It is common to see that each department in a business selects what is most relevant for them to measure according to its mandates. For example, operations focuses on labour productivity, customer support focuses on service quality. What we tend to overlook is the interdependencies across departments. When that happens, you have siloed performance indicators, leading to competing priorities and conflicts.
Let’s look at a meat processor which buys raw meat and turn them into sausages and other deli products. This meat processor plans to launch a new line of natural meat sausages made from antibiotics and hormones free meat.
Two key departments in the business are sales and operations. Sales performance has been rated based on revenue growth. Operations performance is measured based on the unit cost of production. The general philosophy is that as the business grows, the unit cost of production should decrease with economies of scale.
For the premium sausages, the cost of antibiotic and hormone free meat is higher, and the fancy packaging also comes with a higher cost. It is expected that the new line would cause an increase to the overall unit cost of production, which would break the targeted downward trend on unit cost.
The business can’t look at revenue growth and unit cost in silos. They need to correlate the results for these two measures and re-examine their performance targets.
Failing to do so would cause production to bring down cost in ways that might not serve the business or its customers. In other words, looking at performance in silos is haphazard.