HighJump Software

Okay, I admit it is highly unlikely your metrics turn into a diabolical Lex Luther or another super hero nemesis, but it is quite possible you might rue the day a metric was deployed to the field.  In many organizations it is common to develop metrics, deploy them to the field and then tie some form of variable compensation to successful metrics attainment.  I believe many would consider this is an example of supply chain management best practices.

However when it comes to incentives, humans take on the role of lemmings.  Whatever a person gets more compensation for, they are likely to exert a little more effort to achieve.  Herein lies the beauty and evil of deploying metrics-based compensation.  An example of this is the metric ‘Average Warehouse Capacity Used.’  According to a recent study by the Warehousing Education and Research Council this metric was one of the top 10 most popular metrics used by member companies.  The more warehouse capacity used (i.e. 90% vs. 80%) in theory the better you were performing on this metric.  While I agree a higher percentage means you are better leveraging your fixed asset, but what is also happening at the same time?  To go from 70% to 80% or 80% to 90% you are buying more product.  More product means you are likely tying more money up in working capital.  In addition to negatively affecting other metrics in the business, much of supply chain best practices and deployment of technologies are aimed at reducing the amount of working capital tied up in the supply chain.  In certain instances, like a new product launch or seasonal rush, it makes sense to increase inventory to meet expected demand, but as a general rule it is not advisable to stock inventory for inventory’s sake.  Can you imagine if this metric was deployed to a company’s entire supply chain organization including the purchasing department?  The more they ordered, the fuller the warehouse, the more compensation for that specific metric. I am sensing the need for Superman.

When rolling out a compensation plan tied to metrics carefully consider human nature to avoid creating your own personal Lex Luther.

Image via Flickr user Xurble.