Operations Management Chapter 2: Measuring Performance

Measuring Performance in Operations

Measurement

• Measurement is the act of quantifying the performance of:
  • Organizational units
  • Goods and services
  • Processes, people, and other business activities
• Measurement provides a scorecard of performance.
• Measurement helps identify performance gaps.
• Measurement makes accomplishments visible to the workforce, stock market, and other stakeholders.

Introduction

• "You can’t improve what you don’t measure."
• Firms with the best supply chains create hierarchies of precise performance measures at the execution level.
• Designing standards and monitoring them provides better information for decision-making.
• Adding several tiers of suppliers and customers complicates performance measurement.
• Firms aim toward achieving adequate performance and continually improving on those measures.
• Performance measures must be visible and communicated to all members of the Supply Chain.
• 90% of American and Swedish College Students (in Portland, Oregon and Stockholm, Sweden) think they are above average drivers.
• 85% of College Professors think they are above average teachers; more than 60% think they are in the top quarter.
• 80% of Russians think they are above average lovers (2002 Playboy Russia Survey).
• 65% of Americans believe they are above average in intelligence.

Customer-Satisfaction Measurement System

• Provides a company with customer ratings of specific goods and service features.
• Indicates the relationship between customer ratings and a customer’s likely future buying behavior.

Quality

• Measures the degree to which the output of a process meets customer requirements.
• Goods quality: Physical performance and characteristics of a good.
• Service quality: Consistently meeting or exceeding customer expectations and service-delivery system performance for services.
• Assessed by measuring:
  • Tangibles
  • Reliability
  • Responsiveness
  • Assurance
  • Empathy
• Affected by errors made during service encounters.
• Service failures/upsets: Errors in service creation and delivery.

Time

• Performance measures:
  • Speed of performing a task, measured by processing time and queue/wait time.
  • Variability of processes, measured using standard deviation or mean absolute deviation.

Flexibility

• Ability to adapt quickly and effectively to changing requirements.
• Goods and service design flexibility: Ability to develop a wide range of customized goods or services to meet different or changing customer needs.
• Volume flexibility: Ability to respond quickly to changes in the volume and type of demand.

Innovation and Learning

• Ability to create new and unique goods and services that delight customers and create a competitive advantage.
• Innovation: Creating, acquiring, and transferring knowledge.
• Learning: Modifying behavior of employees in response to internal and external change.

Productivity and Operational Efficiency

• Productivity: Ratio of the output of a process to its input.
• Operational efficiency: Ability to provide goods and services to customers with minimum waste and maximum utilization of resources.

Triple Bottom Line (TBL or 3BL)

• Measurement of sustainability related to:
  • Environmental factors: Energy consumption, recycling, resource conservation activities, air emissions, solid and hazardous waste rates, etc.
  • Social factors: Consumer and workplace safety, community relations, and corporate ethics and governance.
  • Economic factors: Auditing, regulatory compliance, sanctions, donations, fines, etc.

Business Analytics

• Helps operations managers analyze data effectively and make better decisions.
• Applications:
  • Visualizing data to examine performance trends.
  • Calculating basic statistical measures.
  • Comparing results relative to other business units, competitors, or best-in-class benchmarks.
  • Using correlation and regression analysis.

Interlinking

• Quantitative modeling of cause-and-effect relationships between external and internal performance criteria.
• Helps quantify performance relationships between all parts of a value chain.

Value of a Loyal Customer (VLC)

• Quantifies total revenues or profits each target market customer generates over a buyer’s life cycle.
• Total market value: Multiplying VLC by the absolute number of customers gained or lost.

Actionable Measures

• Provide the basis for decisions at the level at which they are applied.
• Levels include value chain, organization, process, department, workstation, job, and service encounters.

Models of Organizational Performance

• Baldrige Performance Excellence framework
• Balanced scorecard
• Value chain model
• Service-profit chain

Balanced Scorecard Model

• Translates strategies into measures that uniquely communicate an organization’s vision.
• Performance perspectives:
  • Financial: Measures value provided to shareholders.
  • Customer: Focuses on customer needs and satisfaction and market share and its growth.
  • Innovation and learning: Emphasizes people and infrastructure.
  • Internal: Focuses attention on the performance of key internal processes that drive a business.

Value Chain Model

• Evaluates performance throughout the value chain by identifying measures associated with:
  • Suppliers
  • Inputs
  • Value creation processes
  • Goods and service outputs and outcomes
  • Customers and market segments
  • Supporting and general management processes

Service-Profit Chain Model

• States that employees create customer value and drive profitability through a service-delivery system.
• Based on a set of cause-and-effect linkages between internal and external performance.
• Helps define key performance measurements on which service-based firms should focus.