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Why Linking Supply Chain Objectives to Performance Will Never Work

Every business person knows that setting objectives is critical to business success. Recently, though, I’ve begun to suspect that most of us are managing objectives in the wrong way.  With a few tweaks, though, most organizations can use objectives to deeply impact overall performance. 

Photo credit: CarbonNYC [in SF!] via Visualhunt.com / CC BY

Photo credit: CarbonNYC [in SF!] via Visualhunt.com / CC BY

Let me begin with a graph. I’m sure you all, as supply chain managers, know what this graph looks like:

It’s a daily inventory chart. Of course, if you only follow the “investor relation” reports, you will only have access to the end of quarter points. You can easily distinguish them:

Does it look familiar to you?

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 supply-chain professional, 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 next year objective was even lower. Rescheduling was no longer enough. We’ve begun to close the reception workshop every 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 reach exactly the objective. No more no less. 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 manager were looking for components in the queue instead of into our stock. Truck stock were not into our enterprise resource planning (ERP) system, so we began to make an inventory off the truck queue stock in Excel filesm doing two file updates a day. Better than yelling to truck drivers:“-Anybody carrying some ACME memory modules? –No. How about BestGrade modules? -Don’t know -Purchase order xxx?” 

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

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

Every end and beginning of periods 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 answer 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’s received. We also contended with big negative consequences: shortages, very stressful days, and unsatisfied customers.

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

Takeaway

It’s clear though that objectives linked to performance carry more negative consequences than positive ones. I will never ever again link objectives to performance. 

I’m not saying that we should do away with objectives. Objectives are powerful. It’s a precious factor of motivation. Now, I will consider performance evaluation though discussion of why an objective have been met or missed. It’s 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 placed. 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 firm and reach your market share of servers running under your software by renting many AWS servers at the end of the year. All those examples 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 high price to be able to decrease the price later? Have you seen a procurement manager prefer placing a 1,000 piece order instead of a 2,000 piece order because it is 50% cheaper (it does not improve the stock value but improves the days of inventory)?

Objectives & Key Results systems 

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

Sounds familiar to you? Let me know your thoughts, experience and advice in the comments section below.  

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