Linking supply-chain objectives and performance doesn’t work

Performance evaluations […] should be independent from [employees] Objectives and Key Results. — Rick Klau, Google Ventures

* * *

I’ve just realized how powerful objectives can be and how wrong I was till now during all my past experiences. I suspect most of us are managing objectives and evaluations in the wrong way. With a few tweaks, though, most organizations can ensure that supply-chain objectives and performance are deeply impacted.

Let me begin with a graph. I’m sure you all, as supply-chain managers, know what this graph below  looks like 🙂daily inventory chart for electronic components

Does it look familiar to you? It’s a daily inventory chart. Of course, if you only follow the “investor relations” reports, you will only have access to the end of quarter points, as you can see here. daily inventory chart with end of month and quarterYou can easily distinguish them.

Let me tell you a story to take this to the logical conclusion (remember, this is a story — not based on any company or supplier I know!) Consider it a caricature of the nature of this problem, something that is a bit romanticized for the sake of clarification. After all, we all have our objectives 🙂

* * *

Why the ‘why’ matters

As with many other supply-chain professionals, my main objective was to decrease my stock under a certain number of days of inventory (DOI). Every year, I was really satisfied: each plant was reaching this objective. The “why” did not really matter since the objective was fulfilled.

We had a very effective way to decrease stock levels. Every end of month/quarter/year, purchasing orders were systematically rescheduled in the next period.

To tell the truth, many end of period shortages were due to this rescheduling process. However, with lots of last notice pull-in requests, additional work, and much understanding from the sellers (do they have the choice?), we were able to “go through” the end of periods while decreasing stock level at the target.

The objective is the objective

Unfortunately, the objective for the following year was even lower. Rescheduling was no longer enough. We’ve begun to close the reception workshop every last few days of each period: two or three days for each end of quarter and five to seven days for the end of year. Results exceeded our expectations. Manufacturers and distributors were happy to have shipped the electronic components (invoiced in last period sales) and we were happy not having them at stock.

As far as the transport providers were concerned… well, we never took them into account. In reality, we were decreasing the stock level but not improving our cash position since manufacturers and distributors send the invoices when it’s shipped rather than when it’s received.

But the objective is the objective. No matter what.

Objectives, the infernal spiral

The following year, our stock objective was lower. We quickly developed the expertise to precisely reach the objective. We began to close the reception workshop for one week for end of quarter and two weeks for end of year. Truck by truck, we were filtering deliveries based upon whether we could unload the merchandise or leave it on the truck, depending on shortages.

Trucks were queuing every end of period in front of the plants for days. Supply managers were looking for components in the queue instead of into our stock. Truck stocks were not entering our enterprise resource planning (ERP) system, so we began to make an inventory of the truck queue stock in Excel files, doing two file updates a day. Better than yelling to truck drivers: “-Anybody carrying some Analog Devices? –No. How about STMicroelectronics? -Analog Devices? -Don’t know! -Purchase order xxx?”

Every end of and beginning period began to be a nightmare.

Access to the main plant was only possible thanks to a one hundred meter, one way street. We had to organize which trucks should go first and which trucks should go last. We synchronized both end of the street with walkie talkies. We spent hours finding components in the queue, trying to calm down drivers frustrated and angry by the wait. We had to respond to customers waiting for their products. Again and again, we had to call out to the waiting crowd of trucks to find out what truck in the ☠ ⚰ ? queue had the right parts inside. “Are you sure you’ve done all the queue? They have to be somewhere!”

In the end, we had days with no production every quarter. For what? Well, we reached our objective, but it had no positive impact on our cash position. Invoices are sent when the merchandise is shipped not when it is received. We also had to contend with the negative consequences: shortages, very stressful days, and unsatisfied customers.

Remember: we were reaching our objectives. With pinpoint accuracy. Everybody was happy. Managers, directors, VPs and investors all agreed: “Well done folks!”

* * *

Takeaway: linking objectives and performance

Now, I understand much better. I will never ever again link supply-chain objectives and performance.

I’m not saying that we should do away with objectives. Objectives are powerful. They’re a precious factor of motivation. From now on, I will consider performance evaluation through discussion of why an objective has been met or missed.

I will consider performance to be really good if meaningful and creative actions have been tested, no matter how bad are the results. I will consider performance to be really poor if objectives are met without any sound explanation. Plus I will deep dive to understand if you’ve tried to cheat on the numbers, or intentionally set too easy targets.

It is important to remember that the system too often encourages us to beat a number or goal rather than working toward the good of the organization.

We see examples all over the place. You can increase sales by discounting. You can sell dollars at 80 cents. You can increase your customer acquisition cost. You can reach your recruiting goals by lowering your expectations. You can be the country manager of one of the biggest worldwide software firms and reach your market share of servers running under your software by renting many AWS servers at the end of the year. All these are examples which have really happened.

Have you ever seen a buyer refusing a discount because it has already reached a set objective? Have you heard about someone preferring to buy at a higher price to be able to decrease the price later? Have you seen a procurement manager preferring to place a 1,000 piece order at $1,000 instead of a 10,000 piece order at $4,000? Yes? They’re all examples of why linking supply-chain objectives and performance doesn’t work.

* * *

Objectives and Key Results system

I’ve heard about Objectives and Key Results (OKR) system since I’ve been in the entrepreneurial world. I would highly recommend anyone to take a calm and peaceful hour to watch this video from Google.

It took me six years to fully understand the system and how powerful it is. We will implement OKRs at Precogs and I will let you know the results. No matter what the method is, what I will retain is: supply-chain objectives and performance should never be linked. Otherwise, they will continue to win out to the detriment of your overall performance.

* * *

Photo credit: RogerKG via Visual hunt / CC BY-NC-SA

Want to see Precogs in action?

Contact us to find out how Precogs lowers costs
while improving purchase processing and efficiency.