1 © The Delos Partnership 2003 Performance Measurement Changing Behaviours by changing measures

2 © The Delos Partnership 2003 Performance Measures Introduction

3 © The Delos Partnership 2003 Behaviour Issue If you measure me irrationally I will behave irrationally If you change the way you measure me, I will change the way I behave If you change the way you measure me, and don’t explain what that means, no-one will know how I will behave - not even me !

4 © The Delos Partnership 2003 Traditional Measures Inventory level Volume Machine utilisation Labour productivity Actual vs. Budget Overhead recovery Purchase price variance Overtime vs. Budget

5 © The Delos Partnership 2003 Problem With Traditional Measures Accountancy based Backward looking Focus on Efficiency Encourage Functional behaviour Inventory treated as an asset Purchase Price Variance hurts manufacturing Measures people causing fear and blame and disintegrated behaviour

6 © The Delos Partnership 2003 Performance Measurement is about understanding processes and thereby improving them by examination and analysis Performance Measurement is about understanding processes and thereby improving them by examination and analysis Measurement is ……

7 © The Delos Partnership 2003 ProcessProcess Performance Measurement MeasureMeasure ResultResult

8 © The Delos Partnership 2003 Delos Business Model DemandDemandSupplySupply VisionVision PrioritisationPrioritisation SupportSupport InnovationInnovation StrategyStrategy

9 © The Delos Partnership 2003 Changing Behaviours CULTURE/ BEHAVIOUR TECHNOLOGY WAYS OF WORKING Use theseTo Measure these To Change this

10 © The Delos Partnership 2003 Performance measurement Principles

11 © The Delos Partnership 2003 Measurement - Basics VISION AND STRATEGY OBJECTIVES TARGETS MILESTONES

12 © The Delos Partnership 2003 Benchmarking Benchmarking is a process to evaluate company’s performance against –Sites within same company –Companies within the same industry –Companies within different industries –Companies in different businesses Collect the best practices of the best to make you the best

13 © The Delos Partnership 2003 World Class Performance – Engineering industry MeasureAverageTop 10 %YOU ? Delivery Reliability % New Products in last 5 years %of revenue 463 Scrap Rates - % Total Stock-turns (per annum) (1) 1330 Training Days per Employee 720 (1)Sales Value/Total Stock : assuming average Variable Cost Ratio = 60 % then Figures would be 8 18 Source : Cranfield University

14 © The Delos Partnership 2003 Establishing New Measures Define simple vision – meaningful Establish perspectives that need to be measured and hence objectives Establish Targets for each measure Benchmark against best of the best to establish targets Agree milestones to provide progress charts

15 © The Delos Partnership 2003 Performance Measures Link to company objective – improving profitability

16 © The Delos Partnership 2003 Business Excellence and Performance  Do Business Excellence Performance measures help the company?  What is the link to the benefit of the company?  What’s the cash value of non-financial performance measures?

17 © The Delos Partnership 2003 Assume that Profitability is the Goal ROCE Profit Capital Sales Costs Material Labour Overhead Fixed Current Stocks Creditors Debtors The Core Measures and Financial Effect

18 © The Delos Partnership 2003 Demand Accuracy ROCE Profit Capital Sales Costs Material Labour Overhead Fixed Current Stocks Creditors Debtors Demand Accuracy

19 © The Delos Partnership 2003 Perfect Customer Orders ROCE Profit Capital Sales Costs Material Labour Overhead Fixed Current Stocks Creditors Debtors Perfect Customer Orders

20 © The Delos Partnership 2003 Link Measures to the Goal ROCE Profit Capital Sales Costs Material Labour Overhead Fixed Current Stocks Creditors Debtors Business Excellence Performance Measures are the Foundation; Profitability is a result

21 © The Delos Partnership 2003 The Core Measures and Financial Effect Relationships to RoCE components –All influence cash flow

22 © The Delos Partnership 2003 Performance Measures Detailed Measures

23 © The Delos Partnership 2003 Define the Measures Each measure needs –Definition –Purpose –Horizon –Source of Information –Reports –Accountability For Measure For Reporting –Objectives/Targets/Milestones –What to do with the measure

24 © The Delos Partnership 2003 Forecast Accuracy  Definition  Purpose  Horizon  Source of Information  Percent of items within a tolerance  Assess the degree of flexibility required by the supply side and to improve the process  Cumulative lead time (= purchasing plus manufacturing LT)  Forecasting module  Sales module

25 © The Delos Partnership 2003 Forecast Accuracy Above Target

26 © The Delos Partnership 2003 Performance Targets Objective Target Milestone What would your target be ?

27 © The Delos Partnership 2003 Customer Service –The Perfect Order Define a standard for each –Quality:as agreed or otherwise defined –Time:on the agreed day (and specific time) –Quantity:the exact quantity within agreed tolerances –Place:to specified location –Form:in agreed physical form including packaging –Paperwork: with all agreed paperwork required by customer Manufacturing records Batch record Dispatch and delivery notes Sales invoice with correct pricing and terms

28 © The Delos Partnership 2003 Customer Service  Definition  Purpose  Horizon  Source of Information  Each element of the Perfect Order  Flexibility required to meet customer needs  MTS - none  MTO - product lead time  Sales order entry

29 © The Delos Partnership 2003 Root Cause Analysis Imperfect Orders Imperfect Orders People Processes Unrealistic Promises Lack of Training Systems Data Order Entry Pricing No Customer Required Date Availability Inaccurate Order Due Dates Wrong Product Codes Delivery Lack of Training Functionality

30 © The Delos Partnership 2003 Performance Targets Objective Target Milestone What would your target be ?

31 © The Delos Partnership 2003 Schedule Achievement Schedule = Agreed sequence of activity Across business/value chain Others are dependent on schedule completion Measurement = # Activities completed on time x 100% # Activities scheduled for period Not just production Schedules Purchasing Product Launch Maintenance Cash Collection

32 © The Delos Partnership 2003 Schedule Achievement - Production  Definition  Purpose  Horizon  Source of Information  Number of works orders completed to required date into stock or next operation  Improve manufacturing process  Product Lead Time  Shop Floor control module

33 © The Delos Partnership 2003 Performance Targets  Objective  Target  Milestone What would your target be ?

34 © The Delos Partnership 2003 Supplier Performance  Definition  Purpose  Horizon  Source of Information  Number of deliveries received into stock on or before due date/time  Improve supplier delivery process  Purchasing Lead Time or Time Fence  Vendor Schedule or Purchase Order`

35 © The Delos Partnership 2003 Performance Targets  Objective  Target  Milestone What would your target be ?

36 © The Delos Partnership 2003 Right First Time Measurement = Defects per sample/batch x100% Sample/Batch Size Quality applies to more than just Products Process execution & information quality Purchase Orders Sales Order Capture Warehouse Picking Accounts payable schedules

37 © The Delos Partnership 2003 Right First Time - Production Quality  Definition  Purpose  Horizon  Source of Information  Number of works orders completed to required specification first time  Improve manufacturing process and material acquisition process  Product Lead Time  Quality checks via in line SPC process

38 © The Delos Partnership 2003 Performance Targets  Objective  Target  Milestone What would your target be ?

39 © The Delos Partnership 2003 New Product Development Performance  Definition  Purpose  Horizon  Source of information  Number of new products developed on time  Improve NPD process  New product development time  Activity schedule in planning system or project plans

40 © The Delos Partnership 2003 Performance Targets  Objective  Target  Milestone What would your target be ?

41 © The Delos Partnership 2003 Additional Measures BOM Accuracy Inventory Accuracy Routing Accuracy Work Centre Accuracy Planning Data Accuracy Without Data accuracy there is no reliable information Without Data accuracy there is no reliable information

42 © The Delos Partnership 2003 Performance Measures Link to Appraisal

43 © The Delos Partnership 2003 Intent of New Performance Measures Designed to: –Create value from strategy –Motivate, energise and align efforts –Enable Focused on: –The future - “How can we improve?” –Behaviours, actions, decisions –Customers, Stakeholders & Shareholders –Opportunities –Causes or drivers of success Feels: –Active –Supportive –Positive –Warm

44 © The Delos Partnership 2003 Appraisal Process Continual through the S & OP process Should involve 180˚ appraisal and appraisal of peers through honest feedback Requires enhanced people and team skills Give and receive constructive review Requires removal of blame culture Reduced need for the cult of the hero

45 © The Delos Partnership 2003 Link the Appraisal Process to the Strategy Strategy Grow Business Grow Business Increase Market Share Increase Market ShareMeasuresStrategy Grow Business Grow Business Increase Market Share Increase Market ShareMeasures Sales/Mktg Manager …. …. ….. ….. …... …... Sales/Mktg Manager …. …. ….. ….. …... …... Supply Chain Manager …. …. ….. ….. …... …... Supply Chain Manager …. …. ….. ….. …... …... R & D Manager …. …. ….. ….. …`... …`... R & D Manager …. …. ….. ….. …`... …`... New Product Director …. …. ….. ….. …... …... New Product Director …. …. ….. ….. …... …... Customer Director …. …. ….. ….. …... …... Customer Director …. …. ….. ….. …... …... Supply Director …. …. ….. ….. …... …... Supply Director …. …. ….. ….. …... …... Finance, IT Director …. …. ….. ….. …... …... Finance, IT Director …. …. ….. ….. …... …... Finance Manager …. …. ….. ….. …`... …`... Finance Manager …. …. ….. ….. …`... …`...

46 © The Delos Partnership 2003 Goal Deployment Employees Owner Supply Chain Owner Innovation Owner Community Owner Customer Owner Shareholder Owner TARGETSSenior Management Business Support Supply Management Demand Management New Activity Management PERSPECTIVE Process Owners GOALSGOALS Objectives PROCESS

47 © The Delos Partnership 2003 Performance Measurement Measures Processes to bring about improvement Processes improve profitability Detailed Measures should be owned by by Directors or Process owners Measures should be incorporated into appraisal process