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Dick Strojinc
RSM McGladrey
Director Performance Improvement Group-Practice Lead

The Value and Limitations of Goals in Achieving Results

SOME GOALS ARE MANDATORY, AND OTHERS SEEM DISCRETIONARY

There exists a large body of articles discussing setting realistic goals and their attainment. Virtually every week a new article is published by a respected leader or consulting firm concerning goals. This article is not so much about how to set a goal, but whether it is truly a goal that is accepted and committed to by the organization. Further if it is a goal, then why is falling short of attainment oftentimes accepted.

First, true business goals are contracts. They are commitments to perform and achieve an agreed upon results. They are not optional. Many things in our lives are just that simple. Take a mortgage payment. Many years ago, we agreed for a mortgage to finance the purchase of a home. We have moved on with life, income has gone up or down, monthly expenses fluctuate, sometimes there are extraordinary unexpected events which require funds to be expended. These are all things which occur in business from incoming revenues, to materials price increases, to other events to which we must respond. In our personal lives, the mortgage lender would not tolerate us missing our monthly payment due to any of these events, planned or unplanned. We are not allowed to achieve 95% of a mortgage payment. It is simply that we made the payment in the proper amount on time or we did not. None of these things are permitted as reasons or excuses for falling short. There are numerous areas in our personal lives that we have either met the goal or we have not and there are consequences for each. However, in business, many companies routinely permit under performance.

What about when the team works very hard and has made great progress but still falls short of the goal. An analogy is when the team starts out and is in the middle of an ocean and 300 feet under the surface of the water, the team is drowning. The team has indeed worked hard and made progress, now 299 feet and 6 inches closer to the surface. Without breaking through to the surface, the team is still drowning.

 

Goals vs Stretch Goals

Stretch targets or goals might be different. They are viewed as having some risk and therefor the actualization of that risk prevents achievement of that target. While the use of stretch goals or targets are useful, they add confusion if used in conjunction with true business goals.

On the other hand, in terms of effort, executives and leaders are expected to exert themselves towards improving the business. If that is the overarching objective, then there is no distinction between goals and stretch targets. The maximum effort should be exerted in all situations irrespective of the goal. To be merely satisfied with achieving a goal, when there is capacity to exert further effort is to underachieve relative to one’s capability. As an example, with truly dedicated athletes do they simply run the race to be slightly better than the competition (the goal of winning) or do they run to achieve their personal best which may be substantially faster than the competition. It seems to me than the latter is characteristic of the true athlete.

In a business sense, why is 15% EBITDA acceptable when 20% is achievable.

When I first joined an operating division of Newell Company, as the Senior Operations Executive, I was interested in learning from our best sales manager both what he did that distinguished him from others on our sales team and what I could change in our product and service offering that would help him to be even more successful. We toured various retailers and arrived at one large chain where our shelf presence was a relatively small percentage of the entire assortment which was in great contrast to all the other retailers where we clearly enjoyed the largest share. I was interested in what our competitors were doing better and how we might change things to dramatically increase our share at this retailer. Fortunately, we had been together a few days and shared good dinners with nice wine so that he was relaxed enough to answer honestly. So, I was quite shocked when he answered my question as to what we needed to do different to take most of the share. Basically, it was not in his best interest to do this as he would not be adequately compensated in future years if he gained all that was achievable in the next year. Specifically, he received an annual salary and an annual bonus that was based upon percentage growth. If we were to gain all that growth in the near term, he would maximize his first year’s sales bonus but struggle to meet the future years’ bonus targets. Therefor, he would be potentially limiting his income in those future years. This seems to me to be simply wrong, we are employed by the company to maximize the shareholders’ interest, not our own. In this case a poorly constructed bonus plan limited the growth of the company in revenues and profits. By the way, our CEO, whose career was predominately Sales found this to be acceptable. How many other situations exist throughout companies where the executives and leaders do not achieve the maximum possible because they limit themselves when the goals are going to be accomplished?

By the way, the outcome of this story was a total transformation of a series of money losing businesses combined and then leveraged into a company which exceeded Newell’s expectation of 15% into a multi-year run of 20% operating income. The drive towards maximum potential performance rather than a limiting goal was infused throughout the leadership of the company.

 

Goals Are Not Always Financial Numbers but They Should Result in Financial Gains

On several occasions, I have been privileged to lead major problem-solving initiatives that addressed complex, chronic issues. By addressing these issues and breaking through to new levels of performance, there is a large financial impact. However, by attempting to dimension that impact up front through vague goals like a 20% reduction is somewhat irrational in that it does not look at the underlying causes of the issue. When resolving these individual causes, the results will be totally dependent on how much these causes contribute to the problem. Sometimes these causes are overlapping in that it is necessary to solve one and then the next one before the full results of the first are manifested on the financial result. By focusing on a vague percentage reduction goal, oftentimes, huge savings are left on the table when that percentage improvement has been attained. By focusing on resolving as many of the underlying causes as possible, the results may well surpass any preconceived notion of the amount of improvement that can be attained.

An example at a large consumer products company concerns my experience with a category for our manufacturing plant titled manufacturing defects. Basically, it consisted of charges for defective products received by our captive route sales team (received product from manufacturing, opened the shipping cases, and placed product on the retail shelf). If the product was perceived defective, it was destroyed in the field and the salesperson would charge the product back to the manufacturing plant.

As our plant was much higher in this chargeback rate than our sister plants, it was clearly a problem that should be addressed. To frame this opportunity financially, approximately 5% of all product was charged back as manufacturing defects on a revenue base of around $160 million or this was an $8 million account. Since the salesperson could defect the product at his discretion, it was felt that this was largely a normal cost of doing business. As product approached the end of its shelf life and rather than charge the product as stale, a Sales account, it was charged against the manufacturing defect account. Great effort was expended historically to identify the abusers in Sales rather than accept their judgement. Historic efforts were focused on identifying the abusers to report these defects as Sales issues rather than Manufacturing. Of course, rank ordering the worst to best, had this effect. However, it did not reduce a single dollar of expense across the entire business system. It did assist Manufacturing in achieving its limited goal of a percentage reduction.

The first step in addressing this opportunity was to accept it as true. In fact, I travelled with audited cases of our product through our distribution center and transportation system and opened cases with our members of our sales team and concluded that they were oftentimes under reporting the product that was defective when delivered.

Accepting this now as an opportunity created in either manufacturing or distribution was the first step towards driving the defect rate lower. The specific defect was a blown seal at the end of the bag of chips. As mentioned before, this product had been audited before leaving the distribution center. In other words, the defect appeared in transit. Many inspections were conducted in the shipping warehouse and there was no evidence of blown seals present. However, our sales team was receiving significant levels of defective product. Problem solving then moved to the packaging lines to determine if the appropriate level of quality was achieved that prevented the defects from occurring in transit.

In looking at the opportunity differently, we explored the possibility of improving the quality of the end seals. Note that in examining the seals visually and in manually opening the packages on the lines, nothing appeared different between one package and another. Our operating theory was that seals looked good, but since the sealing process consists of melting the plastic material in the packaging with heat under pressure for a given period of time that one or more of these variables was either causing insufficient seal strength or was causing the plastic to somewhat crystallize and therefor become brittle after cooling in the warehouse or on the journey to the Sales team. Not knowing the cause(s) in advance, it would be difficult to project a percentage improvement, as well as, the magnitude of overall improvement until we had achieved the highest level of seal strength without the material being brittle.

The next step was to develop a measurement method for seal strength. In the Quality Assurance lab at the manufacturing plant, there was a Instron Tensile Strength Tester which could pull apart the seal and provide a measurement of seal strength. This measurement was used in qualifying vendors for packaging materials, but in a laboratory environment. Since we had 65 packaging machines this would be highly impractical as a process control methodology. Going to Walmart, we purchased a less than $10 fish scale measuring in grams. These two methodologies were well correlated and although we could not use the scale with vendors, it was appropriate and affordable for the packaging lines.

Next was to test the variables. First, pressure was standardized by installing pneumatic gauges and pre-setting the air pressure at each machine. The mating surface of the jaws which closed on the end of the package was also somewhat variable based upon the number of cycles the jaws had been operated and the alignment of them. The jaws were somewhat expensive and therefor the plant would defer replacement until an operator complained. Since all looked good for seal quality at the packaging machine, this was rarely done. All jaws were new, and a strict regimen of tracking usage and replacement based upon usage was implemented. This fixed one major variable. Next, was the amount of time that the seals were under heat and pressure. This varied based upon machine speed. The faster a machine operated, the less time the layers of material were held under pressure. Operators would often increase the machine speed to increase the quantity produced in a production shift. The machine manufacturer and the packaging film supplier provided specifications for the machine speed which varied by package size. While retaining the capability to adjust speed, an operator chart was placed at each line where the operator would record the machine speed and supervisors would audit several times daily. Temperature was the final variable. Thermal readouts were part of the packaging machine controls. Typically to accommodate the higher than standard machine speeds which reduced the time of sealing, the operator would increase the temperature of the jaws and produce packages with an apparent good seal. By using the fish scale at each line, we could measure the tensile strength of the fresh seal. Note that changes had to be made in how the operators dealt with all 3 variables. One was fixed physically, the second and third by the operator with displays of fresh seal strength recorded (and the sample displayed in the jaws of the fish scale with the time annotated) and audited by management frequently. With a few weeks of testing on the production lines and then on the delivery trucks, we were able to develop a relationship between fresh seal strength and the rate which the seals were blown throughout the delivery system to the Sales team.

While this has been highly detailed and somewhat laborious in explanation, it is illustrative of the concept that many times the amount of improvement cannot be projected in a conference room or during the budgeting process. It is the derivative of the problem solving. Manufacturing defects declined by 72% within weeks of starting this effort. No one would have projected that level of decrease. Budgeting would typically have been a 10% improvement level. Setting a goal up front on the financial impact was not rational. Setting a goal to determine the root cause and implement a permanent solution was the goal. The financial number would be whatever it would be when the process was in good control.

Two final points, “Things that Are Measured, Get Better” and “If You Cannot Measure It, You Cannot Manage It”. Even having poorly defined or mis applied goals is far better business state than not having them at all.