Manufacturing Metrics Balanced Scorecard MESA Empirical Study

Metrics Matter You can’t improve what you can’t measure. You can’t measure what you can’t see. - Dr. W. Edwards Deming

4/13/2017 Metric A metric is a verifiable measure stated in either quantitative or qualitative terms. “97 percent inventory accuracy” “According to our customer evaluations, we are providing above-average service”

Metric A metric is a verifiable measure that 4/13/2017 Metric A metric is a verifiable measure that captures performance in terms of how something is being done relative to a standard, allows and encourages comparison, supports business strategy.

Customer quality measures 4/13/2017 Customer quality measures Customers typically relate quality to: Feature based measures; “have” or “have not” - determined by design Performance measures - “range of values” - conformance to design or ideal value

True vs. Substitute performance measures 4/13/2017 True vs. Substitute performance measures Customers - use “true” performance measures. example: a true measure of a car door may be “easy to close”. true performance measures typically vary by each individual customer. Unfortunately, producers cannot measure performance as each individual customer does. Producers - use “substitute” performance measures these measures are quantifiable (measurable units). Substitute measure for a car door: door closing effort (foot-pounds). Other example: light bulb true performance measure -- brightens the room substitute performance measure – wattage or lumens

4/13/2017 Educating Consumers Sometimes, producers educate consumers on their substitute performance measures. What are substitute performance measures for the following customer desires: Good Gas Mileage Powerful Computer What is the effect of educating consumers on performance measures?

4/13/2017 What 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 metrics scrap and rework process capability (Cp or Cpk) first time through quality (FTTQ)

Identifying effective metrics 4/13/2017 Identifying effective metrics Effective 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?

Use of quality metrics Quality metric data may be used to: 4/13/2017 Use of quality metrics Quality 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.

4/13/2017 Acceptable ranges In 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.

4/13/2017 Break points Break points are levels where improved performance will likely change customer behavior. Example: waiting in line Suppose the average customer will only wait for 5 minutes Wait longer than 5 minutes -- customer is dissatisfied. 1-5 minutes -- customer is satisfied. less than 1 minute -- customer is extremely satisfied Should a company try to reduce average wait time from 4 to 2 minutes.?

Targets, tolerances and specifications 4/13/2017 Targets, tolerances and specifications Target (nominal) - desired value of a characteristic. A tolerance specifies an allowable deviation from a target value where a characteristic is still acceptable. Lower specification limit (LSL) Upper specification limit (USL) TARGET -1 +1

Balanced ScoreCard A 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.

BayMed (fictitious) Balanced ScoreCard Financial Market/Customers Operational Excellence People & Culture Source: Michael Selby: ScoreCard Partners

BayMed Balanced ScoreCard Financial Market/Customers 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. Operational Excellence People & Culture

BayMed Balanced ScoreCard Financial Market/Customers 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 People & Culture

BayMed Balanced ScoreCard Financial Market/Customers Operational Excellence “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. People & Culture

In Engineering, it’s 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 customer’s issue on their first call resolve the customer’s issue on their first call. We also measure answering speed, abandonment rate and average talk times

BayMed Balanced ScoreCard Financial Market/Customers Operational Excellence People & Culture “People & Culture” looks at the workforce, reporting workforce growth, internal mobility and competency development, strategically vital employees, hiring quality, and employee engagement.

BayMed Balanced ScoreCard Financial Market/Customers Operational Excellence People & Culture

Metrics that Matter: Empirical Study Study Background Metrics Matter to Performance Fast, Effective Metrics Manufacturing Enterprise Solutions Use Metrics Framework Success

Industry Council MESA Guided Project Scott Daugherty, Plant Manager, Cormetech Inc. John Plassenthal, Project Manager, Strategic Integration, Enterprise Applications IT, International Truck and Engine John Moore, Quality Program Manager, KLA Tencor Neil Crew, Group IT Director, Princes Limited Brian Leinbach, MES Deployment Team Lead, Wyeth Pharmaceuticals

Response Demographics On-line: 135 different manufacturers Representing 20 industries Range of Products Counts & Mix in plants Nearly evenly divided by size: over $2B, $500M-$2B, under $500M Telephone: 16 “Industry Leaders”

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

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

Metrics Justify Improvement Industry struggles with the financial hurdles Disconnect between operations, IT and finance Bridging gap justifies projects

Common Business & Financial Metrics Net 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 Metrics Revenue per employee Revenue per square foot Cash-to-cash cycle time Study 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 total EBITDA: Earnings before interest, taxes, depreciation, and amortization Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

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

Business Movers Improved Operations Areas Also It’s 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. Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

Some Operations KPIs Are Common Across Segments the other 8 metrics included in the survey are: Scrap/rework as % of sales OEE CpK – process capability Warranty costs Toxic waste reductions Percentage planned vs. emergency maintenance work Energy consumption per unit of production Upside production flexibility – on the primary constraint Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

Business Movers: More Effective Links Between Business & Ops Metrics Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

24 Hours or Faster Feedback to Operators So They Can Take Action Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

Latency between Business Metrics and Operations that Cause Them Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

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

Gaining Benefits from Manufacturing Software Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

Those with MES & Dashboards Perform Better Teal bars are those who use MES (darker) and dashboards (lighter) while gold are those who do not. Source: MESA Metrics that Matter: Uncovering KPIs that Justify Operational Improvements

MESA Metrics Framework Source: Metrics that Matter Guidebook & Framework

Graphical Representation of Metrics Framework Corporate Strategy: Increase Brand Margin & Value Net margin per brand Financial Metrics # of Profitable Brand Extensions Reduce Stock-outs Lower Production Costs Operational Metrics Plant Metrics Changeover Speed NPI Ramp-up Time Upside Production Flexibility Planned vs. Emergency Maintenance First Pass Yield Energy Consumption Per Unit OEE Source: Metrics that Matter Guidebook & Framework

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