1

Operations Management, 2e/Ch. 2 Measuring Performance in Operations

2007 Thomson South-Western
Operations Management, 2e/Ch. 3 Measuring Performance in Operations
2007 Thomson South-Western
1
Measuring Performance
in Operations
CHAPTER 3
DAVID A. COLLIER
AND
JAMES R. EVANS
OPERATIONS
MANAGEMENT
Goods, Services and Value Chains
2
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
1. To understand the principal types of
performance measures used in organizations
and by operations managers and to be able to
identify important measures and indicators to
manage and improve business performance.

2. To understand the importance of evaluating
relationships and cause-and-effect linkages
among performance measures and
approaches that companies use to understand
such relationships.
Chapter 3 Learning Objectives
3
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
3. To understand the characteristics of a good
measurement system and how to select
appropriate measures to support operations.

4. To understand how measurement systems
are integrated into comprehensive models of
business performance as a basis for better
design and improvement of operations.
Chapter 3 Learning Objectives
4
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Introduction

Managers make many important decisions that
affect how an organization provides value to its
customers.

To know if decisions are effective and to guide the
organization on a daily basis, they need a means
of understanding performance at all levels of the
organization as well as in operations.
5
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Introduction
Good decisions are facilitated
through measurement, the act of
quantifying the performance criteria
of organizational units, goods and
services, processes, people, and
other business activities.
6
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Introduction

Key questions related to measurement in
operations include:

How should we measure the performance of
goods and services?

How should we measure the performance of
processes throughout the value chain?

How should we measure overall organizational
performance and how does it relate to internal
operations?
7
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
The Scope of Performance Measurement

Good performance measures enable
managers to control processes and make
decisions on the basis of facts, not opinions.

Selecting the right measuresnot too many
and not too few is a very important decision
that all managers must make.
8
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
The Scope of Performance Measurement

The list below details various categories of
Performance measurements.
Financial
Customer and market
Safety
Quality
Time
Flexibility
Innovation and learning
Productivity
9
Exhibit 3.1 The Scope of Business and Operations
Performance Measurement
10
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Financial Measures

Often take top priority in for-profit organizations.

Traditional financial measures include revenue,
return on investment, operating profit, pretax
profit margin, asset utilization, growth, earnings
per share, and other liquidity measures.
11
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Financial Measures (cont.)

Cost of quality is not used in most organizations; it
measures what poor quality is costing an
organization.

Nonprofit organizations focus more on minimizing
costs and maximizing value to their target markets,
customers, and society.
12
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Customer and Market Measures

An effective customer-satisfaction measurement
system provides a company with customer ratings of
specific goods and service features and indicates the
relationship between those rating and the customers likely
future buying behavior.

Measured in three areas: 1) goods quality, 2) service
quality, and 3) response time.

Other customer focused measures include: customer
complaints, loyalty, customer retention, warranty claims,
service guarantee claims, service upsets/failures.

Chapter 3 Measuring Performance in Operations
13
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Safety
Measuring safety is vital to all organizations, as the
well- being of its employees and customers should
be an organization's principal concern.

Performance measures include accident rates, parts
per million of arsenic in public water supply, or
security in a hotel room.
Chapter 3 Measuring Performance in Operations
14
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Quality
Quality measures the degree to which the output of
a process meets customer requirements.
Goods quality relates to the physical performance
and characteristics of a good.

A common measure of goods quality is the number
of defects per unit, which is computed by dividing
the total number of defects found by the number of
items examined.

Nonconformities per unit are often reported as rates
per thousand or million, and the measure dpmo
defects per million opportunitiesis often used.
15
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
There are many dimensions of quality
including:
Performance: a goods primary
operating characteristics. Example--
automobile brakes stop the vehicle.
Features: bells and whistles. Example-
- reclining seats.
Reliability: probability of the
manufactured good working over a
certain time. Examplevehicle engine
always starts on cold days.

Conformance: the degree to which
characteristics match preestablished
standards. Examplevehicle door does
not leak water.


16
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Quality
There are many dimensions of quality including
(continued):
Durability: use before it physically
deteriorates. Exampleauto corrosion.
Serviceability: speed, courtesy and
competence of repair work. Example
vehicle oil change.
Aesthetics: how good a manufactured good
looks, feels, sounds, tastes, or smells.
Examplevehicles style and color.
17
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Another Way to Think About Quality
Critical defect -- one that judgment and
experience indicate will surely result in
hazardous or unsafe conditions for individuals
using or experiencing the good or service.
Major defect -- one that is not critical but is
likely to materially reduce the usability of the
good or service for its intended purpose.
Minor defect -- one that is not likely to
materially reduce the usability of the good or
service for its intended purpose.
18
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Quality

Service quality is consistently meeting or exceeding
customer expectations and service delivery system
performance for all service encounters.

Tangibles -- physical facilities, uniforms, equipment,
vehicles, and appearance of employees (i.e., the
physical evidence).
Reliability -- ability to perform the promised service
dependably and accurately.
Responsiveness -- willingness to help customers
and provide prompt recovery to service upsets.
Assurance -- knowledge and courtesy of the service-
providers, and their ability to inspire trust and
confidence in customers.
Empathy caring attitude and individualized
attention provided to its customers.
19
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Service Quality

Every service encounter provides an
opportunity for error. Errors in service
creation and delivery are sometimes called
service upsets or service failures.


Environmental quality focuses on
designing and controlling work processes to
improve the environment.
20
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Time

Time relates to two types of performance measures:

the speed of doing something (average) and
the reliability of doing something (variance).

Processing time is the time it takes to perform some task.

Queue time is a fancy word for wait timethe time spent
waiting.

Cycle time refers to the time it takes to accomplish one
cycle of a process that performs work.

21
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Time

Manufacturing lead time represents the time between
the release of an order to production and shipment to the
customer.

Purchasing lead time is the time required to obtain the
purchased item, including order preparation, supplier lead
time, transportation, and receiving and storage.

22
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Flexibility

Flexibility is the ability to adapt quickly and effectively to
changing requirements.

Goods and service design flexibility is the ability to
develop a wide range of customized goods and services to
meet different or changing customer needs.

Volume flexibility is the ability to respond quickly to
changes in the volume and type of demand.


23
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Innovation and Learning

Innovation refers to the ability to create new and unique
goods and services that delight customers and create
competitive advantage.

Learning refers to creating, acquiring, and transferring
knowledge and modifying the behavior of employees in
response to internal and external change.

24
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Productivity
Productivity = Quantity of Output/Quantity of Input
Productivity is often confused with efficiency or effectiveness.

Efficiency is the degree to which a process generates
outputs with the minimal consumption of inputs or generates
a maximum amount of outputs for a given amount of inputs.

Effectiveness is achieving the organization's objective,
mission, or goal through the eyes of the customer; that is,
doing the right things efficiently.

25
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Productivity

Productivity = Quantity of Output/Quantity of Input

Productivity is expressed in one of three forms:
1. Total Productivity
= Total Output/Total Input

2. Multifactor Productivity
= Total Output/Subset of Inputs

3. Partial Factor Productivity
= Total Output/Single Input
26
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Exhibit 3.2 Examples of Partial Productivity Measures
27
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Designing Performance Measurement Systems
for Operations
1. Identify all customers of the value chain and
determine their requirements and expectations.
2. Define the work process that provides the good
or service.
3. Define the value-adding activities and outputs
that compose the process.
4. Develop specific performance measures.
5. Evaluate the performance measures to ensure
their usefulness.
28
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Models of Organizational Performance

1. Malcolm Baldrige National Quality Award
Framework

2. Balanced Scorecard

3. Value Chain Model

4. Service-Profit Model
29
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Malcolm Baldrige National Quality Award
Framework
Organizations receive the awards in each of the
original categories of manufacturing, small
business, service, and nonprofit education and
health care.
Primary purpose of the program is to provide a
framework for performance excellent through self-
assessment to understand the organizations
strengths and weaknesses.
www.baldrige.org
30
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Exhibit 3.7 Malcolm Baldrige National Quality Award Model
of Organizational Performance
Source: 2005 Malcolm Baldrige National Quality Award Criteria, U.S. Dept. of Commerce
31
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
The Balanced Scorecard Model

Consists of four performance perspectives:
1) Financial

2) Customer

3) Innovation and Learning

4) Internal
32
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Exhibit 3.9 The Balanced Scorecard Performance
Categories and Linkages
Source: Kaplan R. S., and Norton, D. P., The Balanced ScorecardMeasures That Drive Performance, Harvard Business Review, JanuaryFebruary 1992, p. 72.
33
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
The Value Chain Model

Evaluates performance throughout the value
chain: synchronized network of processes
including suppliers and inputs, processes and
associated resources, goods and service
outputs and outcomes, customers and their
market segments, synchronized information
and feedback loops, and management of
value chain.
34
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Exhibit 3.10 Examples of Value Chain
Performance Measurements
35
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Chapter 3 Measuring Performance in Operations
Service-Profit Chain Model

Most applicable to service environments.

Model is based on a set of cause-and-
effect linkages between internal and
external performance and defines the
key performance measurements on
which service-based firms should focus.
36
Operations Management, 2e/Ch. 2 Measuring Performance in Operations
2007 Thomson South-Western
Exhibit 3.11 The Service-Profit Chain Model
Source: Adapted from J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., Jr., and L. A. Schlesinger,
Putting the Service-Profit Chain to Work, Harvard Business Review, MarchApril 1994, pp. 164-174.