Home' MHD Supply Chain Solutions : MHD Jan-Feb 2017 Contents Here are examples of the measures I am
• Sales margin.
• Purchase price of components & products.
• Just about any form of standard cost
• Almost anything to do with transfer pricing.
Making operational decisions using these
measures in isolation from the global financial
statements is incredibly risky and almost certain
to cause the enterprise to lose money, more
often than not.
Linking bonus payment to achieving specified
levels for these individual measures in isolation
from each other and the global performance of
the business is a recipe for civil war.
The types of decisions that I have seen made
using these localised, specific measures include
the following, to:
• Accept an order from a customer.
• Reject an order from a customer.
• Make vs to buy analysis.
• Change component sourcing practices.
• Open/close a factory.
• Invest in new equipment.
• Invest in new products.
• Invest in product 'A' instead of product 'B'.
• Hire or retrench people.
I have seen these decisions made correctly
and executed well so that the business makes
more operating cash flow and the enterprise
value is increased.
I have seen these same decisions made
based upon the impact of a single isolated
measure and literally waste millions of
dollars of shareholder value and precious
Here are some examples of how this
behaviour plays out, I am sure you can relate to
some or all of them.
1. Sales margin
Sales Director: I need to achieve 25% margin
on this product or I will buy it from an outside
supplier, not from our factory. My bonus is paid
on my margin numbers and I cannot lift prices,
so you have to drop your transfer price.
Plant Manager: If you buy elsewhere I will
reduce my costs but not all of the overhead will
be eliminated from the business, the burden on
all products will increase, and that means the
transfer price on all other products will go up
reducing your margin even further.
Plant Manager: I am measured by my plant
efficiency and my cost per unit of production.
We need to make and sell more of the high-
volume products and drop the niche, low
volume complex variants.
Sales Director: Are you nuts? The margin
on the low volume niche products are double
the standard product and the selling price is
massive. We need the variety in order to give
a range of options to the distributors and the
clients. I cannot hit my targets if we only make
the high-volume variants. We will lose sales.
3. Change component supplier
Purchasing Manager: I am measured on the
total purchase price per unit and I can resource
this part from our current supplier to a new
supplier I just visited saving 3 cents a unit, or
$60,000 a year.
Supply Chain Manager: I am measured on the
total value of stock and this re-sourcing means
I have to add $100,000 to my stock holding
when I am required to reduce my total value in
stock by 5% this year. I also do not know if this
supplier is reliable and if we run out of this part
the air freight cost will kill my budget.
Plant Manager: Your last 'cost saving'
re-sourcing caused me to run out of parts and
I couldn't produce that particular variant for
2 weeks. I am measured by plant uptime and
product availability and you killed me.
I can go on and on. I am certain that you can
relate to some -- or all -- of these scenarios and
probably add some examples of your own.
All of these problems and conflicts waste
time, money, management capacity, and have
the potential to annoy the market.
Who needs to worry about competitors when
we are being so self-destructive?
These conflicts are between well-intentioned
people who want the business to succeed
and to have success in their personal careers.
The measures for their personal success are
flawed and causes them to take actions that
compromise the business performance in other
local areas, and overall. This is not their fault.
These people have different goalposts that they
are being required to aim at.
How can any group of individuals who are
aiming at different goalposts possibly work
together as a team?
How much of an improvement could we
make to our business if our behaviours were
aligned instead of in conflict?
Solving the measurement paradox
How do we have people align behaviour to
the global improvement of the business? The
solution is simple, however, simple isn't always
easy to implement and it will require managers
and leaders to have higher-quality holistic
discussions around the impact on globally
based measurements. Some will make it, some
won't. The ideal solution will at least have the
• Drive enterprise value upwards.
• Align behaviours to focus on the agreed
• Cause individuals to collaborate for personal
gain as well as the organisation.
• Provide individuals with a viable path for
• Promote and permit accountability for
behaviour and performance.
• Reduce poor decision making.
Jason's book excerpts will continue in the
March-April issue of MHD magazine. In the
meantime, for more information visit
"Should you buy the new piece of equipment? The
only sensible answer is "it all depends"."
MHD SUPPLY CHAIN SOLUTIONS --- JANUARY / FEBRUARY 2017
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