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Measuring Performance in Operations

COLLIER/EVANS

Describe the types of measures used for decision making

Explain the use of analytics in OM and how internal and external measures are related

Explain how to design a good performance measurement system

Describe four models of organizational performance

LEARNING OUTCOMES

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Measurement

Act of quantifying the performance criteria of:

Organizational units

Goods and services

Processes

People

Other business activities

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Measurement

Good measures:

Provide scorecard of performance

Help identify performance gaps

Make accomplishments visible to:

Workforce

Stock market

Other stakeholders

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Types of Performance Measures

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Financial

Customer and market

Quality

Time

Flexibility

Innovation and learning

Productivity and operational efficiency

Sustainability

Financial Measures

Take top priority in for-profit organizations

Traditional financial measures

Revenue including earnings from new goods and services and growth

Return on investment

Operating profit

Pretax profit margin

Asset utilization

Earnings per share and other liquidity measures

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Customer and Market Measures

Customer and market feedback is used by organization to:

Evaluate the customer and stakeholder’s satisfaction

Customer-satisfaction measurement system: Provides a company with customer ratings of specific goods and service features

Indicates the relationship between those ratings and the customer’s likely future buying behavior

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Quality

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 all service encounters

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Service Quality

Dimensions

Tangibles

Reliability

Responsiveness

Assurance

Empathy

Every service encounter provides an opportunity for error

Service failures: Errors in service creation and delivery

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Time

Relates to types of performance measures

Speed of doing something

Processing time

Queue time

Variability of the process - Measured by statistics such as:

Standard deviation or mean absolute deviation

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Flexibility

Ability to adapt quickly and effectively to changing requirements

Goods and service design flexibility: Ability to develop a wide range of customized goods and services to:

Meet different or changing customer needs

Volume flexibility: Ability to respond quickly to changes in the volume and type of demand

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Innovation and Learning

Innovation: Ability to create new and unique goods and services that:

Delight customers and create competitive advantage

Learning: Creating, acquiring, and transferring knowledge, and modifying the behavior of employees in:

Response to internal and external change

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Productivity and Operational Efficiency

Productivity: Ratio of the output of a process to the input

Productivity = Quantity of output/Quantity of input

Operational efficiency: Ability to provide goods and services to customers with minimum waste and maximum utilization of resources

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Sustainability

Triple bottom line (TBL or 3BL): Measurement of environmental, social, and economic sustainability

Environmental sustainability measures

Energy consumption

Recycling

Air emissions

Solid and hazardous waste rates

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Sustainability

Triple bottom line (TBL or 3BL)

Social sustainability measures

Consumer and workplace safety

Community relations

Corporate ethics and governance

Economic sustainability measures

Financial audit results

Regulatory compliance

Sanctions and fines

Accomplishment of strategic initiatives

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Business Analytics

Helps operations managers to analyze data more effectively and make better decisions

Applications of business analytics

Visualizing data to examine performance trends

Calculating basic statistical measures

Comparing results relative to other business units, competitors, or best-in-class benchmarks

Using correlation and regression analysis

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Linking Internal and External Measures

Cause-and-effect linkages between key measures of performance explain the impact of operational performance on external results

Interlinking: Quantitative modeling of cause-and-effect relationships between external and internal performance criteria

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3.3 Interlinking Internal and External Performance Measures

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Exhibit

Value of a Loyal Customer (VLC)

Quantifies the total revenue or profit each target market customer generates over the buyer’s life cycle

Total market value - Multiplying the VLC times the absolute number of customers gained or lost

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Designing Measurement Systems in Operations

Good performance measures are actionable

Actionable measures: Provide the basis for decisions at the level at which they are applied

Meaningful to the user

Timely

Reflect the way organization generates value to customers

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Models of Organizational Performance

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Baldrige performance excellence framework

Balanced scorecard

Value chain model

Service-profit chain model

Baldrige Performance Excellence Framework

Primary purpose of the program - Provide a framework for performance excellence through:

Self-assessment to understand an organization’s strengths and weaknesses

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3.4 Baldrige Model of Organizational Performance

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Exhibit

The Balanced Scorecard Model

Purpose - Translate strategy into measures that uniquely communicate an organization’s vision

Perspectives

Financial - Value to shareholders

Customer - Customer satisfaction and market growth

Innovation and learning - People and infrastructure

Internal - Processes that drive the business

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3.5 The Balanced Scorecard Performance Categories and Linkages

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Exhibit

The Value Chain Model

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 management processes

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Service-profit Chain Model

Most applicable to service environments

Based on a set of cause and effect linkages between internal and external performance

Defines the key performance measurements on which service-based firms should focus

Theory - Employees driven through the service delivery system, create customer value and drive profitability

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3.7 The Service-Profit Chain Model

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Exhibit

Different measures are used to provide scorecard of performance and to identify gaps in performance

Applications of business analytics helps operations managers to arrive at effective decisions

Good performance measures are actionable

First two models of organizational performance are known as big picture

SUMMARY

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Last two models of organizational performance provide more detailed frameworks for operations managers

SUMMARY

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Actionable measures

Customer-satisfaction measurement system

Flexibility

Goods and service design flexibility

Goods quality

Innovation

Interlinking

Learning

Measurement

KEY TERMS

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Operational efficiency

Processing time

Productivity

Quality

Queue time

Service failures

Service quality

Triple bottom line (TBL or 3BL)

Value of a loyal customer (VLC)

Volume flexibility

KEY TERMS

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