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MEASURING PERFORMANCE IN OPERATIONSCHAPTER 3DAVID A. COLLIER AND
JAMES R. EVANS#2013 OM4 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.#2013 OM4 Cengage Learning.
All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations1
3-1 Describe the types of measures used for decision making.3-2
Explain the use of analytics in OM and how internal and external
measures are related.3-3 Explain how to design a good performance
measurement system.3-4 Describe four models of organizational
performance.
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations2What measures do you use to evaluate a companys goods or
services? Provide some examples.What do you think?What measures do
we use to evaluate a students at AUIS?Provide some examples.#2013
OM4 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.Chapter 3 measuring performance in
operations3Measurement act of quantifying performance criteria
(metrics) of organizational units, goods and services, processes,
people, and other business activities.
Good measures provide a scorecard of performance help identify
performance gapsmake accomplishments visible to workforce, stock
market, and other stakeholders.#2013 OM4 Cengage Learning. All
Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations4Types of
Performance
MeasuresFinancialCustomerMarketQualityTimeFlexibility
Innovation & LearningProductivity & Operational
EfficiencySustainability #2013 OM4 Cengage Learning. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.Chapter 3
measuring performance in operations5Financial MeasuresTop priority
for profit organizations
Include:revenuereturn on investmentoperating profitpretax profit
marginasset utilizationgrowthrevenue from new goods and
servicesearnings per shareother liquidity measures#2013 OM4 Cengage
Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or
in part.Chapter 3 measuring performance in
operations6CustomerCustomer measures:Customer satisfactioncustomer
retentiongains and losses of customers and customer
accountscustomer complaintswarranty claims,measures of perceived
valueLoyaltypositive referralcustomer relationship buildingA
customer-satisfaction measurement system provides customer ratings
of specific goods and service featuresindicates relationship
between ratings and customers likely future buying behavior#2013
OM4 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.Chapter 3 measuring performance in
operations7Market measures:Market sharebusiness growthnew product
and geographic markets enteredpercentage of new product sales.
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operationsQualitydegree to which output of a process meets customer
requirementsGoods qualityrelates to the physical performance and
characteristics of a goodService quality consistently meeting or
exceeding customer expectations (external focus) and service
delivery system performance (internal focus) for all service
encounters.
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations9Service Quality DimensionsTangiblesphysical facilities,
uniforms, equipment, vehicles, and appearance of employees
(physical evidence)Reliabilityability to perform promised service
dependably and accuratelyResponsivenesswillingness to help
customersprovide prompt recovery to service
upsetsAssuranceknowledge and courtesy of the service
providersability to inspire trust and confidence in
customersEmpathycaring attitudeindividualized attention provided to
customers#2013 OM4 Cengage Learning. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.Chapter 3 measuring
performance in operations10Service QualityEvery service encounter
provides an opportunity for error.
service upsets (service failures)Errors in service creation and
delivery#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations11TimeRelates to 2 types of performance measures:speed of
doing somethingvariability of the process
Processing timetime it takes to perform some task
Queue time wait time time spent waiting#2013 OM4 Cengage
Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or
in part.Chapter 3 measuring performance in
operations12Flexibilityability to adapt quickly and effectively to
changing requirements
Goods and service design flexibilityability to develop a wide
range of customized goods and services to meet different or
changing customer needsMeasures include: rate of new product
developmentpercent of product mix developed over past three
years
Volume flexibility ability to respond quickly to changes in
volume and type of demand.Measures include: time to change machine
setups time required to ramp up to an increased production
volume
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations13Innovation and LearningInnovation ability to create new
and unique goods and services that delight customers and create
competitive advantage
LearningCreating, acquiring, and transferring knowledgeModifying
behavior of employees in response to internal and external
change
Measures of innovation and learning include:intellectual asset
growthpatent applicationsbest practices implementednew product
developmentemployee trainingskills development work system
performance and effectiveness#2013 OM4 Cengage Learning. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.Chapter 3
measuring performance in operations14Operational
EfficiencyOperational Efficiency ability to provide goods and
services to customers with minimum waste and maximum utilization of
resources
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations15Productivity = Quantity of Input
Quantity of Output[3.1]ProductivityRatio of output of a process
to the inputProductivity measuresunits produced per labor
hourairline revenue per passenger milemeals served per labor
dollar#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations16Productivity and Operational Efficiency
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations17SustainabilityThe Triple bottom line (TBL or
3BL)measurement of environmental, social, and economic
sustainability
Measures of Environmental sustainabilityenergy consumption,
recycling, air emissions, and solid and hazardous waste
ratesMeasures of Social sustainabilityconsumer and workplace
safety, community relations, corporate ethics and governance, and
ethical violationsMeasures of Economic sustainability financial
audit results, regulatory compliance, sanctions and fines, and
accomplishment of strategic initiatives#2013 OM4 Cengage Learning.
All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations18Analytics in
Operations ManagementBusiness analyticshelp analyze data more
effectively & make better decisionsApplications of business
analytics include:visualizing data using charts to examine
performance trendscalculating statistical measures e.g. means,
proportions, and standard deviations; comparing results relative to
other business units, competitors, or benchmarksusing correlation
and regression analysis to understand relationships among different
measuresUnderstanding cause and effect linkages between key
measures of performance
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations19Analytics in Operations Management -
InterlinkingManagers must understand cause and effect linkages
between key measures of performance.
They explain impact of operational performance on external
results.
InterlinkingQuantitative modeling of cause and effect
relationships between external and internal performance
criteria#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations20Exhibit 3.2 Interlinking Internal and External
Performance Measures
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations21Linking Internal & External Performance
MeasuresValue of a loyal customer (VLC) quantifies total revenue or
profit each target market customer generates over the buyers life
cycleCustomer Retention Rate (RR)= 1-Customer Defection Rate
(DR)Contribution to Profit and Overhead (CM) = Fixed Cost
Percentage + Before Tax Profit MarginA customer who buys a product
every 2 years buys (.5) product each year (Frequency of Purchase
(RF))Average contribution to profit and overhead of a new customer
= (P)*(CM)* (RF), Where P= Price.#2013 OM4 Cengage Learning. All
Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations22Linking
Internal & External Performance Measures
Buying Life of Customer (BLC)= 1/Defection RateE.g. if DR = 20%,
then buying life = 1/.2 = 5 years
Average Value of a customer over his buying life= Average
contribution to profit and overhead* buying life of customer(VLC)=
(P)*(CM)*(RF)*(BLC)
Total Market Value= VLC * Number of Customers Gained (or Lost)
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operationsSolved Problem Value of Loyal CustomerWhat is the value
of a loyal customer (VLC) in the small contractor target market
segment who buys an electric drill on average every 4 years or 0.25
years for $100, when the gross margin on the drill averages 50
percent, and the customer retention rate is 60 percent? What if the
customer retention rate increases to 80 percent?
What is a 1 percent change in market share worth to the
manufacturer if it represents 100,000 customers? What do you
conclude?
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations24Solution
If customer retention rate is 60 percent, the average customer
defection rate = (1 customer retention rate). Thus, the customer
defection rate is 40 percent, or 0.4. The average buyers life cycle
is 1/0.4 = 2.5 years. The repurchase frequency is every four years,
or 0.25 (1/4).
Therefore:VLC = (P)(RF)(CM)(BLC) = ($100)(0.25)(0.50)(1/0.4) =
$31.25 over the buyers life cycle
The value of a 1 percent change in market share = (100,000
customers)($31.25/customer) = $3,125,000#2013 OM4 Cengage Learning.
All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations
Solution (continued):If customer retention rate is 80 percent,
the average customer defection rate is 0.2, and the average buyers
life cycle is 1/0.2 = 5 years. Then: VLC =(P)(RF)(CM)(BLC) =
($100)(0.25)(0.50)(1/0.2) = $62.50Thus, the value of a 1 percent
change in market share(100,000 customers)($62.50/customer/year) =
$6,250,000The economics are clear. If customer retention can be
increased from 60 to 80 percent through better value chain
performance, the economic payoff is doubled.#2013 OM4 Cengage
Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or
in part.Chapter 3 measuring performance in operationsProblemWhat is
the average value of a loyal customer (VLC) in a target market
segment if the average purchase price is $75 per visit, the
frequency of repurchase is six times per year, the contribution
margin is 10 percent, and the average customer defection rate is 25
percent?
VLC = P*CM*RF*BLC, where P = the revenue per unit, CM =
contribution margin to profit and overhead expressed as a fraction
(i.e., 0.45, 0.5, and so on), RF = repurchase frequency = 6
times/year, BLC = buyers life cycle, computed as 1/defection rate,
expressed as a fraction (1/0.25 = 4 years) VLC = P*CM*RF*BLC =
($75)(.10)(6)(4) = $180 #2013 OM4 Cengage Learning. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.Chapter 3
measuring performance in operations
Value of Loyal Customer Solution (continued):
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operationsDesigning Measurement Systems in OperationsKey
Questions:Does the measurement support our mission?Will the
measurement be used to manage change?Is it important to our
customers?Is it effective in measuring performance?Is it effective
in forecasting results?Is it easy to understand/simple?Is the data
easy/cost-efficient to collect?Does the measurement have validity,
integrity, and timeliness?Does the measurement have an owner?#2013
OM4 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website,
in whole or in part.Chapter 3 measuring performance in
operations29Designing Measurement Systems in OperationsGood
performance measures are actionable. Actionable measures provide
the basis for decisions at the level at which they are applied:the
value chainorganizationprocessDepartmentWorkstationJobservice
encounter#2013 OM4 Cengage Learning. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.Chapter 3 measuring
performance in operations30Models of Organizational PerformanceA)
Big picture models of organizational performance:
Baldrige Performance Excellence FrameworkBalanced Scorecard
B) More detailed frameworks for operations managers:
Value Chain ModelService-Profit Chain Model#2013 OM4 Cengage
Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or
in part.Chapter 3 measuring performance in operations31Baldrige
Performance Excellence FrameworkProvide a framework for performance
excellence through self-assessment to understand an organizations
strengths and weaknesses, thereby setting priorities for
improvement
Organizations in manufacturing, small business, service,
education, health care, and non-profit sectors may receive the
Malcolm Baldrige Award.
Recipients receive awards for outperforming competitors in 7
categories.
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations32
Exhibit 3.4 Baldrige Performance Model of Organizational
PerformanceSource: 2011-12 Baldrige Criteria for Performance
Excellence, U.S. Depart. of Commerce#2013 OM4 Cengage Learning. All
Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations33The Balanced
Scorecard ModelDeveloped by Analog Devices and popularized by
Robert Kaplan and David Norton in response to limitations of
traditional accounting measures.
Translates strategy into measures that uniquely communicate an
organizations vision.
Has 4 perspectives:Financialvalue to
shareholdersCustomercustomer satisfaction and market
growthInnovation and Learning future success (people, research,
intellectual property and infrastructure)Internalprocesses that
drive the business (quality, productivity, designs, flexibility,
environment)#2013 OM4 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.Chapter 3 measuring
performance in operations34Exhibit 3.5 The Balanced Scorecard
Performance Categories and Linkages
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations35The Value Chain ModelEvaluates 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, and supporting management
processes.#2013 OM4 Cengage Learning. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.Chapter 3 measuring
performance in operations36
Exhibit 3.6 Examples of Value Chain Performance
Measurements#2013 OM4 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.Chapter 3 measuring
performance in operations37Service-Profit Chain ModelMost
applicable to service environments.
Based on a set of cause and effect linkages between internal and
external performancedefines key performance measurements
service-based firms should focus.
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations38Exhibit 3.7 The Service-Profit Chain Model
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations39Service-Profit Chain ModelThe theory of the
Service-Profit Chain is that employees, through the service
delivery system, create customer value and drive profitability.
As J.W. Marriott, the founder of Marriott Hotels said long ago,
Happy employees create happy customers.#2013 OM4 Cengage Learning.
All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in
part.Chapter 3 measuring performance in operations40
Study GuideKey activities of an operations managerValue chain
integrationCustomer benefit package (CBP) Evolution of operations
managementCurrent challenges to OM?Issues at the core of operations
management
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations
Study GuideFixed cost and variable cost?Break-even analysis and
outsourcing decisionGoods, services and value Outsourcing and
offshoringMass production and customization?
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations
Study Guide12.Sustainability and business practices that support
it13.Supply chain and value chain14. Vertical integration, backward
integration and forward integration15.Economic and noneconomic
issues to consider when making offshore decisions16.Define process
and various types of processes
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operationsExhibit 3.1 The Scope of Business and Operations
Performance Measurement
#2013 OM4 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.Chapter 3 measuring performance in
operations44
