1. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 Performance Measurement and Information Management

2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Importance of Management by Fact If you don’t measure results, you can’t tell success from failure If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure If you can’t recognize failure, you can’t correct it 2

3. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Key Idea A supply of consistent, accurate, and timely data across all functional areas of business provides real-time information for the evaluation, control, and improvement of processes, products, and services to meet both business objectives and rapidly changing customer needs.

4. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Definitions Data are simply representations of facts that come from some type of measurement process. Measurement is the act of quantifying the performance dimensions of products, services, processes, and other business activities. Measures and indicators refer to the numerical results obtained from measurement. Information is derived from the analysis of data and measurements and expressed in the context of a business or organization. 4

5. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Measurement and Information Management Practices for Performance Excellence (1 of 3) Select, collect, align, and integrate data and information for tracking daily operations and for tracking overall organizational performance, including progress relative to strategic objectives and action plans, and using data and information to support organizational decision making and innovation. Select and ensure the effective use of comparative data and information. Review organizational performance and capabilities using effective methods of analysis to assess organizational success, competitive performance, and progress relative to strategic objectives and action plans, and using these reviews to assess the organization’s ability to respond rapidly to changing organizational needs and challenges. 5

6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Measurement and Information Management Practices for Performance Excellence (2 of 3) Translate organizational review findings into priorities for continuous and breakthrough improvement and into opportunities for innovation, and deploy them to work group and functional-level operations to support for decision making Make needed data and information available and accessible to the workforce, suppliers, partners, collaborators, and customers as needed. Ensure that hardware and software are reliable, secure, and user- friendly, and that information systems support the continued availability of data and information in the event of an emergency. 6

7. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Measurement and Information Management Practices for Performance Excellence (3 of 3) Ensure that organizational data, information, and knowledge are accurate, reliable, timely, secure, and confidential. Manage organizational knowledge to accomplish the collection and transfer of workforce knowledge; knowledge from and to customers and other stakeholders; rapid identification, sharing, and implementation of best practices; and the assembly and transfer of relevant knowledge for use in strategic planning. Keep performance measurement systems, hardware, and software current with business needs and directions, and changes in the organizational or external environment. 7

8. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reasons for Good Measures To lead the entire organization in a particular direction; that is, to drive strategies and organizational change. To manage the resources needed to travel in this direction by evaluating the effectiveness of action plans. To operate the processes that make the organization work and continuously improve. 8

9. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Key Idea Measurement-managed companies are more likely to be in the top third of their industry financially, complete organizational changes more successfully, reach clear agreement on strategy among senior managers, enjoy favorable levels of cooperation and teamwork among management, undertake greater self- monitoring of performance by employees, and have a greater willingness by employees to take risks.

10. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three Levels of Measurement Individual: real-time information for feedback and process control Process: understand whether processes are accomplishing their objectives, whether they are using resources effectively, and where improvement might be necessary. Organization: basis for strategic planning and design of products, services, and processes. 10

11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Key Idea To make decisions that further the overall organizational goals of meeting, or exceeding, customer expectations and making productive use of limited resources, companies need good data and information about customers and markets, human resource effectiveness, supplier performance, product and service quality, and other key factors, in addition to traditional financial performance and accounting measures.

12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balanced Scorecard Financial perspective profitability, revenue growth, return on investment, economic value added (EVA), and shareholder value Internal perspective quality levels, productivity, cycle time, and cost. Customer perspective service levels, satisfaction ratings, and repeat business Innovation and learning perspective intellectual assets, employee satisfaction, market innovation, and skills development 12

13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Key Idea A good balanced scorecard contains both leading and lagging measures and indicators. Lagging measures (outcomes) tell what has happened; leading measures (performance drivers) predict what will happen.

14. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cause-and-Effect Relationships: IBM Rochester 14

15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Baldrige Classification of Performance Measures Product outcomes Customer outcomes Financial and market outcomes Workforce outcomes Process effectiveness outcomes Leadership outcomes 15

16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Outcomes Internal quality measurements Field performance of products Defect levels Response times Data collected from customers or third parties on ease of use or other attributes Customer surveys on product and service performance 16

17. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Outcomes Customer satisfaction and dissatisfaction Customer retention Gains and losses of customers and customer accounts Customer complaints and warranty claims. Perceived value, loyalty, positive referral, and customer relationship building 17

18. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial and Market Outcomes Revenue Return on equity Return on investment Operating profit Pretax profit margin Asset utilization Earnings per share 18

19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Workforce Outcomes Employee satisfaction Training and development Work system performance and effectiveness Safety Absenteeism Turnover 19

20. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Process Effectiveness Outcomes Cycle times Production flexibility Lead times and setup times Time to market Product/process yields Delivery performance Cost efficiency Productivity 20

21. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Leadership Outcomes Organizational accountability Stakeholder trust Ethical behavior Regulatory/legal/environmental compliance Financial and ethics review results Community service Management stock purchase activity 21

22. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Purposes of Performance Measurement Systems Providing direction and support for continuous improvement Identifying trends and progress Facilitating understanding of cause-and-effect relationships Allowing performance comparison to benchmarks Providing a perspective of the past, present, and future 22

23. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Fundamental Management Mistakes Not measuring key characteristics critical to organizational performance or customer behavior, Taking irrelevant or inappropriate measurements 23

24. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Key Idea In designing a performance measurement system, organizations must consider how the measures will support senior executive performance review and organizational planning to address the overall health of the organization, and how the measures will support daily operations and decision making.

25. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practical Guidelines for Measurement Fewer is better. Link to the key business drivers. Include a mix of past, present, and future Address the needs of all stakeholders. Start at the top and flow down to all levels of employees Combine multiple indexes into a single index Change as the environment and strategy changes Have research-based targets or goals 25

26. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Linkages to Strategy Key business drivers (key success factors) Strategies and action plans Measures and indicators

27. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Process-Level Measurements Good process measures should be “SMART” Simple Measurable Actionable Related (to customer requirements and to each other) Timely 27

28. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Key Idea Good measures and indicators are actionable; that is, they provide the basis for decisions at the level at which they are applied.

29. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Six Sigma Measurements A unit of work is the output of a process or an individual process step. A measure of output quality is defects per unit (DPU) = Number of defects discovered/Number of units produced Defects per million opportunities (dpmo) = (Number of defects discovered)/opportunities for error × 1,000,000 29

30. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example An airline wishes to measure the effectiveness of its baggage handling system. A DPU measure might be lost bags per customer. However, customers may have different numbers of bags; thus the number of opportunities for error is the average number of bags per customer. If the average number of bags per customer is 1.6, and the airline recorded 3 lost bags for 8000 passengers in one month, then dpmo = 3/[(8,000)(1.6)] × 1,000,000 = 234.375 30

31. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Types of Process Measures Defect classification Critical Major Minor Weighted index E.g., FedEx service quality indicator Rolled throughput yield (RTY) the probability that a unit can pass through a series of process steps without defects; equivalently, the percentage yield of good parts from a series of process steps. 31

32. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Identifying and Selecting Process Measures Identify all customers and their requirements and expectations Define work processes Define value-adding activities and process outputs Develop measures for each key process Evaluate measures for their usefulness 32

33. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aligning Strategic and Process Level Measurements 33

34. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analyzing and Using Data Analysis – an examination of facts and data to provide a basis for effective decisions. Examples Examining trends and changes in measures and indicators using charts and graphs Calculating a variety of statistical measures such as means, proportions, and standard deviations Applying sophisticated statistical tools such as correlation and regression analysis to help understand relationships among different measures Comparing results relative to other business units, competitors, or best-in-class benchmarks 34

35. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example: North Mississippi Medical Center 35

36. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Interlinking Quantitative modeling of cause-and-effect relationships between external and internal performance measures How product and service quality improvement correlates with key customer indicators such as customer satisfaction, customer retention, and market share Financial benefits derived from improvements in employee safety, absenteeism, and turnover Benefits and costs associated with education and training Relationships between product and service quality, operational performance indicators, and overall financial performance Profit impacts of customer satisfaction and retention Market share changes as a result of changes in customer satisfaction Impacts of employee satisfaction on customer satisfaction 36

37. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Key Idea Organizations need comparative data, such as industry averages, best competitor performance, and world-class benchmarks to gain an accurate assessment of performance and know where they stand relative to competitors and best practices.

38. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example: Mercy Hospital, Janesville 38

39. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Performance Review Data provide the foundation for management review to assess organizational success and performance relative to competitors understand how well progress on strategic objectives and action plans is being achieved identify priorities for improvement and opportunities for innovation for products, services, and processes 39

40. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Cost of Quality (COQ) COQ – the cost of avoiding poor quality, or costs incurred as a result of poor quality Provides a basis for identifying improvement opportunities and success of improvement programs 40

41. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 Key Idea COQ approaches have numerous objectives, but perhaps the most important one is to translate quality problems into the “language” of upper management—the language of money.

42. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quality Cost Classification Prevention Investments made to keep nonconforming products from occurring and reaching the customer Appraisal Associated with efforts to ensure conformance to requirements, generally through measurement and analysis of data to detect nonconformances Internal failure Costs of unsatisfactory quality found before the delivery of a product to the customer External failure Costs incurred after poor-quality products reach the customer 42

43. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Key Idea Quality costs in different categories are rarely distributed evenly. Organizations should first attempt to reduce external failure costs to zero by investing in appraisal activities to discover the sources of internal failures and take corrective action. As quality improves, failure costs will decrease, and the amount of appraisal can be reduced with the shift of emphasis to prevention activities.

44. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Key Idea In manufacturing, quality costs are primarily product-oriented; for services, however, they are generally labor-dependent, with labor often accounting for up to 75 percent of total costs.

45. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Return on Quality (ROQ) ROQ – measure of revenue gains against costs associated with quality efforts Principles Quality is an investment Quality efforts must be made financially accountable It is possible to spend too much on quality Not all quality expenditures are equally valid 45

46. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Information Resources Organizations must ensure that both data and information and the hardware and software systems that process them are Reliable Accurate User-friendly Secure Available to all who need them in a timely fashion 46

47. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 Key Idea Reliability of a measurement refers to how well the measuring instrument— manual instruments, automated equipment, or surveys and questionnaires—consistently measures the “true value” of the characteristic.

48. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Knowledge Management The process of identifying, capturing, organizing, and using knowledge assets to create and sustain competitive advantage Explicit knowledge includes information stored in documents or other forms of media. Tacit knowledge is information that is formed around intangible factors resulting from an individual’s experience, and is personal and content-specific. 48

49. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Key Idea Knowledge assets refer to the accumulated intellectual resources that an organization possesses, including information, ideas, learning, understanding, memory, insights, cognitive and technical skills, and capabilities.

50. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Knowledge Management Systems Characteristics A way of capturing and organizing explicit as well as tacit knowledge of how the business operates A systems-approach to management that facilitates assimilation of new knowledge into the business system and is oriented toward continuous improvement/innovation A common framework for managing knowledge and some way of validating and synthesizing new knowledge as it is acquired A culture and values that support collaborative sharing of knowledge across functions and encourages full participation of all employees in the process 50

51. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Knowledge Transfer The transfer of knowledge within organizations and the identification and sharing of best practices often set high- performing organizations apart from the rest. Internal benchmarking - the ability to identify and transfer best practices within the organization Rapid knowledge transfer involves the discovery, learning, creation, and reuse of knowledge that eventually becomes intellectual capital—knowledge that can be converted into value and profits. 51

52. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Key Idea Internal benchmarking requires a process: first, identifying and collecting internal knowledge and best practices; second, sharing and understanding those practices; and third, adapting and applying them to new situations and bringing them up to best-practice performance levels.

53. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Rapid Knowledge Transfer Framework 53

54. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Measurement and Information Management in the Baldrige Criteria The Measurement, Analysis, and Knowledge Management Category examines how an organization selects, gathers, analyzes, manages, and improves its data, information, and knowledge assets, and how it manages information technology and uses organizational reviews to improve performance. 4.1 Measurement, Analysis, and Improvement of Organizational Performance a. Performance Measurement b. Performance Analysis and Review c. Performance Improvement 4.2 Management of Information, Knowledge, and Information Technology a. Data, Information, and Knowledge Management b. Management of Information Resources and Technology 54

55. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Measurement and Information Management in ISO 9000 The document and data control requirements require organizations to define a process for ensuring that any critical information that is required for the performance of a business process is accurate, up-to- date, and effective for its intended purpose. The measurement, analysis, and improvement requirements include: Establishing, planning, and implementing measurement, monitoring, and improvement activities Monitoring information about customer satisfaction as a performance metric Establishing measurement and monitoring methods to assure that product and process requirements are attained Acquiring and analyzing data to determine improvement effectiveness Promoting continuous improvement using auditing reports, data analysis, and management reviews 55

56. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Measurement and Information Management in Six Sigma Six Sigma emphasizes fact-based decisions and provides organizations with tools to generate measurable results from Six Sigma projects. Six Sigma methodology requires measuring and reporting performance goals, and using performance indicators to control and sustain improvements. Project selection is based on understanding the financial as well as the nonfinancial benefits to the organization, such as cost savings, increased sales, reduced cycle times, or improved customer satisfaction. 56