Performance Measurement

MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 1

Chapter 8Chapter 8

Performance Measurement and Strategic Information Management


Key Idea

A supply of consistent, accurate, and timely data across all functional areas of business provides real-time information for the evaluation, control, and improvement of processes, products, and services to meet both business objectives and rapidly changing customer needs.


Information Management

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


Process Flow

Measures and Indicators

Data

Analysis

Information


CustomerRequirements

Measurements

Processes ResultsDesign

Control

Prediction

Validation

Use of Information and Analysis

Measurement supports executive performance review and daily operations and decision making.


Key Idea

Measurement-managed companies are more likely to be in the top third of their industry financially, complete organizational changes more successfully, reach clear agreement on strategy among senior managers, enjoy favorable levels of cooperation and teamwork among management, undertake greater self-monitoring of performance by employees, and have a greater willingness by employees to take risks.


Benefits of Information Management

Understand customers and customer satisfaction

Provide feedback to workers Establish a basis for reward/recognition Assess progress and the need for

corrective action Reduce costs through better planning


Leading Practices (1 of 2)

Develop a set of performance indicators that reflect customer requirements and key business drivers

Use comparative information and data to improve overall performance and competitive position

Continually refine information sources and their uses within the organization

Use sound analytical methods to conduct analyses and use the results to support strategic planning and daily decision making


Leading Practices (2 of 2)

Involve everyone in measurement activities and ensure that information is widely visible

Ensure that data are accurate, reliable, timely, secure, and confidential

Ensure that hardware and software systems are reliable and user-friendly

Systematically manage organizational knowledge and identify and share best practices


Key Idea

To make decisions that further the overall organizational goals of meeting, or exceeding, customer expectations and making productive use of limited resources, companies need good data and information about customers and markets, human resource effectiveness, supplier performance, product and service quality, and other key factors, in addition to traditional financial performance and accounting measures.


Balanced Scorecard1. Financial perspective

Measures the ultimate results that the business provides to its shareholders. They include profitability, revenue growth, return on investment, economic value added (EVA), and shareholder value.

2. Internal perspective Focuses attention on the performance of the key internal processes that drive the business. They include such measures as quality levels, productivity, cycle time, and cost.

3. Customer perspective Focuses on customer needs and satisfaction as well as market share. This includes service levels, satisfaction ratings, and repeat business.

4. Innovation and learning perspectiveDirects attention to the basis of a future success—the organization’s people and infrastructure. Key measures might include intellectual assets, employee satisfaction, market innovation, and skills development.


Key Idea

A good balanced scorecard contains both leading and lagging measures and indicators. Lagging measures (outcomes) tell what has happened; leading measures (performance drivers) predict what will happen.


Baldrige Classification of Performance Measures

Customer-focused outcomes Product and service outcomes Financial and market outcomes Human resource outcomes Organizational effectiveness outcomes Governance and social responsibility

outcomes


Customer Measures

Customer satisfaction and dissatisfaction Customer retention Gains and losses of customers and customer

accounts Customer complaints and warranty claims. Perceived value, loyalty, positive referral, and

customer relationship building


Product and Service Measures Internal quality measurements Field performance of products Defect levels Response times Data collected from customers or third parties

on ease of use or other attributes Customer surveys on product and service

performance


Financial and Market Measures

Revenue Return on equity Return on investment Operating profit Pretax profit margin Asset utilization Earnings per share


Human Resource Measures

Employee satisfaction Training and development Work system performance and effectiveness Safety Absenteeism Turnover


Organizational Effectiveness Measures

Cycle times Production flexibility Lead times and setup times Time to market Product/process yields Delivery performance Cost efficiency Productivity


Governance and Social Responsibility Measures

Organizational accountability Stakeholder trust Ethical behavior Regulatory/legal compliance Financial and ethics review results Community service Management stock purchase activity


Key Idea

Organizations need comparative data, such as industry averages, best competitor performance, and world-class benchmarks to gain an accurate assessment of performance and know where they stand relative to competitors and best practices.


Purposes of Performance Measurement Systems Providing direction and support for

continuous improvement Identifying trends and progress Facilitating understanding of cause-and-effect

relationships Allowing performance comparison to

benchmarks Providing a perspective of the past, present,

and future


Key Idea

In designing a performance measurement system, organizations must consider how the measures will support senior executive performance review and organizational planning to address the overall health of the organization, and how the measures will support daily operations and decision making.


Practical Guidelines Fewer is better. Link to the key business drivers. Include a mix of past, present, and future Address the needs of all stakeholders. Start at the top and flow down to all levels of

employees Combine multiple indexes into a single index Change as the environment and strategy

changes Have research-based targets or goals


Linkages to Strategy

Key business drivers (key success factors)

Strategies and action plans

Measures and indicators


Key Idea

The things an organization needs to do well to accomplish its vision are often called key business drivers or key success factors. They represent things that separate an organization from its competition and define strengths to exploit or weaknesses to correct.


Process-Level Measurements

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 and simple? Are the data easy/cost-efficient to collect? Does the measurement have validity, integrity, and

timeliness? Does the measure have an owner?


Key Idea

Good measures and indicators are actionable; that is, they provide the basis for decisions at the level at which they are applied.


Common Process Quality Measures

Nonconformities (defects) per unit Errors per opportunity Dpmo – defects per million opportunities


Creating Effective Performance Measures

Identify all customers and their requirements and expectations

Define work processes Define value-adding activities and process

outputs Develop measures for each key process Evaluate measures for their usefulness


Analyzing and Using Data

Analysis – an examination of facts and data to provide a basis for effective decisions.

Examples Examining trends and changes in key

performance indicators Making comparisons relative to other business

units, competitor performance, or best-in-class benchmarks

Calculating means, standard deviations, and other statistical measures

Seeking to understand relationships among different performance indicators using sophisticated statistical tools such as correlation and regression analysis


Key Idea

Organizations need a process for transforming data, usually in some integrated fashion, into information that top management can understand and work with.


Interlinking

Quantitative modeling of cause-and-effect relationships between external and internal performance measures

Facilitated by data mining – the process of of searching large databases to find hidden patterns in data, using analytical approaches and technologies such as cluster analysis, neural networks, and fuzzy logic


The Cost of Quality (COQ)

COQ – the cost of avoiding poor quality, or incurred as a result of poor quality

Translates defects, errors, etc. into the “language of management” – $$$

Provides a basis for identifying improvement opportunities and success of improvement programs


Quality Cost Classification

Prevention Appraisal Internal failure External failure


Key Idea

In manufacturing, quality costs are primarily product-oriented; for services, however, they are generally labor-dependent, with labor often accounting for up to 75 percent of total costs.


Quality Cost Management Tools

Cost indexes Pareto analysis Sampling and work measurement Activity-based costing


Return on Quality (ROQ)

ROQ – measure of revenue gains against costs associated with quality efforts

Principles Quality is an investment Quality efforts must be made financially

accountable It is possible to spend too much on quality Not all quality expenditures are equally valid


Key Idea

Data used for planning and decision making need to be reliable, accurate, secure, and accessible to those who need them.


Managing Data and Information

Data Reliability – How well does an indicator consistently measure the “true value” of the characteristic?

Data Accessibility – Do the right people have access to the data?


Key Idea

In many companies, business information is only accessible to top managers and others on a need-to-know basis. In high-performing companies, business information is accessible to everyone.


Knowledge Management

The process of identifying, capturing, organizing, and using knowledge assets to create and sustain competitive advantage Explicit knowledge includes information stored in

documents or other forms of media. Tacit knowledge is information that is formed

around intangible factors resulting from an individual’s experience, and is personal and content-specific.


Key Idea

Knowledge assets refer to the accumulated intellectual resources that an organization possesses, including information, ideas, learning, understanding, memory, insights, cognitive and technical skills, and capabilities.


Internal Benchmarking The ability to identify and transfer best

practices within the organization Process:

Identify and collect internal knowledge and best practices

Share and understand those practices Adapt and apply them to new situations and

bringing them up to best-practice performance levels.


Measurement and Information Management in the Baldrige Award CriteriaThe Measurement, Analysis, and Knowledge Management Category examines an organization’s information management and performance measurement systems and how the organization analyzes performance data and information.

4.1 Measurement, Analysis, and Review of Organizational Performance

a. Performance Measurement b. Performance Analysis and Review

4.2 Information and Knowledge Managementa. Data and Information Availabilityb. Organizational Knowledge Managementc. Data, Information, and Knowledge Quality

Performance Measurement

Documents

key measures

measures outcomes

customer perspective

service performance

customer expectations

customer relationship

accounting measures

overall performance