Importance of Performance Measurement: Osborne and Gaebler: 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.
Balanced Scorecard: A tool for business performance measurement, Kaplan and Norton’s model – four perspectives: Financial / Internal / Customer Innovation / Learning.
1. FINANCIAL METRICS: COSTS: cash flow; direct and indirect labor costs; direct and indirect material costs; facility and operational costs; production systems; information systems; inventory-carrying costs; total cost of ownership… REVENUE: sales; earnings before taxes and interest; return on assets; return on investment; warranty costs; product profitability…
2.a CUSTOMER METRICS Customer satisfaction and dissatisfaction;, Customer retention;, Gains and losses of customers;, Customer awards;, Customer ratings;, Suggestions rates;, Customer complaints;, Warranty claims, etc. // 2.b HR METRICS Employee well-being: safety, absenteeism, grievances;, Employee satisfaction: turnover;, Employee motivation;, Employee training and development: extent of training, training effectiveness;, Work system performance, and effectiveness: measures of improvement in job effectiveness, employee productivity, suggestion rates.
BEHAVIORAL METRICS Category – COMMITMENT: adherence to policies and procedures; participation levels in improvement activities; availability and dedication of HR department; efforts to train employees as needed;
Category – COMMUNICATION: customer/ employee surveys regarding quantity and quality of company communications efforts; elimination of service or production errors caused by ineffective communications; error-reporting accuracy and timelines; formal recognition of employees’ communication efforts;
Category – COOPERATION: shared financial risks and rewards; effective efforts toward reporting and resolving problems; joint recognition activities; formal recognition of employees’ cooperation efforts;
3. OPERATIONS METRICS: Productivity, Cycle time, Distribution channels, Product quality levels, Operations costs CORE PROCESS METRICS: Results-focused; Productivity-focused. General core process metrics: New product launches; New product extensions; Product failures; Design-cycle time; Time to market; Product life-cycle profitability;
Core Process Metrics – Results - RESULTS METRICS: Health and safety (HS); First-time-through quality (FTT); Rolled-throughput yield (RTY); On-time delivery (OTD); Dock-to-dock (DTD); Order-fulfillment lead time (OFLT).
Core Process Metrics – Productivity - PRODUCTIVITY METRICS: Inventory turnover rate (ITO); Build to schedule (BTS); Overall equipment effectiveness (OEE); Value-added to non-value-added ratio (VA/NVA).
HEALTH AND SAFETY (HS) METRICS Measure the impact of the production processes on employees’ health and safety: days lost due to accidents; absenteeism; employee turnover.
FIRST-TIME-THROUGH QUALITY (FTT) METRIC: Measures the percentage of units that go through the production process without being scrapped, rerun, retested, returned by the downstream operation, or diverted into an off-line repair area. FTT measures how well you create units of product. unit = finished product, component, or sales order.
FTT = [units entering process – (scrap + reruns + retests + repaired off-line + returns)]/ units entering process.
ROLLED-THROUGHPUT YIELD (RTY) METRIC Measures the probability that a process will be completed without a defect occurring. RTY measures how well you create quality. opportunity = a part, product, or service characteristic that is critical to customer-quality expectations or requirements; you measure, test, or inspect it RTY = 1 – DPO // DPO (defect per opportunity) = probability of a defect occurring in any one product, service characteristic, or process step // DPO = DPU/ opportunities per unit // DPU = number of defects per unit/ total number of units
ON-TIME DELIVERY (OTD) METRIC Measures the percentage of units the company produces that meet customer’s deadline OTD = line items received on time by customer/ total line items received.
DOCK-TO-DOCK (DTD) METRIC Measures how long it takes raw materials or sub-components coming into the plant to be turned into finished products. control part = a significant component of the final product that travels through all the major manufacturing processes for that product // end-of-line rate = the average number of jobs per hour for a particular product end-of-line rate = manufactured units (per week) / production hours (per week)
DTD = total number of control parts/ end-of-line rate
ORDER FULFILLMENT LEAD TIME (OFLT) METRIC Measures the average time that elapses between the company’s receipt of an order from a customer and when the company sends an invoice to the customer for the finished product or service. OFLT is a measure of the company’s operating cash flow (the time from receipt of the sales order to the time of receipt of payment).
OFLT = SO + PS + M + S + I
SO (sales order) = the time from when an order is received until the time it is entered into the production-scheduling system // PS (production scheduling) = the time from when an order enters the production-scheduling system until the time actual production begins // M (manufacturing) = the time from when manufacturing order starts under the order is released to the shipment department // S (shipping) = the time from when an order is received in the shipping department until it leaves the dock // I (invoice) = the time from when accounting is notified of a shipment going out until it sends the invoice to the customer
INVENTORY TURNOVER RATE (ITO) Measures how fast the company sells the products produced (how efficient the marketing efforts are). A low ITO rate indicates excess inventory or poor sales. A high ITO rate indicates high efficiency: reduces the risk of inventory loss and keep the return on assets highly competitive.
ITO = goods sold/ year-end inventory (taken from the company’s balance sheet).
BUILD TO SCHEDULE (BTS) METRIC Measures the percentage of units scheduled for production on a given day that are actually produced on the correct day, in the correct mix, and in a correct sequence. BTS alerts the company to potential overproduction situations.
BTS = volume performance x mix performance x sequence performance
Volume performance = actual number of units produced/ scheduled number of units Mix performance = actual number of units built to mix/ actual units produced or units scheduled to be produced Sequence performance = actual number of units built to schedule/ actual number of units built to mix
number of units built to mix = number of units built that are included in the daily production schedule
number of units built to schedule = number of units built on a given day in a scheduled order
OVERALL EQUIPMENT EFFECTIVENESS (OEE) METRIC Measures the availability, performance efficiency, and the quality rate of the equipment
OEE = equipment availability x performance efficiency x quality
Equipment availability = operating time/ net available time
operating time = net available time – all downtime (breakdowns, setup time, and maintenance)
Performance efficiency = total parts run x ideal cycle time / operating time
total parts run = total number of parts produced (regardless of quality)
ideal cycle time = the normal expected cycle time for the equipment
Quality = [total parts run – total defects]/ total parts run
VALUE-ADDED TO NON-VALUE-ADDED RATIO (VA/NVA) METRIC Compares the amount of time in the work process spent on value-added activities to the amount of time spent on non-value-added activities.
VA/NVA = total value-added activities time/ total OFTL
VA = SO + PS + M + S + I // OFTL = SO + PS + M + S + I
4. SOCIETY METRICS: Environmental and regulatory compliance; Community service; Ethics audit results; Market innovation; Skills developed.