1. The Use of Metrics in Operations Management

2. Operations Management & Metrics So far in class we have learned about what operations management is, how it goes hand-in-hand with accounting/finance and marketing to make companies run successfully We’ve learned about the many methods to improve productivity, lower costs, improve quality --all of which increase customer satisfaction, profitability, and shareholder wealth Many of the methods of measuring operational performance entail recording and using numbers or metrics Whether its for reporting, forecasting, statistical process control, project management, TQM, or any other operations management tool, accurate metrics are needed and just as important, accurate interpretation of the metrics

3. Operations Management – Measuring Performance An article based on manufacturing plants, “Are Your Scrap Metrics Lying About What Happens on the Shop Floor?” is a perfect example of how accurate or inaccurate operations performance reporting can be based on how metrics are presented to the public In this case scrap metal metrics is measured against sales figures in three different scenarios The irony is in each scenario, scrap metal stays constant at $1M

4. Operations Management - Example Example 1: – Assume sales revenues are $10 million/month, cost of goods sold is $7 million and plant scrap for the month is $1 million. Against sales revenue the scrap result would be 10%, i.e. $1,000,000 ÷ $10,000,000 = 10%. Example 2: – A 3% price increase but scrap remained at the same $1 million. The scrap rate for this particular month is now reported as $1 million ÷ $10.3 million = 9.7% scrap. Example 3: – Now let’s see what happens when the following month has a discount of 10% off the regular sales price. Now sales revenues are reported as $9.0 million vs. the same $1 million of scrap for a scrap rate of 11.1%. While scrap actually remains the same the way the metrics are used makes it misleading SalesScrap Scrap Performance $10M$1M10% $10.3M$1M9.7% $9M$1M11.1%

5. Operations Management – Measuring Performance This demonstrates how the scrap rate can move around even though the plant’s performance each month is exactly the same Possible Solution: gross scrap ÷ cost of goods produced = scrap % rather than revenues Lesson: “The most important thing about every metric used in the plant is that is tells the truth about what’s really going on in the shop. Secondly, metrics need to be actionable and level specific. For example, the tracking of scrap, OEE and schedule performance may be a report the plant manager wants to see weekly. The first line supervisor, however, needs to know hour-to-hour how his/her area is doing relative to the promised outcomes so the level of detail in the metrics must be appropriate to the structure of the organization charts. Pareto charts should also accompany the results so the responsible person can immediately know where to put the focus for recovering and making the commitments for the week and month.”