BALANCED SCORECARD MESA EMPIRICAL STUDY Manufacturing Metrics

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Balanced ScorecardMESA Empirical Study

Manufacturing Metrics1Educating ConsumersSometimes, producers educate consumers on their substitute performance measures.What are substitute performance measures for the following customer desires:Good Gas MileagePowerful ComputerWhat is the effect of educating consumers on performance measures?

10/20/20117MetricA metric is a verifiable measure stated in either quantitative or qualitative terms.97 percent inventory accuracyAccording to our customer evaluations, we are providing above-average service10/20/20113Customer quality measuresCustomers typically relate quality to:

Feature based measures; have or have not - determined by design

Performance measures - range of values - conformance to design or ideal value10/20/20115What is a metric?Another term for a substitute performance measure is a metric.Metric is a standard of measurement.In quality management, we use metrics to translate customer needs into producer performance measures.Internal quality metricsscrap and reworkprocess capability (Cp or Cpk)first time through quality (FTTQ)

10/20/20118MetricA metric is a verifiable measure thatcaptures performance in terms of how something is being done relative to a standard,allows and encourages comparison,supports business strategy.10/20/20114Identifying effective metricsEffective metrics satisfy the following conditions:performance is clearly defined in a measurable entity (quantifiable). a capable system exists to measure the entity (e.g., a gage).Effective metrics allow for actionable responses if the performance is unacceptable.There is little value in a metric which identifies nonperformance if nothing can or will be done to remedy it.Example: Is net sales a good metric to measure the performance of a manufacturing department?10/20/20119Use of quality metricsQuality metric data may be used to:spot trends in performance.compare alternatives.predict performance.However, organizations should consider the costs and benefits of collecting information for a particular quality metric.collecting data will not necessarily result in higher performance levels.higher quality companies often use fewer metrics than their competitors.10/20/201110Acceptable rangesIn practice, identifying effective metrics is often difficult.Main reason: non-performance of a metric does not always lead to customer dissatisfaction.Consider the car door example again, if door closing effort is the metric, will a customer be dissatisfied if the actual effort is 50 foot-pounds versus 55 foot-pounds.Producers typically identify ranges of acceptable performance for a metric.(a) For services, ranges often referred to as break points.(b) In manufacturing, these ranges are known as targets, tolerances, or specifications.10/20/201111Break pointsBreak points are levels where improved performance will likely change customer behavior.Example: waiting in lineSuppose the average customer will only wait for 5 minutesWait longer than 5 minutes -- customer is dissatisfied.1-5 minutes -- customer is satisfied.less than 1 minute -- customer is extremely satisfiedShould a company try to reduce average wait time from 4 to 2 minutes.?10/20/201112Targets, tolerances and specificationsTarget (nominal) - desired value of a characteristic.A tolerance specifies an allowable deviation from a target value where a characteristic is still acceptable.TARGET-1+1Lower specification limit (LSL)Upper specification limit (USL)

10/20/201113Balanced ScoreCardA Balanced ScoreCard is both a Tool and a Process:The Tool: Your ScoreCard reports all key drivers of your strategic success. It lets you know if performance in each critical area is at the level you expect, and shows you trends for each major business driver.The Process: For the Executive Team, the ScoreCard is the centerpiece of your month-end review process. It is also used with your extended management team, employees, and Board to educate them on key performance issues.14FinancialMarket/CustomersOperational ExcellenceBayMed (fictitious) Balanced ScoreCardPeople & Culture

Source: Michael Selby: ScoreCard Partners

FinancialMarket/CustomersOperational ExcellenceBayMed Balanced ScoreCardPeople & Culture

The Dashboard divides into 4 quadrants, or perspectives. The Financial perspective reports Revenues, Gross Margins, EBITDA, Operating Expense, Net Operating Income, Free Cash Flow, and any other Financial Data you choose.


The Market/Customers perspective reports repeat business with existing customers, new customers, new business partners, how recent releases are performing, customer complaints and customer satisfaction.


Operational Excellence reports the core competencies which you have to execute well to win customer loyalty. Core Competencies vary by company and industry. BayMed tracks sales execution, marketing effectiveness, product development speed, manufacturing and customer support excellence.

In Engineering, its all about meeting our milestones on major products in development. This chart shows recent and upcoming milestones, where we stand now vs. 1 mo. ago, and days early/late for each milestone.

This slide looks at order fulfillment timeliness: do we meet our delivery commitments? We track both Product Orders as well as Service Contract milestones.

This slide looks at Inventory Turn rates in each of our three value-add levels.

This manufacturing slide looks at the cost of poor quality in Total, and by each of 5 key drivers. Note that quality cost is expressed as a % of COGS we want NOT to exceed 10%. Note the problem areas of Sustaining Engineering and Inventory Accuracy.

resolve the customers issue on their first call. We also measure answering speed, abandonment rate and average talk timesFinancialMarket/CustomersOperational ExcellenceBayMed Balanced ScoreCardPeople & Culture

People & Culture looks at the workforce, reporting workforce growth, internal mobility and competency development, strategically vital employees, hiring quality, and employee engagement.


Metrics that Matter: Empirical StudyStudy BackgroundMetrics Matter to PerformanceFast, Effective MetricsManufacturing Enterprise Solutions UseMetrics Framework Success

39Industry CouncilMESA Guided ProjectScott Daugherty, Plant Manager, Cormetech Inc.John Plassenthal, Project Manager, Strategic Integration, Enterprise Applications IT, International Truck and EngineJohn Moore, Quality Program Manager, KLA TencorNeil Crew, Group IT Director, Princes LimitedBrian Leinbach, MES Deployment Team Lead, Wyeth Pharmaceuticals

40Response DemographicsOn-line: 135 different manufacturersRepresenting 20 industriesRange of Products Counts & Mix in plantsNearly evenly divided by size: over $2B, $500M-$2B, under $500MTelephone: 16 Industry Leaders41

Every Production TypeSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

42

Three Major Respondent Groups by RoleSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

43Metrics Justify ImprovementIndustry struggles with the financial hurdles Disconnect between operations, IT and financeBridging gap justifies projects

44Common Business & Financial MetricsNet Operating Profit (78%)EBITDA (71%)Labor cost per unit (68%)Customer Fill Rate / On-time Delivery (64%)ROA / RONA (62%)Economic Value / Economic Profit (60%)Market Share (54%)

Top Productivity MetricsRevenue per employee Revenue per square footCash-to-cash cycle timeSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

45Study also asked about productivity by 3 perspectives revenue & value added per employee and revenue per square foot and also about cash-to-cash cycle time. For 11 metrics totalEBITDA: Earnings before interest, taxes, depreciation, and amortization

Business Movers: Operations Improvement to Financial MetricsSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

46This is what the business and finance folks know they want to be in that Business Movers group and improve against key business and financial metrics.

Business Movers ImprovedOperations Areas AlsoSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

47Its doubtful that this is a coincidence.We did a similar split of those who improved against the 19 operations KPIs and found that over 80% of the Business Movers were also in this group.Some Operations KPIsAre Common Across Segments

Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements48the other 8 metrics included in the survey are:Scrap/rework as % of salesOEECpK process capabilityWarranty costsToxic waste reductionsPercentage planned vs. emergency maintenance workEnergy consumption per unit of productionUpside production flexibility on the primary constraintBusiness Movers: More Effective Links Between Business & Ops Metrics

Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements 49

24 Hours or Faster Feedback to Operators So They Can Take ActionSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements50 Latency between Business Metrics and Operations that Cause Them

Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements51

Most Common Applications in Investment Plans for Next 12 MonthsSource: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements

52Gaining Benefits from Manufacturing Software

Source: MESA Metrics that Matter:Uncovering KPIs that Justify Operational Improvements53Those with MES & Dashboards Perform Better

Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements 54Teal bars are those who use MES (darker) and dashboards (lighter) while gold are those who do not.MESA Metrics FrameworkSource: Metrics that Matter Guidebook & Framework

55Graphical Representationof Metrics Framework

Corporate Strategy: Increase Brand Margin & Value

Net margin per brandFinancial Metrics

# of ProfitableBrandExtensionsReduceStock-outsLower ProductionCostsOperationalMetricsPlantMetricsChangeoverSpeedNPIRamp-up TimeFirstPassYieldPlanned vs.EmergencyMaintenanceUpsideProductionFlexibilityOEEEnergyConsumptionPer UnitSource: Metrics that Matter Guidebook & Framework

56ReferencesCharlie Gifford, Lean Production, MESA International.Michael Selby, Scorecard Partners.Kaplan &Norton: The Balanced Scorecard.

57Chart10.460.330.468750.30526315790.540.430.42424242420.38541666670.450.370.60606060610.4123711340.510.410.57575757580.39361702130.50.290.36363636360.34736842110.510.380.55882352940.3645833333

Use MESNo MESUse Plant DashboardNo Plant Dashboard% with >1% annual improvement

Sheet1First-pass yieldBatch / lot / unit right first timeProcess capability per line (CpK)Scrap/rework as % of salesCustomer reject rate (PPM)Warranty costsCapacity utilization (actual vs. designed total)Manufacturing cycle timeOverall equipment effectiveness (OEE)Average days total inventoryAverage days WIP inventoryOSHA-reportable incidents/yearToxic waste reductionsEnergy consumption per unit of productionAverage hours of overtime per weekOn-time delivery to customer requestOn-time delivery to commitUpside production flexibility - primary constraint daysPercentage planned vs. emergency maintenance work ordersSUM# KPIsAverageUse MES56%44%42%38%34%16%49%51%39%51%46%46%21%28%50%54%45%28%30%7.681940.4%131.28205128205100%No MES39%39%29%36%38%19%43%41%34%38%31%33%19%12%29%43%37%10%15%5.851930.8%31% more likely to have improved operations metrics with MES144%113%145%106%89%84%114%124%115%134%148%139%111%233%172%126%122%280%200%OSHA-reportable incidents/yearOn-time delivery to customer requestOn-time delivery to commitManufacturing cycle timeAverage hours of overtime per weekAverage days total inventoryUse MES46%54%45%51%50%51%No MES33%43%37%41%29%38%Productivity in value-add per employee Improvement in performance to Financial / Business KPIs to the best of your knowledge Productivity in revenue per employee Improvement in performance to Financial / Business KPIs to the best of your knowledge Productivity in revenue per square foot in plant Improvement in performance to Financial / Business KPIs to the best of your knowledge Labor cost per unit Improvement in performance to Financial / Business KPIs to the best of your knowledge Cash-to-cash cycle time Improvement in performance to Financial / Business KPIs to the best of your knowledge Earnings before interest, taxes, depreciation and amortization (EBITDA) Improvement in performance to Financial / Business KPIs to the best of your knowledge Economic value / economic profit Improvement in performance to Financial / Business KPIs to the best of your knowledge Net operating profit (value of shipments less material & mfg cost) Improvement in performance to Financial / Business KPIs to the best of your knowledge Return on assets / Return on net assets (ROA/RONA) Improvement in performance to Financial / Business KPIs to the best of your knowledge Customer fill rate/on-time delivery Improvement in performance to Financial / Business KPIs to the best of your knowledge Market Share % in key targeted markets Improvement in performance to Financial / Business KPIs to the best of your knowledge AverageW32%33%37%41%36%49%46%59%44%46%51%4.741143.1%1.190954773919% more likely to have improved substantially on financial metrics with MESW/O41%42%22%42%22%44%38%43%37%43%24%3.981136.2%78%79%168%98%164%111%121%137%119%107%213%Net operating profitEBITDALabor cost per unitCustomer fill rate/on-time deliveryROA/RONAUse MES59%49%41%46%44%No MES43%44%42%43%37%

Sheet1000000000000

Use MESNo MES% of Respondents Reporting Over 1% Annual ImprovementA Larger Portion of Those Using MES Improved at Least 1% Per Year on Top Operations KPIs

Sheet20000000000

Use MESNo MES% of Respondents improving over 1% Average in Last Three YearsA Higher Percentage of those Using MES Improved on Business Metrics by at Least 1% Annually

Sheet3OSHA-reportable incidents/yearOn-time delivery to customer requestOn-time delivery to commitManufacturing cycle timeAverage hours of overtime per weekAverage days total inventoryImproved >1% annuallyUse MES46%54%45%51%50%51%No MES33%43%37%41%29%38%Use Plant Dashboard47%42%61%58%36%56%No Plant Dashboard31%39%41%39%35%36%

Sheet3000000000000000000000000

Use MESNo MESUse Plant DashboardNo Plant Dashboard% with >1% annual improvement

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BALANCED SCORECARD MESA EMPIRICAL STUDY Manufacturing Metrics