is ye 3104 lecture 02

ISyE 3104 Fall 2014 Georgia Tech, 2014 1

KPI: Key Performance IndicatorsMEASURING SYSTEM PERFORMANCE


Content Context: Enterprise financial performance

Income statement and EBITDA Balance sheet and RONA

Operational KPIs Resource focused Flow focused System focused


Brief financial background Income statement and EBITDA

Balance sheet and RONA

Ultimately, the success of the enterprise is seen in its financial reports, and sustained success requires enterprise leadership to pay attention to the financials. The goal of this short module is not to become a financial expert, but to understand how operational results contribute to financial results.


Income Statement

Net Income

Tax

Other Income

ExtraGains or Losses

Interest Expense

Net Sales

Cost of SalesOperating

Expense (SG&A)

Depreciation Expense

Income = Revenue Expense

Net IncomePre-tax

Operating Income

Gross Income

Summarizes financial transactions over a period of timea month, a quarter, or a year. Close the books to create the income statement.


EBITDA

EBITDA = Earnings before interest, taxes, depreciation, and amortization

Thought by many to be a more informative assessment of the enterprises performance in terms of generating revenue; interest is a financing outcome, not an operating outcome; taxes are beyond the control of the enterprise, depreciation is not a cash flow, nor is amortization.


Computing EBITDAEBITDA = Net Income Before Taxes Interest - Depreciation

Net Income

Tax

Other Income

Extr. Gains or Losses

Interest Expense

Net Sales

Cost of SalesOperating

Expense (SG&A)

Depreciation Expense

Net IncomePre-tax

Operating Income

Gross Income

NB: this example doesnt include amortization, but it would be treated like an interest expense

QualityDelivery

FacilityEquipment

Direct costs: Labor Material & partsIndirect Costs Allocated

overhead Utilities Supervision etc


Balance Sheet

Shareholder Equity

Receivables

Inventory

OtherCurrent Assets

Non-Current Assets

Assets = Liabilities + Equity

Total Assets

Cash and Market Securities

Current Liabilities

Total Liabilities

InvestmentsOther

Net Property & Equipment

Accts Payable

Other

Notes Payable

Other

Long term debtNon-Current Liabilities

The Balance Sheet is a snapshot at a point in time (immediately after closing the books). Two consecutive balance sheets show how assets, liabilities and shareholder equity have changed during the accounting period.

Current: Easier to convert to cash


RONA

RONA = Return on Net Assets, or Net Income/(Fixed Assets + Working Capital)= Net Income/(Fixed Assets + Current Assets Current Liabilities)

RONA is viewed as a measure of how well the enterprise managers are using the enterprise resources. If RONA is low, the managers should liquidate some of the resources and return the money to the owners, who can invest it elsewhere (with a higher RONA).


Computing RONA

RONA = Net Income

Fixed Assets + Current Assets Current Liabilities FacilityEquipment

QualityDelivery

Direct costs: Labor Material &

partsIndirect Costs Allocated

overhead Utilities Supervi


Why is this important?RONA and EBITDA are typical of the financial metrics ultimately used to judge enterprise performance

Its a good idea to have alignment between operational performance metrics and the metrics that drive enterprise level decisions

In practice, you will need to be able to explain how a particular operational metric relates to the enterprise level financial metrics


Operational KPI Resource focused

Tell something about how resources are used or the condition of resources

Flow focused Tell something about the flow, e.g., its properties or flow results compared to expectations

System focused Combine information about resources and information about flow An important category is productivity measures, which are always of the form,

productivity = (units of output)/(unit of resource) Issue: there are several categories of resource (labor, machines, space, etc) so which productivity metric is the right one? No single productivity metric is adequate by itself


Resource focused KPI

Provides information about the condition or use of resources, which include facilities (space), equipment, and people.

Examples:

Doctors: clinic hours per day (daily, average)Patient rooms: percent of time occupiedX-ray machines: # exposures since last maintenance;

exposures per day (daily, average)Waiting room: number of patients (at specific times, daily

maximum, daily average, )


Warehouse resource focused KPI

Examples:

A-frame: fraction of slots utilized (daily, average, max, ); mispicks (per hour, daily, average, )

Flow rack: fraction of facings utilized (daily, average, max); inventory capacity utilization (daily, max, min, average)

Conveyor: % misreads (daily, average, max, min, ); # jams (daily, average, max, min, )

Pickers: paid hours (daily, average, individual, department, ); error rate (daily, average, individual, department, )


Flow focused KPI

Provides information about flow properties or about flow properties relative to expectations.

Examples:

Number of patients seen per day (by specialty, total, daily, average, )

Patient arrival rate (by specialty, total, by hour, average, max, min, )

Distribution of waiting time (by step in process flow, by specialty, average, max, min, )

% of patients with total flow time less than 60 minutes (by specialty, average, )

NB: Customers dont care about your resource focused KPI, but they certainly do care about flow focused KPI!


Warehouse flow focused KPI

Examples:

Orders shipped (daily, average, max, min, by customer type, by carrier, )

Lines picked (daily, average, max, min, by department, by product family, )

Items picked (daily, average, max, min, by department, by product family, )

Contain flow rate from A-frame to fast pick (by hour, hourly average, daily average, max, min, )

Order fill rate (daily, average, max, min, by department, )% orders shipped same day% orders shipped within 24 hours


System focused KPI

Combines information about resources and about flows. Examples:

Number of patients seen per doctor per day (by specialty, total, daily, average, )

Patient arrival rate (by doctor, total, by hour, average, max, min, )

Exposures per x-ray machine (daily, average, max, min, )Number of patients see per mid-level per day (daily,

average, max, min, )


Warehouse system focused KPI

Examples:

Orders shipped per labor hour (daily, average, max, min, by customer type, by carrier, )

Lines picked per labor hour (daily, average, max, min, by department, by product family, )

Items picked per labor hour (daily, average, max, min, by department, by product family, )

(Earned hours)/(paid hours) (Error rate)/((Earned hours)/(paid hours))(Order fill rate)/(average inventory level)


KPIs are an important tool, but They can distort behavior (people respond to rewards and punishments)

No one KPI can give the whole story Beware of sub-optimizing, i.e., focusing on one particular productivity can lead to unanticipated

(negative) outcomes (optimizing the A-frame overloads the slow pick conveyor, resulting in a backup that stalls the A-frame)

There can be conflicting goals, and these result in dueling KPI


Goods Reception

Goods Storage Assembly Packaging

Finished Products Handling

Picking Delivery

Appliances Manufacturer


Conflicting Operational KPIs in our manufacturing exampleProcurement wants:

Flexible and little variation in delivery time Little variation in mix Large order quantities

Production/Assembly wants: No setups High throughput (productivity)

Warehousing wants: Low inventory Quick picking and replenishment capability

Sales and Marketing want: Large inventory in stock High product variety

What does the consumer want?

Wallace J. Hopp, Mark L. Spearman, 1996, 2000 www.factoryphysics.com

Hierarchical ObjectivesHigh

Profitability

LowCosts

Low UnitCosts

High Throughput

Less Variability

High Utilization

LowInventory

QualityProduct

HighSales

Many products

Fast Response

MoreVariability

High Inventory

LowUtilization

ShortCycle Times

High CustomerService

21


Whats next? Process mapping tools that are useful for understanding and analyzing material flow systems

Some team collaboration tools that are useful in almost any setting

KPI: Key Performance IndicatorsContentBrief financial backgroundIncome StatementEBITDAComputing EBITDABalance SheetRONAComputing RONAWhy is this important?Operational KPIResource focused KPIWarehouse resource focused KPIFlow focused KPIWarehouse flow focused KPISystem focused KPIWarehouse system focused KPIKPIs are an important tool, butSlide Number 19Conflicting Operational KPIs in our manufacturing exampleHierarchical ObjectivesWhats next?

is ye 3104 lecture 02

Documents