Performance

Measurement

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Importance of Management
by Fact
If you dont measure results, you cant tell
success from failure
If you cant see success, you cant reward it
and if you cant reward success, you are
probably rewarding failure
If you cant recognize failure, you cant
correct it

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Key Idea
A supply of consistent, accurate, and
timely data across all functional areas of
business provides real-time information for
the evaluation, control, and improvement
of processes, products, and services to
meet both business objectives and rapidly
changing customer needs.

3
Key Definitions
Data are simply representations of facts that come
from some type of measurement process.
Measurement is the act of quantifying the
performance dimensions of products, services,
processes, and other business activities.
Measures and indicators refer to the numerical results
obtained from measurement.
Information is derived from the analysis of data and
measurements and expressed in the context of a
business or organization.

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Reasons for Good Measures
To lead the entire organization in a particular
direction; that is, to drive strategies and
organizational change.
To manage the resources needed to travel in this
direction by evaluating the effectiveness of action
plans.
To operate the processes that make the
organization work and continuously improve.

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Key Idea
Measurement-managed companies are more
likely to be in the top third of their industry
financially, complete organizational changes
more successfully, reach clear agreement on
strategy among senior managers, enjoy
favorable levels of cooperation and teamwork
among management, undertake greater self-
monitoring of performance by employees, and
have a greater willingness by employees to take
risks.

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Three Levels of Measurement
Individual: real-time information for feedback
and process control
Process: understand whether processes are
accomplishing their objectives, whether they are
using resources effectively, and where
improvement might be necessary.
Organization: basis for strategic planning and
design of products, services, and processes.

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Balanced Scorecard
Financial perspective
profitability, revenue growth, return on investment,
economic value added (EVA), and shareholder value
Internal perspective
quality levels, productivity, cycle time, and cost.

Customer perspective
service levels, satisfaction ratings, and repeat business

Innovation and learning perspective

intellectual assets, employee satisfaction, market
innovation, and skills development

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Key Idea
A good balanced scorecard contains both
leading and lagging measures and
indicators. Lagging measures (outcomes)
tell what has happened; leading measures
(performance drivers) predict what will
happen.

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Cause-and-Effect Relationships:
IBM Rochester

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Baldrige Classification of
Performance Measures
Product outcomes
Customer outcomes
Financial and market outcomes
Workforce outcomes
Process effectiveness outcomes
Leadership outcomes

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Product Outcomes
Internal quality measurements
Field performance of products
Defect levels
Response times
Data collected from customers or third parties
on ease of use or other attributes
Customer surveys on product and service
performance

12
Customer Outcomes
Customer satisfaction and dissatisfaction
Customer retention
Gains and losses of customers and
customer accounts
Customer complaints and warranty claims.
Perceived value, loyalty, positive referral,
and customer relationship building

13
Financial and Market Outcomes
Revenue
Return on equity
Return on investment
Operating profit
Pretax profit margin
Asset utilization
Earnings per share

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Workforce Outcomes
Employee satisfaction
Training and development
Work system performance and effectiveness
Safety
Absenteeism
Turnover

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Process Effectiveness Outcomes
Cycle times
Production flexibility
Lead times and setup times
Time to market
Product/process yields
Delivery performance
Cost efficiency
Productivity

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Leadership Outcomes
Organizational accountability
Stakeholder trust
Ethical behavior
Regulatory/legal/environmental compliance
Financial and ethics review results
Community service
Management stock purchase activity

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Purposes of Performance
Measurement Systems
Providing direction and support for continuous
improvement
Identifying trends and progress
Facilitating understanding of cause-and-effect
relationships
Allowing performance comparison to benchmarks
Providing a perspective of the past, present, and
future

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Fundamental Management
Mistakes
Not measuring key characteristics
critical to organizational performance
or customer behavior,
Taking irrelevant or inappropriate
measurements

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Practical Guidelines for
Measurement
Fewer is better.
Link to the key business drivers.
Include a mix of past, present, and future
Address the needs of all stakeholders.
Start at the top and flow down to all levels of
employees
Combine multiple indexes into a single index
Change as the environment and strategy changes
Have research-based targets or goals

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Linkages to Strategy

Key business drivers Strategies and

(key success factors) action plans

Measures and indicators

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Process-Level Measurements
Good process measures should be
SMART
Simple
Measurable
Actionable
Related (to customer requirements and
to each other)
Timely

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Key Idea
Good measures and indicators are
actionable; that is, they provide the basis
for decisions at the level at which they are
applied.

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Six Sigma Measurements
A unit of work is the output of a process or an
individual process step.
A measure of output quality is defects per unit
(DPU) = Number of defects
discovered/Number of units produced
Defects per million opportunities (dpmo) =
(Number of defects discovered)/opportunities
for error 1,000,000

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Example
An airline wishes to measure the effectiveness of its
baggage handling system. A DPU measure might be
lost bags per customer. However, customers may have
different numbers of bags; thus the number of
opportunities for error is the average number of bags
per customer.
If the average number of bags per customer is 1.6, and
the airline recorded 3 lost bags for 8000 passengers in
one month, then
dpmo = 3/[(8,000)(1.6)] 1,000,000 = 234.375

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Other Types of Process Measures
Defect classification
Critical
Major
Minor
Weighted index
E.g., FedEx service quality indicator
Rolled throughput yield (RTY)
the probability that a unit can pass through a series of
process steps without defects; equivalently, the
percentage yield of good parts from a series of process
steps.
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Identifying and Selecting
Process Measures
Identify all customers and their
requirements and expectations
Define work processes
Define value-adding activities and process
outputs
Develop measures for each key process
Evaluate measures for their usefulness

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Aligning Strategic and Process Level
Measurements

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Analyzing and Using Data
Analysis an examination of facts and data to
provide a basis for effective decisions.
Examples
Examining trends and changes in measures and
indicators using charts and graphs
Calculating a variety of statistical measures such as
means, proportions, and standard deviations
Applying sophisticated statistical tools such as
correlation and regression analysis to help understand
relationships among different measures
Comparing results relative to other business units,
competitors, or best-in-class benchmarks
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Interlinking
Quantitative modeling of cause-and-effect relationships between
external and internal performance measures
How product and service quality improvement correlates with key
customer indicators such as customer satisfaction, customer
retention, and market share
Financial benefits derived from improvements in employee safety,
absenteeism, and turnover
Benefits and costs associated with education and training
Relationships between product and service quality, operational
performance indicators, and overall financial performance
Profit impacts of customer satisfaction and retention
Market share changes as a result of changes in customer satisfaction
Impacts of employee satisfaction on customer satisfaction

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Key Idea
Organizations need comparative data, such
as industry averages, best competitor
performance, and world-class benchmarks
to gain an accurate assessment of
performance and know where they stand
relative to competitors and best practices.

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Example: Mercy Hospital, Janesville

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Performance Review
Data provide the foundation for management
review to
assess organizational success and
performance relative to competitors
understand how well progress on strategic
objectives and action plans is being achieved
identify priorities for improvement and
opportunities for innovation for products,
services, and processes

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The Cost of Quality (COQ)
COQ the cost of avoiding poor quality,
or costs incurred as a result of poor
quality
Provides a basis for identifying
improvement opportunities and success
of improvement programs

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Key Idea
COQ approaches have numerous
objectives, but perhaps the most
important one is to translate quality
problems into the language of
upper managementthe language
of money.

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Quality Cost Classification
Prevention
Investments made to keep nonconforming products from occurring
and reaching the customer
Appraisal
Associated with efforts to ensure conformance to requirements,
generally through measurement and analysis of data to detect
nonconformances
Internal failure
Costs of unsatisfactory quality found before the delivery of a product
to the customer
External failure
Costs incurred after poor-quality products reach the customer

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Key Idea
Quality costs in different categories
are rarely distributed evenly.

Organizations should first attempt to reduce external

failure costs to zero by investing in appraisal activities
to discover the sources of internal failures and take
corrective action. As quality improves, failure costs will
decrease, and the amount of appraisal can be reduced
with the shift of emphasis to prevention activities.
37
Key Idea
In manufacturing, quality costs are
primarily product-oriented; for services,
however, they are generally
labor-dependent, with labor often
accounting for up to 75 percent of
total costs.

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Costs of Quality

Total Total Cost

Cost
External Failure

Internal Failure

Prevention

Appraisal
Quality Improvement
 Problem #1

The following cost of quality data were collected at the installment loan
department of the Hamilton Bank. Classify these data into the
appropriate cost of quality categories and analyze the results. What
suggestions would you make to management?
Loan Processing
1. Run credit check: $26.13
2. Review documents: $3,021.62
3. Make document corrections; gather additional
information: $1,013.65
4. Prepare tickler file; review and follow up on titles,
insurance, second meetings: $156.75
5. Review all output: $2,244.14
6. Correct rejects and incorrect output: $425.84
7. Reconcile incomplete collateral report: $78.34
8. Respond to dealer calls; address associate problems;
research and communicate information: $2,418.88
9. Compensate for system downtime: $519.38
10. Conduct training: $1,366.94
Loan Payoff
Receive and process payoff and release documents: $13.92
Research payoff problems: $14.34
Solved Problem #1 (continued)
Loan Payoff
1. Receive and process payoff and release documents: $13.92
2. Research payoff problems: $14.34
Solution:
Quality Cost Categories
Cost Elements Costs Subtotal Proportion
APPRAISAL
Run credit checks 26.13
Loan Payment & Loan Payoffs
Receive & process (2 items) 1058.92
Inspection
Review documents 3021.63
Prepare tickler file, etc. 156.75
Review all output 2244.14

Appraisal Costs $6,507.57 0.496

Solved Problem #1 (continued)
PREVENTION
Conduct training 1366.94
Prevention Costs $ 1,366.94 0.104

INTERNAL FAILURE COSTS

Scrap and Rework
Make document corrections 1013.65
Correct rejects 425.84
Reconcile incomplete collateral
reports 78.34
Compensate for system downtime 519.38
Loan Payment or Payoff
Respond to inquiries - no coupon 783.64
Research payoff problems 14.34
Internal Failure Costs $2,820.85 0.215
 Problem #1 (continued)

EXTERNAL FAILURE COSTS

Respond to dealer calls, etc. 2418.88
External Failure Costs $ 2,418.88 0.185
Total Quality Costs $13,114.24

The external failure costs for the bank are not extremely high.
However, they do represent 18.5% of the total quality costs.
The process of working with dealers should be investigated to
determine if it can be simplified, better communications
established, and problems avoided, in the future. The highest
cost category is in appraisal costs at $6,507.57 and 49.6% of
total quality costs. If the categories of "document review" and
"review all output" can be reduced without compromising the
quality of the lending procedure, these costs could be greatly
improved.
 Exercise 1

Repack Solutions, Inc. has a distribution center in Cincinnati where it receives and breaks down bulk
orders from suppliers factories, and ships out products to retail customers. Prepare a chart showing the
different quality cost categories and percentages for the companys quality costs that were incurred over
the past year.

Cost Element Amount:

Checking outbound boxes for errors $710,000
Quality planning 12,000
Downtime due to conveyor/computer problems 400,000
Packaging waste 80,000
Incoming product inspection 60,000
Customer complaint rework 40,000
Correcting erroneous orders before shipping 43,000
Quality training of associates 30,000
Quality improvement projects 20,000
Other waste 42,000
Correction of typographical errors--pick tickets 13,000
Total Quality Cost $1,450,000
 Exercise 2

Prepare a chart showing the different quality cost categories and percentages for the Great
Press Printing Company.

Cost Element Amount:

Customer complaint remakes $ 27,000
Printing plate revisions 28,000
Quality improvement projects 13,000
Gauging 100,000
Other waste 38,000
Correction of typographical errors 210,000
Proofreading 450,000
Quality planning 56,000
Press downtime 285,000
Bindery waste 51,000
Checking and inspection 42,000