Chapter 8

1. Chapter 8 Performance Measurement and Information Management

2. Importance of Management by Fact • If you don’t measure results, you can’t tell success from failure • If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure • If you can’t recognize failure, you can’t correct it

3. Key Definitions • Data are simply representations of facts that come from some type of measurement process. • Measurement is the act of quantifying the performance dimensions of products, services, processes, and other business activities. • Measures and indicators refer to the numerical results obtained from measurement. • Information is derived from the analysis of data and measurements and expressed in the context of a business or organization.

4. Reasons for Good Measures • To lead the entire organization in a particular direction; that is, to drive strategies and organizational change. • To manage the resources needed to travel in this direction by evaluating the effectiveness of action plans. • To operate the processes that make the organization work and continuously improve.

5. Three Levels of Measurement • Individual: real-time information for feedback and process control • Process: understand whether processes are accomplishing their objectives, whether they are using resources effectively, and where improvement might be necessary. • Organization: basis for strategic planning and design of products, services, and processes.

6. Balanced Scorecard • Financial perspective • profitability, revenue growth, return on investment, economic value added (EVA), and shareholder value • Internal perspective • quality levels, productivity, cycle time, and cost. • Customer perspective • service levels, satisfaction ratings, and repeat business • Innovation and learning perspective • intellectual assets, employee satisfaction, market innovation, and skills development

7. Key Idea A good balanced scorecard contains both leading and lagging measures and indicators.Lagging measures(outcomes) tell what has happened;leading measures(performance drivers) predict what will happen.

8. Baldrige Classification of Performance Measures • Product outcomes • Customer outcomes • Financial and market outcomes • Workforce outcomes • Process effectiveness outcomes • Leadership outcomes

9. Product Outcomes • Internal quality measurements • Field performance of products • Defect levels • Response times • Data collected from customers or third parties on ease of use or other attributes • Customer surveys on product and service performance

10. Customer Outcomes • Customer satisfaction and dissatisfaction • Customer retention • Gains and losses of customers and customer accounts • Customer complaints and warranty claims. • Perceived value, loyalty, positive referral, and customer relationship building

11. Financial and Market Outcomes • Revenue • Return on equity • Return on investment • Operating profit • Pretax profit margin • Asset utilization • Earnings per share

12. Workforce Outcomes • Employee satisfaction • Training and development • Work system performance and effectiveness • Safety • Absenteeism • Turnover

13. Process Effectiveness Outcomes • Cycle times • Production flexibility • Lead times and setup times • Time to market • Product/process yields • Delivery performance • Cost efficiency • Productivity

14. Leadership Outcomes • Organizational accountability • Stakeholder trust • Ethical behavior • Regulatory/legal/environmental compliance • Financial and ethics review results • Community service • Management stock purchase activity

15. Purposes of Performance Measurement Systems • Providing direction and support for continuous improvement • Identifying trends and progress • Facilitating understanding of cause-and-effect relationships • Allowing performance comparison to benchmarks • Providing a perspective of the past, present, and future

16. Practical Guidelines for Measurement • Fewer is better. • Link to the key business drivers. • Include a mix of past, present, and future • Address the needs of all stakeholders. • Start at the top and flow down to all levels of employees • Combine multiple indexes into a single index • Change as the environment and strategy changes • Have research-based targets or goals

17. Process-Level Measurements • Good process measures should be “SMART” • Simple • Measurable • Actionable • Related (to customer requirements and to each other) • Timely

18. Key Idea Good measures and indicators areactionable; that is, they provide the basis for decisions at the level at which they are applied.

19. Six Sigma Measurements • A unit of work is the output of a process or an individual process step. • A measure of output quality is defects per unit (DPU) = Number of defects discovered/Number of units produced • Defects per million opportunities (dpmo) = (Number of defects discovered)/opportunities for error × 1,000,000

20. Example • An airline wishes to measure the effectiveness of its baggage handling system. A DPU measure might be lost bags per customer. However, customers may have different numbers of bags; thus the number of opportunities for error is the average number of bags per customer. • If the average number of bags per customer is 1.6, and the airline recorded 3 lost bags for 8000 passengers in one month, then dpmo = 3/[(8,000)(1.6)] × 1,000,000 = 234.375

21. Other Types of Process Measures • Defect classification • Critical • Major • Minor • Weighted index • E.g., FedEx service quality indicator • Rolled throughput yield (RTY) • the probability that a unit can pass through a series of process steps without defects; equivalently, the percentage yield of good parts from a series of process steps.

22. Analyzing and Using Data • Analysis – an examination of facts and data to provide a basis for effective decisions. • Examples • Examining trends and changes in measures and indicators using charts and graphs • Calculating a variety of statistical measures such as means, proportions, and standard deviations • Applying sophisticated statistical tools such as correlation and regression analysis to help understand relationships among different measures • Comparing results relative to other business units, competitors, or best-in-class benchmarks

23. The Cost of Quality (COQ) • COQ – the cost of avoiding poor quality, or costs incurred as a result of poor quality • Provides a basis for identifying improvement opportunities and success of improvement programs

24. Quality Cost Classification • Prevention • Investments made to keep nonconforming products from occurring and reaching the customer • Appraisal • Associated with efforts to ensure conformance to requirements, generally through measurement and analysis of data to detect nonconformances • Internal failure • Costs of unsatisfactory quality found before the delivery of a product to the customer • External failure • Costs incurred after poor-quality products reach the customer

25. Return on Quality (ROQ) • ROQ – measure of revenue gains against costs associated with quality efforts • Principles • Quality is an investment • Quality efforts must be made financially accountable • It is possible to spend too much on quality • Not all quality expenditures are equally valid

26. Knowledge Management • The process of identifying, capturing, organizing, and using knowledge assets to create and sustain competitive advantage • Explicit knowledgeincludes information stored in documents or other forms of media. • Tacit knowledgeis information that is formed around intangible factors resulting from an individual’s experience, and is personal and content-specific.

27. Knowledge Transfer • The transfer of knowledge within organizations and the identification and sharing of best practices often set high-performing organizations apart from the rest. • Internal benchmarking - the ability to identify and transfer best practices within the organization • Rapid knowledge transfer involves the discovery, learning, creation, and reuse of knowledge that eventually becomes intellectual capital—knowledge that can be converted into value and profits.

28. Measurement and Information Management in Six Sigma • Six Sigma emphasizes fact-based decisions and provides organizations with tools to generate measurable results from Six Sigma projects. • Six Sigma methodology requires measuring and reporting performance goals, and using performance indicators to control and sustain improvements. • Project selection is based on understanding the financial as well as the nonfinancial benefits to the organization, such as cost savings, increased sales, reduced cycle times, or improved customer satisfaction.