9

Source: Archie Miles

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

A model of Opera-ons Management

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Teaching Objectives
To illustrate the fundamental importance of
performance measurement to any
operations manager
To relate performance measurement and
improvement to each other and the overall
topic of OM
To present the Balance Scorecard
technique for Performance Measurement
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The Need for a Performance

Measurement System
If you cant measure it, you cant manage it!
Kaplan and Norton, The Balance Scorecard: Measures that drive performance , HBR, Jan-Feb 1992

You Get What you Measure

Bruggeman, W., Bartholomeeusen, L. and Heene, A. (1988) How Management Control Systems can aect the
performance of service operaPons InternaPonal Journal of OperaPons and ProducPon Management, 8 (3)

All opera<ons need some kind of performance

measurement as a prerequisite for improvement
Slack, N., et al. (2001) "OperaPons Management". UK Pearson EducaPon. (Chapter 18)

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Opera-ons Performance Measures

Dependability
Quality

Dependability
Cost

Speed

Flexibility

Quality

Cost

Speed

Flexibility

Market requirements and opera:ons performance change over :me

Performance of the opera:on

Requirements of the market

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Typical Measures of Performance

Performance Objective

Some Typical Measures

Quality

Speed

Dependability

Flexibility

Cost

Number of defects per unit

Level of customer complaints
Scrap level
Warranty claims
Mean time between failures
Customer satisfaction score
Customer query time
Order lead time
Frequency of delivery
Actual vs. theoretical throughput time
Cycle time
Percentage of orders delivered late
Average lateness of orders
Proportion of products in stock
Mean deviation from promised arrival
Schedule adherence
Time needed to develop new
product/service
Range of products/services
Machine change-over time
Average batch size
Time to increase activity rate
Average capacity/ maximum capacity
Time to change schedules
Maximum delivery time / average
delivery time
Variance against budget
Utilisation of resources
Labour productivity
Added value
Efficiency
Cost per operation hour

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Performance Standards
Historical Standards
Measure current performance against previous
performance

Target Performance Standards

They are arbitrary and reflect some level which is
regarded as appropriate or reasonable

Competitor Performance Standards

Compare performance against competitors
(benchmarking)

Absolute Performance Standards

It takes performance on theoretical limits (zero
defects)
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Trade-o Rela-onship Between Objec-ves

Performance
objec:ve 2

Performance
objec:ve 1
Improve
performance by
raising the pivot

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Priori-zing Compe--ve Objec-ves

Priori:es should be determined by ......

The
IMPORTANCE

Your
PERFORMANCE
in each of
compe::ve
objec:ves

of each
compe::ve
objec:ve
IMPROVEMENT PRIORITIES

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

9 Point Importance Scale

For this product group does this performance objec:ve ......
ORDER
WINNING
OBJECTIVES

QUALIFYING
OBJECTIVES

1 - Provide a crucial advantage with customers

2 - Provide an important advantage with most customers
3 - Provide a useful advantage with most customers
4 - Need to be up to good industry standard
5 - Need to be around median industry standard
6 - Need to be within close range of the rest of the industry

LESS
IMPORTANT
OBJECTIVES

7 - Not usually important but could become more so in future

8 - Very rarely rate as being important
9 - Never come into considera:on

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

9 Point Performance Scale

For this product group is achieved performance ........

BETTER
THAN
COMPETITORS

SAME
AS
COMPETITORS

WORSE
THAN
COMPETITORS

1 - Consistently considerably be]er than our nearest compe:tor s

2 - Consistently clearly be]er than our nearest compe:tor s
3 - Consistently marginally be]er than our nearest compe:tor s
4 - O^en marginally be]er than most compe:tors
5 - About the same as most compe:tors
6 - O^en close (but slightly lower) to main compe:tors
7 - Usually marginally worse than main compe:tors
8 - Usually worse than most compe:tors
9 - Consistently worse than most compe:tors

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The Importance-Performance Matrix

COMPETITORS PERFORMANCE

BAD

AGAINST

PERFORMANCE

GOOD

be]er
than

2
3
4

same
as

5
6
7
8

worse
than

9
9

less
important
LOW

qualifying

IMPORTANCE
FOR

CUSTOMERS

order
winning
HIGH

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The Importance-Performance Matrix with Zones of

Improvement Priority
1

be]er
than
E

COMPETITORS

AGAINST

PERFORMANCE

GOOD

same
as

IMPROVE

URGENT
ACTION

8
9
9

less
important

Lower bound of
acceptability

APPROPRIATE

3
4

worse
than
BAD

EXCESS ?

LOW

qualifying

IMPORTANCE
FOR

CUSTOMERS

order
winning
HIGH

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Approaches to Improvement

Performance

Con:nuous and breakthrough improvement

Breakthrough
improvement

Con:nuous
improvement

Time

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The PDCA Cycle (Deming Wheel)

Plan

Examina:on of process or problem

Collect and Analyse Data

Do

Act

Implement Improvement plan

Standardise and learn lessons

change is consolidated (or not)

Check

Measure and conrm result

whether it has resulted in the expected

performance improvement

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Common Techniques for Process Improvement

Input/output analysis

Flow charts

ScaMer diagrams
x

Input

Out put

x
x

Cause-eect diagrams

Pareto diagrams

x
x

x
x

x
x

Why-why analysis
Why?
Why?
Why?

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Process Improvement Tools

Tools for generating ideas
Check sheet
Scatter diagram
Cause and Effect diagram

Tools to organise the data

Pareto charts
Process & flow charts

Tools for identifying problems

Histograms
Statistical Process Control (SPC) chart
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Check Sheet for Data Collection

Hour
Defect

A
B
C

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Scatter Diagrams

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Cause and Effect Diagram

Used to find problem source / solutions
Also known as fish-bone diagram or
Ishikawa diagram
Steps:
Identify problem to correct
Draw main causes of problem as bones
Ask , where, how, who, where, what could
have caused problems in these areas?
Repeat for each sub-area, sub-sub-area
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Cause and Effect Diagram :

Main Causes the Four Ms
Methods

Manpower

Too many
defects

Materials

Machinery

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Fish-bone chart for Problems with

Airline Flight Departure
Methods
Acceptance of
late passengers

Manpower
Overbooking
policies
Understaed
Delayed
crew
check-in

Understaed
check-in
Poorly trained
agents

Late fuel
Late food

Materials

De-icing equipment
not available

Delayed
Flight
Departure

Aircra^ late to
gate
Mechanical
failure

Machinery

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Why-Why Analysis
A varia:on on the sh-bone diagram iden:fy problem,
then ask why it occurred. Take each major reason, and ask
why it occurred
Not in budget

Lack of training

PROBLEM
Cause of failure
wrongly iden:ed

Why?

Why?

No :me available
High sta turnover

Lack of product
knowledge

Why?
Lack of customer
knowledge

Why?
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Pareto Analysis of Wine Glass

Defects

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Process Flow Charts

Shows sequence of events in processes
and flow of resources
Depicts activity relationships
Has many uses
Identify data collection points
Find problem sources
Identify places for improvement
Identify where travel distances can be
reduced
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Process Chart Example

SUBJECT: Purchase request
Dist
Time Symbol
(metres) (mins)

Descrip:on
Write order
On desk

25

To buyer
Examine

= opera:on = transport = inspec:on

= delay = storage
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Flow Chart Example

User

Purchasing

Request goods

Inform user

Supplier

Check request

OK?
Y

Send Purchase
Order
Receive goods

Fill order
Send goods to
user

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Another Flow Chart Style

Screen applicants
Move to mortgage ocer
Wait to be processed
Complete applica:on,
verica:on & disclosures
Transport documents
Request verica:on of
income, account balances
and employment history
Wait for verica:on of
documents

Conduct property
appraisal and land survey
Conduct :tle search
Request credit bureau
analysis
Wait for credit report
Inspect property
Wait for closing
Transfer :tle

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Histograms
Measurements of a variable taken during normal
opera:on will show some varia:on these can be plo]ed
as a histogram which (with a suciently large sample) will
normally show a Normal distribu:on.

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Statistical Process Control

(SPC)
Statistical technique used to ensure
process is meeting required standard
All processes are subject to variability
Natural causes, i.e. random variation
Assignable causes, i.e. correctable problems
Machine wear, unskilled workers, poor material

Objective: identify assignable causes

Uses process control charts
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Process Control Charts

Upper
Control Limit

Ac:on
taken

Lower Control
Limit
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Patterns to look for on SPC Charts

Value above Upper Control Limit, or below Lower Control
Limit, may mean stopping process (expensive) so try to
anticipate problems by looking for patterns, e.g.:
UCL

UCL

UCL

C/L

C/L

C/L

LCL

LCL

LCL

Alterna:ng and erra:c

behaviour

Apparent trend in
one direc:on

Two points near

control limit

UCL

UCL

UCL

C/L

C/L

C/L

LCL

LCL

LCL

Suspiciously average
behaviour

Five points one side of

centre line

Sudden change in level

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Setting Control Limits

Actual process state
Decision

In control

Out of control

Stop process

Type I error

Correct decision

Leave alone

Correct decision

Type II error

With Upper and Lower Control Limits set at +/- 3

standard devia:ons away from the mean,
probability of a Type I error is 0.3%
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Further Reading
Heizer & Render, Chapter 6
Slack et al, Chapters 17 & 18
Bicheno J, The Lean Toolbox, PICSIE, 2nd
ed, 2000

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The Balanced Scorecard

What is it?
A Strategic Communica:on and Performance Technique

Origins
The rst balanced scorecard was created in 1987 at Analog Devices, a mid-
sized semiconductor company in the USA
Introduced by D. Norton and R. Kaplan in a series of ar:cles in Harvard
Business Review in early 90s.

Philosophy
Communica:ng goals and priori:es clearly
Emphasising Learning and Team working

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The Balanced Scorecard

The BSC is a conceptual framework for
translating an organisation's vision into a set of
performance indicators distributed among four
perspectives
Financial
Customer
Internal Business Processes, and
Learning and Growth.

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

A Typical Balanced Scorecard

Goals

Being a financially
strong institution
by maintaining
certain available
debt capacity and
certain financial
rations

How do we look to
our shareholders?

Customer Perspec:ve

Goals

Continuously
improving the
quality of our
products/services
and giving priority
attention to their
concerns

Measurements

Financial Perspec:ve

Measurements

Revenue Growth
Sales and market share
No. of new products
No. of new customers and markets
No. of new market channels
No. of new pricing strategies
Cost Management
Revenue per employee
Unit cost reduction
Percent use of low cost business processes
Percentage of expenses measured by ABC
Asset Utilisation
Inventory reduction, increased turns
Cash-to-cash cycle
Return on capital
Productivity / efficiency

What must we excel at?

Internal Business Process Measures

Goals

Market Share
% of market segment captured
% of each customer's total requirement served
Customer Retention
Number of customers who go elsewhere
Vision
Increase in sales to current customers
Delivering
Frequency of orders / visits / contacts with current customers
and
effective
Customer Acquisition
products/services
Strategy
Number of new customers, or total sales to new customers
in terms of
Average cost to acquire a new customer
outcomes
Average order size, or average revenue per customer interaction
Customer Satisfaction
Number of complaints
Number of unsolicited thank you letters
Number of individuals indicating that they are extremely satisfied
Customer Profitability
Total profit per customer
Innova:on and Learning Perspec:ves
Total cost per customer or per transaction

Goals

How do customers see us?

Being involved in
leading edge
tertiary care
research &
training

Measurements
Identify or Make the Market Profitability
Percent of revenue from new products
Percent of revenue from new customers
Design
Time to market
Break-even time
Build
Number of defects
Process time
Process cost
Deliver
Percent on-time delivery
Stock-outs
Percent defects
Service (post-sales)
Average satisfaction rating
Number of customers re-ordering
Number of customers who do not order again

Measurements

Employee Capabilities
Employee satisfaction
Staff turnover
Productivity (revenue per employee, etc.)
Information Technology
Information coverage ratio - number of processes having
adequate information on quality, cycle time, and cost
Return on data - new revenue per database etc.
Motivation and Alignment
Suggestions received
Suggestions implemented
Rewards provided
Time required to improve e.g. on-time deliveries by 50%

Can we con:nue to improve

and create value?

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Why Do Businesses Need a Balanced

Scorecard?
Financial

ROCE

Customer

Customer
Loyalty
On-:me
Delivery

Internal/Business Process

Learning and Growth

Process
Quality

Process
Cycle Time

Employee
Skills
Understanding the cause & eect rela:onship

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Performance Measurement: Key Points

Performance measurement is central to TQM, Continuous Improvement
Measuring one aspect of performance can have detrimental effects on
another
Too much emphasis on the bottom line can lead to short termism
Often there is no such thing as a perfect measure: use a range of
measures
The costs of measuring performance should be weighed against the
costs of not measuring
Target setting forces the manager to think through the potential tradeoffs between different dimensions of performance

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Exercise
Device an effective performance measurement system for a
fast food restaurant
Decide on the most important performance objectives for this type of
operation
Device performance measurements for these objectives
Debate on the most appropriate form of performance standards
Discuss the practical implications of how to make such a performance
system work (how often should measurement be taken, who should
take the measurements, etc.)
15 minutes..

Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007