The principle of short interval control, which I described in a previous article, also applies to management control at daily, weekly, and monthly frequencies. In this article I explain how a hierarchical management control and reporting system with feedback loops is essential to change behaviours and drive continuous improvement.
Figure 1 below illustrates the information flows in a typical management control and reporting system (MCRS). At the end of each 24-hour period, the information from the hourly short interval control (SIC), shown at the bottom of the diagram, is taken to the daily production meeting where the daily-weekly operating report (DWOR) is reviewed by the plant management team. Similar to an hourly SIC, the DWOR is a daily short-interval control to ensure that the key performance indicators (KPIs) for the week are on track and the weekly production plan is achieved.
Likewise, at a weekly frequency, the operations management team review weekly performance in the context of the current month or quarter using a weekly-monthly operating report (WMOR), and on a monthly frequency, senior management review progress towards annual production targets and costs versus budget.
Note that at each review frequency—hourly, daily, weekly, monthly—there is a closed feedback loop. Actions from the review of the previous period are fed to a planning meeting where they are translated into an updated plan for the next period. The plan is then used for short-interval control by the managers at the level below. At the end of each period, performance is reviewed again. Thus, decision-makers get feedback on the effects of the decisions made at previous meetings. This is crucial for learning, continuous improvement, and behaviour change—recall the concept of mental models and the fact that it may take several iterations of plan-do-check-act before a problem is effectively solved.
Figure 2 shows a typical layout of a DWOR. At the beginning of each week, the blue columns labelled 'plan' are populated with the production plan for the week. Actual daily production and cumulative production are added to the report at the end of each day. The updated report is then reviewed by the plant management team in the daily meeting and deviations from plan and production losses are discussed. Reviewing KPIs in this way allows the responsible managers to monitor progress towards the weekly production target, and to identify when corrective action is needed. When action is taken, they can observe its effect and by the end of the week it is easy to see how daily events and actions contributed to overall production for the week. This leads to a more effective diagnosis of weekly performance and thus better decision-making in the weekly meeting.
Despite its advantages, use of the DWOR format in Figure 2 is not common. In my experience, daily production reports are usually summaries of the previous 24-hours. A myopic focus on the previous day means that trends and daily changes are harder to detect. When each day is considered in isolation, the effects of problems and actions taken on previous days are forgotten, making it difficult to explain why the weekly production target was not met at the end of the week.
It's also common to see multiple time-horizons presented on the same KPI report. For example, daily reports may have 'month-to-date' or 'year-to-date' KPIs in addition to the daily data. It makes little sense to review such long time horizons in a daily meeting. Progress towards monthly or annual targets does not need to be reviewed daily. The reports at each review frequency should be tailored to the type of decisions to be made at that frequency and the appropriate level of management.
Similar to the DWOR which links daily and weekly performance, the weekly-monthly operating report (WMOR) makes the connection between weekly performance and monthly. Figure 3 shows a snapshot of an actual WMOR. It shows production for the current week and the previous 4 weeks, a rolling 5-week summary, and also monthly performance for the year-to-date. As well as production, it includes other KPIs necessary to capture all aspects of operational performance. Note that for each KPI there is a planned value from the sales and operational plan (S&OP) or a target.
The WMOR, along with an action log, forms the basis of an effective weekly operations meeting. A weekly summary of production losses is also typically available. All the responsible managers of each functional group are present (production, maintenance, engineering, safety, health, environment, etc.) to review the facts on performance, and as a team they must diagnose the root causes and determine appropriate corrective actions.
The key idea behind hierarchical management is that decision-makers at each level manage performance at different timescales. This timescale separation is necessary because the information requirements, expertise, and scope of decision-making depend on the review frequency and the time horizon over which actions are planned and results expected. Obviously, the kind of actions an operator takes on an hourly basis are very different from the decisions managers make at a weekly management meeting. At the lower levels, decisions and actions relate to immediate issues that require prompt action and can be resolved with the resources and expertise available. More complex issues that cannot be resolved at that level, or require further analysis, are reported up the hierarchy to an appropriate level where the decision-makers have the expertise, authority and resources at their disposal to devise and initiate an appropriate action plan. The higher levels are also responsible for identifying long term trends and opportunities, and to implement initiatives to exploit them. These may take weeks or months to deliver results.
Over time, management teams at every level become skilled in identifying the key issues, making appropriate decisions, and initiating actions. However, this requires behaviour change. They must learn to overcome their biases and the tendency to make decisions by 'gut feel.' This is achieved by a systematic process of data analysis, agreement on the cause and appropriate corrective actions, implementing the actions, and reviewing the results of the actions. Over time, through repeated iterations of data-analysis-decision-action, decision-makers develop mental models based on facts. This learning loop is depicted in Figure 4.
Finally, for the overall MCRS to be effective, decisions and actions at each level must be connected so that decisions at one level are based on the facts reported by the level below. To achieve this, the manager responsible for execution during the previous time period attends the review meeting at the level above to report issues and explain performance to the decision-makers at that level. Also, decisions must be integrated into the plan for the next period and communicated to those responsible for execution. Once these connections between the levels are in place and the feedback loops closed, managers at all levels will be aligned and focused on the key issues, and the whole organization learns how to solve problems and continuously improve performance.
Summary
What makes an effective management control and reporting system?
A hierarchical structure based on different decision-making timescales
Short-interval control of execution at each level
Each layer connected to the layer above by reporting and planning links
Feedback loops to ensure organizational learning.