More importantly, Raniero – with the help of COE Associate Director Tom Goldsby – developed a new performance measurement framework for the lean supply chain. The final product is a road map of sorts that could help organizations move from implementing lean in a single silo to a more holistic approach, all while measuring what matters – and ignoring what doesn’t.
Raniero’s research, “Applying Lean Principles in the Supply Chain: An Examination of Measurement System Adaptation,” is the product of more than 80 hours of face-to-face interviews conducted between October 2012 and February 2013 with 10 companies, though much of the research looked in-depth at Dublin-based COE member Cardinal Health.
The inspiration for the research, Raniero said, was rooted in a key observation she made about organizational behavior.
“The measurement system is something that drives the company’s behavior and drives employees’ behavior, too,” she said. “As companies adapt their strategy, they need to adapt their measurement systems accordingly.”
Selecting the wrong metrics plays out in familiar fashion for many: A measurement that seemingly aligns with company goals – cost per unit, for example – ultimately can encourage very “un-lean” behavior. Aggressive bulk purchasing might lower a company’s cost per unit, but it could wreak havoc on inventory levels and other key measures. A company taking a broader look at the supply chain might instead choose to track total cost of ownership, a metric that would raise a red flag much sooner.
Raniero’s research, in fact, found that companies with a track record of success in lean implementation have taken such a journey: First, applying lean in operations, then spreading it across the entire enterprise. The final, and largest, leap came when companies began to bring this waste-zapping, value-focused strategy to their interactions with suppliers, customers, their own employee relations, and their sustainability initiatives.
In short, it ultimately becomes a question not of performing better in tried-and-true metrics, but broadening the very definition of performance, said Goldsby, a professor of logistics at Fisher.
“Companies are becoming aware of how operational excellence can impact customer retention, employee satisfaction, supplier relations, and sustainability concerns,” he said. “As a result, companies are introducing new measures that capture these dimensions of performance, which yields a more holistic perspective on the health and future prospects for an enterprise.”
That final “voice” has taken on a much more important role in today’s business environment, but Raniero said companies wrestle with it nonetheless.
“Many companies struggle to find the right measures and don’t know how to tie sustainability into the profit-loss statement,” she said.
By making sustainability one part of a larger lean strategy, the report states, it’s possible to use tools such as value-stream mapping to identify environmental wastes and ultimately reduce cost.
With five distinct “voices” and metrics for each one, how do successful lean organizations not wind up with too many dials on the dashboard? The answer, Raniero’s research found: They adapt metrics along with shifts in strategy, keeping an eye out for newly important ones and those that no longer guide lean behaviors.
John Matera, COO of COE member Willow Wood and one of Raniero’s interviewees, said his part in the research project has helped the company take a closer look at its “voice of business,” which includes key financial and operational measures. Where once Willow Wood was tracking as many as 15 business-related metrics, it’s now working down to half as many.
“(Fifteen) is a lot to keep track of on a regular basis,” Matera said. “Working with Ilaria has helped us focus on what’s important.”
This so-called “structured adaptation” in measurement systems is a defining mark of a company making progress in its lean journey. It also highlights another key feature of Raniero’s framework: Strategy influences each one of the five “voices” by guiding what’s measured, but the results themselves can play a role in strategy over time.
It’s this complex interplay that Alan Deutschendorf, vice president of operational excellence at Cardinal, says the company can evaluate with a renewed perspective after taking part in Raniero’s COE-sponsored research.
“This has really given us food for thought as we update our strategy and tactics and continue to develop a culture of operational excellence,” he said.
To view an executive summary of Raniero’s research, download the document here.