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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

quantifying the performance criteria of: Measurement quantifying the performance criteria of: Organizational units Goods and services Processes People Other business activities

Why ? - Measurement Good measures: Provide scorecard of performance Help identify performance gaps Make accomplishments visible to: Workforce Stock market Other stakeholders

What is measured Financial Customer and market Quality Time Flexibility Innovation and learning Productivity and operational efficiency Sustainability

Most important in for-profit organizations Financial Measures Most important in for-profit organizations Traditional financial measures Revenue new goods and services existing goods and services Operating profit (EBIDTA) Net profit (E after I D A) Return on investment (ROI) Pretax profit margin Asset utilization Earnings per share and other liquidity measures

Customer and Market Measures Customer and market feedback is used by to: Evaluate the customer and stakeholder’s satisfaction Indicate the customer’s likely future buying behavior. Value of Loyal Customer (VLC)

Quality is defined by customer expectations Quality measures show how well the output 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

Every service encounter provides an opportunity for error Service Quality Dimensions Tangibles –premises, uniforms, vehicles etc Reliability –dependable & accurate service Responsiveness –problem solving Assurance – product knowledge & trust Empathy – ‘customer care’ Every service encounter provides an opportunity for error Service failures: Errors in service creation and delivery

Moments of Truth “Have a nice day” Something extra https://www.ted.com/talks/renny_gleeson_404_the_story_of_a_page_not_found?language=en

Relates to types of performance measures 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

Ability to adapt quickly and effectively to changing requirements 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

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

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

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

Triple bottom line (TBL or 3BL) 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

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

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

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

Calculating VLC VLC = P*CM*RF*BLC P = price CM = contribution (Price – VC) RF = repurchase frequency (how often / year) BLC = buyer life cycle (how long a customer?)

Repurchase = 12 times /year Customer satisfaction / retention = 90% HAIRCUTS Price = $15.00 per cut Costs Rent $330/week Power $50/week Licenses $20/week Repurchase = 12 times /year Customer satisfaction / retention = 90%

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

Models of Organizational Performance 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

3.4 Baldrige Model of Organizational Performance

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

3.5 The Balanced Scorecard Performance Categories and Linkages

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

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

3.7 The Service-Profit Chain Model