Increasing Industrial Distribution Profitability by Segmenting Customers, Suppliers and Products-Part 2 Segmentation as a business process continued

A second lesson of metrics is that managers get paid for only one thing. That is to move the numbers. It is, therefore, imperative that the organization agree on the following requirements prior to starting any process that will rely on the new metrics.

1. What the metric represents: This may be “contribution to gross profi t” that can be measured on a line item basis, an average order basis, a product basis, or a vendor basis. It may be a measure of shipping errors by shift by error code. Whatever the definition, everyone must agree on what it is.

2. How the metric is created: This is a detail definition of where the numbers come from and the calculations that are used to derive the final metric. All persons responsible for the results need to understand and agree on the techniques that are used or they will not trust or use the metric. It is important to allow input from the line staff about how the measurement is defined.

3. Where we are: There must be a starting point. In many cases, the metrics will be new to the organization, so there may be a short time necessary to accumulate some history to provide an accurate knowledge of the current situation.

4. Where we want to be: For every metric, there needs to be a REALISTIC goal. For example, it might be great to have zero shipping errors out of a billion dollar distribution center, but that may not be realistic. It may be realistic to expect less than 0.1 percent of line items that are shipped to be returned. (Some may come back due to customer ordering error.)

5. Time frames: Set intermediary points on the way to the ultimate goal. Using the shipping example, a short term goal of 6 months maybe set to reduce all errors to less than 2 percent with 18 months to reach the 0.1 percent goal. All time frames must be accepted by the team responsible for meeting the goal. These timeframes cannot be imposed. If they are considered impossible, all of the potential benefi ts may be lost.

6. Approved resources: The responsible team has the right to request additional resources to meet their goals. There may be a need for additional handheld devices, a more accurate scale (part of a quality shipping process), or additional people. Again, without the proper tools and resources, the team may give up before they start. The resources won’t be unlimited, so negotiation where everyone is part of the process is important.

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