This article, which I originally wrote in 2017, builds upon my recent “metrics and goals” article, focusing on a specific example of how goals should not be set—and if they are, they can have a negative impact on an organization. In reading it, you’ll see the article is based on a very personal experience.
I became materials manager at our corporation’s third largest-spend factory after 11 years of successfully filling positions within its purchasing function. The industry our factory participated in was a bit outside of the norm for our company since it was highly competitive. For instance, it wasn’t unusual for one of our other divisions to hold market shares over 50% in important product categories. Our division enjoyed a few of those in minor niche markets but, for the most part, was happy to achieve double-digit percentage market shares for our primary products.
The reason for the intense competition in our business was that the financial investment needed to gain entry into it in was relatively small. For instance, it was not a stretch to say that some of our competitors had actually started out as garage-based operations and pretty much continued to operate “on the cheap.” The investment needed to enter the markets our company’s other divisions sold products in was prohibitive to an extreme, which limited the number of participants.
To differentiate our division’s products from that of our competitors, we focused on designs that delivered higher productivity, better user friendliness, the highest quality and the longest life. Consequently, our brand had the reputation of being the crème-de-la-crème in our product category. This was a good position to be in, but even so, most demand in our market was from homeowners. This meant that while prestige might be a factor in buying decisions, price and availability were usually the dominant considerations.
This market situation presented a different procurement predicament for us than in our factories in other divisions, whose customers were often willing to both pay a premium for their products and wait months (not kidding!) for delivery. In fact, our factory’s market situation was such that if our products weren’t priced “right” out-of-the-chute and immediately available, customers would likely purchase from the competition. This reality hurt our division’s performance relative to the rest of the company when it came to hitting the corporate-wide annual price-reduction goals, as I describe below.
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At the other end of the spectrum were our colleagues in the other divisions who—due to the competitive differences in their industry—tended to leave a little more meat on the bone for their suppliers during the sourcing process. This is not just my opinion. I heard it voiced from many suppliers that sold to multiple units across all our company’s divisions. Because of it, our factory’s year-to-year material variance (annual piece-price reduction performance) didn’t measure up to the top performing factories in the company’ i.e., when there is more meat left on the bone, initially it is easier to cut from it. In fact, over the last couple of decades our factory’s annual material variance had consistently been adverse, with prices typically going up in the 1% to 2% range. On the other hand, some factories in other divisions would consistently deliver favorable material variances of up to 2% a year.
In other words, year-to-year pricing comparisons across the corporation made our factory procurement function look like it wasn’t doing the job in controlling prices. Consequently, when I became materials manager the primary mission I was given was to start delivering favorable material variance performance; i.e., achieve lower pricing on a year-to-year basis.
We worked on cost reduction just like every purchasing department in our company, and did a pretty good job at it. However, in investigating our past material variance performance, I found that to compensate for the extremely competitive initial pricing, we tried to honor reasonable supplier price increase requests. Why? Because if we didn’t, capable suppliers might not to want to give us their best pricing up front. As a consequence, piece-price increases more than offset our cost-reduction efforts. The fact was, though, that we had probably become a bit too lenient in our price-increase request approvals.
I met with my department and told them that we intended to continue to collaborate with suppliers on year-to-year pricing—after all, everyone needs to eat—but that going forward we would be less open to granting price increases involving controllable costs. In other words, if the worldwide price of steel rose, we would certainly grant price increases related to steel content. But, on the other hand, we would look very closely at things like price increase requests related to things like increases in wages since, in our own factory, such increases were expected to be offset by productivity gains; i.e., total labor cost would not rise. Feedback indicated that this seemed a pretty fair strategy and, while suppliers would certainly need to adjust their practices, they would understand and accept the basis of the change.
At about this same time, the top purchasing position at corporate had been elevated from director to vice-president. The company had then been able to attract a well-known procurement VP from another corporation to fill that position. At every step this individual’s strategy tended to be to try to centralize purchasing power and decision-making at corporate, a difficult “sell” at a company known for distributed authority. He also thought to standardize procurement practices across the corporation which, of course, wouldn’t take into account market-related differences and necessities.
It was obvious the new VP wasn’t used to getting the type of pushback he received on his “one-size-fits-all” plans from our company’s individual factory materials managers but he remained persistent. However, within a year he had gotten CEO approval for an ongoing year-to-year material variance goal that would apply equally to all factories. The expected annual price reduction was 5%.
I decided I needed to go to my general manager for guidance. His advice to me was to stay the course relative to our goal of having a favorable annual material variance, regardless of what corporate was demanding. In other words, if we could introduce a trend of positive price reduction he would look upon that as a major victory.
So how did we do? A year into my tenure we had a favorable material variance of 1.29%! I was ecstatic and so was my general manager. I sat down with my group and congratulated them for what they had accomplished and asked what they thought they could deliver as a follow-up, as we were setting next year’s budgets and financial projections which required a direct material cost projection. They took up the challenge and agreed there was a legitimate chance of achieving a 2% reduction. I asked for details on how they expected to achieve this—commodity-by-commodity and supplier-by-supplier—and they put together what I considered to be a great plan.
I would need this because I was soon to report to our division’s new VP of operations on my department’s fiscal year-end results as well as our goals for next year. I was excited about this because we had such good news to report. This person was whom my general manager reported to. I had heard things about the new VP that worried me. For instance, he was the sort of guy who demanded strict loyalty. What do I mean by this? In staff meetings he would regularly say things like “if you aren’t with me, you’re against me.” I had also heard that he had visions of becoming a division president someday and, because of this, came down hard on his people whose performance didn’t make him look good. I think you can see where this is going.
I spent a lot of time and effort putting my presentation together. It focused on our factory’s historically adverse material variance performance; the favorable material variance the team had delivered this year, and the plan to improve upon this year’s performance next year. The VP didn’t have much to say until I ended when he said, “Your department’s performance for this year wasn’t acceptable, nor is the goal for next year.”
I was stunned and asked him what he meant. He said, “This factory’s material variance performance lagged compared to factories in other divisions. The corporate-wide goal is a 5% favorable material variance and, if you don’t deliver it, you will have failed.”
I again reminded him of our past material variance performance and the progress we had made this year, telling him that in my opinion my people had gone way above-and-beyond in making it happen. I went on to say there was no materials manager in this company that thought setting an annual across-the-board corporate-wide cost reduction goal of 5% was either reasonable or even the right thing to do -- which was true. He replied, “A 5% favorable material variance is next year’s goal and I expect you to propose a plan that will deliver it.”
Hmmm. I had been pretty proud of my team’s performance and this reaction was unexpected. I told the VP that while we could set the goal at any level he wanted, next year’s financial projections needed to be based on reality, and a 2% reduction in direct material cost represented a realistic stretch goal for our factory that we would be hard-pressed to delivery. I went on that if we set our material variance goal at 5% and didn’t deliver, it would introduce error into those financial projections. He replied, “Your goal is 5%.”
At that point I lost my cool and said, “If what you’re interested in is an attention-grabbing performance goal, why not set it at 10%?”
He replied, “Ok, this factory’s material variance goal for next year is 10%.”
My boss gave me a sharp look that indicated I should stop talking—and now—but I couldn’t help myself. I said, “Why stop at 10%, then? Why not set it at 20%?”
Well, that was the end of my update. Shortly thereafter my boss let me know that I was being replaced as the factory materials manager. When I asked why he replied that our new VP of operations didn’t believe I was committed to cost reduction. Really? Fortunately, I had supporters at the division’s executive level and they made sure a job was created for me that didn’t result in a grade drop.
So what happened as a result of the above? The new materials manager put together and presented a plan to deliver a 5% favorable material variance. The actual results came in under 1%, i.e., less than had been delivered the previous year when I was in charge and also less than the 2% goal I had proposed. But I guess that must have been OK because even though the department didn’t come close to hitting its performance target, the fact that my replacement had been willing to set an unrealistic performance goal implied that he was “with”—not against—the operations VP. Consequently, my replacement continued on in the materials manager position for several years, setting annual cost reduction goals of 5% and never coming close to hitting them.
What did I learn? I should have kept my mouth shut at that meeting. There would have been better times and channels to make my point but I had lost my cool and so responded as I did. I felt that by taking the position he did the operations VP was setting my employees up for failure. I have an admitted weakness in that I can’t tolerate bullying—either against me or my people—and his position on our performance failure tripped-my-trigger. Realize, I would have been trying to justify pay raises for my group in the near future and his “unacceptable performance” comments were sure to get around, making it very difficult to make a strong case for them.
In my book there is a primary characteristic to being a bully: namely, denigrating (or trying to) someone lower than you in the pecking order when there is really no reason for doing so. In losing my position I was certainly denigrated, and everyone knew it! And in making this move as he did, the new VP of operations confirmed that he was, indeed, a bully.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
