Measuring

Performance
in
Operations &
Value Chains
 Measurement
• Act of quantifying the performance of:
– Organizational units
– Goods and services
– Processes
– People
– Other business activities
• Provide a scorecard of performance
• Helps identify Performance Gaps
• Makes accomplishments visible to workforce, stock
market, and other stockholders
“How you are
Measured is
how you
Perform”
 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
• Minimize Cost
• Increase Revenue
• Financial Ratios
– Liquidity
– Solvency
– Profitability
• Source: Financial
Statements
 Customer & Market Measures
• Provides companies with customer
rating of specific goods and
service features
• Indicates the relationship between
customer ratings and a customer’s
likely
future buying behavior
• Tracks trends and patterns of customer
behavior
 Quality, part 1
• 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
• Service Quality: consistently meeting or
exceeding customer expectations and service
delivery system performance for services
 Quality, part 2
Five Dimensions in assessing Service Quality:
1. Tangibles
2. Reliability
3. Responsiveness
4. Assurance
5. Empathy
Service failures/upsets: errors in service
creation and delivery
 Time
Two Types of Performance Measures:
1. Speed of performing a task
- measured by processing time and queue
time
2. Variability of processes
- measured using standard deviation or
mean absolute deviation
 Flexibility
• The ability to adapt quickly and effectively to
changing requirements
• Goods and Service Design Flexibility
– Ability to develop a wide range of customized
goods or services to meet different or changing
customer needs
• Volume Flexibility
– Ability to respond quickly to 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, Part 1
Triple Bottom Line (TBL or 3BL):
measurement of sustainability related to:
• 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
 Sustainability, Part 2
• Economic Factors
– Auditing, regulatory compliance, sanctions,
donations, fines, etc.
Analytics in Operations Management, P1
• Helps Operations Managers 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
Analytics in Operations Management, P2
• Statistics
– 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, P3
• 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
 Value of a Loyal Customer (VLC), P1
• Quantifies total revenues or profits each
target market customer generates over a
buyer’s life cycle
– Total Market Value:multiplying VLC by the
absolute number of customers gained or
lost
 Value of a Loyal Customer (VLC), P2
VLC Equation:

VLC = P x CM x RF x BLC
Where

P = the revenue per unit

CM = contribution margin to profit and overhead expressed as a
fraction
RF = repurchase frequency = number of purchases per year
BLC = buyer’s life cycle computed as 1/defection rate, expressed
as a fraction
 Value of a Loyal Customer (VLC), P2
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 Systems
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
Models of Organizational Performance
 Baldrige Performance Excellence
Framework, P1
• Helps in the process of self-assessment to
understand an organization’s strengths and
weaknesses
– Self assessment:
• Helps improve quality, productivity, and
overall competitiveness
• Encourages development of high-
performance management practices
•
Baldrige Performance Excellence
Framework, P2
 Baldrige Performance Excellence
Framework, P3
Seven Categories:
1. Leadership
2. Strategy
3. Customers
4. Measurement, Analysis, and Knowledge
Management
5. Workforce
6. Operations
7. Results
•
 Balanced Scorecard Model, P1
• 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
 Balanced Scorecard Model, P2
– Innovation & Learning:
emphasizes people and infrastructure

– Internal: focuses attention on the

performance of key internal processes that
drive a business
Balanced Scorecard Model, P3
 Value Chain Model, P1
• 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, P2
 Service Profit Chain Model, P1
• 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, P2