Most manufacturing companies have a standard cost system. Their first motivation for this system is to simplify inventory valuation and tracking. Then with all the resulting information available from this system, it seems only logical to use it for key performance indicators or KPI's. One indicator could be a product's total Distribution Labor Standards cost; others could be variances recorded for material prices, scrap, labor rates, labor efficiency, and overhead. Variances are the differences between a standard and the actual costs or usage. The problem with standards as key performance indicators is that they are interrelated and may trigger unintended consequences.

For a simple, yet classic, example, let's assume that purchasing has a purchase price variance performance indicator and that purchasing is rewarded for a favorable variance. A purchase price variance is the difference between the standard cost and the actual price of materials purchased. However, purchasing also has a role in setting the cost Labor standards for materials. With all else equal, purchasing would drive for higher standards for materials. Then when they negotiate a lower price, the resulting more favorable variance contributes to their performance evaluation.

This performance indicator may also drive purchasing to consider substandard materials or less qualified vendors offering a lower price. In this case, the purchase price variance may be favorable but additional cost is incurred in reworking materials, dealing with poor quality issues, or in manufacturing downtime. For another Retail labor standards, a creation executive has creation cost as a presentation pointer. He complains that his product is over coasted and sends a team of engineers to fix it. The team examines the labor routing for the product and adjusts the labor standard. This lowers the standard cost for labor. And, since many companies use labor for the basis to calculate overhead, the overhead standard is reduced also.

However, since the adjustment is done for one product and does not take all other products into consideration, the net effect may only be to shift cost from one product to all others. Then may trigger a snowball effect as other product managers then complain that their products are now over coasted. Does this denote that normal costs should never be used as input presentation indicators? Not necessarily. There is no single magical key performance Retail consulting. Any measure always has consequences whether intended or unintended. What gets measured gets managed. Too much focus on one indicator may well lead to improvements in that measure but then be an overall detriment to the company.