MEASURING PERFORMANCE IN OPERATIONS. CHAPTER 3. DAVID A. COLLIER AND JAMES R. EVANS. LO1 Describe the types of measures used for decision making. LO2 Explain how to calculate and use productivity measures. LO3 Explain how internal and external measures are related.
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DAVID A. COLLIER AND JAMES R. EVANS
LO2Explain how to calculate and use productivity measures.
LO3Explain how internal and external measures are related.
LO4Explain how to design a good performance measurement system.
LO5Describe four models of organizational performance.
Pilot: Airspeed. I’m really working on airspeed this flight.
Passenger: That’s good. Airspeed certainly seems important. But what about altitude? Wouldn’t an altimeter be helpful?
Pilot: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I have to concentrate on proper airspeed.
Passenger: But I notice you don’t even have a fuel gauge. Wouldn’t that be useful?
Pilot: You’re right; fuel is significant, but I can’t concentrate on doing too many things well at the same time. So on this flight I’m focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption on the next set of flights.
imagine entering the cockpit of a modern jet airplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot?
What measures do you use to evaluate a company’s goods or services? Provide some examples.
Measurementis 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.
Important categories of organizational performance measures:
Exhibit 3.1 The Scope of Business and Operations Performance Measurement
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.
Every service encounter provides an opportunity for error.
Errors in service creation and delivery are sometimes calledservice upsetsorservice failures.
Productivityis the ratio of output of a process to the input
Quantity of Output
Quantity of Input
Productivity measures include units produced/labor hour, airline revenue per passenger mile, meals served/labor dollar.
Exhibit 3.2 Interlinking Internal and External Performance Measures
What is the value of a loyal customer (VLC) in the small contractor target market segment who buys an electric drill on average every 4 years or 0.25 years for $100, when the gross margin on the drill averages 50 percent, and the customer retention rate is 60 percent? What if the customer retention rate increases to 80 percent?
What is a 1 percent change in market share worth to the manufacturer if it represents 100,000 customers? What do you conclude?
If customer retention rate is 60 percent, the average customer defection rate = (1 – customer retention rate). Thus, the customer defection rate is 40 percent, or 0.4. The average buyer’s life cycle is 1/0.4 = 2.5 years. The repurchase frequency is every four years, or 0.25 (1.4).
VLC (P)(RF)(CM)(BLC) =
($100)(0.25)(0.50)(1/0.4) = $31.25 over the buyer’s life cycle
The value of a 1 percent change in market share =
(100,000 customers)($31.25/customer) = $3,125,000
If customer retention rate is 80 percent, the average customer defection rate is 0.2, and the average buyer’s life cycle is 1/0.2 = 5 years.
Then: VLC (P)(RF)(CM)(BLC) =($100)(0.25)(0.50)(1/.2) = $62.50
Thus, the value of a 1 percent change in market share(100,000 customers)($62.50/customer/year) = $6,250,000
The economics are clear. If customer retention can be increased from 60 to 80 percent through better value chain performance, the economic payoff is doubled.
Good performance measures are actionable. Actionable measuresprovide the basis for decisions at the level at which they are applied—the value chain, organization, process, department, workstation, job, and service encounter.
Source:2011-12 Baldrige Criteria for Performance Excellence, U.S. Depart. of Commerce
Purpose is to translate strategy into measures that uniquely communicate an organization’s vision.
Source: Kaplan R. S., and Norton, D. P., “The Balanced Scorecard—Measures That Drive Performance,”Harvard Business Review, January–February 1992, p. 72.
Exhibit 3.5 Examples of Value Chain Performance Measurements
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. 164-174.
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.
What are the major problems facing the credit card division?
What steps are required to develop a good internal and external performance and information system?
How should internal and external performance data be related? Are these data related? What do graphs and/or statistical data analysis tell you, if anything?
Is the real service level what is measured internally or externally? Explain your reasoning.
What are your final recommendations?