The ordeal of measurement

“What gets measured gets managed” – Peter Drucker

Measuring progress of an economy is critical to its enduring status as an investment destination. China registered a double digit GDP growth rate when it was spending driven. From the time it started focusing on consumption, the growth rate tumbled. The growth rate plummet sent shivers across the globe who pinned their hopes on china. Does the nose-diving of the growth rate mean its people are swiftly heading towards penury? Let’s evaluate.

Let’s suppose the challenge is to determine how well-off people are across countries, say America, France and India. If you pose this question to an economist, he will immediately compare the GDP of these nations, convert the GDP in dollars terms and provide a comparison. Additionally, the per capita GDP will also be computed as guidance to reflect the material standard of living. Does this really indicate the “well-off” quotient?

GDP was designed to measure only the value of goods and services produced in a country, and it does not even do that precisely. How well off people feel also depends on factors that GDP does not attempt to capture, such as their health or employment status etc. GDP treats the despoliation of the planet as a plus which environmentalist vehemently oppose.

So, if economists and environmentalists were treated as departments within an organization, GDP would be considered as a conflicting inter-departmental indicator.

Indicators within organizations are established after expending enormous amount of energy, skill and money.  Traditionally, indicators have been instrumental in measuring departmental performance and approving the use of a management method. In the quest to encompass the entire gamut, numerous indicators have rendered themselves redundant, repetitive or conflicting.

A classic example is the predicament between the sourcing and the shop floor manager. With the objective of cost reduction, sourcing managers strike agreements with vendors to supply consolidated orders at a favorable price. While the sourcing manager performs well on reducing the cost, he ends up increasing the work in progress shop floor inventory. The onus of consuming the delivered materials falls on to the shop floor manager. The poor shop floor manager will diligently embark on consuming the materials. If there are no rules that govern the shop floor, very soon the floor will look gleam with copious work in progress (wip) inventory. Another latent problem, excess inventory drains cash out of the system.

One single indicator of cost reduction transcends itself into a multi-dimensional challenge that requires an acute understanding and a careful handling to keep it under check.

So, what is the best way to rescue you from this quandary? The answer lies in the ability to visualize the holistic picture of the business and design a measurement system commensurate to its ecosystem. Organizations that lack this wisdom, in all probabilities will lose business to nimbler firms that are capable of delivering on-time and as a result, enjoy a healthy order book. If you are entangled in a maze of cryptic indicators, decisions would largely be gut feel driven instead of data driven.

In this current age, this could be detrimental.

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