Follow what is Real
We seem to be possessed by a mania for measuring. Perhaps it is computers making it easier for us to amass data, and tease it for meaning. Measure the wrong things and you will get the wrong things no matter how strong are your problem solving skills in the workplace. Or is it just that you have a hard time dealing with uncertainty?
Too bad if you do, cause nature is uncertain, and measuring the wrong things can lead to doing the wrong things. No amount of problem solving skills in the workplace can help when the feedback you are getting isn't modeling what really goes on: isn't it better to follow what is real, than what makes us feel in control?
"All models are wrong, some are useful" George Box
And when that "real" is really complex, it can be useful to be approximate, show a little humility in the face of an uncertain universe. Lets take the case of the household thermometer. Not exactly a precision instrument. But, it is good enough to tell us if we have a fever, and if that fever is serious enough to call the doctor.
Imagine if instead of a thermometer you had a "dashboard" of measures, like those machines they use in hospitals to monitor people in intensive care. Every bleep and we would be in panic. It is unproductive to try to measure every important variable in human health when a simple thermometer will do.
Just because your business software spits out information, doesn't mean it is useful. Sadly, we do some things in our innocence, just because we can. But is what it shows us modeling what is really going on?
How to model the real in a P&L
Income statement secrets revealed
Lets stop a minute and think about measures of what is still called, for some reason, man hour production measures (average production per hour per worker). In reality, this kind of measure would only be relevant in a factory producing to capacity. Why? Think about it. If there was little work on monday and a lot on tuesday if we average the two both days are modeled in a way that has little to do with what really happened.
Making Money Even When Not as Busy
In lower volume situations, where more than one product may be produced on a line in the same day. There are too many variables based on product, volume, pack etc. to model accurately, and messy measures are never good.
A better measure than output per person per hour, in this case, is output per HOUR OF OPERATION. That way you get your efficiency, (man-hours used effectively) but don't encourage overproduction.
The danger of any measure is when people fudge it to not look bad. And, if a process isn't capable of delivering, what choice do people have but "Twist the measure or twist the process."
From my point of view, the most profitable approach is to meet the need of customers, meaning, produce no more than what you are selling. IIn all but start ups this is surprisingly predictable, within limits, and with careful monthly projecting, allows for leveling of production, the gold standard of effective quality production, aka as the cornerstone of "Lean."
But leveling wreaks havoc with production efficiency measures. Measure per person or per line or per machine per day/ week/ month and you will look bad: but it makes you money! Real money, not spreadsheet money.
What you want to know is not how efficient you were over time, but how effective you were in converting our investment in raw material into profit over time. The value you add to raw material for sales is the only profit you make. Even service and virtual industries have a kind of raw material called knowledge. Shouldn't your goal be to be driven by sales, not by capacity? What good is it to make something if there t'aint no one who wants to buy it, damn your ROI.
When an investor, or accountant sees a purchased machine based only on its ROI, they miss the boat. A machine has no inherent value except for how it helps you add value to products that sell. If an expensive machine is seen as not "utilized fully," and production is forced to use it to maximize return on investment, you end up, making things that don't sell, tying up or losing money. You are killing yourself. It is not the investment that makes the money, it is what you use that investment to do.
Dumb measures, and inaccurate models can take attention away from what matters, and cause losses. So stay away from measures that force you into thinking crazy things, like return on investment per hour paid, unless you are selling at 100% capacity, which you rarely are, because by the time we get to 100% you are probably already expanding.
And measuring output per day, the 6 hour day would look "bad" and the 8 "good" even in cases where the longer day was producing things no one is paying for, and tying up money in inventory. It may shock you to hear but if your people and machines are working all the time, if they don't have periods of sitting idle, or schmoozing, you are probably going out of business, or at least, creating losses. Is it possible that it is better business to have people standing idle when there is nothing to do? Damn straight!
What are you paying them for? To work, right? Yes, but doing things for no good reason but to look busy is not the same as working. Bad measures are not good for production flow, nor profit, as they take focus from what matters and in its place creates waste, unnecessary steps, and defects.
Unfortunately, the opposite of what I am saying is taught in most MBA programs, and for some reason perfectly intelligent small business people whose businesses aren't traded on the stock exchange do the opposite as well. It is the cause of huge hidden losses. I know cause, I am that guy the one they bring in to help save them.
For Everything a Season
There will be times when demand is low, and output per day is low, and that is natural, and it's OK. If production is low, is that a production problem or a sales problem, or a company problem? You still need to make money at low volumes? overproducing is not the way to do it.
The ROI should be measured on the plant overall, don't you think? On profit overall, not on the ROI of a machine or people or DAILY utilization,
...unless it is already "leveled" by relentless volume...
For the rest, an output per HOUR of use measure would give you more of what you want, to know how well things are running:
output / ((hours in full production) - (setup breakdown time) )
both per production line, or item produced and by production overall. I heartily recommend it in place of output per man hour per day. I also recommend measuring the flow of profit produced, as in
(output converted into value in actual sales) / (hours in full production)
as a measure of the effectiveness of generating greenbacks.
Another interesting measure I have seen, but never used personally, is
to compare productive hours vs down time to volume of sales.
That inspires sales to bring in more volume in a hurry, and provide a better chance for leveling, plus it us away from the temptation of tying up money in excess inventory.
Isn't it reasonable to say that it is not production's job to increase overall productive hours? Isn't it their job to optimize production based on a predictable volume of sales, to model what is real?
Another interesting measure would be to compare production needed to production completed, meaning, on any given week how many units were actually produced compared to what was needed. In the end that will lead to optimizing the plant overall for production capacity as sales volume grows.
The tricky thing with production measures is they can move the focus unconsciously from where the work is actually done, the only place real money can be made, to a spreadsheet, and that will always bring trouble
"A desk is a dangerous place from which to view the world." John Le Carré
By measuring output per hour, (product and dollars) not including set up and breakdown time, and comparing that to volume of sales, or projected volume of sales, you would have a very interesting measure and one that models more closely how you really make the most money.
That's my thoughts, I hope they help, and don't step on anyone's toes, unless you are a cost accountant!