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Put Customers First When Designing Business Performance Metrics


Published in the Houston Business Journal in October, 2003.


Authors:
Brady Murphy, Vice President, Supply Chain & Management Systems, Halliburton Energy Services.
Ravi Kathuria, President, Cohegic Corporation


Murphy

Kathuria

Lou Gerstner, former CEO of IBM says in his book, “You get what you inspect, not what you expect.” Inspecting and measuring are powerful tools as they send a message to the organization about what is important. As in the case of any powerful tool, how the tool is used can dramatically impact the outcome.

An organization's internal viewpoint often influences the initial design of performance metrics. However, it is important to ensure that the design of performance metrics evolves to reflect customer interests and viewpoints. Achieving performance that satisfies internal criteria may not serve the organization as well as satisfying customer influenced criteria.

Based on General Electric Corporation's manufacturing measurement program, Halliburton Energy Services implemented the “six keys” metrics to measure manufacturing performance. The metrics included were Asset Management (inventory dollars), Health, Safety and Environment (number of incidents), Customer Service (Promises Kept), Speed (Lead Time), Cost (Productivity) and Quality (Scrap and Rework). Several of these metrics have evolved to align more closely with customer interests and viewpoints. Let us examine three examples of customer-focused metrics versus their traditional internally focused alternates.


Promises Kept versus Customer Request Met

Promises Kept measures the percentage of times the organization meets the date of delivery promised to the client. It may seem to be a customer-oriented metric but it measures against an internally generated date that may have little to do with when the customer needs and wants the delivery.

Customer Request Met is a customer focused metric and measures the percentage of times the organization is able to meet the customer's request for delivery by a certain date.

Keeping promises 100% of the time could mean very little if the promises are not competitive enough and if the promised dates are not good enough for the customer. On the other hand, meeting customer requests 100% of the time is worth a lot more in customer satisfaction and the right way to measure the organization's ability to meet customer demands.


Scrap & Rework versus Cost of Poor Quality to Customer

Scrap & Rework is a metric that captures the labor and material cost of product defects that are caught during the manufacturing process. Focusing on this metric can drive the right behavior and improve quality of the manufacturing process. However, it does not capture the total cost of poor quality in situations where poor quality negatively impacts the customer's business.

Cost of Poor Quality to Customer measures the opportunity and additional engagement costs including downtime and equipment damage, resulting from poor product and/or service. Working with customers to develop a fair mechanism to determine cost of poor quality may in certain cases be a challenge. However, tracking the cost of poor quality and compensating customers could dramatically impact an organization's work quality and customer loyalty.


Inventory Dollars versus Inventory Turns

Inventory Dollars track the capital tied up in inventory and encourages production managers to maintain low level of inventories. This can lead to behaviors where inventories go down with little regard to whether manufacturing meets customer product needs.

Inventory Turns is a customer focused metric and tracks how well the choice of products manufactured respond to market demand. Understanding customer needs and electing to manufacture products that are in high demand cause inventories to sell faster and not collect in the warehouse. Measuring inventory turns and the dollar value of goods shipped drives focus on market needs and not on reducing inventory artificially.

The evolution of manufacturing metrics from an internal focus to customer focus has produced significant benefits for Halliburton Energy Services' customers and reinforced the right focus and approach internally.