1. MEASURING PERFORMANCE IN OPERATIONS
CHAPTER 3
DAVID A. COLLIER AND JAMES R. EVANS

2. 3-1 Describe the types of measures used for decision making.
3-2 Explain the use of analytics in OM and how internal and external measures are related.
3-3 Explain how to design a good performance management system.
3-4 Describe four models of organizational performance.

3. Measurement is the act of quantifying the performance criteria (metrics) of organizational units, goods and services, processes, people, and other business activities.
Good measures provide a “scorecard” of performance, help identify performance gaps, and make accomplishments visible to the workforce, the stock market, and other stakeholders.

4. Types of Performance Measures
Important categories of organizational performance measures:
Financial
Customer and Market
Quality
Time
Flexibility
Innovation and Learning
Sustainability

5. Exhibit 3.1 The Scope of Business and Operations Performance Measurement

6. Financial Measures
Often take top priority in for-profit organizations.
Traditional financial measures include revenue, return on investment, operating profit, pretax profit margin, asset utilization, growth, revenue from new goods and services, earnings per share, and other liquidity measures.

7. Customer and Market Measures
Customer measures: Customer satisfaction, customer retention, gains and losses of customers and customer accounts, customer complaints, warranty claims, measures of perceived value, loyalty, positive referral, and customer relationship building.
A customer-satisfaction measurement system provides a company with customer ratings of specific goods and service features, and indicates the relationship between those ratings and the customer’s likely future buying behavior.
Market measures: Market share, business growth, new product and geographic markets entered, percentage of new product sales.

8. Quality
Quality measures the degree to which the output of a process meets customer requirements.
Goods quality relates to the physical performance and characteristics of a good.
Service quality is consistently meeting or exceeding customer expectations (external focus) and service delivery system performance (internal focus) for all service encounters.

9. Service Quality Dimensions
Tangibles—physical facilities, uniforms, equipment, vehicles, and appearance of employees (i.e., the physical evidence).
Reliability—ability to perform the promised service dependably and accurately.
Responsiveness—willingness to help customers and provide prompt recovery to service upsets.
Assurance—knowledge and courtesy of the service-providers, and their ability to inspire trust and confidence in customers.
Empathy—caring attitude and individualized attention provided to its customers.

10. Service Quality
Every service encounter provides an opportunity for error.
Errors in service creation and delivery are sometimes called service upsets or service failures.

11. Time Time relates to two types of performance measures:
the speed of doing something
the variability of the process
Processing time is the time it takes to perform some task.
Queue time is a fancy word for wait time—the time spent waiting.

12. Flexibility
Flexibility is the ability to adapt quickly and effectively to changing requirements.
Goods and service design flexibility is the ability to develop a wide range of customized goods and services to meet different or changing customer needs.
Measures include the rate of new product development or percent of product mix developed over the past three years.
Volume flexibility is the ability to respond quickly to changes in the volume and type of demand.
Measures include the time to change machine setups or time required to “ramp up” to an increased production volume.

13. Innovation and Learning
Innovation refers to the ability to create new and unique goods and services that delight customers and create competitive advantage.
Learning refers to creating, acquiring, and transferring knowledge, and modifying the behavior of employees in response to internal and external change.
Measures of innovation and learning include intellectual asset growth, patent applications, best practices implemented, new product development, employee training and skills development, satisfaction, work system performance and effectiveness.

14. Sustainability
The Triple bottom line (TBL or 3BL) refers to the measurement of environmental, social, and economic sustainability.
Environmental sustainability measures include energy consumption, recycling, air emissions, solid and hazardous waste rates.
Social sustainability measures include consumer and workplace safety, community relations, corporate ethics and governance, and ethical violations.
Economic sustainability measures include financial audit results, regulatory compliance, sanctions and fines, and accomplishment of strategic initiatives.

15. Quantity of Output Productivity = Quantity of Input Productivity
Productivity is the ratio of output of a process to the input
Quantity of Output
Productivity =
[3.1]
Quantity of Input
Productivity measures include units produced/labor hour, airline revenue per passenger mile, meals served/labor dollar.

16. Linking Internal and External Performance Measures
Managers must understand the cause and effect linkages between key measures of performance. These relationships often explain the impact of operational performance on external results.
The quantitative modeling of cause and effect relationships between external and internal performance criteria is called interlinking.

17. Exhibit 3.2 Interlinking Internal and External Performance Measures

18. Linking Internal and External Performance Measures
The value of a loyal customer (VLC) quantifies the total revenue or profit each target market customer generates over the buyer’s life cycle.
By multiplying the VLC times the absolute number of customers gained or lost, the total market value can be found.

19. Designing Measurement Systems in Operations
Key Questions:
Does the measurement support our mission?
Will the measurement be used to manage change?
Is it important to our customers?
Is it effective in measuring performance?
Is it effective in forecasting results?
Is it easy to understand/simple?
Is the data easy/cost-efficient to collect?
Does the measurement have validity, integrity, and timeliness?
Does the measurement have an owner?

20. 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—the value chain, organization, process, department, workstation, job, and service encounter.

21. Models of Organizational Performance
“Big picture” models of organizational performance:
Baldrige Performance Excellence Framework
Balanced Scorecard
More detailed frameworks for operations managers:
Value Chain Model
Service-Profit Chain Model

22. Baldrige Performance Excellence Framework
Primary purpose of the program is to provide a framework for performance excellence through self-assessment to understand an organization’s strengths and weaknesses, thereby setting priorities for improvement.
Organizations in manufacturing, small business, service, education, health care and non-profit sectors may receive the Malcolm Baldrige Award.

23. Exhibit 3.4 Baldrige Performance Model of Organizational Performance
Source: Baldrige Criteria for Performance Excellence, U.S. Depart. of Commerce

24. The Balanced Scorecard Model
Purpose is to translate strategy into measures that uniquely communicate an organization’s vision.
Four perspectives:
Financial—value to shareholders
Customer—customer satisfaction and market growth
Innovation and Learning—people and infrastructure
Internal—processes that drive the business

25. Exhibit 3.5 The Balanced Scorecard Performance Categories and Linkages
Source: Kaplan R. S., and Norton, D. P., “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, p. 72.

26. 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, and supporting management processes.

27. Exhibit 3.6 Examples of Value Chain Performance Measurements

28. Service-Profit Chain Model
Most applicable to service environments.
Based on a set of cause and effect linkages between internal and external performance, and defines the key performance measurements on which service-based firms should focus.

29. Service-Profit Chain Model
The theory of the Service-Profit Chain is that employees, through the service delivery system, create customer value and drive profitability.
As J.W. Marriott, the founder of Marriott Hotels said long ago, “Happy employees create happy customers.”

30. Exhibit 3.7 The Service-Profit Chain Model
Source: Adapted from J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., Jr., and L. A. Schlesinger, “Putting the Service-Profit Chain to Work,” Harvard Business Review, March–April 1994, pp

31. IBM Rochester – Service Profit Chain Example
IBM’s AS/400 Division in Rochester, Minnesota, used the Service-Profit-Chain concept to help understand relationships that existed among measurements such as market share, overall customer satisfaction, employee morale, job satisfaction, warranty costs, inventory costs, product scrap, and productivity in order to determine which factors had the greatest impact on business performance and improve management decisions. The analysis helped managers to understand not only how to manage the workforce more effectively, but also how decisions at the operations level can affect long-term business success. Such decisions cannot be made without considering the ripple-effects throughout the company. For example, if an action is taken that impacts employee satisfaction, such as a layoff, managers must consider counteractions to prevent a decline in productivity, customer satisfaction, and market share. 31