CHAPTER 2  Product-related litigation

Measuring Performance in Operations &  Financial Audits

Value Chains Typical Operational-Level Performance
Measurement Measures
 Act of quantifying the performance 1. Financial
of:  Labor and material costs
 Organizational units  Cost of quality
 Goods and services  Budget variance
 Processes 2. Customer and Market
 People  Customers claims and
 Other business activities complaints
 Provide a scorecard of performance  Type of warrant failure/upset
 Helps identify Performance Gaps  Sales forecast accuracy
 Makes accomplishments visible to 3. Quality
workforce, stock market, and other  Defects/ unit or error/ opportunity
stockholders  Service representative courtesy
4. Time
Types of Performance
 Flow processing or cycle time
Typical Organizations-Level Performance
 Percent of time meeting
Measures
promised due date
1. Financial
5. Flexibility
 Revenue and profit
 Number of engineering changes
 Return on asset
 Assembly-line changeover time
 Earnings per share
6. Innovation and learning
2. Customer and Market
 Number of patent applications
 Customer satisfaction
 Number of improvement
 Customer retention
suggestions implemented
 Market Share
 Percent of workers trained on
3. Quality
statistical process control
 Customer ratings of goods and 7. Productivity and operational
services Efficiency
 Product recalls  Manufacturing yield
4. Time
 Order fulfillment time
 Speed 8. Sustainability
 Reliability  Toxic waste discharge rate
5. Flexibility
 Workplace safety violations
 Design flexibility
 Percent of employees with
 Volume flexibility emergency preparedness
6. Innovation and learning training
 New product development rates
 Employee satisfaction Financial Measures
 Employee turnover  Minimize Cost
7. Productivity and operational  Increase Revenue
Efficiency  Financial Ratios –
 Labor productivity  - Liquidity
 Equipment utilization  Solvency
8. Sustainability
 Profitability
 Environmental and regulatory
 Source: Financial Statements
compliance
  Ability to develop a wide
range of customized goods
or services to meet different
Customer & Market Measures or changing customer needs
 Provides companies with customer  Volume Flexibility
rating of specific goods and service  Ability to respond quickly to
features changes in the volume and
 Indicates the relationship between type of demand
customer ratings and a customer’s
likely future buying behavior Innovation and Learning
 Tracks trends and patterns of
customer behavior Innovation
 Ability to create new and
Quality unique goods and services
 Measures the degree to which the that delight customers and
output of a process meets customer created competitive
requirements advantage
 Goods Quality: relates to the Learning
physical performance and  Creating, acquiring, and
characteristics of a good transferring knowledge
 Service Quality: consistently  Modifying behavior of
meeting or exceeding customer employees in response to
expectations and service delivery internal and external change
system performance for services
Productivity & Operational Efficiency
Five Dimension in assessing Service
Quality Productivity: ration of the outpost of a
1. Tangibles process to the input
2. Reliability
3. Responsiveness Productivity = Quantity of Output
4. Assurance Quantity of Input
5. Empathy
Service failures/upsets: errors in service Operational Efficiency: ability to provide
creation and delivery goods and services to customers with
minimum waste and maximum utilization off
Time resources
Two Types of Performance Measures:
1. Speed of performing a task Sustainability
 measured by processing time
and queue time Triple Bottom Line (TBL or 3BL)
2. Variability of processes  Measurement of
 measured using standard sustainability related to:
deviation or mean absolute  Environmental Factors
deviation  Energy consumption,
recycling, resource
Flexibility conservation activities, air
 The ability to adapt quickly and emissions, solid and
effectively to changing requirements hazardous waste rates, etc.
 Goods and Service Design Flexibility  Social Factors
  Consumer and workplace
safety, community relations,
and corporate ethics and
governance
 Economic Factors
 Auditing, regulatory
compliance, sanctions,
donations, fines, etc.
Analytics in Operations Management
 Helps Operations Managers
analyze date effectively and
make better decisions
 Applications
 Visualizing data to examine
performance trends
 Calculating basic statistical
measures
 Comparing results relative to
other business units,
competitors, or best-in-class
benchmarks
 Using correlations and
regression analysis
 Statistics
 Involve collecting, organizing,
analyzing, interpreting, and
presenting data.
 A statistic is a summary
measure of data
 Descriptive Statistics
 Refers to methods of
describing and
summarizing data
using tabular, visual,
and quantitative
techniques
 Statistics provides the means
of gaining insight both
numerically and visually-into
large quantities of data
understanding uncertainty
and risk in making decisions,
and drawing conclusions
form sample data that come
from very large populations.
 Operations managers use statistics
to gauge production and quality
performance to determine process
and design improvements.
 Statistical methods allow us to gain
a richer understanding of data by not
only summarizing data succinctly but
also finding unknown and interesting
relationships among the data.
Interlinking
 Quantitative modeling of cause-and-
effect relationships between external
and internal performance criteria
 Helps quantify performance
relationships between all parts of a
value chain
Value of a Loyal Customers (VLC)
 Quantifies total revenues or profits
each target market customer
generates over a buyer’s life cycle
 Total Market Value:
multiplying VLC by the
absolute number of
customers gained or lost
VLC Equation:
VLC = P x CM x RF x BLC
Where
P = the revenue per unit
CM = contribution margin to profit and
overhead expressed as a fraction
RF = repurchase frequency = number of
purchases per year
BLC = buyer’s life cycle computed as
1/defection rate, expressed as a fraction
Designing Measurement Systems
Actionable Measures
 Provide the basis for
decisions at the level at
which they are applied
- Levels include value
chain, organization,
process, department,
workstation, job, and
service encounters
Models of Organizational Performance
Baldrige Performance Excellence
Framework
  Helps in the process of self- performance results
assessment to understand they yield.
an organization’s strengths
and weaknesses Core Values and Concepts
 Self-assessment: - The basis of the
- Helps improve criteria is a set of
quality, productivity, Core Values and
and overall Concepts that are
competitiveness embedded in high-
- Encourages performing
development of high- organizations.
performance
management Balanced Scorecard Model
practices  Translates strategies into
Top measures that uniquely
Organizations Profile communicate an
- sets the context for organiztion’s vision
your organization. It  Performance perspectives
serves as the - Financial: measure
background for all value provided to
you do. shareholders
Seven Categories: (Integration) - Customer: focuses
Left Side on customer needs
1. Leadership and satisfaction and
2. Strategy market share and its
3. Customers growth
- Emphasizes the - Innovation &
importance of a Learning:
leadership focus on emphasizes people
strategy and and infrastructure
customers. - Internal: focuses
Bottom attention on the
4. Measurement, Analysis, and performance of key
Knowledge Management internal processes
- is critical to effective that drive a business
management and to a
fact-based, Value Chain Model
knowledge-driven,  Evaluates performance
agile system for throughout the value chain
improving by identifying measures
performance and associated with:
competitiveness. - Suppliers
Right Side - Inputs
5. Workforce - Value Creation
6. Operations Processes
7. Results - Goods and Service
- includes your Outputs and
workforce-focused Outcomes
processes, your key - Customers and
operational Market Segments
processes, and the
 - Supporting and
General Management
Processes
Service-profit Chain
 States that employees create
customer value and drive
profitability through a service-
delivery system
 Based on a set of cause-and-
effect linkages between
internal and external
performance
- Helps define key
performance
measurements on
which service-based
firms should focus