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Session
Measuring Operations
Performance
Session Outline
Balanced Scorecard Lead Indicators Lag Indicators S.A.V.I. KRA’s KPI’s
This Session Weekly Activity: Team Roles Undertake the Belbin Self Perception Inventory
quiz and which types of team roles best suit you. Go to: http://aneesha.ceit.uq.edu.au/drupal/node/58 The highest score on team-role will indicate how
best you can make an impact in a management or project team.
Your second highest score will indicate a likely secondary role you would be suited to if there are other people also capable of performing in the primary role.
Activity: Performance Measures
In groups of 3 – 4, discuss how would measure performance of a pizza delivery shop
What performance would you measure? What performance behaviour would you
expect to observe? If you were asked to make
improvements, what areas would you review first?
Activity: Performance Measures
So how about a 30 minute pizza delivery guarantee?
Is it promoting speeding and if a delivery person has an order at 28 minutes and another at 10, which does he deliver first?
And what happens if Pizza delivery people are offered a cash bonus for every delivery made within 30 minutes, and what does this do to pizza quality? What is the resulting behaviour?
Perfect Measurement System
In a perfect world, a measurement system will actively promote
performance improvement by; measuring what matters, providing corrective feedback and
positive reinforcement to enthusiastic people who enjoy being measured and take improvement on as a challenge.
Performance Measure Failings?
Root cause: complexity - details, details, details
Staff who collect data get frustrated.
Follow: What has to be done" (WHTBD).
Measure What Matters
Easy to say but difficult to do. Find out what is valued both by customers
and stakeholders Examples:
process: new product development, measure: time to market.
process: customer service, measure: customer retention.
process: treasury management, measure: cost of service vs. value created.
Keep it Plain & Simple
Performance Measures must be simple to operate simple to understand simple to action
Ex: If a sales person spends too much time on call reporting, they have less time for making calls.
Accounting measures are lagged indicators.
Dependent on the choice of measurement method.
Accounting Measures Inadequate
Accounting Management Myopia
Accounting is short term earnings or returns.
Why focusing on the short term is inappropriate?
Why would this short-term focus affect long-term relationships?
Global Era
In the global, technology-driven, decentralized environment, measuring
Financial performance, while important, is not adequate.
Even if less than precise, other measures of performance are required.
These measures should be capable of measuring multiple attributes of an organization.
Lead Indicators
Many non-financial indicators can serve as lead indicators in certain settings.
Common examples are: Market share, backlog (book-to-bill ratio),
new product introductions, new product development lead times, product quality, customer satisfaction, employee morale, personnel development, inventory turnover, bad debt ratio, or safety
Lag Indicators
In contrast to lead indicators, lag indicators are measures that point to earlier plans and their execution.
Financial performances are lag indicators. Many times, financial performances are too
late to affect future products and services. Therefore, we need multiple measures that
include both financial and non-financial measures.
Effective Measurement System
An effective performance measurement system should have the following attributes.
FOCUS ON EFFECTIVENESS 1) We have a need to measure better. 2) We have a need to measure less.
FOCUS ON THE FUTURE
Topic Example Video
The following video explains what is meant by Key Result Areas.
Take note of the key points. http://www.youtube.com/watch?
v=XxbgclPRFd8
FOCUS ON OBJECTIVES, “KEY RESULT AREAS” KRAs are those functions or divisions of performance in which your organization must continually improve to be successful.
Effective Measurement System
KRA Example Areas Customer Product/service Public/society/natural environment Marketing Human Resources Production Maintenance Operations Finance
Good measurement systems don’t just measure things done according to the organizational chart. Good systems measure things done to satisfy stakeholders.
Stakeholders
Topic Example Video
The following video explains what are key performance indicators.
Take note of the key points. http://www.youtube.com/watch?
v=QcGu3ynub8s
Key Performance Indicators - KPI’s
This is the essence of measurement. What is meant by the concept of Key Performance Indicator? An “indicator” is a gauge or a measure that
reports information. “Performance” is the result or activity we are
looking for that fits in to strategic goals. “Key” means that this measure has been
pinpointed so carefully that management knows precisely what to do.
Measures are developed to capture both the input and output elements of a business system.
Key Performance Indicators
S.A.V.I. Speed (S) Accuracy (A) Volume (V) Investment (I)
(S) Speed Indicators
response time records turn around time records cycle time records project completion dates meeting scheduled time records
(A) Accuracy Indicators judgment based climate or opinion surveys
focus groups comment cards telephone surveys advisory panels
opinions of community leaders meeting design specifications or passing an
inspection point that ensures the product works.
Customer returns or warranty claims.
(V) Volume Indicators Measures the amount (Number of) of
outputs or results from a specific activity or program. number of units produced number of completed transactions % market share Back order statistics Number of failed sales due to being out
of stock
(I) Investment Indicators Measures the amount of resources
expended on a specific program or activity or the unit cost (cost/number of units produced ($)).
operating costs per unit produced capital costs per unit produced cost per customer as to sales and marketing expenses cost per unit of after sales service and customer support.
Notice that the financial measures are “per” something
Measurement System Steps
1. Separate Strategic Goals Into Input and Output Dimensions
2. Develop Output and Results Measures for each goal
3. Develop Input Measures for each goal4. Check to see if the set of measures are
complete (SAVI)5. Use an Effective Recognition System6. Build the Culture
Transformation Process
FeedbackFeedback
INPUT MaterialMachinesLaborManagementCapital
OUTPUT GoodsServices
TRANSFORMATIONPROCESS
OperationsOperations
Input/Output Dimensions (S1)
Following from Vision, Mission and Values, organizations create strategic goals that identify “Key Result” areas of the organization where change and improvement is possible and desirable.
Our first step in developing measures to reflect the goal is to dissect the goal into its input and output dimensions.
Inputs Measurement Concept
Input dimension
unit cost efficiencyHow well are materials used, (excessive waste)How well is labour used, (excessive idle time)How well is overhead used (idle capacity)
Output Measurement Concepts
Output Dimension
Internal Results
maintaining and improving qualitylower consumer prices
External Results
financial returnsimprove market sharemeet current and future demand
Develop Output Measures (S2)
Outputs are accomplishments. In most organizations, accomplishments can be categorized into three groups.
Investment returns Customer Satisfaction Social Impacts
Measures of Outputs or Results
OUTPUT MEASURES
CATEGORYMEASUREMEN
T CONCEPTPERFORMANCE
MEASURE
PERFORMANCE GOAL (changes of specific amounts over
specific time frames)
Investment
Returns
Financial returns
% return on investment% return on assets employedProfit margin on sales
All should increase by a specific % change, to be accomplished by a specific date.
Market share
% market share relative to the competition% market share relative to total market size
The proportion of the market share against the competition should increase.The proportion of the market share relative to the total market should increase at a rate that is faster than the rate of change in total market size.
Measures of outputs or Results
Customer Satisfactio
n
Product or service quality
Rejection rates in the production processSales returns
Both should decline by a specific amount in a specific timeframe.
Deliver on time and
in sufficient quantity
Backorder and delivery statistics
Backorders should decline and delivery cycle times should improve.
Consumer prices
Retail price by product
The retail price matched to value should decline.
Social Benefits
Child developmen
t
Improvement in reading skills
Children using these toys should show a measured improvement in reading skills
Environmental impact
Impact on landfills when the toy is finished
The proportion of toys presented for re-cycling should go up.
Develop Input Measures (S3)
We normally develop input measures after we have developed output measures because it is a good idea to know where you are going before you decide how to get there. Financial operating resources Financial capital resources Other organizational resources
Measures of Inputs or Efficiencies
INPUT MEASURES for “UNIT COST EFFICIENCY”
CATEGORYMEASUREMENT
CONCEPTPERFORMANCE
MEASUREPERFORMANCE GOAL
Financial Operating Resources
Materials and labour
Direct materials and direct labour per unit, expressed in both dollar and quantity terms
Material and labour cost and or consumption per unit should decline over a specified time period
Overhead
Overhead charged per unit
Overhead consumed per unit produced should decline
% utilization of capacity%capacity utilized should increase to or remain at optimal levels
Financial Capital
Resources
Capital investment in operating assets
Dollars of capital investment per unit produced
Dollars per unit of capital invested should decline over time as capital resources are used more efficiently
Other Organizationa
l Resources
Non-financial resources consumed by the performance area
Management estimates of the resources of talent and energy and other non-financial resources that have been dedicated to this performance area
The amount consumed will increase as the project is developed and decrease after it is implemented
Complete Set of Measures (S4)
Before we can be sure that we have a complete set of measures, we need to apply the SAVI framework to categorize the measures as to Speed, Accuracy, Volume and Investment.
Linking Output Measures
OUTPUT MEASURES
CATEGORYMEASUREMENT
CONCEPTPERFORMANCE MEASURE SAVI
Investment Returns
financial returns
% return on investment% return on assets employedProfit margin on sales
Accuracy
market share
% market share relative to the competition% market share relative to total market size
Volume
Customer Satisfaction
Product or service quality
Rejection rates in the production processSales returns
Accuracy & Volume
Deliver on time and in sufficient
quantityBackorder and delivery statistics
Speed & Volume
Consumer prices
Retail price per product Investment
Social Benefits
Child development
Improvement in reading skills Accuracy
Environmental impact
Impact on landfills when the toy is finished Volume
Linking Input Measures
INPUT MEASURES for “UNIT COST EFFICIENCY”
CATEGORYMEASUREMENT
CONCEPTPERFORMANCE MEASURE SAVI
Financial Operating resources
Materials and labour
Direct materials and direct labour per unit, in both dollar and quantity terms. Investment
Overhead
Overhead charged per unit. Investment
% utilization of capacity Volume
Financial Capital
Resources
Capital investment in
operating assets
Dollars of capital investment per unit produced Investment
Other organizational
resources
Non-financial resources consumed
Management estimates of the resources of talent and energy that have been dedicated to this performance area.
Investment
Effective Recognition System (S5)
Use Measurement to Initiate Change An effective measurement system will use the
measured results as a management tool. Every result should have an automatic
intervention strategy. When results are as expected we should offer
congratulations and reinforcement to keep it going,
when results are less than expected we should quickly isolate the cause and correct the process
Build the culture (S6)
Good systems need good people. There is no sense in examining a process unless at the same time you examine the people who govern the process.
Improvement does not take place on paper. Improvement happens when people employ enthusiasm,
dedication, commitment, leadership and morale in their daily routine.
A good system on paper is a healthy beginning but if you want results you need to follow up a paper system with a people system.
Balanced Scorecard
Translates mission, vision and strategy through objectives and measures
Provides a framework to describe the key elements in the achievement of the strategy
Measures four perspectives- Customer Relations- Financial- Internal Service Process - Learning, Innovation and Growth
A Measurement System
Financial
Customer Relations
Learning, Innovation and
Growth
Internal Service Process
Vision and Strategy
Topic Example Video
The following video explains the balanced scoreboard approach to performance measurement and managent.
Take note of the key points. http://www.youtube.com/watch?
v=CFkyEi099Zc
Measurement is the Measurement is the language that gives language that gives clarity to vague clarity to vague conceptsconcepts
Measurement is used Measurement is used to communicate, not to communicate, not simply to controlsimply to control
Financial Perspective
• Profitability• Growth • Shareholder Value
The VisionThe Vision
Customer Perspective
• Price• Service• Quality
Internal Perspective
Learning and Growth• New Skills• Continuous Improvement
• Intellectual Assets
“If we succeed, how will we look to our shareholders?”
“To achieve our vision, what customer needs must we serve?”
“To satisfy our customers and shareholders, at which business processes must we excel?”
“To excel in our processes, what must our organization learn?”
• Cycle Time• Productivity• Cost
Four Perspective Framework
A Strategic Management System
Translates strategy into: Objectives Measures Targets Initiatives
Objectives
• Fast ground turnaround
Statement of what strategy must achieve
and what’s critical to its
success
Target
• 30 Minutes• 90%
The level of performance
or rate of improvement
needed
• Cycle time optimization
Key action programs
required to achieve
objectives
InitiativeMeasurement
• On Ground Time• On-Time
Departure
How success in achieving the strategy
will be measured and
tracked
Strategic Theme: Operating Efficiency
ProfitabilityFinancial
Learning
Morecustomers
Ground crew alignment
Lowest prices
Fewer planes
Customer
Internal
Fast ground turnaround
Flight Is on time
Southwest Airlines ExampleExtending the Map into Objectives,
Measurements, Targets and Initiatives
Based on : Presentation of Balanced Scorecard Collaborative
What about the Dimensions?
The Balanced Scorecard:
Balances financial and non-financial measures
Balances short and long-term measures
Balances performance drivers (leading indicators) with outcome measures (lagging indicators)
Should contain just enough data to give a complete picture of organizational performance… and no more!
Leads to strategic focus and organizational alignment.
Why do it?
To achieve strategic objectives. To provide quality with fewer resources. To eliminate non-value added efforts. To align customer priorities and expectations with the customer. To track progress. To evaluate process changes. To continually improve. To increase accountability.
FINANCIAL/REGULATORYTo satisfy our constituents, what financial & regulatory
objectives must we accomplish?
CUSTOMERTo achieve our vision,
what customer needs must we serve?
INTERNALTo satisfy our customers and
stakeholders, in which business processes must we excel?
LEARNING & GROWTHTo achieve our goals, how
must we learn, communicate and grow?
Strategy Focus Aims
Internal Process PerspectiveInternal Process Perspective
Financial PerspectiveFinancial Perspective
Learning & Growth PerspectiveLearning & Growth Perspective
Customer PerspectiveCustomer Perspective
Return on Investment
Price Quality Time Function ImageRelatio-
ship
Value Proposition
Sources of Growth Sources of Productivity
Technology Infrastructure
Climate for Action+ +
“Build the Brand”
“Make the Sale”
“Deliver the Product”
“Service Exceptionally”
Revenue Strategy
Productivity Strategy
1.The economic model of key levers driving financial performance
2. The value proposition of target customers
3. The value chain of core business processes
4. The critical enablers of performance improvement, change and learning
Staff Competencies
Source: Presentation of Balanced Scorecard Collaborative
Strategy Building Blocks
Financial Perspective
What are financial steps necessary to ensure the organisational strategy/goals?
Are the organisational goals, implementation, and execution contributing to the bottom line?
Is the organisation meeting operational and financial targets?
Dimensions of Quality: Efficiency
Financial Perspective
o Cost / Unit
o Unfunded Requirements or Projects
o Cost of Service
o Budget Projections and Targets
Possible Performance MeasuresPossible Performance Measures
What financial and regulatory objectives must the organisation need to accomplish?
Customer Perspective Who are our target customers? How do our patients/customers see us? How do patients/customers rate our
performance? Dimension of Quality:
Accessibility Acceptability Continuity
Customer Perspective
o Customer Satisfaction (Average)
o Satisfaction Gap Analysis (Satisfaction vs.
Level of Importance)
o Satisfaction Distribution (% of each area scored)
Possible Performance MeasuresPossible Performance Measures
To achieve our vision, what customer needs must we serve?
Internal Perspective
What critical processes must we excel at to satisfy our customers/stakeholders?
What must be done internally to meet patient/customer expectations?
Dimension of Quality: Effectiveness Appropriateness Safety
Internal Perspective
o Cycle Time
o Completion Rate
o Workload and Employee Utilization
o Transactions per employee
o Errors or Rework
Possible Performance MeasuresPossible Performance Measures
To satisfy customers, which business processes must the organisation excel in?
Learning and Growth
How can we continue to improve?
What capabilities and tools do our employees need to execute our strategy/goals?
Dimension of Quality: Competence Participation
Learning and Growth
To achieve our goals and accomplish core activities, how must we learn, communicate and work together?Possible Performance MeasuresPossible Performance Measures
o Employee Satisfaction
o Retention and Turnover
o Training Hours and Resources
o Technology Investment
Performance Measures Examples
Measurement Charts
Radar ChartRadar Chart DashboardDashboard
Targets
“If you don’t know where you’re going, you’re probably not gonna get there.”
Forrest Gump
Targets
• Targets need to be set for all measures
• Should have a “solid basis” • Give personnel something for which to aim
• If achieved will transform the organization
• Careful not to develop measures/targets in a fragmented approach:
i.e. Asking people to increase customer satisfaction has to be backed up with the knowledge, tools, and means to achieve that target.
Initiatives
Once measures and targets are established, it is the responsibility of management to determine HOW the organization will achieve its goals.
Measures are used to determine the effectiveness of strategic initiatives.
Recap Video
The following video recaps on what is meant by performance measurement.
Take note of the key points. http://www.youtube.com/watch?
v=IdZxNl40tU0
Task 1: Undertake Chapter Review: Quible Z.K. (8th Ed) –
Productivity Improvement Strategies Ch. 16. http://wps.prenhall.com/chet_quible_adminofficemgt_8/24/6173/1580440.cw/index.html
Task 2: Undertake Chapter Quizz: Quible Z.K. (8th Ed) –
Productivity Improvement Strategies Ch. 16. http://wps.prenhall.com/chet_quible_adminofficemgt_8/24/6173/1580440.cw/index.html
Task 3: Undertake Case Study – Corus Continuous Improvement http://businesscasestudies.co.uk/corus/continuous-improvement-the-corus-way/introduction.html#axzz2PGyn1llO
Question: How did Corus implement continuous improvement within it’s organisation?
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