Performance Management EGN 5622 Enterprise Systems Integration Spring, 2012

1. Performance ManagementEGN 5622 Enterprise Systems IntegrationSpring, 2012

2. Corporate Performance Management „One cannot manage what cannot be measured!“ Compare Measure Vision Events Goals/ Results Strategies Business Processes Act Decide

3. Performance ManagementConcepts & Theories

4. A comprehensive framework that translates a firm’s vision and strategy into a coherent and linked set of performance measures. • Measures include both outcome measures and the performance drivers of these outcomes (cause and effect). • Some measures are generic (customer satisfaction survey), while others focus on specific strategic objectives to attain competitive advantage. • Used to articulate (communicate) strategy and align individual, cross-departmental and organizational initiatives to achieve a common goal. Balanced Scorecard (BSC) Concept SAP-SEM Faculty Workshop July 2007

5. Financial perspective (financial results) • Customer perspective (customer satisfaction). • Internal perspective (Continuous improvement of internal processes) • Learning and growth perspective (the organization’s innovation and improvement activities) • Note: • Focus on operational and financial measures that drive future performance: Perspectives of BSC SAP-SEM Faculty Workshop July 2007

6. Adaption of Balanced Scorecard

7. Balanced Scorecard Approach

8. How does firm look to shareholders? • Revenue growth and mix. • Cost reduction/productivity improvement. • Asset utilization/Investment strategy. • Improved operational performance pays off only when it results in • improved sales, • reduced operating costs, • faster asset turnover and • higher stock price. • If financial results poor, review strategy. 1. Financial Perspective SAP-SEM Faculty Workshop July 2007

9. Increase economic value through revenue growth and productivity. • Revenue growth • sales to new markets, customers or with new products. • More sales to existing customers by deepening relationships (cross selling/complete solution). • Productivity • Improve cost structure by lowering direct and indirect expenses. • Utilize assets more efficiently by reducing working and fixed capital. 1. Financial Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

10. How can the firm best create value for the customer? • Time from product order to delivery. • Time to get product from definition stage to market. • On-time delivery measures. • Defect level as measured by customers. 2. Customer Perspective SAP-SEM Faculty Workshop July 2007

11. Core strategy is customer value proposition: • Unique mix of product, price, service, • Relationship (loyalty), and • Image that a company offers. • Examples: • Operational excellence (McDonald’s, Dell) • Customer intimacy (Home Depot) • Product leadership (Intel, Sony) • Hint: excel in one and be satisfactory in the other two. 2. Customer Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

12. Operational Excellence • Excel at competitive pricing, product quality, product selection, lead time and on-time delivery. 2. Customer Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

13. Stress quality of relationship with customer • exceptional service • completeness and suitability of solutions offered to individual customers. • Hint: • increase customer’s loyalty (or cost to switch) 2. Customer Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

14. Product Leadership • Functionality • Features • Performance 2. Customer Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

15. Intended outcomes from value proposition • Market share in targeted customer segments. • Account share with targeted customers. • Acquisition and retention of customers in targeted segments. • Customer profitability. 2. Customer Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

16. What must firm excel at to satisfy customer needs? These are factors that affect: • Cycle time • Quality • Employee skills • Productivity 3. Internal Business Process Perspective SAP-SEM Faculty Workshop July 2007

17. Must identify core competencies: the critical technologies needed to ensure market leadership. • Must specify measures for these core competencies to evaluate performance. • Note: • Need timely information and ability to drill down to identify trouble spots. • Need a good information system. 3. Internal Business Process Perspective (-cont.) SAP-SEM Faculty Workshop July 2007

18. How will company achieve its differentiated value proposition? • Build the franchise • Increase customer value • Achieve operational excellence • Become a good corporate citizen • Not just cost/time/quality 3. Internal Business Process Perspective (-cont.) SAP-SEM Faculty Workshop July 2007

19. Employee capabilities and skills • Use of technology • Climate needed to support a strategy 4. Learning & Growth Perspective SAP-SEM Faculty Workshop July 2007

20. Continue to create value in face of global competition and when targets for success keep changing. • Identify (competency) gaps between existing capabilities of people, systems and procedures and those needed to achieve targets. • Launch new products (percent of sales from new products). • Employee satisfaction, retention and skills. • Detailed indexes of specific skills for specific environment. 4. Learning & Growth Perspective (- cont.) SAP-SEM Faculty Workshop July 2007

21. Major operational performance measure types: • Cost • Lead time • Quality • Benefit (profit) Enterprise Performance (Summary)

22. Foundation for performance measure • Mission>value>vision>strategy (game plan)>strategy roadmap (implementation plan)>performance measure Performance Measure

23. Vision Strategy Strategic Objectives Balanced Scorecard Performance measurement THE BALANCED SCORECARD AND STRATEGY SAP-SEM Faculty Workshop July 2007

24. Performance measurement levels • At corporate level (financial perspective) • Core performance indicators (CPI) • At division (profit center) level (customer perspective) • Key performance indicators (KPI) • At dept. (cost center) level (internal process perspective) • Department performance indicators (DPI) • At individual level (learning & growth perspective) • Personal performance indicators (PI) Performance measurement

25. CPI: From financial perspective for long-term shareholder value • Strategy types • Productivity strategy • Improve cost structure • Measures: cash expense reduction, defect elimination, yield improvement • Increase asset utilization • Measures: resource utilization, bottleneck elimination • Grow strategy • Expand revenue opportunities • Measures: new revenue sources (new products, markets, partners) • Enhance customer value • Measures: profitability improvement (of existing customers) Performance measurement

26. KPI, From customer perspective • Customer value proposition • Product attributes: price, quality, availability, selection, and functionality • Relationship: service and partnership • Image: brand • Cost-related strategy • Measures: lowest cost supplier, • Quality related strategy • Measures: product performance, quality consistency, quality of solution to customer, • Time related strategy • Measures: availability, first to market, response time • Benefit related strategy • Measures: high switching cost to customers, customer retention, customer’s product lifetime profitability Performance Measurement

27. Performance Measurement and KPIs Key Performance Indicators (KPI) define a set of key figures used to measure against a target, benchmark or time. KPIs are used in Business Intelligence to assess the present state of the business, evaluate the strategic performance and prescribe a course of action. For example: "Increase Average Revenue per Customer from $10K to $15K by 2010.“ In this case, 'Average Revenue Per Customer' is the key figure. Key Performance Indicator dashboard Company Vision Goals / Results Strategies Business Processes

28. KPI Example • Cost-related • Meting target revenue • Indirect cost ratio • Labor resource utilization • Direct/indirect labor ratio • Equipment resource utilization • Quality related • Continuing disability review (CDR) • Rework counts • T1 accomplishment rate • # of Tests to delivery • Accomplishment rate • Time related • Quotation/EC turnaround time • In-time delivery • Benefit/goodwill • Industrial safety • Customer satisfaction Performance Measurement

29. DPI, from internal process perspective (1) • For operations management processes • Supply • Production • Distribution • Risk management • For customer management processes • Selection • Acquisition • Retention • growth Performance Measurement

30. DPI, from internal process perspective (2) • For innovation processes • Opportunity ID • R&D portfolio • Design and development • Launch • For regulatory and social processes • Environment • Safety and health • Employment • community Performance Measurement

31. DPI, from learning and growth perspective • For human resource • Skills • Training • Knowledge • For information • Systems • Database • Network • For organization structure • Culture • Alignment • Leadership • Teamwork Performance Measurement

32. DPI, a generic example • Cost-related • Sales, overhead, gross profit, average revenue per head count, worker & machine utilization • Quality-related • Number of try-outs, rework, in process quality control (IPQC), first article quality, product quality at shipping. • Time-related • Turnaround time • Benefit related • Customer satisfaction Performance Measurement

33. DPI, specific example – production engineering • Department overall performance • From sub-departments and/or • From all workers in the dept. • Organization • Resources readiness (counts) • Resources readiness (competence) • Individual (head) • Planning capability (% of work planned) • TQM/6-sigma project • Patent application • Employee training • Industrial safety Performance Measurement

34. PI, varying by individual’s functionality (& personal objectives) • Cost-related • Resources uptime • Resources utilization • Expense and overhead • Quality-related • Work quality • Re-work rate • Time-related • In-time work completion • Response time • Benefit related • Customer satisfaction Performance Measurement

35. PI, an Example • For a machining worker • Equipment uptime • In-time work completion • Work quality • Tooling consumption rate • Equipment utilization • CAD/CAM worker • Program error • In-time work completion • Tooling consumption rate • Equipment utilization • For a design worker • In-time work completion • Design change rate • Design for manufacturability Performance Measurement

36. Specific PI example – production engineer • MPI accomplishment counts • EC accomplishment rate • Test accomplishment rate • Test counts to delivery • Work load • 6 sigma • Training • Industrial safety Performance Measurement

37. Performance Management Implementation in SAP/SEM

38. SEM Overview url: help.sap.com/saphelp_sem40bw/helpdata/en/15/d75f3785b8fc49e10000009b38f842/frameset.htm SAP-SEM Faculty Workshop July 2007

39. PM asks “How effectively is management implementing the company’s strategy?” • Develops perspectives, objectives and metrics to monitor this progress. • In many, especially larger, companies PM is a major, enterprise-wide initiative. • Two major formats are EVA (Economic Value Added) and BSC (Balanced Scorecard Concept). • Software for BSC, MC (Management Cockpit)and Dashboard are ways to create, organize and display variables. “Strategic Performance Measurement Systems: Translating Strategy into Results” by Stephen Gates, Journal of Applied Corporate Finance (Fall 2000).* ALL VIEWED IN CONTEXT OF PERFORMANCE MEASUREMENT (PM) SAP-SEM Faculty Workshop July 2007

40. BSC Overview with Perspectives Strategy maps illustrate cause and effect SBUs integrated into corporate model. Status settings Different views Management Cockpit (MC) Walls (Panels) KPI Reporting Different visuals (dials, graphs, etc.) COMPARATIVE FEATURES SAP-SEM Faculty Workshop July 2007

41. Vision Strategy Strategic Objectives Balanced Scorecard Performance Measurements THE BALANCED SCORECARD AND STRATEGY SAP-SEM Faculty Workshop July 2007

42. Not just a display methodology. • Offers a process and a clear structure by which strategy is developed, implemented, communicated and monitored. • More expensive and time consuming to implement than MC or Dashboard. • Software has more analytics (Cause and Effect maps). BALANCED SCORECARD SAP-SEM Faculty Workshop July 2007

43. Visual structure and logical structure. • Black wall: financial indicators and critical success factors. • Red wall: Indicators for markets, competitors and competitor analysis. • Blue wall: Indicators for internal processes, productivity and quality improvement • White wall: Indicators for monitoring strategic projects. (Infrastructure). MC STRUCTURE SAP-SEM Faculty Workshop July 2007

44. Each wall (summarizes information of a specific type: financial, market, etc.) can have up to 6 logical views. • Each logical view (summarizes a business factor: profitability) can have up to 6 graphic frames. • Each graphic frame displays the relationship between up to three measures as KPIs. MC Structure, cont. SAP-SEM Faculty Workshop July 2007

45. Dashboard probably has oldest roots. Emerged from pre-existing Executive Information Systems. • Pratt & Whitney’s ‘War Room’ in 1980s. • Least structure of the three. • May or may not be linked to strategy. • Can focus on KPIs that represent ‘the way we have always done it’. DASHBOARD (CONTROL PANEL) SAP-SEM Faculty Workshop July 2007

46. Presentation of information with colorful graphic indicators and other easy to read gauges. • “Delivers at a glance summaries presented in a highly visual and informative format”. • Easier to monitor performance and recognize when corrective action should be taken. ( • Can be ‘quickly’ implemented. • A “data delivery vehicle”. Colin, David. “How Dashboards Can Change Your Culture” Strategic Finance pp. 45 – 50 (October 2004). DASHBOARDS SAP-SEM Faculty Workshop July 2007

47. PM systems must go beyond old EIS systems and alert cross functional teams monitoring processes when corrective action must be taken. • Team knows best what measures it needs and should create own system. • Should adopt ‘dashboard’ to display data trends related to process measures. This instead of spreadsheet presentation. • Should display results measures (financial) as well as process (cycle times) measures. Latter more important for teams. • Can be linked to BSC initiatives. Thus, issue is one of how to display information. Meyer, Christopher “How the Right Measures Help Teams Excel;” Harvard BusinessReview, pp. 95 - 103 (May – June 1994). DASHBOARDS FOR TEAMS SAP-SEM Faculty Workshop July 2007

48. Important for all display systems. • Focus on cause and effect links between nonfinancial performance measures and financial results (cash flow, profit, stock price). • Survey results suggest most companies do not rigorously establish these links. Instead use boiler plate approach or preconceptions of what is important. • Strategy maps help. Diagram logical links. But survey showed only 23% took this step. • Validation through statistical techniques, focus groups, etc. • Too many measures on MC counterproductive. • Weightings on measures important but difficult to establish. • What level of customer satisfaction contributes most to financial results and beyond that is associated with excessive investment levels? Ittner, Christopher D. and David F. Larcker, “Coming Up Short on Nonfinancial Performance Measurement” Harvard Business Review pp. 1 – 8 (November 2003). ESTABLISHING CAUSE AND EFFECT RELATIONSHIPS SAP-SEM Faculty Workshop July 2007

49. “My car is like the control panel. It gives me information on how fast I am going, how many miles I have traveled, what the temperature is inside the car, how much gas I have left, etc. Bob’s car gives him all that plus, he has a GPS system. The GPS tells him where he wants to go. While my car is useful to me telling me how I am doing, it has no clue where I want to go and what I need to do to get there, unlike Bob’s car. There are no cause and effect maps (strategy maps) embedded in the control panel”. Narayanan, V.G., “Teaching Note: Andina Bottling Co.” HBS No. 102-040 (2003). BOB KAPLAN’S CAR SAP-SEM Faculty Workshop July 2007

50. GilbraltarServer – SEM7.0 • Choose Client 800 • Login=fiu-001 ~ fiu-020 • Initial password: • SUBWAY80 • Click checkmark or hit enter • At prompt, change your password SAP-SEM Faculty Workshop July 2007