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The key takeaways are about different models for measuring organizational performance such as the Balanced Scorecard Model, Value Chain Model, and Service-Profit Chain Model.
The principal types of performance measures used in organizations are financial measures, customer satisfaction measures, innovation and learning measures, and internal process measures.
The characteristics of a good measurement system include selecting appropriate measures that are quantifiable, consistent, and support operations improvement.
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Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western Operations Management, 2e/Ch. 3 Measuring Performance in Operations 2007 Thomson South-Western 1 Measuring Performance in Operations CHAPTER 3 DAVID A. COLLIER AND JAMES R. EVANS OPERATIONS MANAGEMENT Goods, Services and Value Chains 2 Operations 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 3 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 4 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 5 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Introduction Good decisions are facilitated through measurement, the act of quantifying the performance criteria of organizational units, goods and services, processes, people, and other business activities. 6 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Introduction
Key questions related to measurement in operations 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? 7 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations The Scope of Performance Measurement
Good performance measures enable managers to control processes and make decisions on the basis of facts, not opinions.
Selecting the right measuresnot too many and not too few is a very important decision that all managers must make. 8 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations The Scope of Performance Measurement
The list below details various categories of Performance 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 10 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Financial 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. 11 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 12 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 customers 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 13 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 14 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Quality 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 opportunitiesis often used. 15 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations There are many dimensions of quality including: Performance: a goods 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. Examplevehicle engine always starts on cold days.
Conformance: the degree to which characteristics match preestablished standards. Examplevehicle door does not leak water.
16 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Quality There are many dimensions of quality including (continued): Durability: use before it physically deteriorates. Exampleauto 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. Examplevehicles style and color. 17 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Another 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. 18 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Quality
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. 19 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 20 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Time
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 timethe time spent waiting.
Cycle time refers to the time it takes to accomplish one cycle of a process that performs work.
21 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Time
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.
22 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Flexibility
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.
23 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Innovation 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.
24 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Productivity 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.
25 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 26 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Exhibit 3.2 Examples of Partial Productivity Measures 27 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 28 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Chapter 3 Measuring Performance in Operations Models of Organizational Performance
1. Malcolm Baldrige National Quality Award Framework
2. Balanced Scorecard
3. Value Chain Model
4. Service-Profit Model 29 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 organizations strengths and weaknesses. www.baldrige.org 30 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 31 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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 32 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Exhibit 3.9 The Balanced Scorecard Performance Categories and Linkages Source: Kaplan R. S., and Norton, D. P., The Balanced ScorecardMeasures That Drive Performance, Harvard Business Review, JanuaryFebruary 1992, p. 72. 33 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 34 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western Exhibit 3.10 Examples of Value Chain Performance Measurements 35 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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. 36 Operations Management, 2e/Ch. 2 Measuring Performance in Operations 2007 Thomson South-Western 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, MarchApril 1994, pp. 164-174.