1Operations Management, 2e/Ch. 2 Measuring Performance in Operations©2007 Thomson South-WesternOperations Management, 2e/Ch. 3 Measuring Performance in Operations©2007 Thomson South-Western 1
Measuring Performance in Operations
CHAPTER 3
DAVID A. COLLIERAND
JAMES R. EVANS
OPERATIONS MANAGEMENTGoods, Services and Value Chains
2Operations Management, 2e/Ch. 2 Measuring Performance in Operations©2007 Thomson South-Western
1.To understand the principal types of performance measures used in organizations and by operations managers and to be able to identify important measures and indicators to manage and improve business performance.
2.To understand the importance of evaluating relationships and cause-and-effect linkages among performance measures and approaches that companies use to understand such relationships.
Chapter 3 Learning Objectives
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3.To understand the characteristics of a good measurement system and how to select appropriate measures to support operations.
4.To understand how measurement systems are integrated into comprehensive models of business performance as a basis for better design and improvement of operations.
Chapter 3 Learning Objectives
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Chapter 3 Measuring Performance in Operations
Introduction
Managers make many important decisions that affect how an organization provides value to its customers.
To know if decisions are effective and to guide the organization on a daily basis, they need a means of understanding performance at all levels of the organization as well as in operations.
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Chapter 3 Measuring Performance in Operations
IntroductionGood decisions are facilitated through measurement, the act of quantifying the performance criteria of organizational units, goods and services, processes, people, and other business activities.
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Chapter 3 Measuring Performance in Operations
IntroductionKey questions related to measurement inoperations include: How should we measure the performance
of goods and services?
How should we measure the performance of processes throughout the value chain?
How should we measure overall
organizational performance and how does it relate to internal operations?
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Chapter 3 Measuring Performance in OperationsThe Scope of Performance
Measurement
Good performance measures enablemanagers to control processes and
makedecisions on the basis of facts, not
opinions.
Selecting the right measures—not too many
and not too few is a very important decision
that all managers must make.
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Chapter 3 Measuring Performance in Operations
The Scope of Performance Measurement
The list below details various categories ofPerformance measurements.• Financial• Customer and market
• Safety• Quality
• Time• Flexibility• Innovation and learning
• Productivity
9
Exhibit 3.1
The Scope of Business and Operations Performance Measurement
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Chapter 3 Measuring Performance in OperationsFinancial Measures
• Often take top priority in for-profit organizations.
• Traditional financial measures include revenue, return on investment, operating profit, pretax profit margin, asset utilization, growth, earnings per share, and other liquidity measures.
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Chapter 3 Measuring Performance in Operations
Financial Measures (cont.)
• Cost of quality is not used in most organizations; it measures what poor quality is costing an organization.
• Nonprofit organizations focus more on minimizing costs and maximizing value to their target markets, customers, and society.
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Customer and Market Measures
• An effective customer-satisfaction measurement system provides a company with customer ratings of specific goods and service features and indicates the relationship between those rating and the customer’s likely future buying behavior.
• Measured in three areas: 1) goods quality, 2) service quality, and 3) response time.
• Other customer focused measures include: customer complaints, loyalty, customer retention, warranty claims, service guarantee claims, service upsets/failures.
Chapter 3 Measuring Performance in Operations
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Safety• Measuring safety is vital to all organizations,
as the well- being of its employees and customers should be an organization's principal concern.
• Performance measures include accident rates, parts per million of arsenic in public water supply, or security in a hotel room.
Chapter 3 Measuring Performance in Operations
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Chapter 3 Measuring Performance in OperationsQuality• Quality measures the degree to which the
output of a process meets customer requirements.
• Goods quality relates to the physical performance and characteristics of a good.
• A common measure of goods quality is the number of defects per unit, which is computed by dividing the total number of defects found by the number of items examined.
• Nonconformities per unit are often reported as rates per thousand or million, and the measure dpmo—defects per million opportunities—is often used.
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Chapter 3 Measuring Performance in Operations
There are many dimensions of quality including:
Performance: a good’s primary operating characteristics. Example--
automobile brakes stop the vehicle.
Features: bells and whistles. Example- - reclining seats.
Reliability: probability of the manufactured good working over a certain time. Example—vehicle engine always starts on cold days.
Conformance: the degree to which characteristics match
preestablished standards. Example—vehicle door does not leak water.
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Chapter 3 Measuring Performance in OperationsQualityThere are many dimensions of quality
including (continued): Durability: use before it physically
deteriorates. Example—auto corrosion.
Serviceability: speed, courtesy and competence of repair work.
Example— vehicle oil change. Aesthetics: how good a manufactured good
looks, feels, sounds, tastes, or smells. Example—vehicle’s style and color.
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Chapter 3 Measuring Performance in OperationsAnother Way to Think About Quality
Critical defect -- one that judgment and experience indicate will surely result in hazardous or unsafe conditions for individuals using or experiencing the good or service.
Major defect -- one that is not critical but is likely to materially reduce the usability of the good or service for its intended purpose.
Minor defect -- one that is not likely to materially reduce the usability of the good or service for its intended purpose.
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Chapter 3 Measuring Performance in OperationsQuality• Service quality is consistently meeting or
exceeding customer expectations and service delivery system performance for all service encounters.
– Tangibles -- physical facilities, uniforms, equipment, vehicles, and appearance of employees (i.e., the physical evidence).
– Reliability -- ability to perform the promised service dependably and accurately.
– Responsiveness -- willingness to help customers and provide prompt recovery to service upsets.
– Assurance -- knowledge and courtesy of the service-providers, and their ability to inspire trust and confidence in customers.
– Empathy – caring attitude and individualized attention provided to its customers.
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Chapter 3 Measuring Performance in Operations
Service Quality Every service encounter provides an
opportunity for error. Errors in service creation and delivery are sometimes called service upsets or service failures.
Environmental quality focuses on
designing and controlling work processes to improve the environment.
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Chapter 3 Measuring Performance in OperationsTime
• Time relates to two types of performance measures: the speed of doing something (average) and the reliability of doing something (variance).
• Processing time is the time it takes to perform some task.
• Queue time is a fancy word for wait time—the time spent waiting.
• Cycle time refers to the time it takes to accomplish one cycle of a process that performs work.
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Chapter 3 Measuring Performance in OperationsTime
• Manufacturing lead time represents the time between the release of an order to production and shipment to the customer.
• Purchasing lead time is the time required to obtain the purchased item, including order preparation, supplier lead time, transportation, and receiving and storage.
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Chapter 3 Measuring Performance in OperationsFlexibility
• Flexibility is the ability to adapt quickly and effectively to changing requirements.
• Goods and service design flexibility is the ability to develop a wide range of customized goods and services to meet different or changing customer needs.
• Volume flexibility is the ability to respond quickly to changes in the volume and type of demand.
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Chapter 3 Measuring Performance in OperationsInnovation and Learning
• Innovation refers to the ability to create new and unique goods and services that delight customers and create competitive advantage.
• Learning refers to creating, acquiring, and transferring knowledge and modifying the behavior of employees in response to internal and external change.
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Chapter 3 Measuring Performance in OperationsProductivity• Productivity = Quantity of Output/Quantity of Input• Productivity is often confused with efficiency or
effectiveness. • Efficiency is the degree to which a process generates
outputs with the minimal consumption of inputs or generates a maximum amount of outputs for a given amount of inputs.
• Effectiveness is achieving the organization's
objective, mission, or goal through the eyes of the customer; that is, doing the right things efficiently.
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Chapter 3 Measuring Performance in Operations
Productivity
• Productivity = Quantity of Output/Quantity of Input
• Productivity is expressed in one of three forms:
1. Total Productivity= Total Output/Total Input
2. Multifactor Productivity= Total Output/Subset of Inputs
3. Partial Factor Productivity= Total Output/Single Input
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Exhibit 3.2
Examples of Partial Productivity Measures
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Chapter 3 Measuring Performance in Operations
Designing Performance Measurement Systems for Operations
1. Identify all customers of the value chain and determine their requirements and expectations.
2. Define the work process that provides the good or service.
3. Define the value-adding activities and outputs that compose the process.
4. Develop specific performance measures.5. Evaluate the performance measures to
ensure their usefulness.
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Chapter 3 Measuring Performance in OperationsModels of Organizational
Performance
1. Malcolm Baldrige National Quality Award Framework
2. Balanced Scorecard
3. Value Chain Model
4. Service-Profit Model
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Chapter 3 Measuring Performance in Operations
Malcolm Baldrige National Quality Award Framework
• Organizations receive the awards in each of the original categories of manufacturing, small business, service, and nonprofit education and health care.
• Primary purpose of the program is to provide a framework for performance excellent through self-assessment to understand the organization’s strengths and weaknesses.
• www.baldrige.org
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Exhibit 3.7
Malcolm Baldrige National Quality Award Model of Organizational Performance
Source: 2005 Malcolm Baldrige National Quality Award Criteria, U.S. Dept. of Commerce
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Chapter 3 Measuring Performance in Operations
The Balanced Scorecard Model
• Consists of four performance perspectives:
1) Financial
2) Customer
3) Innovation and Learning
4) Internal
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Exhibit 3.9
The Balanced Scorecard Performance Categories and Linkages
Source: Kaplan R. S., and Norton, D. P., “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, p. 72.
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Chapter 3 Measuring Performance in Operations
The Value Chain Model
• Evaluates performance throughout the value chain: synchronized network of processes including suppliers and inputs, processes and associated resources, goods and service outputs and outcomes, customers and their market segments, synchronized information and feedback loops, and management of value chain.
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Exhibit 3.10 Examples of Value Chain Performance Measurements
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Chapter 3 Measuring Performance in Operations
Service-Profit Chain Model
• Most applicable to service environments.
• Model is based on a set of cause-and-effect linkages between internal and external performance and defines the key performance measurements on which service-based firms should focus.
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Exhibit 3.11 The Service-Profit Chain Model
Source: Adapted from J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., Jr., and L. A. Schlesinger, “Putting the Service-Profit Chain to Work,” Harvard Business Review, March–April 1994, pp. 164-174.
