The Failure Modes Effects Analysis (FMEA) is another risk mitigation deci- sion tool that assess risks of different options in terms of three different considerations:
⻬What is the severity of a failure? High (8–10) would mean catastrophic to the company and the business. Medium (4–7) would be severe, but not fatal to the organization. Low (1–3) would impact minimally or not at all.
⻬How probable is the failure likely to occur? High would mean very prob- able to inevitable, medium would mean somewhat likely, and low would indicate an unlikely probability of occurrence.
⻬How detectable would the failure be if it should occur? High would mean its occurrence would be invisible to the organization. Medium would suggest some possibility to see it, but not much, and low would indicate there are detection systems or methods in place to alert immediate fail- ure occurrence.
Each option is analyzed for possible failures, and each failure is assessed via these three considerations, with a score assigned in each, and multiplied together to give an overall risk value, or Risk Priority Number (RPN). Then, the option with the lowest RPN is the option with least risk.
Review structures are often used to ensure completeness, when time is avail- able. When a decision is made, a review of that decision is conducted one level higher up in the organization, by a team of three or more, who would use a checklist or critical index of key considerations to ensure the decision took all appropriate aspects into account. This also enables a broader per- spective for consideration, where the decision maker may not have investi- gated indirect aspects as well as needed, which may impact the company’s longer term planning or other factors outside of his/her direct influence.
Different types of organization structures also can contribute greatly to oper- ational success, especially where customer satisfaction is a big factor. Switching to more program and product or service focus from traditional functional structures enables a clear line-of-sight to the customer for every participating department, who together share responsibility for delivery, quality and per- formance. Added side benefits are greatly reduced rework loops, better hand- offs, and quicker response to problems or issues that arise from time to time.
Figure 9-8 highlights this concept.
Understanding the Essence of Accuracy
What happens when data is not what it seems, what we want, or what we need? Part of the problem is that if the data going in is not dependable, the data coming out will not be dependable either. But that is not the whole story. With errors in data, you may interpret such conclusions incorrectly. In the following section, we show you that, even if the data might be credible, the challenges in treating input as valid is actually a no-brainer, but often gets complicated in the day-to-day rush.
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The key is to focus everyone away from their silos, on their specific role in supporting how well we deliver to the customer,
and how to improve this above all else.
Figure 9-8:
Financial measures can create trans- parency to customer created value.
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Chapter 9: Building the Financial Leg Scorecard
Oh no, the numbers are wrong!
The pitfall resulting from this exclamation is one of the most dangerous mis- takes a company can make. We have done the math, analyzed the dashboard, and the results are in. The performance is bad. Put another way, the numbers represent less than stellar performance.
The most common mistake, and the most deadly, is denying the data. A lot of companies actually decide that the financial measures, as indicated on the dash- board, and as linked and integrated to the four legs of the Balanced Scorecard, must be wrong. They reason that, with the recent introduction of the Balanced Scorecard and dashboard, and the newness of the approach to the company, it must be the figures that are wrong, since the approach must be right.
This tendency is brought about by something called cognitive dissonance, or CG. CG happens when we encounter something that does not fit our ‘rules of the road’ or our cognitive map, which is a map in our minds of our hopes, dreams, ideas, impressions, rules of normalcy, and other things related to how we feel about things. When we come across a situation that does not align with our cognitive map, we experience CG. Since two truths cannot exist in the same time and space, one has to give. In this case, given that it must be possible to meet the numbers, politically as well as personally, then the num- bers must be wrong. Very dangerous. Denial of accurate results has destroyed many companies, and rendered many more into bankruptcy or worse. However, there are other ways to slice a carp.
Some company leaders don’t deny the data outright. Instead, they qualify the data, to render it safe, making the tenuous assumption that it might be true after all. For example, we need to meet the numbers, but the sales department projects that sales of a particular model will go down unexpectedly. So, typi- cally the leaders might point to the data, and indicate that it is probably true for a specific set of circumstances, or a separate department or group, but because there are differences in departments, it does not apply to his or her particular department. This is equally dangerous, since it also results from taking drastic action, in order not to lose a significant portion of the company.
The key is to ask where are you focused, talk with your peers, your boss, and even other department heads, before you select your financial measures, so that what you measure aligns with what you want to ultimately achieve.
The right numbers, the wrong analysis
The pitfall here is the potential to draw correlations regarding performance that have no true link, but appear to be linked anyway. For example, we see an improvement in margin numbers, supported by an improvement in on- time delivery. The conclusion is that we are delivering on time, which results
in reduced expediting costs. But we may find that the volume has reduced, making it easier to deliver on time and avoid expediting.
A small electrical component company was tracking its volume production, noting increases in specific current and capacitance based items, and began to analyze these items and their use in electronic stereo sound systems.
Based on the volume increase, they revised their strategic focus, and laid groundwork for additional capacity to support such stereo sound systems in other ways, such as with additional components. They also established and staffed a new marketing strategy to approach such stereo sound system pro- ducers, in order to improve their market share. However, when they did approach these producers, they were told that their products were actually being phased out of their products, due to limits in capability. Surprised by this, they tried to analyze who might be buying such components, only to dis- cover that hobby radio enthusiasts had found their particular products useful in controlling bandwidth and enabling parallel processing in short- wave communications equipment. Had they looked first at the consumer of their components, they would have saved hundreds of thousands of dollars in marketing to the wrong customer base and restructuring, and been able to capitalize on the increased customer base they did not know existed at all.
To avoid this pitfall, the key is to integrate your financial measures, such as margin and delivery with yield, takt (volume provided over available time), along with growth measures (shift rates to new products, for example) and internal measures as well (operational changes due to supplier or environ- mental variation) in the dashboard.
This will require a comprehensive review of your financial dashboard, to ensure its measures integrate and align with the other dashboard measures as well, so that the right analysis can be conducted, providing the correct decision choices for competitive advantage.
Tracking the numbers by automatic pilot
It’s not uncommon for managers to create a dashboard that tracks “standard financial measures” in a way that reflects more of a reporting scheme than something that actually contributes to decisions. The problem here is that, while you set up your financial measures in order to monitor your company’s behavior, you need to be sure to regularly check the measures as well, and not just depend on the ‘automatic response’ system to report irregularities.
The reason for this is that, while airplanes can use an automatic pilot system to monitor, detect, and signal an alarm when irregularities occur, they are flying level, with most environmental and mechanical factors known. Companies, on the other hand, ride their market waves with no warning to changes in trends, customer buying variation, new or competitor product introductions,
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Chapter 9: Building the Financial Leg Scorecard
supplier influence to your performance, and dozens of other factors that will have an effect on how you are doing today, and how you will do tomorrow.
Many companies are brought down thinking they had great risk reduction programs in place, only to discover their market stolen out from under them.
The key to avoiding this pitfall is to provide for excellent risk reduction, based on Failure Mode Effects Analysis, or FMEA. Risks are assessed on the basis of three elements; severity of something occurring, probability of that occur- rence, and detect-ability of the possibility of occurrence, or of the occurrence itself. As discussed in Chapter 10, this tool provides excellence risk mitiga- tion, management and control for a company, and can guard against the auto- matic pilot tendency of financial dashboards.
To avoid these pitfalls, we need to review our rewards and recognition sys- tems as they relate to achieving certain financial performance, and ensure we are not promoting any of the above behaviors. Remember: You get the perfor- mance that you reward! Especially vulnerable are compensation-related incentives.
However, equally strong in motivation are those factors that fuel such inap- propriate behaviors through recognition or internal competition. We have seen where internal competition resulted in instituting cross-charging fees, delivering late, and questionable quality performance to sister companies, in order to gain an internal competitive advantage. The amazing thing is that management continues to advocate internal competition, in spite of the grow- ing mountain of evidence of catastrophic damage caused to company, not to mention the fact that it does not add value anyway, nor would the customer be willing to pay for it anyway.
The bottom line is this: be aware that there may be a propensity to cheat, and that the measures recorded and reported may need an additional review, to ensure they are accurate and timely, so that you can indeed make the best decisions you can for your company.