Measuring

Performance
in
Operations & Value
Chains
 Measurement
• Act of quantifying the
performance of:
– Organizational units
“How you
are
– Goods and services
– Processes
– People

•
– Other business activities
Provide a scorecard of
Measured is
how you
performance
• Helps identify Performance
Gaps
• Makes accomplishments visible
to workforce, stock market, and
Perform”
other stakeholders
 Types of Performance Measures
Performance Measurement Typical Organizational-Level Performance Measures Typical Operational- Level Performance Measures
Category
Financial Revenue and profit, Labor and material costs
Return on assets Cost of quality
Earning per share Budget variance

Customer and market Customer satisfaction Customer claims and complaints

Customer retention Type of warrant failure/upset
Market Share Sales forecast accuracy

Quality Customer ratings of goods and services Defects/unit or error/opportunity

Product recalls Service representative courtesy

Time Speed Flow processing or cycle time

Reliability Percent of time meeting promised due date

Flexibility Design flexibility Number of engineering changes

Volume flexibility Assembly-line changeover time

Innovation and learning New product development rates Number of patent applications
Employee satisfaction Number of improvement suggestions implemented
Employee turnover Percent of workers trained on statistical process control

Productivity and operational Labor productivity Manufacturing yield

efficiency Equipment utilization Order fulfillment time

Sustainability Environmental and regulatory compliance Toxic waste discharge rate

Product-related litigation Workplace safety violations
Financial audits Percent of employees with emergency preparedness training
Financial Measures Customer & Market
Measures
• Minimize Cost • Provides companies with
• Increase Revenue customer rating of specific
• Financial Ratios goods and service features
– Liquidity • Indicates the relationship
– Solvency between customer ratings
and a customer’s likely
– Profitability
future buying behavior
• Source: Financial
• Tracks trends and patterns
Statements of customer behavior
 Quality
• Measures the degree to Five Dimensions in
which the output of a assessing Service Quality:
process meets customer 1. Reliability
requirements 2. Assurance
• Goods Quality: relates to 3. Tangibles
the physical performance 4. Empathy
and characteristics of a good 5. Responsiveness
• Service Quality: consistently Service failures/upsets:
meeting or exceeding errors in service creation
customer expectations and and delivery
service delivery system
performance for services
 Time Flexibility
Two Types of Performance • The ability to adapt quickly and
Measures: effectively to changing
requirements
1. Speed of performing a task
- measured by • Goods and Service Design
processing time and Flexibility
queue time – Ability to develop a wide range
of customized goods or
services to meet different or
2. Variability of processes changing customer needs
- measured using
standard deviation • Volume Flexibility
or mean absolute – Ability to respond quickly to
deviation changes in the volume and
type of demand
Innovation and Learning
Productivity & Operational Efficiency
• Productivity: ratio of the output of a process
to the input

• Operational Efficiency: ability to provide

goods and services to customers with
minimum waste and maximum utilization of
resources
 Productivity Example
Consider a division of Miller Chemicals that produces
water purification crystals for swimming pools. The
major inputs used in the production process are labor,
raw materials, and energy. For Year 1, labor costs are
$180,000; raw materials cost $30,000; and energy costs
amount to $5,000. Labor costs for Year 2 are $350,000;
raw materials cost $40,000; and energy costs amount
to $6,000. Miller Chemicals produced 100,000 pounds
of crystals in Year 1 and 150,000 pounds of crystals in
Year 2.
 Sustainability
Triple Bottom Line (TBL or 3BL): • Economic Factors
measurement of sustainability – Auditing, regulatory
related to: compliance, sanctions,
donations, fines, etc.
• Environmental Factors
– Energy consumption, recycling,
resource conservation
activities, air emissions, solid
and hazardous waste rates, etc.

• Social Factors
– Consumer and workplace
safety, community relations,
and corporate ethics and
governance
 Analytics in Operations Management, Part 1
• Helps Operations Managers • Statistics
analyze data 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
– Involves 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 from sample data that
come from very large populations.
Analytics in Operations
Management, Part 2
• 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
Interlinking
 Value of a Loyal Customer (VLC), Part 1
• Quantifies total revenues or VLC Equation:
profits each target market
customer generates over a VLC = P x CM x RF x BLC
buyer’s life cycle Where:

P = the revenue per unit

CM = contribution margin to profit and
– Total Market Value:
overhead expressed as a fraction
multiplying VLC by the RF = repurchase frequency = number of
absolute number of purchases per year
customers gained or lost BLC = buyer’s life cycle computed as 1/defection
rate, expressed as a fraction
Value of a Loyal Customer (VLC), Part 2
Problem 2.3
Retention Rate = 80%
Defection Rate = 20% (1-
retention rate)

P = 1,000
CM = 45% or 0.45 (10% + 35%)
RF = 0.5 (1/2)
BLC = 5 (1/0.2>>defection rate)

VLC = 1,000 x .45 x. 0.5 x 5 =

1,125
Designing Measurement Models of Organizational
Systems Performance

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
 Baldrige Performance Excellence Framework, Part 1

• Helps in the process of self- Seven Categories:

assessment to understand an 1. Leadership
organization’s strengths and
weaknesses 2. Strategy
– Self assessment: 3. Customers
• Helps improve quality, 4. Measurement, Analysis,
productivity, and overall and Knowledge
competitiveness Management
• Encourages 5. Workforce
development of high- 6. Operations
performance 7. Results
management practices
•
“ leadership drives the system
that creates results”
•
Baldrige Performance Excellence Framework, Part 2
 Balanced Scorecard Model, Part 1
• Translates strategies into
measures that uniquely
communicate an
organization’s vision
• Performance perspectives
– Financial: measures
value provided to
shareholders
– Customer: focuses on
customer needs and
satisfaction and market
share and its growth
– Innovation & Learning:
emphasizes people and
infrastructure
– Internal: focuses
attention on the
performance of key
internal processes that
drive a business
Balanced Scorecard Model, Part 2
 Value Chain Model, Part 1
• Evaluates performance throughout the value
chain by identifying measures associated with:
– Suppliers
– Inputs
– Value Creation Processes
– Goods and Service Outputs and Outcomes
– Customers and Market Segments
– Supporting and General Management Processes
Value Chain Model, Part 2
 Service Profit Chain Model, Part 1
• 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
Service Profit Chain Model, Part 2
 Productivity Exercise 1
A major airline is attempting to evaluate the effect of
recent changes it has made in scheduling flights between
New York City and Los Angeles. Data available are shown
below.

Using passengers per flight as a productivity indicator,

comment on the apparent effect of the schedule change.
 Productivity Exercise 2
A hamburger factory produces 60,000 hamburgers each week.
The equipment used costs $10,000 and will remain productive
for four years. The labor cost per year is $13,500.

a. What is the productivity measure of “units of output per

dollar of input” averaged over the four-year period?
b. We have the option of $13,000 equipment, with an
operating life of 5 years. It would reduce labor costs to
$11,000 per year. Using productivity arguments alone,
should we consider purchasing this equipment?
 Productivity Exercise 2
a. Productivity = total units produced___
total labor cost + total equipment

= _ 60,000 x 52 x 4___
(13,500 x 4) + 10,000

= 195 hamburgers/dollar
 Productivity Exercise 2
b. Productivity = total units produced___
total labor cost + total equipment

= _ 60,000 x 52 x 5___
(11,000 x 5) + 13,000

= 229.4 hamburgers/dollar