A Lesson Learned: You Get What You Measure

By Jeff Monaghan, Climax Portable Machine Tools

As Climax Portable Machine Tools strives to increase a powerful metric—profit margin—it learns in the planning for a new product that the calculations determining profit margin don’t necessarily drive improvements in Lean terms—reducing non-value added activities—proving once gain the adage, that “what gets measured, gets done.”

You get what you measure. In other words, the performance measurements that an organization uses will drive behaviors that support those measurements. That seems obvious. Yet often the measurements applied are incomplete—and in some cases, counterproductive.

At Climax Portable Machine Tools, as with many companies, profit margin is used as the primary performance metric. For the most part, when measuring a specific product, this is the only performance metric that the shop floor has control of and is held accountable to. The company has other important measurements, such as on-time delivery, but these are typically applied more in enterprise-wide discussions and less to specific products.

So in November of 2007, when Climax held an event to develop an assembly cell for a newer product, the LM6000 portable milling machine, increasing the profit margin was, naturally, a key goal.

What resulted from the event was the creation of a three-workstation assembly cell. The right tools for assembly were obtained and laid out at the point-of-use with the beginnings of 5S. Parts were delivered much closer to the right place at the right time. Engineering made significant improvements to the design-for-assembly of the product.

These changes combined to provide a dramatic decrease in assembly cycle-time from more than 60 hours to less than 30. This cycle-time reduction translated into a profit margin that rose in excess of 10 percent. These impressive gains are rightly celebrated. However, it is important to recognize what the profit margin tells us, and consequently, which behaviors are or aren’t driven by it.

Profit margin is defined as: [(Sales-COGS)/Sales] x 100%

Where COGS = Cost of Goods Sold = Cost per Unit X Units Sold

Cost per Unit = (Material Cost + Labor Cost + Overhead) / Units Produced

Therefore, if we build and sell one unit, the profit margin is

[(Sales Price – (Material Cost + Labor Cost + Overhead))/ Sales Price] x 100%

Sales price and overhead are fairly rigid, or at least the organization has little control over them. The material cost portion of the measurement promotes large lot sizes in an attempt to reduce per-unit cost. Nevertheless, the shop floor employee has little chance to affect sales, overhead, or material costs—only labor cost.

At Climax, labor cost is the product of actual time spent building a product (actual cycle-time) and a specified labor rate. Other companies may use a standard labor time applied to a product. In either case, in terms of the labor cost:

Profit margin attempts to provide a measurement of value-added time.

Time spent on value-added activities is important, but the Lean practitioner knows that the vast majority of improvements come from the reduction of non-value-added activities.

Returning to our example of the LM6000 assembly cell event, it is clear that we have become much more effective in our value-added processes. However inventory levels haven’t changed significantly, part shortages continue to plague lead-times, and defects bring build activities (i.e., value-added activities) to a halt, which all lead to expediting as a way of life. Additionally, part-picking time has increased slightly and so have the floor space requirements.

Since only the value-added activity is reflected by profit margin measurements, value-added activity has improved while non-value added processes have not changed significantly. In order to drive behaviors that eliminate non-value added processes, we must apply the appropriate measurements to all the activities we seek to improve.

Jeff is a manufacturing engineer who has been with Climax for five years. He is part of the Lean Enterprise Facilitation Team, which functions as internal Lean consultancy. His focus currently lies primarily with the assembly team.