Operational Performance Measurement

Increasing Total Productivity

Wilfred Kaydos

• Publisher: CRC Press
• Year: 2020
• eBook ISBN: 9781000285611
• Topic: Betriebswirtschaft
• Subtopic: Operations

Mention the phrase "bottom line," and the immediate thought tends to focus on a company's financial performance. Think again! There's an equally important factor that carries tremendous impact on that final total: operational performance measures. Implementation of a performance improvement program can significantly improve a company's bottom line. Operational Performance Measurement: Increasing Total Productivity shows the way-featuring a new integrated theory of performance measurement, with a never-before-published measurement model that's applicable to any business activity. Practical procedures and guidelines directly identify the variables that should be measured; guidelines to develop measurement systems; and how to analyze, interpret, and use performance methods effectively. Numerous diagrams, tables and examples make the principles and procedures easy to understand and implement. While this performance measurement approach is simplicity itself, be prepared for powerful results! Managers can put the theory into action right away- giving them better control, improved performance, increased personal productivity-and an easier day at work! Operations, finance, administration and quality managers alike will find there's so much to gain when they're Operational Performance Measurement: Increasing Total Productivity ... and a better bottom line is just the beginning!

1
WHY MEASURE PERFORMANCE?

Performance measures provide managers, front-line employees, and companies with a broad assortment of both cultural and technical benefits. These benefits go far beyond the bottom line, but they are not commonly recognized. While it is not a prerequisite to implementing performance measures, an understanding of these benefits will give managers insight into what makes a good measurement system and how performance measures should be used.

BENEFITS FOR MANAGERS

Improved Control

Feedback is essential for control of any system. Without the feedback provided by sight, sound, and touch, we humans would not be able to identify threatening or favorable situations and there would undoubtedly be fewer of us on the planet. The same is true for companies. When managers don’t have timely and meaningful feedback, companies fail to recognize opportunities and become much more vulnerable to hazards that can threaten their existence.

The feedback provided by performance measures gives managers better control over their areas of responsibility, whether it is a department, a plant, or a division. With measures in place, deviations in performance are detected earlier, enabling managers to step in and minimize the damage or make the most of the opportunity. Performance measures also prevent managers from getting blind-sided with bad news. If you have ever experienced some unpleasant surprises at the end of a month or quarter, it indicates you don’t have appropriate measures in place. With adequate measures, the news may not always be good, but at least it won’t be a surprise.

Clear Responsibilities and Objectives

Good performance measures clarify who is responsible for specific results or problems. They specify what “good performance” means for each person, manager, or operating unit in unmistakable terms. This has several distinct advantages for managers:

1. Everyone knows what they are supposed to accomplish. There is no question about what matters most, so when daily operating decisions have to be made, it is more likely the right course will be taken.
2. Everyone knows how well they are performing. This creates a self-correcting feedback loop that reduces negative deviations in performance.
3. Everyone becomes accountable for only their performance and not problems created by someone else. Anyone who has ever had their performance questioned because someone else didn’t do their job properly, knows how discouraging that can be. Good performance measures make it clear who owns what parts of a performance problem. By doing so, they dramatically reduce inter-departmental finger-pointing and buck-passing.

Strategic Alignment of Objectives

Performance measures are probably the best way to communicate a company’s strategy throughout an organization. Of course, this means a company must develop a strategy and determine what each operating unit must accomplish to execute it. This requires establishing a company’s strategic objectives and then breaking them down into lower level objectives and corresponding performance measures. When a company’s performance measures reflect its strategy, they assure everyone is working toward the same objectives and not going off in different directions.

Performance measures are also essential for assessing the effectiveness of a strategy. Unless a company’s key business processes are under control and meeting their defined performance objectives, there is no way to tell whether a strategy is effective or not.

Understanding Business Processes

“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”

H. James Harrington

When it comes to understanding a production process, the simple fact is that if you aren’t measuring a process, you cannot understand how it works. You may know what goes into a process and what comes out the other end, but understanding how it works means knowing what happens in the middle, what factors affect its performance, how it will behave if something in the process changes, and what the process is capable of doing.

When performance measures are not in place, there is typically a big difference between how managers think a process works and the way it actually works. Here are a few examples that indicate how large that gap can be.

• A CEO believed rejects in a complex manufacturing operation were running about 10% — which is certainly not something to brag about. When measures were put in place, they showed the true reject rate was over 30%. The CEO is still recovering from shock.
• Everyone believed that on-time delivery performance in a service company was 90% or better. Measures showed that to be true for a select group of customers, but for most customers, it was closer to 60%.
• In a manufacturing plant with only twenty employees, what was believed by everyone to be the number one cause of production downtime turned out to be sixth on the list. What was more surprising, was that the two largest problems were never mentioned during preliminary surveys of the staff to determine the possible causes of downtime. As close as everyone was to the problems in the plant, it is difficult to believe their judgment could be so wrong. However, this illustrates just how unreliable subjective judgment of performance problems can be.

Similar examples would be easy to find in most companies. I have never encountered a situation where newly implemented performance measures did not show a substantial difference between management’s perceptions of what was happening and what was actually happening. This should not be surprising. No manager can be everywhere all the time. Even if this was possible, storing and assimilating all the performance data produced by the typical business process is far beyond the mental capacity of anyone.

There is a very big difference between understanding some of the problems in a process and understanding all of them. This is certainly one of the primary reasons so many performance improvement initiatives fail. A case in point was a company that spent $180,000 to replace a piece of equipment that the managers had identified as being the primary bottleneck in the whole process. They had assured headquarters replacing this one piece of equipment would greatly increase productivity and output. Unfortunately, after the $180,000 was spent, there was no noticeable change in either output or productivity.

Needless to say, no one was pleased with the results, but nobody could explain why performance had not improved. The mystery was solved when performance measures were implemented in the plant. They showed that the “big bottleneck” was not the only problem that needed to be addressed. There were six other major causes of waste, downtime, and poor quality that had to reduced for the process to reach the productivity objectives.

Why had such a serious error in judgment been made? The reason was that the piece of equipment in question frequently broke down for short periods. Like being repeatedly stabbed with a pin, the aggravation of the frequent breakdowns was much greater than the actual damage. What seemed like 90% of the problem was really only 10%. Another case of human perception being quite different from reality.

Knowing What a Process Can Do — Its Capability

Understanding a process also means knowing its capability — the limits of what it can do. At any point in time, every process, mechanism, organization, or person, has a capability. By definition, this capability cannot be exceeded, even though one of the enduring cliches of the sports world is “giving 110%.”

Knowing the capability of a machine is essential for determining what action needs to be taken to correct a problem. If a machine is not producing good products but has the capability to do so, something must be wrong with the machine and it must be repaired. On the other hand, if it does not have the capability to produce good products, “repairing” the machine will not solve the problem because nothing is broken. The only way insufficient capability can be corrected in a machine is to improve its capability. This might be accomplished by installing better parts, a more powerful motor, or even replacing the machine.

“If it ain’t broke, don’t fix it.”

Anonymous

Managers should take this old cliche seriously, because trying to fix what isn’t broken is an exercise in futility. There are many cases where just getting a process to work as it should, made dramatic improvements in performance. However, quality authorities say that 80–90% of quality problems are the result of processes that are not capable of doing what is being demanded of them. Measurement is the only way the capability of a machine or a process can be determined. That is one reason the sports pages are full of statistics. They are used by fans, writers, and anyone inclined to bet on the outcome of a game, to assess the capability of competing teams and players.

When processes and their capabilities are not understood, it is hardly surprising that so many attempts to improve performance fail. Surveys of companies that have implemented such concepts as material requirements planning, total quality management, and reengineering, indicate that only 25 to 35 percent of them achieved meaningful results.^* “Reengineering” a process makes sense if you know the process is operating properly and it cannot do what is required. But if that hasn’t been determined, then introducing radical changes may be totally unnecessary and could make matters worse. On the other hand, applying a Band-Aid when major changes are needed doesn’t work either.

* (Please see “Endnotes” at end of this book.)

No doubt factors such as the lack of top management leadership and a poor understanding of the concepts account for many failures. But it is also clear managers are sometimes applying solutions to problems that don’t exist and failing to recognize many problems that do exist.

Improved Quality and Productivity

As shown by Figure 1–1, quality improvement is simple in principle. It is just a matter of determining the difference between actual and desired performance and then changing or improving the production process to improve its performance.

Figure 1–1 The Quality Improvement Process

However, to make quality improvement work, the following measurements are needed.

1. The size of the gap between what customers want and what they are getting. This determines the size of the performance problem. In fact, without knowing this gap, you don’t even know if there is a problem.
2. Measurements of the process providing the goods or services. This provides an understanding of the process. Without measures, how do you know where the problems are located and which ones should be attacked first? The answer is you can’t know, which is why getting performance measures in place should be one of the first steps anyone takes when trying to improve quality and productivity.
3. The size of the performance gap after changes have been made to improve the process providing the goods or services. This tells you whether your attempts to improve performance worked. Without this measure, you are just guessing or engaging in wishful thinking.

Trying to improve performance without these measures is like shooting at targets in the dark. You will hit a few, but your score won’t be anything to brag about because you won’t know where the targets are or how to adjust your aim.

In almost all cases, implementing performance measures will, by itself, noticeably improve performance. In my experience, introducing measures typically improves quality 10 to 20% in a few weeks. Why the improvement? Certainly not because the measures were used to punish or reprimand anyone. Instead, the most important reasons for this initial improvement in performance are:

• The measures define what is important and focus attention on those issues.
• Developing measures requires establishing and communicating quality standards, which are usually not understood by everyone. It is amazing how often something is being done the wrong way because the person has never been told what “the right way” is.
• When performance becomes visible, no one wants to look bad to their peers or themselves. In one noteworthy case, when a group saw how poorly they were performing relative to other companies, they were so embarrassed they immediately took it upon themselves to assign teams and individuals to attack the problems. No one in management said a word about their performance, but within a few weeks rejects and rework in the department decreased 40%.

These initial gains can only be expected when the performance measures meet the criteria defined in subsequent chapters. Poor...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Preface
• The Author
• Dedication
• 1 Why Measure Performance?
• 2 What Is Measurement?
• 3 Measuring Production Processes
• 4 Operational Requirements for Effective Measurement Systems
• 5 Determining What to Measure
• 6 Implementing Performance Measures
• 7 Analyzing and Interpreting Measures
• 8 Using Performance Measures Effectively
• 9 Insuring Your Measures are Showing an Accurate Picture
• Appendix A: What Some Leading Companies are Measuring
• Appendix B: Implementing Manufacturing Performance Measures - A Case Study
• Appendix C: Implementing a Formal Selling Process and Performance Measures in a Sales Organization
• Appendix D: Global Warming?
• Appendix E: Measuring an Inventory Transaction Reporting Process
• References and Suggested Reading
• Endnotes
• Index