Manufacturing Metrics

1. Manufacturing Metrics Balanced Scorecard MESA Empirical Study

2. Metrics Matter • You can’t improve what you can’t measure. • You can’t measure what you can’t see. - Dr. W. Edwards Deming

3. Metric • A metric is a verifiable measure stated in either quantitative or qualitative terms. • “97 percent inventory accuracy” • “According to our customer evaluations, we are providing above-average service”

4. Metric • A metric is a verifiable measure that • captures performance in terms of how something is being done relative to a standard, • allows and encourages comparison, • supports business strategy.

5. Customer quality measures • Customers typically relate quality to: • Feature based measures; “have” or “have not” - determined by design • Performance measures - “range of values” - conformance to design or ideal value

6. True vs. Substitute performance measures • Customers - use “true” performance measures. • example: a true measure of a car door may be “easy to close”. • true performance measures typically vary by each individual customer. • Unfortunately, producers cannot measure performance as each individual customer does. • Producers - use “substitute” performance measures • these measures are quantifiable (measurable units). • Substitute measure for a car door: door closing effort (foot-pounds). • Other example: light bulb • true performance measure -- brightens the room • substitute performance measure – wattage or lumens

7. Educating Consumers • Sometimes, producers educate consumers on their substitute performance measures. • What are substitute performance measures for the following customer desires: • Good Gas Mileage • Powerful Computer • What is the effect of educating consumers on performance measures?

8. What is a “metric”? • Another term for a substitute performance measure is a metric. • Metric is a standard of measurement. • In quality management, we use metrics to translate customer needs into producer performance measures. • Internal quality metrics • scrap and rework • process capability (Cp or Cpk) • first time through quality (FTTQ)

9. Identifying effective metrics • Effective metrics satisfy the following conditions: • performance is clearly defined in a measurable entity (quantifiable). • a capable system exists to measure the entity (e.g., a gage). • Effective metrics allow for actionable responses if the performance is unacceptable. • There is little value in a metric which identifies nonperformance if nothing can or will be done to remedy it. • Example: Is net sales a good metric to measure the performance of a manufacturing department?

10. Use of quality metrics • Quality metric data may be used to: • spot trends in performance. • compare alternatives. • predict performance. • However, organizations should consider the costs and benefits of collecting information for a particular quality metric. • collecting data will not necessarily result in higher performance levels. • higher quality companies often use fewer metrics than their competitors.

11. Acceptable ranges • In practice, identifying effective metrics is often difficult. • Main reason: non-performance of a metric does not always lead to customer dissatisfaction. • Consider the car door example again, if door closing effort is the metric, will a customer be dissatisfied if the actual effort is 50 foot-pounds versus 55 foot-pounds. • Producers typically identify ranges of acceptable performance for a metric. • (a) For services, ranges often referred to as break points. • (b) In manufacturing, these ranges are known as targets, tolerances, or specifications.

12. Break points • Break points are levels where improved performance will likely change customer behavior. • Example: waiting in line • Suppose the average customer will only wait for 5 minutes • Wait longer than 5 minutes -- customer is dissatisfied. • 1-5 minutes -- customer is satisfied. • less than 1 minute -- customer is extremely satisfied • Should a company try to reduce average wait time from 4 to 2 minutes.?

13. Targets, tolerances and specifications • Target (nominal) - desired value of a characteristic. • A tolerance specifies an allowable deviation from a target value where a characteristic is still acceptable. Lower specification limit (LSL) Upper specification limit (USL) TARGET +1 -1

14. Balanced ScoreCard A Balanced ScoreCard is both a Tool and a Process: The Tool:Your ScoreCard reports all key drivers of your strategic success. It lets you know if performance in each critical area is at the level you expect, and shows you trends for each major business driver. The Process:For the Executive Team, the ScoreCard is the centerpiece of your month-end review process. It is also used with your extended management team, employees, and Board to educate them on key performance issues.

15. BayMed (fictitious) Balanced ScoreCard Financial Market/Customers People & Culture Operational Excellence Source: Michael Selby: ScoreCard Partners

16. BayMed Balanced ScoreCard Financial Market/Customers The Dashboard divides into 4 quadrants, or “perspectives”. The Financial perspective reports Revenues, Gross Margins, EBITDA, Operating Expense, Net Operating Income, Free Cash Flow, and any other Financial Data you choose. People & Culture Operational Excellence

19. BayMed Balanced ScoreCard Financial Market/Customers The “Market/Customers” perspective reports repeat business with existing customers, new customers, new business partners, how recent releases are performing, customer complaints and customer satisfaction. People & Culture Operational Excellence

24. BayMed Balanced ScoreCard Financial Market/Customers “Operational Excellence” reports the core competencies which you have to execute well to win customer loyalty. Core Competencies vary by company and industry. “BayMed” tracks sales execution, marketing effectiveness, product development speed, manufacturing and customer support excellence. People & Culture Operational Excellence

32. BayMed Balanced ScoreCard Financial Market/Customers People & Culture Operational Excellence “People & Culture” looks at the workforce, reporting workforce growth, internal mobility and competency development, strategically vital employees, hiring quality, and employee engagement.

38. BayMed Balanced ScoreCard Financial Market/Customers People & Culture Operational Excellence

39. Metrics that Matter: Empirical Study • Study Background • Metrics Matter to Performance • Fast, Effective Metrics • Manufacturing Enterprise Solutions Use • Metrics Framework Success

40. Industry CouncilMESA Guided Project • Scott Daugherty, Plant Manager, Cormetech Inc. • John Plassenthal, Project Manager, Strategic Integration, Enterprise Applications IT, International Truck and Engine • John Moore, Quality Program Manager, KLA Tencor • Neil Crew, Group IT Director, Princes Limited • Brian Leinbach, MES Deployment Team Lead, Wyeth Pharmaceuticals

41. Response Demographics • On-line: 135 different manufacturers • Representing 20 industries • Range of Products Counts & Mix in plants • Nearly evenly divided by size: over $2B, $500M-$2B, under $500M • Telephone: 16 “Industry Leaders”

42. Every Production Type Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

43. Three Major Respondent Groups by Role Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

44. Metrics JustifyImprovement • Industry struggles with the financial hurdles • Disconnect between operations, IT and finance • Bridging gap justifies projects

45. Common Business & Financial Metrics • Net Operating Profit (78%) • EBITDA (71%) • Labor cost per unit (68%) • Customer Fill Rate / On-time Delivery (64%) • ROA / RONA (62%) • Economic Value / Economic Profit (60%) • Market Share (54%) Top Productivity Metrics • Revenue per employee • Revenue per square foot • Cash-to-cash cycle time Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

46. Business Movers: Operations Improvement to Financial Metrics Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

47. Business Movers ImprovedOperations Areas Also Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

48. Some Operations KPIsAre Common Across Segments Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

49. Business Movers: More Effective Links Between Business & Ops Metrics Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

50. 24 Hours or Faster Feedback to Operators So They Can Take Action Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements