A maxim of business management is to measure what is important.
The focus on aligning metrics, rewards, and incentives is not a new concept. Many businesses create target focused incentives with the expectation it will assist achieving those important business goals.
In many cases, simply monitoring a metric improve the team’s ability to achieve a specific goal.
In some cases, though, achieving the goal and associated incentive has an associated negative impact on the business.
If you offer a bonus for a short-term behavior or goal and offer nothing to balance with the long-term impact.
Your incentive may actually damage your business in the long term.
Procurement Cost Reduction Bonus
Procurement teams work with suppliers to purchase the materials, parts, subassemblies that make up your product.
The priorities and goals for procurement teams can vary from quality to speed of delivery.
Often the focus is on cost.
The cost of purchased items is often a large percentage of the final costs to create a product.
A reduction in the cost of purchased parts translates into an increase in profit per item sold.
A common procurement team goal is to reduce costs by 10% year over year.
Achieving the goal may trigger bonus payouts to the procurement team.
This where the problem arises. When someone is motivated by money in their own pocket, they tend to pay attention to the metric triggering the payment to the exclusion of other factors.
Sure, some keep in mind the longer term business objectives, including creating a reliable product.
The issue is the incentive leads to a short term focus.
Think long term
We can measure the cost reduction today. The impact on reliability, warranty, and customer satisfaction may not occur for years.
The impact on reliability, warranty, and customer satisfaction may not occur for years.
Saving a few pennies for the same form, fit, and function while using a slightly less expensive material, sounds good today.
If that material breaks down and causes product failure before the end of the warranty period, that is bad tomorrow.
Saving a dollar or two from a power supply able to deliver to the same functional specifications, while operating just 10°C warmer, sounds good today.
The additional heat will lead to problems over time.
Removing just half the margin for a specific load may still allow the product to function initially.
Over time, the lack of margin will increase the time to wear out or failure.
A less robust component will cost less today and help meet the cost reduction goals today.
When the impact is not measured nor included in the calculation of cost reductions the incentive program may help achieve the short term cost reduction goal at the expense of future warranty and customer satisfaction.
Development team/marketing time to market criteria
A product not for sale will not generate profit.
The product has to exit development and become available for customers to purchase.
Time to market for some markets and most projects is a major driver for those managing product development.
A product that is late to market will not enjoy sales while late plus may erode customer confidence in the brand.
It may hurt market share. That costs money.
Each day a product is not on the shelf is a day of lost sales.
Setting aggressive development deadlines is one way to minimize the amount of lost revenue.
The incentives to ship on time may lead to decisions that accept significant (and sometimes known) risk to product reliability performance.
The downside may occur in two ways.
First, the rush to market may limit the necessary reliability analysis and testing to quantify the design’s reliability performance.
Second, when the team discovers a major reliability problem late in the development cycle, they delay the project.
Thus incurring the adverse impact of missing the deadline directly.
The loss of any incentive payouts due to the delay may find blame with the reliability efforts. This may diminish the ability of the reliability professionals to influence future projects.
Even when the delay is to fix a reliability issue the cost of the delay is measured today.
The cost of the future reliability problem never hits the financial records as it is avoided (estimated) future costs.
The incentives tied to short-term goals of cost and time to market can lead to adverse impacts on future product reliability performance.
Those are just two examples of the many ways a focus on short-term objectives without the balancing impact on long-term reliability.
Think through the metrics in place within your organization.
Do they help or hinder the team’s ability to achieve their reliability objectives?
What have you seen? How have specific incentives led to poor reliability?
Share your experience in the comments section below and help avoid the same fate for other organizations.
Guiding Programs by Product Goals (article)
3 Elements of Reliability Goal Setting (article)