The Perils of Bad Metrics

Before I leave off HBR’s September edition here are two entertaining/instructive anecdotes on how the wrong metrics can dramatically affect your company’s performance. In both these cases there was an apparent seasonality in the company’s sales performance that turned out to be down to the management of the sales force.

End Of Quarter Discounts and Baby Pee

A manufacturer of diapers was experiencing a monthly demand cycle of low, low, high, which would be repeated each quarter. All this despite the fact that babies tend to pee at a roughly constant rate. It turns out that the CEO was driving his workforce hard to hit quarterly sales targets. Retailers soon realised that if the manufacturer was falling short of its quarterly numbers, it would offer deep discounts. So retailers ended up waiting till the quarter end and buying 3 months’ supply of diapers. The following quarter they wouldn’t need to buy anything until month 3 by which time the manufacturer’s sales were struggling and discounts became available again.

Great at Forecasting, but Lousy at Growth

This company was facing a high, high, low cycle in demand.

A CEO wanted to promote “rigour” in his sales force – so their commission was based on forecasting accuracy as well as sales. If a salesperson hit her forecast she would get an extra bonus on top of commission. If she went over her forecast, any subsequent commission would be halved.

The salespeople therefore worked hard to avoid going over their forecasts – in effect holding sales over their forecast into the next quarter. Not only did company growth suffer, but so did customer satisfaction – customers would find it very hard to get hold of product in the 3rd month of the quarter.

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