SOURCE: Kay Sever | September 29, 2021
One of management’s most important tasks is monitoring progress and taking action to meet/exceed budget goals. To do that, management focuses on measurements for productivity, quality, cost and sales. Some of those measures are identified by management as Key Performance Indicators (KPIs).
Management teams often use a subset of KPIs for performance assessment, analysis, communications, goal setting and decision-making. Sometimes this set of measures is called a “Balanced Scorecard”. If managers were asked if they could run an operation or meet budget without this set of KPIs, they would probably say no. The point is that management teams depend on a subset of quantitative information to successfully lead a company… metrics that help them operate safely, take corrective action and meet budget goals and regulatory requirements.
Company-wide optimization means that assets, the organization and the management team achieve “best possible” results while operating within all safety, ethical and regulatory guidelines. Making an investment in optimization is one thing, but how do you know when “best possible” results have been achieved?
- No financial system includes metrics for “best possible” results.
- Budget values are not the same as “best possible” values.
- When companies pursue optimization, a third set of values that reflect “best possible” performance is required to quantify and reveal a company’s untapped upside potential.
A new set of values representing “best possible” performance must be strategically established for a select group of KPIs for assets, the organization and management teams. These values will reveal hidden equipment capacity, hidden cost overruns, and organizational weaknesses lurk in the background and hold you back from achieving “best possible” performance. When a company’s upside potential is revealed, executives and management teams can take action to tap into it and convert it to reported profit… often for free!
Which brings us to the reason for this month’s article…
If your company has invested in new equipment or the purpose of optimization, your management team is still responsible for meeting budget and minimizing budget variances. If a company’s success with optimization depends on a third set of KPI values, you may be wondering how you would use those values for decision-making.
For decades, meeting budget and minimizing budget variances have been adequate to make money and satisfy the board of directors and shareholders. How would a third set of data affect your focus on budget goals and budget variances? Would management and employees be confused or distracted if they had a metric that exposed upside potential? THESE ARE SUCH IMPORTANT QUESTIONS! Let’s explore the answers with some facts about optimization metrics…
- The budget is an educated guess for future performance… “best” is a number that takes the limit off and helps people reach for levels of performance not considered or thought possible.
- Metrics for “best possible” results make a lot of sense to management and employees. Executives and management teams often wonder how good they could be… “best” metrics help answer that question. With “best” metrics, departments can tear down silos in their search for excellence. Employees with high personal standards for quality of work welcome a way to measure their “best” performance and look for ways to continually improve.
- When you expand your thinking to include a “best possible” focus, you don’t stop using the budget for decision-making. Understanding how “best possible” metrics are different from (and related to) budget is a critical step in every optimization implementation. “Best possible” metrics can be used strategically to help you achieve or exceed the budget.
- Learning how to integrate “best possible” metrics with budget targets for measuring performance, making decisions and communicating trends is the NON-NEGOTIABLE STEP that helps management teams 1) escape their dependency on budget variances and 2) expand their focus to include both datasets in day to day operations and decision-making.
- Once the relationship between the two sets of data is understood, this relationship can also be used to a) evaluate budget reasonableness/achievability before budget approval, b) strategically evaluate capital requests and expansions, and c) reveal and strengthen organizational weaknesses that cost money and negatively influence the corporate culture.
Thought for the month: If executives and management teams know how to strategically use budget and “best possible’ metrics in tandem, they have a skill that can sustain optimization over the long-term.
Kay Sever is an Expert on Achieving “Best Possible” Results. Kay helps executive and management teams tap their hidden profit potential and reach their optimization goals. Kay has developed a LIVESTREAM management training system for Optimization Management called MiningOpportunity – NO TRAVEL REQUIRED. See MiningOpportunity.com for her contact information and training information.
To comment on this story or for additional details click on related button above.