session measuring operations performance session outline balanced scorecard lead indicators lag...

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.


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.


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


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


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)


To achieve our vision, what customer needs must we serve?


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


o Cycle Time

o Completion Rate

o Workload and Employee Utilization

o Transactions per employee

o Errors or Rework


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.


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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Documents

measures of performance

performance measure

performance behaviour

measuringfinancial performance

performance measuresso

pizza delivery people

performance measuresin

delivery person