Performance Measures

1. Measuring and improving performance

1.1 Performance measurement
The activity of measuring and assessing the various aspects of a process or whole operation’s performance.
Performance here is defined as the degree to which an operation fulfils the five performance objectives at any point
in time, in order to satisfy its customers.
A polar diagram can be used to see how well the 5 dimensions of performance of the operation meet requirements
of the market.
It is unlikely that for any operation a single measure of performance will adequately reflect the whole of a
performance objective. Usually operations have to collect a whole bundle of partial measures of performance.
What factors to include as performance measures?
The five generic performance objectives – quality, speed, dependability, flexibility and cost –can be broken down
into more detailed measures, or they can be aggregated into ‘composite’ measures.
The more aggregated performance measures have greater strategic relevance. The more detailed performance
measures are usually monitored more closely and more often. In practice, most organizations will choose to use
performance targets from throughout the range.

What are the most important performance measures?

One problem to devise performance measurement system is to achieve some balance between having a few key
measures on one hand, or, on the other hand, having many detailed measures.
Broadly, a compromise is reached by making sure that there is a clear link between the operation’s overall strategy,
the ‘key’ performance indicators (KPIs) that reflect strategic objectives, and the bundle of detailed measures that
are used to ‘flesh out’ each key performance indicator.

What detailed measures to use?

The five performance objectives – quality, speed, dependability, flexibility and cost – are really composites of many
smaller measures. All of these measures individually give a partial view of the operation’s cost performance, and
each of them does give a perspective on the cost performance of an operation that could be useful either to identify
areas for improvement or to monitor the extent of improvement.

The balanced scorecard approach

The balanced scorecard attempts to bring together the elements that reflect a business’s strategic position, at the
same time it restricts the number of measures and focus especially on those seen to be essential.
It presents an overall picture of the organization’s performance in a single report, and by being comprehensive in the
measures of performance it uses, encourages companies to take decisions in the interests of the whole organization
rather than sub-optimizing around narrow measures.
1.2 Setting target performance
After identified each partial measure, it has to be compared against some performance standard to make it
meaningful. There are four types of performance standard commonly used:
 Historical standards, which compare performance now against performance sometime in the past;
 Strategic target standards, which compare current performance against some desired level of performance;
 Competitor performance standards, which compare current performance against competitors’ performance;
 Absolute performance standards, which compare current performance against its theoretically perfect state.

1.3 Benchmarking
Benchmarking is ‘the process of learning from others’ and involves comparing one’s own performance or methods
against other comparable operations (obtaining competitor performance standards).
It’s based on the idea that (a) problems in managing processes are almost certainly shared by processes elsewhere,
and (b) there is probably another operation somewhere that has developed a better way of doing things.
Types of benchmarking
 Internal benchmarking - a comparison between operations or parts of operations which are within the same
total organization. E.g. a manufacturer with several factories benchmarks each factory against the others.
 External benchmarking - a comparison between an operation and other operations which are part of a
different organization.

 Non-competitive benchmarking - compare with organizations do not compete directly in the same markets.
  Competitive benchmarking - a comparison directly between competitors in the same, or similar, markets.

 Performance benchmarking - a comparison between the levels of achieved performance in different

operations. E.g. compare its own performance in terms of performance objectives – quality, speed,
dependability, flexibility and cost – against other organizations’ performance in the same dimensions.
 Practice benchmarking - a comparison between an organization’s operations practices and those adopted by
another operation. E.g. a large retail store might compare its systems and procedures for controlling stock
levels with a department store.
Criticism of Benchmarking
 Information may be inaccurate
 What works for one company doesn’t necessarily work for another
 Stifle innovative thinking
 Homogenises market

2. Improvement priorities
Two major influences on the way in which operations decide on their improvement priorities:

 The needs and preferences of customers (shape the importance of operations objectives)
 The performance and activities of competitors (determining achieved performance)
Judging importance to customers
 Order-winning: The competitive factors that directly and significantly contribute to winning business.
 Qualifying: The competitive factors that have a minimum level of performance (the qualifying level) below
which customers are unlikely to consider an operations performance satisfactory.
 Less important: Competitive factors that performance in them does not significantly affect the competitive
position of an operation.
In fact, to judge the relative importance of its competitive factors, an operation will usually need to use a slightly
more discriminating scale (divide each criteria into three further points representing strong, medium and weak
positions). i.e. nine-point importance scale.
Judging performance against competitors
The simplest way is to judge whether the achieved performance of an operation is better than, the same or worse
than that of its competitors. However, we can derive a more discriminating nine-point performance scale.
2.1 The importance–performance matrix
The priority for improvement which each competitive factor should be given can be assessed from a comparison of
their importance and performance. This can be shown on an importance–performance matrix.
 the ‘appropriate’ zone – competitive factors in this area lie above the lower bound of acceptability and so
should be considered satisfactory;
 the ‘improve’ zone – lying below the lower bound of acceptability, any factors in this zone must be
candidates for improvement;
 the ‘urgent-action’ zone – these factors are important to customers but performance is below that of
competitors. They must be considered as candidates for immediate improvement;
 the ‘excess?’ zone – factors in this area are ‘high performing’ but not important to customers. The question
must be asked, therefore, whether the resources devoted to achieving such a performance could be used
better elsewhere.
2.2 The sandcone Theory
The sandcone theory holds that objectives should be prioritized in a particular order.
It recommends that improvement should cumulatively emphasize quality, dependability, speed, flexibility, then cost.
Moving on to the next priority for improvement does not mean dropping the previous ones.

3. Approaches to improvement
An organization’s approach to improving its operation can be characterized as lying somewhere between the two
extremes of ‘pure’ breakthrough improvement and ‘pure’ continuous improvement.
3.1 Breakthrough improvement
Breakthrough improvement, which is sometimes called innovation-based improvement, sees improvement as
occurring in a few, infrequent but major and dramatic changes. Although such changes can be abrupt and volatile,
they often incorporate radical new concepts or technologies which can shift the performance of the operation
significantly.

3.2 Continuous improvement

Continuous improvement assumes a series of never-ending, but smaller, incremental improvement steps. This type
of improvement is sometimes called kaizen improvement. It is gradual and constant, often using collective group-
based problem-solving. It does not focus on radical change but rather attempts to develop a built-in momentum of
improvement.

3.2.1 The differences between breakthrough and continuous improvement

It is possible to combine the two, albeit at different times. Large and dramatic improvements can be implemented as
and when they seem to promise significant improvement steps, but between such occasions the operation can
continue making its quiet and less spectacular kaizen improvements
3.2.2 Improvement Cycle models
The idea that improvement can be represented by a literally never-ending process of repeatedly questioning and
requisitioning the detailed working of a process or activity. E.g. the PDCA cycle and the DMAIC cycle.

The PDCA cycle

The PDCA cycle model is perhaps the best known of all improvement cycle models.
It starts with the Plan stage, which involves an examination of the current method or the problem area being
studied.
The next step is the Do stage. This is the implementation stage during which the plan is tried out in the operation.
This stage may itself involve a mini-PDCA cycle as the problems of implementation are resolved.
Next comes the Check stage where the new implemented solution is evaluated to see whether it has resulted in the
expected performance improvement.
Finally, for this cycle, comes the Act stage. During this stage the change is consolidated or standardized if it has been
successful. Alternatively, if the change has not been successful, the lessons learned from the ‘trial’ are formalized
before the cycle starts again.

The DMAIC cycle

In some ways this cycle is more intuitively obvious than the PDCA cycle in so much as it follows a more
‘experimental’ approach. The DMAIC cycle starts with Defining (identify problems, define requirements and set the
goal), the next is Measurement stage (gather data, refine problem to prove it’s a problem worth solving, and
measure inputs and outputs), then Analysis stage (develop problem hypotheses, identify ‘root causes’ and validate
hypotheses), then begin on Improving the process ( develop improvement ideas, test, establish solution, and
measure results). The improved process needs then to be continually monitored and Controlled to check that the
improved level of performance is sustaining.

Remember though, it is the last point about both cycles that is the most important – the cycle starts again. It is only
by accepting that in a continuous improvement philosophy these cycles quite literally never stop that improvement
becomes part of every person’s job.

4. The techniques of improvement

 Scatterdiagrams, which attempt to identify relationships and influences within processes;
 Flow charts, which attempt to describe the nature of information flow and decision making within
operations;
 Cause–effect diagrams, which structure the brainstorming that can help to reveal the root causes of
problems;
 Pareto diagrams, which attempt to sort out the ‘important few’ causes from the ‘trivial many’ causes;
 Why-why analysis that pursues a formal questioning to find root causes of problems.