Performance Measurement - Florida International Universityweb.eng.fiu.edu/Leet/Mgmt_Inno_Tech/PerformanceMeasurement.pdfToyota Cambridge (sub) Ford Atlanta (mid) Ford Chicago (mid)

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Hope, Knowledge, and Opportunity

Ronald Giachetti © 2003

Performance Measurement

Ronald Giachetti



Overview

• Performance measurement provides necessary feedback to process control.

• Balanced Scorecard Approach

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Feedback Control

ProcessBeing

Controlled

Controlled OutputParameter

MeasureControlledParameter

DecisionMaking

Function

Actuator

ErrorSignal

ProcessInput

Reference Level



Feedback Control

Detector(measures actual

performance)

Goal/Standard(desired performance

level)

Controlled Activity(what we regulate)

Worker Responsible(compares actual with goal)

Responsible Decision Maker

(makes changes necessary to bring performance to

goal)

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Units of Measurement• A performance measure is composed of a number

and a unit of measure.– Value of performance measure relates to size (how

much).• Measure should be tied to a goal (strategic)• Measures should be:

– Reflect customers as well as business needs– Provide an agreed upon basis for decision making– Understandable– May be interpreted uniformly– Economic to apply



Macro Performance Measures• Cost – direct labor, indirect labor, actual versus

budgeted, ABC, cost/transaction.• Quality – number defects, dpmo, MTBF, warranty

costs.• Time – time to market, delivery performance,

service level.• Flexibility – ability to change order details,

change operations.• Environment – percent reusable components.• Culture/Employee – safety records, absenteeism,

training hours/employee.

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Performance Categories

Ratio of input versus outputProductivity

Is the unit of work done correctly on time?

Timeliness

Does the product or service meet customer requirements and expectations?

Quality

Is the process producing the required output at a minimum resource costs?

Efficiency

Is the process output conforming to customer requirements? Doing the right thing?

Effectiveness



Current Status

• domination of short-term financial measures:– return on investment– sales growth– operating income

• local productivity measures– number of engineering change notices

processes(ECNs).

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Measurement influences Behavior

• A warehouse manager’s performance was measured on the inventory level semi-annually.– To get rid of inventory the manager discounted

the product just before each semi-annual review.



CRITERION WEIGHT Research Activities 40% Research Funding

o Federal Funded Research Grants (x 1.2) o Corporate (other) Funded Research Grants (x 1.0) o Educational Grants (x 0.9) o Software/In-Kind Gifts (x0.25)

Proposal Submitted 5% Publications

o Level I journals (x 1.7) o Level II journals (x 1.0) o Conference publication (x 0.4)

20%

o Conference Chairs (x 1.0) o Conference Organizing (x 1.0) o Book/Chapter Publication (x 0.75)

Teaching 25% Student Evaluation Dissertation/Thesis/Project Supervision Dissertation/Thesis/Project Committee Number of Courses Taught Number of New Courses Prepared Number of Students Supported Number of Students Advised Distance Learning/Web Courses Development

Service 10% University Committees/Governance Professional Society Institutional Support (recruitment events,

undergrad orientation)

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Organization Performance Measures• University Level

– Headcount– Incoming SAT/GRE Scores– # FTE’s (Full-Time Equivalents) 12-credit hours

undergrad.– # doctoral degrees – # different doctoral degrees– External Funding ($)

• Department Level– External Funding/Faculty– # Journal Publications– # dissertations supervised– # courses/faculty



Balanced Scorecard Concept

• What gets measured gets done• a single measure cannot provide a clear

performance target or focus attention on critical areas of the business

• Managers want a balanced presentation of both financial and operational measures.

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Performance Measurement Must Balance:

• Customer Metrics– how your customers view you

• Business Process Metrics– how well your core processes generate value

• Internal Development Metrics– how your company learns and grows

• Financial Metrics– how well your company meets shareholder needs.



Financial

Growth &Learning

Vision&

Strategy

CustomerService

InternalBusiness

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“as our customers’ preferred

provider, we shall be the

industry leader.This is our mission”

The Vision

•Services that surpass needs•customer satisfaction•continuous improvement•quality of employees•shareholder expectations

Strategy

return on capitalcash flowproject profitabilityreliability of performanceFi

nanc

ial

value for money Tier Icompetitive price Tier IIHassle-free relationshiphigh performance professionalsinnovationC

usto

mer

shape customer requirementtender effectivenessquality servicesafety/loss controlsuperior project managementFi

nanc

ial

continuous improvementproduct and service innovationempowered work force

Cus

tom

er



Balanced Scorecard and Processes

• BSC is a performance management program that puts strategy at the center of the process.

• BSC translates strategy into terms that can be understood and acted upon.

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MEASURESGOALSMEASURESGOALS

Innovation and Learning Perspective

Internal Business Perspective

MEASURESGOALSMEASURESGOALSCustomer PerspectiveFinancial Perspective



Some Comments

• “Balanced” is an important part of the method. Too narrow a focus on a single measure will lead to sub-optimization.

• Example:– Strategic Goal is Research 1 status– Measurement: Research Dollars Won– Potential short-coming of measure: over-emphasis on $

may lead to a situation where what is done with the $ is forgotten. Need to consider impact of $$ funds and quality of work done.

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Customer Perspective

• Translate general mission statements such as “customers are number one” into specific measures that reflect customer concerns.

• Customers’ concerns have four general categories:– time– quality– performance and service– cost



Customer Concern Time

• Lead times– time required to meet the customers’ needs.

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Customer Concern Quality

• measures the defect level as perceived and measured by customers.– Note: Defect level as perceived by customer may be

quite different than as perceived or measured by company.

– Example: Automotive companies measure manufacturing defects as number of defects per million. However, customers may consider a “manufacturing defect-free” car to be of poor quality if there is wide and uneven spaces between the body panels.

• Measure accuracy of company’s delivery forecasts.



Customer Concern: Performance & Service

• how the company’s products and services contribute to creating value for the customer.

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Examples of customer measures



Computer manufacturer

• Company wanted to be the competitive leader in customer satisfaction and to do a better job of solving customers’ problems by creating more partnerships with suppliers.– Measured competitive rankings for customer

satisfaction.– Measured percentage of revenue from third-

party relationships for problem-solving.

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Medical Equipment Manufacturer

• Customers demanded high reliability.– Measured equipment up-time percentage– measured mean-time response to a service call.



ECI• Goals:

– get standard products to market faster– improve time to market– be preferred supplier– develop innovative products tailored to customer needs.

• Measures– percent of sales from new products– on-time delivery– ranking by key accounts– number of cooperative engineering efforts

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Measuring from the customers’ perspective

• customers’ evaluations.• Outside sources in industry:

– Automotive: JD Powers Quality Survey– Airlines: Dept. of Transportation’s measures of

on-time performance and lost baggage.• Benchmarking other companies




What must we excel at?

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• need to translate customer-based measures into measures of what the company must do internally to meet its customers’ expectations.

• Excellent customer performance derives from processes, decisions, and actions made throughout the organization.



Which business processes?

• focus on business processes that have the greatest impact on customer satisfaction.

• Factors that affect measures such as:– cycle time– quality– employee skills– productivity

• Core competencies play an important role here.

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Innovation & Learning Perspective

Can We Continue to Improve and Create Value?



Innovation and Learning

• need to innovate and learn in order to launch new products/services, create more value for customers, improve operating efficiencies, and penetrate new markets.

• Innovation and learning support growth and consequently increase shareholder value.

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Financial Measurements

• Companies that succeed in quality, service, technology, and customer satisfaction can lose money without sufficient consideration of financial success.

• Example: NISSAN

17.66

17.72

18.09

18.97

19.17

19.55

19.88

20.13

20.87

21.27

0 5 10 15 20 25

Toyota Cambridge (sub)

Ford Atlanta (mid)

Ford Chicago (mid)

Nissan Smyrna (sub/mid)

Honda E. Liberty (sub)

Toyota Georgetown (mid)

GM Oshawa 1 (mid)

Ford St. Thomas (lg)

GM Oshawa 2 (mid)

Ford Kansas City (sub)

Hours per Vehicle in Assembly Plants, 1999

Manufacturing Engineer, August 1999, 25-26

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Labor Cost per Car

Overall, including engine, stamping, and assy.DaimlerChrysler $1991/vehicleFord $1566/vehicleGM $2052/vehicleHonda $1079/vehicleNissan $1077/vehicleToyota $1063/vehicle




Profit/Car

DaimlerChrysler $1470Toyota $1348Honda $ 993Ford $ 854GM $ 317Nissan ($ 66) LOSS


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Financial Measures

• important – basis of a corporation is to generate profits.

• Linkage between improved operating performance and financial success is tenuous and uncertain.

• Sometimes not all long-term strategies are profitable strategies.



new product introduction vs. competition.

time to marketactual introduction versus planNew product introduction

process time to maturitymanufacturing learning

cycle time, unit cost, yieldmanufacturing excellence

on-time deliveryresponsive supply

quarterly sales growth and operation income by division

Succeed

percent of products that equal 80% sales

product focussilicon efficiency, engineering efficiency

design productivity

time to develop next generationtechnology leadership

manufacturing geometry vs competition

technology capability


Innovation and Learning Perspective


share of key accounts purchasesPreferred Supplier

increased market share and ROEProsper

percent of sales from new productsnew productscash flowSurvive


Customer PerspectiveFinancial Perspective

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Role of Information Systems in Supporting BSC



Information Systems’ Role

• Generating Measures and Presenting Balanced Scorecard

• Drill-down capability from balanced scorecard to see root of problem.

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Information Systems for presenting balanced scorecard

• collecting and presenting the measures in a balanced scorecard can be a daunting task.

• Information Systems can be utilized to collect the data and present it in a suitable format.



Example IS for BSC

• Hospital generate many statistics on a weekly basis for many reasons including regulations and other health requirements.

• IS department developed an Intranet System linked to a Database in order to present a BSC on a department level.

• Department managers can visit the internal web-page to see the BSC for their department.

• Design promotes use, relevance (current numbers), and centralized management.

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Summary

• Performance measurement required for feedback to control process/system.

• Performance measures influence behavior.• Need to consider all the internal and

external elements of the company as a cohesive whole, rather than a set of discrete functions and organizations.

• Related measures to strategy (BSC)

Documents

Performance Measurement - Florida International Universityweb.eng.fiu.edu/Leet/Mgmt_Inno_Tech/PerformanceMeasurement.pdfToyota Cambridge (sub) Ford Atlanta (mid) Ford Chicago (mid)