The Beginning: Drucker and Ridgway

Everyone reading this will have no doubt heard the expression, “what gets measured, gets managed” – or something similar. The original quote usually is attributed to Peter Drucker’s 1954 book The Practice of Management.

Perhaps more interesting is the somewhat lesser-known full quote, “What gets measured gets managed, even when it is pointless to measure and manage it, even if it harms the purpose of the organization to do so.”

Drucker wasn’t simply encouraging people to measure their actions and outcomes; he was warning us about the dangers of not being fully aware of the organizational impact of what we were measuring.

There is another famous maxim for management measurement: “Not everything that matters can be measured, and not everything that we can measure matters.” This is attributed to V.F Ridgeway in a paper published in 1956.

Read this in conjunction with Drucker’s comment, and we begin to see a picture emerging. We may very well be measuring things that don’t really matter simply because we can measure them, and that the act of measuring and managing those things may actually “harm the purpose of the organization.”

Further Insight: Goodhart’s Law

The thinking about measurement of actions and outcomes was further evolved when a British economist, Charles Goodhart, wrote in 1975 what became known as ‘Goodhart’s Law.’ The simplified version states “When a measure becomes a target, it ceases to be a good measure.”

Essentially, Goodhart is warning us about the law of unintended consequences. That is, often when we use a measure targeting a specific goal, people will aim to achieve that goal regardless of the consequences. Tying that back to Drucker, even if it harms the purpose of the organization. Or perhaps, even if it doesn’t actually achieve the goal for longer than the point in time of the measurement.

Consider this example.

With spare parts inventory, managers will often set a goal focusing on a reduction in inventory value by a specific target date. On the surface this is not unreasonable.

There is (hopefully) a management expectation that the team working on this will take sensible actions that will reduce the value of the inventory (achieving the goal) without damaging the ability of the organization to fulfil its mission with that inventory.

However, what happens when the metric of inventory reduction becomes the target without consideration of longer-term consequences?

Then, companies experience what is often referred to as a ‘slash and burn’ approach to inventory reduction. People will remove whatever they can, however they can, just to achieve the goal. Sometimes this will leave the operational part of the business short of necessary spare parts, resulting in extended downtimes and inefficient labor utilization. Thus harming the purpose of the organization.

This type of action is most prevalent as the deadline approaches, maybe the end of the fiscal year or perhaps the quarter. The goal is to achieve the metric target at that singular point in time, with little thought about what happens next month of quarter.

A slightly less damaging approach occurs when, in the last month of the fiscal year, people stop reordering spare parts that need replenishment. This results in a reduction in the value of the ‘stock on hand’ for that point in time – the end of the reporting period. At the beginning of the next period all those orders are now placed, and the inventory goes back to its previously bloated state. Thus, not achieving the goal at all.

Use Metrics to Tell the Story

 The key to managing spare parts inventory is to use a suite of metrics that will tell the story of what happened, not just the point-in-time result.

Like all good stories, we need continuity. So, the metrics need to be reported monthly. And to borrow another phrase, ‘the trend is your friend’ so charts work better than just numbers.

Returning to the end-of-year example above, reporting the value of both inwards and outwards storeroom transactions each month, in addition to the actual value of stock on hand, helps tell the story of how the result was achieved. If there is a sudden reduction in the value of inwards goods or a sudden surge in outwards goods while the stock on hand drops to the target level, then you know that while the goal was achieved at that point in time, it is probably not sustainable.

Goal setting and metrics is one of those tasks that can seem to be straight forward. However, setting metrics that tell the story and direct people to actions that won’t harm the organization requires consideration of the consequences. Ignore the guidance of Drucker, Ridgway, and Goodhart at your peril.

www.provisoneronline.com   |   APRIL 2022