For many DCs, operation execution depends on a clear understanding of the strategic direction of the firm. Unfortunately, we are finding that more and more DCs are disconnected from the strategic goals of the firm. For example, everyone agrees that no matter what strategy you employ, financial metrics should be used to reflect how well we are executing operationally. Strangely enough, only companies using a differentiation strategy had any financial metrics in their top ten! It was expected that the strategic direction of the organization would influence the metric package that firms use if they were properly aligned. So, we dug a little deeper and identified three areas that companies may want to consider spending some time investigating.
We say that talent retention matters. Previously we’ve written about obtaining, training and retaining talent at all levels of the organization. And, it would seem that, to determine how well we are performing, firms would gather data on talent turnover and report it to senior management. Interestingly, that is not a widespread best practice. There was only one strategy that had workforce turnover in their top ten: Cost Leadership. Outside of this, companies do not seem to be placing an emphasis on turnover until their performance starts suffering. Then, only one strategy starts looking at turnover: Customer Service. If part of the strategy to improve operational execution were making sure you keep the talent you have invested in, then wouldn’t it make sense to align your metrics to understand your performance in this area?
We found that over 85 percent of executives were involved in the initial metric selection for the DCs. However, how involved are those executives on a day-to-day basis? What happens when things aren’t going so well? So what does senior management look for? The single metric that management was most interested in was, by far, DC Costs as a percent of Cost of Goods Sold. Interestingly, in our list of the top metrics used, DC Costs as a percentage of COGS is currently ranked 34th. It doesn’t even make the top 20. Perhaps we are utilizing too many metrics, when 3 to 5 KPIs would be enough.
One good thing we discovered is that when senior management starts looking at DC Costs as a percentage of COGS, they also start asking for four other specific metrics: on-time delivery, order cycle time, perfect order, and annual workforce turnover. Sometimes, when companies continue to grow, they can inadvertently make their system more complex than it needs to be. In these cases, proactive leadership will always look for ways to simplify things and get back to the basics of their core business.
Aligning the performance metrics with the strategy of the firm still boils down to doing the basics. Three overarching questions firms could ask to get proper alignment are: DC managers need to know how performance will be measured, so what are the goals of the firm? Are you measuring performance and how do you track your performance? Most importantly, do your activities and tasks align with and support the strategic goals of the firm?
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