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NAME: Carlos Manuel S.

Abalos DATE: November 20, 2017
SUBJECT: BEC102-Total Quality Management SECTION: III-BSBA-H

CHAPTER 10 PERFORMANCE MEASURES

INTRODUCTION

 A world-class organization, whether it is in the public sector or private sector doesn’t do different
things, but do things differently. They apply performance measurements to gain insight into and
come to conclusions about their organization and assess effectiveness and efficiency of its business
processes and people. Organizations use the performance measurement data to drive improvements
and successfully translate strategy into action.
 One of the important principles of TQM is to measure for success. Therefor performance should
be measured to know clearly whether an organization is achieving its objectives and goals. The
objectives of the organization are manifold as illustrated below:
o Achieving business objectives
o Improving response to customer’s needs
o Increasing functionality and improving quality and reliability of the product
o Customer satisfaction
o Reduction of cost of products
o Improving competitive position
o Achieving the required growth rate for survival
o Return on investment
o Making more and more profits

PDCA FOR MEASUREMENT

Phase What to do
During this phase, the possible measures are identified. The right
measure is the one that can help the organization to prove a point.
Plan Phase
Approval of senior management may be required for the planned
measures
The organization collects data in this phase as per approved
procedures on a pilot basis. The procedure will address the following:
 What will be measured?
Do (Measure) Phase
 Who will measure?
 When it will be measured?
 How? The detailed instructions for measuring
During this phase, the results are counterchecked through other
Check Phase means. An analysis has to be made to validate the methodology
adopted
Measures can be confirmed if the results confirm the reality. The
Act Phase procedure is confirmed and adopt it for organization-wide
application.
Examples of Measures

Area Examples of Measures
 Customer satisfaction Index (CSI)
 Total number of customers
 Number of repeat customers
 Number of new customers
 Cycle time achieved
 Percentage on time deliveries
 Time taken to accommodate design changes
Customer Satisfaction
 Number of change request accepted
 Warranty cost
 Mean time to repair
 Mean time between failures
 Number of customer complains as a percentage of orders
 Failure cost as a percentage of turnover
 Total quality cost as a percentage of turnover
 Actual production line as a percentage of planned time
 Cost of scrap/rework
 Machine idle time as a percentage of total production time
 Value of Work In Progress
Quality Measures in production
 Cost of miscellaneous materials such as lubricants as a percentage
of production value
 Percentage of billable hours to total time available
 Number of accidents
 Number of requirement change requests
 Number of design changes
Quality measures in R&D
 Failure costs due to R&D as percentage of sales value
 Average percentage deviation from the project schedule
 Employee Satisfaction Index (ESI)
 Number of employee suggestion received and implemented
 Training cost per employee
 Number of mentors
Quality measures in Human
 Number f complaints from employees
Resource Management
 Employee attrition rate
 Percentage of employees involved in process improvement
 Training days per employee per year
 Training expenditure as a percentage of turnover
 Number of deliveries rejected as percentage of total
 Cost of failures of incoming material
Quality measures in purchasing
 Cost of incoming inspection
 Number of purchase orders that contain defects
 Production hours lost due to non-availability of materials
 Reorder level
Quality measures in  Number of invoices with errors
Administration and Sales  Number of credit notes with errors
 Number of credit notes as a percentage of total invoice
 Average number of debtor days
 Market capitalization growth
 Total turnover
 Total profits
 Growth of turnover and profits per year
Measures for financial
 Total outstanding revenue
performance
 Revenue vs expenditure ratio
 Revenue as a ratio of capital investments
 Revenue as a ratio of depreciation
 Quality costs as a percentage of turnover
 Revenue per employees
 Ratio of overhead expenditure to total expenditure.

CRITERIA FOR SELECTION OF MEASURES

 The selected measure should relate closely to the issues which will require examination. The issue
are quality, resource utilization, cycle time, profit, etc.
 High information content
 Sensitive to variations
 Reflect the degree to which the processes achieve goals of the organization
 Permit easy and economical collection of data
 Facilitate consistent collection of well-defined data
 Help the organization identify occurrence of special cause variations
 Easily understandable and implementable
 A few vital measures than many trivial measures should be selected
 Identified by or acceptable to the process owners
 Reflect the needs of internal customers namely employees and external customers
 Facilitate improvement actions
 Obtainable on time for taking corrective and preventive actions
 Aligned to the organization’s vision, mission and objectives
 Able to satisfy all five stakeholders
 There should be measures for each process, each section and organization as a whole.

MEASUREMENT STRATEGY

 The Quality Council is responsible for formulating strategy for measuring. The measures should
be planned after thorough analysis. For each measure the following questions should be answered:
o What is the purpose of measuring?
o How will the measurement result be used?
o Is it important in determining the acceptance of the process or product?

Three Activities of Measurements Planning

Identify issues of Select and Integrate
Objectives of process, products,
the define with
business, system, measures processes
organization and employees

 The relevant issues should be identified from the goals and objectives of the organization. They
pertain to process, product, system, employees, and business. Then the appropriate measures should
be selected to address issues. The selected measures should be defined clearly and unambiguously.
Then the measurement process should be planned and integrated with the ongoing processes. The
measures should be collected as part of normal work in the organization.

Activity Explanation on How to Carry Out
The following steps will help in identifying issues:
 Classifying business goals or objectives
Steps for identifying issues  Identifying critical processes
 Listing the objectives for each critical process
 Listing potential problem areas associated with the processes
 What determines customer satisfaction?
 What determines quality?
 What determines success?
 What could go wrong?
 What is not working well?
Questions for identifying  Where are the delays?
measures  What can be controlled and what cannot be?
 What is our real capacity?
 How much are we working?
 Are the processes improving?
 Are the products improving?
 Is customer satisfaction improving?
The above will bring out the measures for performance. Some
performance measures will address more than one issue and one
question. Some measures, which will address multiple issues and
Selecting measures multiple questions are:
 Product quality
 Process cycle time
 Product delivery quality
 Process cost
 Customer satisfaction
 Employee satisfaction
The success lies in integrating the measures with the existing
processes. Every employee should be given responsibility to measure
Integrate with process
in addition to executing the process. Thus, the measures should
become internal part of the process.

Six Common Measures

Common Measures Measures that will address
 Internal failure cost
 External failure cost
 Materials rejected
 Vendor rating
Product quality  Cost per piece
 Product quality characteristics
 Percent on-time delivery
 Mean time between failures
 Mean time to repair
 Setup time
Process cycle time
 Total cycle time
 Wrong shipments
 Delayed delivery
Product delivery quality
 Product delivery with defects
 Products returned to supplier
 Cost of work in progress
 Down time of machinery
Process cost
 Material cost
 Percent reduction in floor space
 Sales growth
 Profit growth
Customer satisfaction  CSI
 New customers
 Customer attrition
 Employee productivity
Employee satisfaction
 Employee absenteeism

PERFORMANCE MEASURE DESIGN

The performance measure should be designed to answer the following questions:
 What is the measure?
 What is the objective of the measure?
 What is the expected output of the measure?
 What is the required input?
 How the measure is arrived at?
 Who is the owner of the measure?
 What is the information required for data collection?
o When?
o How?
o Where?
o From whom?
 Reporting information -report to be given
o To whom?
o Where?
o How?
o When?
 What records are to be maintained?

Define Measures

This is a very detailed activity. Each measure should be clearly defined. The following should be defined
for each measure.

 Who will measure?
 What will be measured
 How it will be measured
 Training required for measuring
 Data format and organization of results
 Quality checks on data
 Data analysis

Use of 7 QC Tools for Performance Management and Analysis

 Process flow chart can be used for selecting and defining measures
 Cause and effect diagram can be used for carrying out brainstorming to select measures and to
discuss cause of poor performance as revealed by the measures
 Pareto diagram can be used to identify a few vital causes, which contribute either to success or
failure
 Capability studies should be carried out for all critical process and control charts will be useful
for this purpose
 Data collection can be carried out using Tally sheets

Objectives of Performance Measurement

 Assess performance against goals. If there are gaps take action to improve
 Achieving the goals to:
o Meet the competition
o Enhance customer satisfaction
 Communication goals
 Improve process by stimulating improvement and innovation
o Identifying opportunities for improvement
o Motivating employees
o Locating problem areas
 Feedback
o Enabling comparison with world’s best practices
o Recording achievements and fixing new goals
o Giving a feedback about improvements needed
o Transferring responsibility for improvement to employees

Tasks Involved in Measuring Performance

Task Explanation
The performance measures should have the backing of the middle
Establishing commitment and senior management. Therefore, the idea should be sold to them
to get their commitment
The strategic objectives should be set taking into account the
following:
 Vision, mission statements, and objectives of the organization
 Benchmarking findings
Setting strategic objectives
 Undertaking survey about competitor’s capabilities
 Undertaking survey about customer requirements
 Defining critical success factors
 Defining strategy to improve performance
Defining measures  Defining measures for key business process area
 Defining the boundaries of the processes assigned to the owner for
Ownership
measurement

Checklist for performance measures

 Performance measurements should be consistent
 Should lead to getting a balanced view leading to financial performance, customer satisfaction,
internal quality, efficiency, and productivity improvement
 Relevant to the activity
 Simple to understand
 It should be easy to collect data and arrive at conclusions
 Implementable by lowest level employee in the organization
 Measure with appropriate scale
 Based on strategic objectives and making general goals more specific
 Reflection of short-term and long-term objectives
 Oriented towards the objectives of business process
 Should be few and vital
 Useful for stimulating improvement
 Should be dynamic
 Can be integrated into a management process and reward management systems
 Agreed to by employees and not imposed by management
 Fit for public display at prominent places in the organization

Measures to be Avoided

 Expensive
 Difficult to implement
 Trivial or viewed as trivial
 Conflicting with other measures
 Producing misleading information
 Short-term in nature

BALANCED SCORECARD (BSC)

 According to Stephen Covey, “People and their managers are working so hard to be sure things
are done right, that they hardly have time to decide if they are doing the right things.” For doing
right things, an organization needs the right business strategies. Right strategies will result in
continuously improving operations to deliver the products and services right the first time and every
time.
 According to 1998 Fortune Magazine article, an estimated 70 per cent failures of initiatives of
senior executives are not caused by poor strategy, rather by poor execution of the strategy.
 Good financial results are the success of strategies in the past. An organization needs leading
indicators for ensuring success in the future. The leading indicators provide an early indication of
whether an organization will achieve its business goals or will it be able to sustain these
achievements in the future. That should be the right business strategy

History of the Balanced Scorecard

 Robert S. Kaplan and David P. Norton published an article in the Harvard Business Review Jan-
Feb 1992 called “The Balanced Scorecard – Measures that Drive Performance” the article stressed
the importance of not relying solely on financial measures to measure organizational success. It
stressed the need for balance between short-term and long-term objectives, between financial and
non-financial measures and between internal and external performance measures.
 Balance is necessary for efficient and effective movement of the organization and reaching the
fullest potential
 Factors that enable financial results:
o Customer satisfaction
o Supplier satisfaction
o Employee satisfaction
o Efficient processes
o Modern technology
o Good organizational culture.
Balanced Scorecard Perspectives

 It is a conceptual framework for translating the organization’s vision into a set of performance
indicators distributed among four perspectives: the four perspectives are:
o Learning and growth Perspective
o Business Process Perspective
o Customer Perspective
o Financial Perspective
 Performance indicators are used to measure an organization’s progress towards achieving its
vision. An organization monitors both its current performance (financial, customer satisfaction, and
business process results) and its efforts to improve processes, motivate, and educate employees and
enhanced information systems – its ability to learn and improve
 The balanced scorecard developed by Kaplan and Norton provides a strategic framework for
identifying and liking the enablers with the desired results by defining the relationships between
performance levels in four distinct perspectives

Perspective Definition
This perspective captures the ability of the organization to provide
quality products and services, the effectiveness of their delivery
systems and overall customer service and satisfaction. Customers
Customer Perspective
include both internal as well as external. It must provide answer to
the question, “To achieve our vision, how must we look our
customers?”
It is different for public and private sector. Private sector’s financial
objective generally represents clear long-range targets for profits for
Financial Perspective the organization. Success of public organizations should be measured
by how effectively and efficiently they meet the needs of the target
sector
Internal business processes are the mechanisms through which
performance expectations are achieved. It should provide answer to
“To satisfy our customers’ value proposition as well as to satisfy our
other stakeholders, what process must we excel at?”

Internal Business Process This perspective provides data regarding the internal business results
against measures that lead to financial success and satisfied
customers. To meet the organizational objectives and customers’
expectations, organizations must identify the key business processes
at which they must excel. Key processes are monitored to ensure that
the outcomes are satisfactory.
This perspective captures the ability of employees, the quality of the
information system and organizational alignment to manage the
business and adaptability to change, in supporting accomplishment
Learning and Growth
of the organizational goals. Processes will be successful, only if
adequately skilled and motivated employees are used and they are
provided with accurate and timely information. In order to meet
customer requirement and customer expectations, employees may be
required to take on new responsibilities, which require skills,
capabilities, technologies that were not available before.

Employees should ask the question, “If we are to succeed, what must
we do to learn and improve?” To quote Kaplan and Norton, to satisfy
this perspective of BSC, the organizations must ask, “To achieve our
vision, how will we sustain our ability to change and improve?”

 Balanced scorecard is described as a framework for translating an organization’s vision into a
strategy by focusing on shareholders, customers, internal and external processes, and learning
requirements, which collectively describe the strategy of an organization and how the strategy can
be achieved.

Balanced Scorecard – a Management System

 Balanced scorecard is a management system because it enables organizations to clarify their
vision and strategy and translate them into action. It provides feedback around both the internal
business processes and external customer in order to continuously improve strategic performance
results.
 Kaplan and Norton describe the innovation of the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of
past events, an adequate story for industrial age companies for which investments in long-term capabilities
and customer relationships were not critical for success. These financial measures are inadequate,
however, for guiding and evaluating the journey that information age companies, must make to create
further value through investment in customers, suppliers, employees, processes, technology, and
innovation.”

 The balanced scorecard suggests that we view the organization from four perspectives as given
in the figure below and to develop metrics, collect data and analyze it in relation to the for
perspectives.
Growth

Business Process

Financial Growth

Learning
 The customer is the nucleus of the whole business. Business processes are aimed at delighting
the customers. This needs continuous learning of the employees, which is the foundation of the
organization. All these lead to financial growth, which will be visible.

Metrics

 Metrics must be developed based on the priorities of the strategic plan. Processes are then
designed to collect information relevant to these metrics and reduce it to numerical form. This will
enable the management to examine the outcome of various plans and strategies and track the results
to guide the company and provide feedback to employees and suppliers. The metrics of the
scorecard enables the following:
o Strategic feedback to show the present status of the organization from many perspectives
for senior management as well as employees
o Feedback for various processes to guide improvements on a continuous basis.
o Trends in performance over time
o Quantitative inputs for forecasting and use in models for decision support systems.

Perspective Definition
One of the important contributions of the balanced scorecard is to
reiterate that the employees are very important assets to an
organization. The training and learning of the employees will keep
Metrics for Learning and Growth the organization growing.
Perspective
The central idea of this perspective is that the senior management
take steps to convert their business into a learning organization, in
which knowledge of employees is the key resource
The metric should be designed to indicate how well the business
processes are being carried out. Measures for this perspective can be
designed only through intimate knowledge of the processes. The
Metrics for Business Process
metrics collected should address this perspective and help the
Perspective
management in understanding the current status of processes,
products and services. This will in turn facilitate identifying the goals
and targets for the future.
It has been proved beyond doubt that customer delight and customer
focus are the key to sustain business. The metrics derived from
Metrics for Customer
customer perspective should help the organization to understand the
Perspective
level of customer orientation of the organization and the customer
satisfaction achieved.
This is the only perspective on which the traditional organizations
measure success. Kaplan, et. al. give equal weightages to the
financial performance, the traditional measure.
Metrics for financial perspective
Currently, in a traditional organization, the financial perspective is
unbalanced. What is needed is to balance the financial perspective
with the other three perspectives just discussed above.
Six Steps for Building Balanced Scorecard

 Vice President of the Balanced Scorecard Institute, Howard Rohm, has given a six-step process
to build an organization’s balanced scorecard.

Step Discussion
The organization should assess
its foundations, vision, its core
plans, market opportunities,
competition, financial position, This is the first step in building the balanced scorecard.
short and long-term goals, and an
understanding of what satisfies
the customers.
Common themes are:
 Build the business
 Improve operational efficiency
The organization should develop  Develop new products
an overall business strategy  In case of a public sector organization
o Build a strong community
o Improve education
o Meet citizen’s requirements better
When an organization has
understood its own business and
derived the overall business
Objectives are the basic building block of strategy – the components
strategy, based on that, it has to
or activities that make up complete business managers
now decompose the business
strategies into small components
called objectives
A strategic mapping of the
organization’s objectives is then This may be achieved through the cause and effect diagram
created.
During this phase, the performance measures are developed to track
both strategic and operational progress. To develop meaningful
performance measures, one has to understand the desired outcomes
and the processes that are used to produce the outcomes. At this stage,
the organization identifies and develops meaningful metrics and the
The strategic map will give the
expected level of performance or targets.
metrics to be collected
straightaway
Process flowcharting will help in identifying the measures. The
causal analysis helps the organization in identifying the causes and
effects of good performance. The organization should start with the
result (the effect we want to achieve) and then identify all the causes
that contribute to the desired result. The causal model is most useful
for identifying input and process measures, which are the leading
indicators of future results.
New initiatives that need to be
funded and implemented to
At this stage, the organization knows what should be the initiative
ensure that the organization’s
that will help the organization to meet its objectives.
strategies are successful are
identified

Planning for BSC

 BSC can be used for performance improvement in a systematic manner. The organization should
plan for the following from each perspective.
o Objectives
o Measures
o Targets
o Initiatives
 The data sheet below provides a template for planning for process improvement. It summarizes
each perspective for ready reference. Then the BSC team can formulate objectives of the
organization from each perspective. This will lead to identifying corresponding measures., targets,
and initiatives required for achieving the target.

FINANCIAL CUSTOMER
“ To Objectives Measures Targets Initiatives Objectives Measures Targets Initiatives
“To achieve
succeed
our vision
financially,
how should
how should
we appear
we appear
to our
to our
customers?
shareholder

s?”

INTERNAL BUSINESS PROCESSES LEARNING AND GROWTH
“To satisfy Objectives Measures Targets Initiatives Objectives Measures Targets Initiatives
shareholders “To achieve
and our vision
customers how will we
what sustain our
business ability to
processes change and
must we improve?”
excel at?

Presentation of Balanced Scorecard

 Once the scorecard of actual measures is available, they can be presented in different forms to
meet the needs of the organization. One of the examples of Balanced Scorecard is given below.
 The balanced scorecard system provides a basis for executing a lasting strategy for managing
organization successfully. The balanced scorecard provides a basis for executing good strategy well
and managing change successfully
What strategy
How success will Key initiatives
must be achieved Performance
be measure and required to
and what is critical expectation
tracked? achieve objectives
to its success?

Objectives Measure Target Initiatives
10% Product A  Sales Promotions
Financial Broaden revenue mix Revenue mix 40% Product B  New channels of
50% Product C marketing

Increase customer  Frequent buyers’
Customer Customer retention 95%
satisfaction club

Internal 1999 – 15%
Develop new Percent revenue from  R&D Program
Business 2000 – 50%
products new products  Customer mailing
Process 2001 – 60%

Learning and Develop strategic  Custom training
Cross-train 90%
Growth skills  Knowledge library

PERFORMANCE BASED MANAGEMENT SYSTEM

 The key steps in performance-based management are given below:
o Define mission and goals
o Measure performance
o Use performance information
o Sustain performance-based management

Key Steps Sub-steps
 Involve key stakeholders in defining measures and goals
Define mission and goals  Identify key factors that could significantly affect the achievement
(including outcome-related of the goals
goals)  Align activities, core processes, and resources to help achieve the
goal.
 Develop a set of performance measures at each organizational
level, which are limited to the vital few, respond to multiple
Measure performance priorities, link to responsible programs and are not too expensive.
 Collect sufficiently complete, accurate and consistent data to
document performance and support decision making at various levels
 Use performance information to improve performance
 Communicate performance information to key stakeholders and the
Use performance information public
 Demonstrate effective or improved program performance
 Support policy decision making
 Devolve decision making with accountability for results
 Create incentives for improved management and performance
Sustaining performance based  Build expertise in strategic planning, performance measurement
management and use of performance information in decision making
 Integrate performance based management into the culture and day-
to-day activities of the organization

ATTRIBUTES OF SUCCESSFUL PERFORMANCE MANAGEMENT SYSTEM

 A documented conceptual framework is needed for the performance measurement and
management system.
 Effective internal and external communication are the keys to performance measurement.
 Accountability for results must be clearly assigned and well understood.
 Performance management systems must provide intelligence to decision makers, not just compile
data.
 Rewards and recognition should be linked to performance measurements.
 Performance measurement systems should be positive, not punitive.
 Results and progress toward program commitments should be openly shared with employees,
customers, and stakeholders.