Improve performance of the system, not the figures
A colleague forwarded a copy of this December 2006 article from Manufacturing Engineering, Manage a Living system, Not a Ledger by H. Thomas Johnson. It is a great discussion of why traditional financial measures, while required for accounting reporting, are terrible for internal decision making. This internal use assumes a simple, linear system, when that hasn't been true about companies for decades. Saving $1 in department X almost never translates to an overall savings - it might even lead to higher costs overall. This article argues that the focus is all wrong.
No company that talks about improving performance can know what it is doing if its primary window on results is financial information and not system principles.
Long-term improvement of the system should ideally result in improved financial performance. But to use standard financial measures to measure the incremental improvements drives the wrong view on the system.
But all is not lost either. Systems thinking shows a way to think about the entire system with an aim towards improving the overall goal. What is the overall goal? (Is it really just "make money now and in the future"?) What is the system? It certainly isn't the NC-10 machine out on the shop floor, nor is it the manufacturing plant by itself. There are other plants, sales and marketing, even the larger ecosystem in which the organization operates, etc.
What are some ways to measure and guide improvements, if the traditional metrics don't work? I've thought that any effort should be gauged against how that effort helps the system: can you get more flow through the system? does the system respond faster? Of course, this also means that you can describe the system.
As this article was from 2006, I fully expected to find a number of other pieces that reference it. And there are.
- Train-wreck management from Tom & Mary Poppendieck is a great discussion related to this topic.
- The Mindset by Israel Gat on the systems mindset required for managing.
- Lean accounting is part of the management problem? by Mark Graban is a bit of a critique of the article and agreement of the larger principles.
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