Direct Connection to Business Performance

Of the myriad ways to improve cost and revenue performance, one area that has been fruitful for production and manufacturing companies for many years is the production plant. Past productivity and efficiency gains may lead to an assumption that this area of opportunity is exhausted, but this is not the case.

A recent study, Correlating Plant Performance to Business Performance (see ‘The study’, right) shows that companies that made significant business improvements during this economic turmoil had also made significant plant operation improvements. The majority of companies in this study did suffer in the economic downturn. Most, too, had lower revenues and/or volume and many felt a resource pinch with internal budgets and the ability to borrow decreased. Nonetheless, a group of respondents made improvements in their financial position, and they show a clear path forward.

It’s easy to understand the assumption that a manufacturing firm’s performance in their production plants will have a significant impact on financial outcomes. However, making those correlations is not so easy. Often, traditional accounting systems that allocate costs with rudimentary assumptions make it challenging to gain an accurate perspective of the financial impact of various aspects of operational performance. The interdependencies in an operation also contribute to make this correlation difficult.

Production companies are complex, and the process of articulating goals and crafting a system of metrics that is effective can require a good bit of work. Each company will need to create correlations and linkages, from corporate objectives to financial metrics to operations key performance indicators (KPIs), and from aggregate KPIs to very specific production metrics.

Business Movers

To examine what makes some companies more successful, the study breaks the respondents into two groups.

1. ‘Business Movers’ are the 39% of respondents who reported improving business performance either dramatically or broadly on average over the past three years. Specifically, to be in this group, companies either improved EBITDA or net operating profit by 10% or made more than a 1% improvement in 10 or more of the 14 business metrics included in the survey.

2. ‘Others’ are the other 61% of companies that may have made some improvements, but less dramatic.

While their results are different, their demographic profile is very similar. Both groups have a similar breakdown by geography, production type, order fulfilment mode and size. Yet, one group managed to improve its business performance significantly more effectively.

Based on this data, it appears that every manufacturer or producer can improve business performance dramatically, even during challenging economic times. The question is how – what are Business Movers doing differently?

One difference between Business Movers and Others has to do with their performance metrics system for their operations. In short, their metrics processes are faster and better linked between plant and enterprise.

The speed of the performance measurement process can make a major difference. As Figure 1, right, shows, Business Movers are much more likely to display performance results or operational KPIs to those managing the operations within a shift. This allows employees much greater opportunity to improve the outcomes if they see a negative trend.

Business Movers are also more likely to have effective linkages between business metrics and operations metrics. They are more likely, too, to re-evaluate the effectiveness of that linkage frequently – Business Movers evaluate a range of issues regarding their metrics programmes more regularly than Others.

Business Movers have faster, more rigorous metrics processes. If the links between business and operational KPIs are sound, it should be possible to correlate their business metrics improvement to operational improvements. Indeed, a larger proportion of Business Movers report they have achieved the highest level of improvement, more than 10%, on the majority of operational metrics in the study – 25 out of 26. So the correlation is extremely strong. Those who perform better on financial metrics also perform better on operational metrics.

Business Movers improved across a wide array of areas, and most interesting much more on:

1. some of the things customers care about most, such as quality and on-time delivery

2. IT metrics, including reliability and also data quality.

Did the operations improvements directly cause the financial performance of these business movers? It’s not possible to say with certainty, and it’s rare the linkages are that direct. However, the correlations between plant performance and business performance are extremely strong.

Leveraging IT

Of the 29 specific technologies included in the survey, Business Movers are more likely to have 23 of those in wide use, and they are much less likely to make wide use of homegrown technology. One of the critical obstacles for many companies in rapid metrics display is collecting data. Business Movers are nearly twice as likely to use fully automated data collection. A larger proportion of Others key data into spreadsheets or have a manual data collection system.

Also, Business Movers are more likely to use Enterprise Manufacturing Intelligence or Operations Performance Management (EMI/OPM). These are often displayed as an operations dashboard. Again, Business Movers are likely achieving greater benefits because their operational dashboards are more likely to provide drill-down to root causes, trigger alerts, link to MES/MOM, and roll-up to an enterprise scorecard.

Note that this is a separate category of software from business intelligence (BI), designed especially to suit production operations with real-time data collection, analysis and display.

Business Movers tend to have IT solutions more widely deployed and, having a broader set of IT applications, they are leveraging those investments to gauge performance more effectively. It appears they are linking operations performance to business performance not only in concept, but also with information flows between plant and enterprise systems.

To summarise the findings of this report, plant performance does correlate to business performance. Business Movers who achieved strong financial improvements have also improved against their operations metrics. Any company can achieve this, but it does require effective metrics and IT support. In fact, a sound performance metrics initiative can become a business improvement initiative.

Production and IT personnel can contribute greatly to the success of their business. Management teams need everyone to contribute to a more responsive and profitable enterprise, in which every employee’s view of activity and performance is truly informed by metrics that matter.