Principles of Business Operations

Topic 3:
Frameworks for Operations Management © NCC Education Limited
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Learning Objectives

On completion of this unit, students will be able to:

• Appreciate and understand the importance of

performance measures used by organisations
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Introduction

• Organisations need to measure their performance

against targets to ensure they are achieving their
goals.

• They do this in several ways…

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Key Questions for Organisations

• How should we measure performance of goods

and services?
• How should we measure performance of processes
throughout the value chain?
• How should we measure overall organisational
performance? And how does it relate to internal
operations?
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Performance Measurement 1

• Measurement is about quantifying performance

criteria of goods, services and associated activities

• Good performance measures offer managers facts

– not opinions
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Performance Measurement 2

• Too many or too few performance measures is

undesirable

• World class organisations generally use between 3-

10 per process
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Key Performance Measures 1

Categories key of performance measures include:

• Financial
• Customer and markets
• Safety
• Quality
• Time
• Flexibility
• Innovation and learning
• Productivity
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Key Performance Measures 2

Financial
• Often high priority for organisations
• Income and profit
• Earnings per share
• Labour and materials costs

• Note – the cost of quality should NOT be used as a

financial performance measure
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Class Activity

• Work in groups of about 5

• Considering the key performance measure of

finance – why do you think the “cost” of quality
should not be used as a financial performance
measure?
• 10 minutes
• Feedback to the class
• 5 minutes
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Key Performance Measures 3

Customer and Markets

• Measuring customer satisfaction – goods, level of

service, response time

• Customer satisfaction is a key measurement –

even for organisations that don’t use it!
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Key Performance Measures 4

Safety

• Vital to all organisations to protect customers &

employees
• Number of accidents/incidents
• Lost workdays
• Workplace safety violations
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Key Performance Measures 5

Quality

• Degree to which the output of a process meets

customer requirements or expectations

• “Goods” quality relates to the physical performance

and characteristics
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Key Performance Measures 6

Quality continued…

• Features offered
• Reliability of the product
• Durability of the product
• Conformance – does it do what it is supposed to do
• Serviceability
• Aesthetics (visual, look and feel, etc.)
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Key Performance Measures 7

Quality continued…

• Common measure of quality is “number of defects

per unit”
• Service quality – continually meeting or exceeding
customer expectations & service delivery
performance
• Common measure of service quality is “service
upsets” or “service failures”
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Key Performance Measures 8

Time

• Speed of doing something

• Reliability of doing something
• Manufacturing lead time – elapsed time from order
being placed to shipment to customer
• Purchasing lead time – total time taken to obtain
the good or service
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Key Performance Measures 9

Flexibility
• Ability to adapt quickly and effectively to changing
requirements
• Design flexibility is the ability to develop a wide
range of goods or services to meet different or
changing customer needs
• Volume flexibility is the ability to respond quickly to
changes in volume demand
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Key Performance Measures 10

Innovation and Learning

• Innovation is the ability to create new and unique
goods and services that delight customers and
create competitive advantage
• Learning is the ability to create and acquire
knowledge and use this to improve the organisation
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Key Performance Measures 11

Productivity
• Measures the ratio of output of a process to the
input
• Efficiency measures the degree to which the output
uses the minimum number of resources
• Effectiveness measures how well the process
achieves the objective of meeting the customer
requirements
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Internal and External Performance

Measures

• Uses “cause and effect” measures between key

performance measures
• For example – how do improvements in customer
complaint handling affect customer retention?
• Often used to explain linkages between internal
and external measures
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Designing Performance Measures

Key questions to answer include: Does the measure:

• Support the organisation’s mission?
• Help the organisation to manage change?
• Have importance for customers?
• Forecast results effectively?
• Allow for collection easily/cost-effectively?
• Have an owner?
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Class Activity

• Work in groups of about 5

• Devise some key performance measures for a fast

food restaurant. Justify why you have included
these as “key”.
• 15 minutes

• Feedback to the class

• 5 minutes
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Performance Measures Reliability

• How well does the measuring instrument assess

the true value of the performance objective being
assessed?

• Remember – garbage in, garbage out

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Organisational Performance Models

There are several popular models used to assess

organisational performance – we shall briefly look at 4
of them …

• Malcolm Baldrige National Quality Program

• Balanced Scorecard
• Value Chain
• Service-Profit Chain Model
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Malcolm Baldrige National Quality

Program

• Provides a framework for performance excellence

through self-assessment to understand the
organisation’s strengths and weaknesses
• Framework is made up of 7 criteria
• Intention is to establish priorities for improvement
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The Baldridge Criteria

• Leadership
• Strategic planning
• Customer and market focus
• Measurement, analysis and
knowledge management
• Human resource focus
• Process management
• Business/organisational
performance results
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Balanced Scorecard

• Performance measurement tool that focuses on

four dimensions: finance perspective, customer
perspective, learning and growth perspective, and
internal business perspective
• Looks at how these contribute to an organisation’s
performance
• Goals should be put in place for the four areas and
measured appropriately
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Balanced Scorecard
Financials
•Objectives
•Measures
•Targets
•Initiatives

Customer Internal Business

Vision Processes
•Objectives •Objectives
and
•Measures •Measures
•Targets Strategy
•Targets
•Initiatives •Initiatives

Learning and
Growth
•Objectives
•Measures
•Targets
•Initiatives
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Value Chain

• Measures the “added value” of goods and services

and information as they pass through the
organisation’s processes
• Typical measures include:
– Conformance to specifications, accuracy and quality
– Efficiency, cost and reliability
– Market share, growth and revenue per target market
– Customer satisfaction, service quality and timeliness
– Achievement of strategic objectives
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Service-Profit Chain Model

• Links employee satisfaction to customer loyalty and

profitability
• Particularly useful to service organisations
• Defines the key performance measurements on
which service-based organisations should focus
• Emphasises that customer satisfaction drives
customer loyalty
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Service-Profit Chain

Employee
Retention Revenue

Internal Employee Customer Customer Customer

Services Satisfaction Value Satisfaction Loyalty
Quality

Employee
Productivity Profitability
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Conclusions

• Organisations need to measure performance

against objectives to ensure they are meeting their
goals and the needs of their customers

• Some measures can be used to demonstrate

linkages between internal and external factors

• There are several models organisations can adopt

to help them in devising performance measures
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References

• Evans & Collier (2007) “Operations Management:

An Integrated Goods & Services Approach”,
Thomson
Topic 3 – Frameworks for Operations
Management

Any Questions?