Soft side of supply chain

DEPARTMENTS A HARD LOOK AT THE SOFT SIDE OF PERFORMANCE BY KATE VITASEK AND TRACY M. MAYLETT Supply chain scorecards typically focus on operational metrics. But if companies want to capture a true picture of supply chain success, they need to measure employees’ interpersonal performance, too. FOR DECADES, the standard approach to performance measurement has been based on the acronym “SMART": Specific, Measurable, Actionable, Relevant, and Timely. While most companies continue to follow this advice, field-based research by academics and consulting firms has found that some companies are searching for ways to augment these traditional, “hard” operational measures with an evaluation of the “soft” side of business performance. Soft considerations include interpersonal skills, such as leadership, developing and managing relationships, accomplishing team and individual goals, collaborating effectively, and communicating clearly. We will show through real-world examples that managers’ abilities in these areas have a measurable impact on a supply chain organization's effectiveness. For this reason, we challenge practitioners to rethink their performance scorecards. Rather than focus only on operational performance and view supply chains solely as purely logical or mechanical systems, they should start measuring both the hard and soft sides of performance if they want to truly gauge supply chain success. Why measure the softer side of business? Most supply chain managers are accustomed to measuring operational performance, and they typically have an affinity for and are skilled in this type of analysis. Today it is easier than ever to measure the operational aspects of a business, thanks to the availability of free or inexpensive operational benchmarking data through organizations like the Warehousing Education and Research Council (WERC), the American Productivity and Quality Center (APQC), and the Supply Chain Council. The advent of automated scorecards, dashboards, financial analyses, and reporting tools has also made it easier to accurately measure operational performance. Operational analysis is a top priority in today's business environment, which has driven companies to manage by the numbers and emphasize bottom-line results. And when the going gets tough, organizations focusing solely on bottom-line results tend to revert to what they know best. In the case of performance measurement, the tendency is to place additional emphasis on improved operational efficiency at both the organizational and individual levels. As a result, many organizations are reducing the number of customer-facing personnel they employ, slighting customer service, and imposing greater pressure and unfavorable terms on vendors. Without solid relationships to back them up, however, the operational components of a business are unlikely to be successful. Simply put, the interpersonal skills that promote and nurture strong relationships— the ability to communicate well, interact effectively with others, make mutually beneficial decisions, solve problems jointly, and collaborate—can have as direct an impact on supply chain performance as do the operational aspects of a business. To develop a true picture of supply chain success, then, organizations must measure both the “what” (operational) and the “how” (interpersonal) aspects of performance. The importance of these soft skills dictates a need for a new generation of business metrics and scorecards able to gauge both sides of performance. It's not easy to measure interpersonal performance, but the good news is that some companies (like the one in the following example) are finding ways to combine both hard operational metrics and soft interpersonal metrics to gain a more accurate look at their organizational performance. By learning from these early leaders in measuring the soft side of the business, supply chain managers can better understand and therefore improve their own organizations’ performance. 360 degrees of feedback The experience of a Fortune 500 manufacturer and distributor of cereals and grains shows the importance of measuring interpersonal performance in addition to traditional operational measures. In line with longstanding company tradition and practice, the organization engaged in extensive benchmarking efforts to gauge its performance. The numbers reported each day indicated the company was healthy, but executives were suspicious. If the key performance indicators measured what was truly important, and they appeared to show all was going well, then why was the company seeing reduced profitability, higher employee turnover, and the loss of key client business? The answer, they believed, might be found in the behaviors and competencies of their managers. The company engaged Decision Wise, a management consulting firm specializing in organizational measurement and development, to conduct a three-year study involving approximately 150 managers at several manufacturing facilities. This research would attempt to determine how the facility's senior managers (referred to as “supervisors") measured the overall performance of the people who worked for them, and whether they were measuring the right elements when assessing both employee and organizational performance. The research found that the facility supervisors took great care to measure operational performance at the division, facility, and line levels, examining such factors as defect rates, throughput, revenue, waste, safety, transportation costs, and so forth. These key performance indicators were regularly, vigorously, and visibly reported. The company “lived and died” by its performance scorecards, as this executive team was quick to point out. Like most companies, the manufacturer used annual performance evaluations or appraisals to measure employees’ success. Each employee received formal feedback at least annually from his or her immediate manager. The supervisors also provided evaluations of each of their managers. The primary component of the performance appraisals was a measurement showing how well an individual performed against the facility's operational metrics, including how much the individual contributed to the facility's success in hitting operational targets. As expected, each facility had its share of high performers, strong-and-steady performers (the bulk of employees), and a few poor performers. However, these evaluations were largely ignoring the interpersonal components of performance, such as communication, delegation, customer service, and the ability to build and maintain effective business relationships. The company acknowledged the softer elements played some role in employees’ success but did not formally measure them. As part of the research, the company began conducting “360-degree feedback” assessments for each manager. This evaluation method figuratively places an individual at the center of a circle, and then gathers feedback from those in a position to observe the manager's performance: supervisors, direct reports, peers, customers, suppliers, and others. Most of the questions on the surveys the company used for these assessments looked at “soft” traits and skills, such as leadership, communication, ethics and integrity, relationship building, and decision making. The surveys also measured (as seen by others) such “hard” skills as a manager's overall performance, job-specific skills, service levels, quality, safety, managing through established procedures and processes, legal and regulatory compliance, and more. One might assume a manager who scored high on annual performance reviews would also score well on the 360-degree assessments. However, three years of data showed there was little correlation between the managers’ performance reviews and their 360-degree feedback scores. In fact, the results revealed that direct supervisors (in this case, the facility's senior managers) of the managers being tracked typically gave the highest performance-evaluation scores to the managers they believed performed best in regard to operational results, compliance, and job-specific skills. In other words, these supervisors typically gauged overall performance based on the results their subordinates delivered in terms of key operational performance indicators. These were the very indicators being tracked by daily metrics, a testament to Tom Peters’ “what gets measured, gets done” way of thinking. An interesting twist: managers who received the highest overall marks from their facility supervisors did not always fare as well on their 360-degree assessments. Specifically, these “high performers” did not score as well with their co-workers in terms of interpersonal skills, teamwork, leadership, relationships, and communication. But why did the supervisors who were assessing those labeled as “high performers” fail to consider both the operational and non-operational side of the performance picture? One of the primary reasons was that the supervisors typically were not deeply involved with these managers on a daily basis, thus their understanding of their subordinates’ overall performance was largely based on what they saw in the traditional scorecards. Co-workers and direct reports who interacted daily with those managers were in a better position to recognize and evaluate the soft skills highlighted in their 360-degree assessments. An interesting discovery was that most of the managers in the study who performed well in regard to operational metrics but ignored the interpersonal side of performance typically did not sustain their employment at the organization. Over the short term, those managers were able to achieve the desired operational results, such as improved fill rate or on-time delivery metrics. Some of them resorted to achieving the objectives defined in the key performance indicators “at any cost.” This included, at times, scrimping on product quality, overstretching suppliers, and placing excessive stress and workloads on fellow employees, including subordinates. According to the key operational indicators valued by this particular company, they were performing very well. However, in doing so they may have destroyed critical relationships along the way. Those managers who achieved operational results “at any cost” failed to build relationships (both internal and external) promoting long-term sustainability of results. Further investigation revealed that those managers, as well as their subordinates, often damaged client, customer, and vendor relationships. In many cases, those relationships were permanently damaged, resulting in lost or decreased business. In addition, their teams experienced high levels of employee turnover; consequently, operating costs increased significantly over the next 12 months. Although in the short term these employees were able to hit important operational objectives, their poor interpersonal performance often derailed any operational success they had achieved. In fact, many of the operationally high-performing managers who had low 360-degree assessment scores eventually were terminated because of their ineffective interpersonal skills or their inability to sustain their personal operational performance. Of the original group of 147 managers involved in the study, only 107 were with the company three years later. Of those who left the company, the vast majority had received low marks in the non-operational, interpersonal elements. Tracking these individuals’ performance over time clearly showed that operational excellence could not be maintained in the long term without the interpersonal skills needed to nurture relationships. Another interesting finding: the managers who received the highest 360-degree assessment marks in categories related to interpersonal performance were also those who received high ratings from evaluators outside the company, such as customers and suppliers. This confirmed that supply chain partners paid far more attention to a manager's “softer side” than the manager's supervisor did. This study revealed that measuring success is not a simple matter of looking at the hard numbers. For this particular company, the DecisionWise study revealed what the executives’ intuition had told them: the company needed to balance its hard-core focus on operational performance with attention to interpersonal performance. In short, it should measure both the hard and soft sides of performance as part of its assessment of its supply chain operations. The soft side of supplier and customer relationships The example described above illustrates the importance of measuring how well an employee performs in both the hard and soft side of business. But can (and should) this thinking extend to how companies deal with their supply chain partners? We believe it's not just a “nice thing to do.” In fact, we believe companies that don't formally measure the overall health of their trading partner relationships are myopic. This is particularly important in the supply chain arena. The effectiveness of a supply chain relationship with customers and suppliers depends heavily upon non-operational elements of performance: employees’ ability to communicate well, personally interface with counterparts at other companies, make mutually beneficial decisions, solve problems jointly, and collaborate. Interpersonal relationships directly impact such factors as purchase/repurchase decisions, sharing critical information, collaborative education (educating each other on critical aspects of the product, strategy, or service), and the degree of strategic partnership. Sacrificing any of these elements for short-term gain can often have negative, long-term consequences on supply chain relationships, which is likely to have severe consequences for a company as a whole. Research supports the “soft” trend If you are not yet convinced that the softer side of business performance should be measured alongside operational metrics, then consider the following highlights from research conducted by the Corporate Executive Board, Brigham Young University, the University of Tennessee, and the University of California-Berkeley. Their results show how some companies are benefiting from measuring both sides of performance. Corporate Executive Board—governance of 3PL relationships Research by the consulting firm Corporate Executive Board Company on third-party logistics service provider (3PL) relationships looked at how Whirlpool Corporation measures its overall “relationship health” with strategic logistics service providers. Kevin O'Meara, Whirlpool's director of supply chain operations, has established five key principles to ensure the overall health of those relationships. Figure 1 illustrates Whirlpool's approach. (The service provider is referred to as a “company” in the chart.) While this example specifically refers to how Whirlpool works with a 3PL, the model is relevant to any outsourcing relationship. What is attractive about this model is its emphasis on the softer side of performance—transparency of communication, collaborative problem solving, trust, and finally, profit opportunity for the service provider. Brigham Young University's five dimensions of trust Dr. Stan Fawcett of Brigham Young University has done excellent work in the area of measuring trust among supply chain partners. His work revealed the following five key “dimensions” of trust: Dimension #1: Performance. Performance is defined simply as doing what you say you are going to do— every time. Following through on commitments is the sine qua non of trust. Without performance, trust cannot exist. Dimension #2: Open communication. Trust requires the open and timely sharing of all information that's relevant to a partner's ability to make decisions. Sharing information is a highly valued investment in a supply chain partner's capabilities. Dimension #3: Behavior. Trust is promoted or eroded by the way partners treat each other. Stated in question form: Do you treat other participants in your supply chain as truly valued members of the team? Behaviors that ultimately determine the amount of trust in a relationship include the willingness to share risks and rewards, investing in each other's capabilities, paying suppliers on time, and substituting collaboration for leverage to achieve relationship goals. Dimension #4: Personal buyer-supplier relationship. The personal interaction between the buyer's and supplier's representative(s) is critical. This relationship needs to be professional and fair. Dimension #5: Two-world view. Trust only truly exists when both sides of a relationship feel it characterizes the relationship. To achieve trust, each partner must make an effort to view decisions from the other's perspective. That is, how will the decisions we make affect our supply chain partner? Such empathy can mitigate opportunism and promote collaboration. For example, empathy requires a buyer to reconsider some decisions because of their negative impact on the supplier. As part of his work in this area, Fawcett designed a survey to measure the levels of trust between supply chain partners. He found that companies like Honda, Toyota, and even Wal-Mart Stores are actively exploring how to build into (and measure!) trust in their relationships specifically to improve supply chain performance. 1 Field-based research conducted by the University of Tennessee (UT) on “vested outsourcing"—performance-focused outsourcing agreements providing mutual rewards for buyer and supplier—shows that the “soft stuff” involved in building long-term supplier relationships genuinely matters. 2 UT researchers have studied highly successful outsourcing relationships across all industries and functions being outsourced. They have seen a clear trend toward companies reducing the number of operational metrics and increasing the number of soft metrics. In one outsourcing relationship the UT teams studied, the company and the service provider went so far as to remove all of the task-level service agreements from their contract! Instead, they relied on just three, high-level “critical success factors” to gauge operational performance. The contract also spelled out nine additional “soft” metrics, including such hard-to-measure items as “flexibility” and “responsiveness.” The most unusual metric in the relationship addressed what the companies termed “discretionary governance.” This was an index derived from surveying the top 40 people involved in the outsourcing relationship, ranging from those with direct control to major stakeholders in the affected business units. The goal of the discretionary governance index was to gauge the overall “happiness” of the relationship. The companies referred to the index as “discretionary governance” because the parties had agreed to tie a full 20 percent of the service provider's fees to the index—a rarity in a world where most companies only want to make payments based on bullet-proof, quantifiable metrics. UT researchers came to call the discretionary governance metric the “happy factor” because the happier the company, the bigger the payout for the service provider. How much of a difference did this focus on soft considerations make? It may sound far-fetched, but the company named this particular supplier “Supplier of the Year” two years in a row—out of 80,000 suppliers. The supplier confirms that focusing on the softer side of supply chain performance has helped it to build deep and meaningful relationships, which are driving overall business success. University of California-Berkeley's transaction cost economics Still not convinced? Dr. Oliver Williamson, a professor at the University of California-Berkeley, has extensively studied and written on “transaction cost economics,” which is more or less the cost of doing business. One of our favorite findings from Dr. Williamson's research is that the style of doing business matters. Williamson identified three styles: muscular, benign, and credible. He offers the following simple but profound advice: “Muscular buyers not only use their suppliers, but they often ‘use up’ their suppliers and discard them. The muscular approach to outsourcing of goods and services is myopic and inefficient." 3 He won a Nobel Prize in 2009 for his work. It's a balancing act Today's demands require organizations to adopt a balanced approach between the hard and soft sides of performance measurement. How we get results is as important to supply chain effectiveness as what we achieve. As performance measurement moves beyond operational metrics to include interpersonal performance, companies should equally emphasize both. As we have demonstrated, effective interpersonal behaviors lead to stronger relationships, which lead to better operational performance. Organizations that fail to consider the interpersonal component eventually find that this failure has serious consequences for their operational performance. Because of this, the new generation of business metrics and scorecards must reflect this thinking if they are to capture the full picture of supply chain success. δ [STRYKER FINDS LEADERS WITH “SOFT” SKILLS ARE TOP PERFORMERS] One of the most effective tools for assessing the “soft” skills discussed in this article is the “360-degree feedback” assessment. This evaluation method figuratively places an individual at the center of a circle, and then gathers feedback from those in a position to observe the employee's performance: supervisors, direct reports, peers, customers, suppliers, and others. One company that has made effective use of this technique is Stryker Corporation, one of the world's leading medical technology companies. Stryker understands that its overall success depends on developing strong, balanced leaders who excel in both operational and interpersonal performance. With that in mind, the company set out to understand the profile of its most successful leaders. “We wanted to understand how our top leaders differ from the average leader, and then maximize the strengths of our best leaders while also helping our average leaders develop into top performers,” says Chief Human Resources Officer Mike Rude. In order to identify the profile of leaders who were the most successful overall, Stryker employed three types of assessments. The company used 360-degree feedback and employee-engagement surveys to help it understand individual behavior and how it relates to the degree to which an employee is actively engaged in contributing to the company's success. Stryker then paired these results with employees’ performance evaluations as well as with key operational metrics obtained from immediate supervisors. Because executives felt a combination of the interpersonal and operational aspects of getting the job done would provide the most accurate picture of a manager's overall performance, they reasoned that well-balanced performers (those who were or would be the most successful leaders) would score within the top 25 percent on each of the three assessments. Those top scorers represented approximately 10 percent of Stryker's management team. In reviewing the 360-degree feedback scores, Stryker found that these top performers scored better than the “average” leaders by about 10 percent overall. Most interesting to the project's leaders, however, was the fact that these top performers showed significantly higher marks than their colleagues when it came to “soft” skills. Top performers scored 25 percent better than average leaders when it came to soft skills, such as collaboration, developing others, building effective teams, integrity, and communicating effectively, while simultaneously delivering better operational results. Armed with this information, Stryker now helps its leaders develop into top performers by providing 360-degree feedback, coaching, and development opportunities related to both operational and soft skills. “We see a direct relationship between interpersonal performance, employee engagement, and operational performance,” says Rude. “We want leaders to take advantage of feedback and coaching for their development, while we present them with information that shows how their leadership directly impacts performance.” [WHICH “SOFT” SKILLS SHOULD YOU MEASURE?] In this article, we suggest that assessments of a supply chain organization's overall performance include the kind of “soft” considerations typically measured in individual performance evaluations. Which ones should be measured? The following interpersonal skills and attributes have a demonstrable impact on operational performance: ▪ leadership ▪ development and management of internal relationships ▪ accomplishment of team and individual goals ▪ effective collaboration ▪ ability to jointly solve problems ▪ clear communication ▪ ability to make mutually beneficial decisions ▪ effective delegation of responsibility ▪ attention to customer service ▪ ability to build and maintain effective business relationships ▪ ethics and integrity ▪ flexibility ▪ responsiveness