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Chapter 11_ Six Steps of Performance Measurement

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					 Chapter 11, Six Steps of
Performance Measurement


    Our new corporate motto is
       READY…FIRE…AIM




                                 1
 Figure 11.1,             The Management
                            Cycle
        Operating plans
         and budgets

                                            Project
                                          management




  Needs
Assessment




                                   Performance
                                   Measurement




                                                       2
       The perfect world

 In a perfect world, a measurement
     system will actively promote
    performance improvement by;
• measuring what matters,
• providing corrective feedback and
  positive reinforcement to enthusiastic
  people who enjoy being measured and
  take improvement on as a challenge.
                                           3
  ATTRIBUTES OF A GOOD
  MEASUREMENT SYSTEM
• An effective performance measurement
  system should have the following attributes.

• FOCUS ON EFFECTIVENESS
  – 1) We have a need to measure better.
  – 2) We have a need to measure less.


• FOCUS ON THE FUTURE


                                                 4
 ATTRIBUTES OF A GOOD
 MEASUREMENT SYSTEM
• FOCUS ON OBJECTIVES,
  “KEY RESULT AREAS”
 –KRAs are those functions or
  divisions of performance in which
  your organization must
  continually improve to be
  successful.
                                      5
         EXAMPLES OF “KEY
          RESULT” AREAS
     •   Customer
     •   Product/service
     •   Public/society/natural environment
     •   Marketing
     •   Human Resources
     •   Production
     •   Maintenance
     •   Operations
     •   Finance


• Good measurement systems don’t just
  measure things done according to the
  organizational chart. Good systems measure
  things done to satisfy stakeholders.         6
        Key Performance
        Indicators “KPI‟s”
• This is the essence of measurement. Let’s
  make sure the concept of Key Performance
  Indicator is understood.

  – An “indicator” is a gauge or a measure that
    reports information.
  – “Performance” is the result or activity we are
    looking for that fits in to strategic goals.
  – “Key” means that this measure has been
    pinpointed so carefully that management knows
    precisely what to do.
  – Measures are developed to capture both the input
    and output elements of a business system.          7
       SPEED INDICATORS

•   response time records
•   turn around time records
•   cycle time records
•   project completion dates
•   meeting scheduled time records




                                     8
  ACCURACY INDICATORS
• judgment based climate or opinion surveys
   –   focus groups
   –   comment cards
   –   telephone surveys
   –   advisory panels
• opinions of community leaders
• meeting design specifications or passing an
  inspection point that ensures the product works.
• Customer returns or warranty claims.



                                                     9
     VOLUME INDICTORS

• Measures the amount (Number of) of
  outputs or results from a specific
  activity or program. number of units
  produced
  – number of completed transactions
  – % market share
  – Back order statistics
  – Number of failed sales due to being out of
    stock
                                                 10
INVESTMENT INDICATORS

• Measures the amount of resources
  expended on a specific program or
  activity or the unit cost (cost/number of
  units produced ($)).
  –   operating costs per unit produced
  –   capital costs per unit produced
  –   cost per customer as to sales and marketing expenses
  –   cost per unit of after sales service and customer support.

• Notice that the financial measures are
  “per” something
                                                                   11
    „Six Steps‟ of a
  Measurement System
1. Separate Strategic Goals Into Input and
   Output Dimensions
2. Develop Output and Results Measures for
   each goal
3. Develop Input Measures for each goal
4. Check with SAVI to see if the set of
   measures is complete
5. Use an Effective Recognition System
6. Build the Culture
                                             12
 Step 1, Separate Strategic
    Goals Into Input and
    Output Dimensions
• Following from Vision, Mission and Values,
  organizations create strategic goals that
  identify “Key Result” areas of the
  organization where change and improvement
  is possible and desirable.

• Our first step in developing measures to
  reflect the goal is to dissect the goal into its
  input and output dimensions.

                                                     13
           Broad
            Figure 11.2,
measurement concept of
       inputs


             unit cost efficiency
Input            How well are materials used, (excessive waste)
dimension        How well is labour used, (excessive idle time)
                 How well is overhead used (idle capacity)




                                                                  14
           Broad
             Figure 11.3,
measurement concepts of
       Outputs

                         maintaining and improving quality
              Internal
              Results
                         lower consumer prices
   Output
 Dimension

                         financial returns
              External   improve market share
              Results
                         meet current and future demand




                                                             15
Step 2, Develop Output
Measures or Each Goal
• Outputs are accomplishments. In most
  organizations, accomplishments can be
  categorized into three groups.

  –Investment returns
  –Customer Satisfaction
  –Social Impacts

                                          16
               Measures of
       Figure 11.4,
        outputs or Results.
                           OUTPUT MEASURES

                                                         PERFORMANCE GOAL
             MEASUREMENT        PERFORMANCE
CATEGORY                                            (changes of specific amounts over
               CONCEPT            MEASURE
                                                          specific time frames)



                            % return on
                            investment
                                                 All should increase by a specific
              Financial     % return on assets
                                                 % change, to be accomplished
               returns      employed
                                                 by a specific date.
                            Profit margin on
                            sales
Investment                                       The proportion of the market
  Returns                   % market share       share against the competition
                            relative to the      should increase.
               Market       competition          The proportion of the market
               share        % market share       share relative to the total market
                            relative to total    should increase at a rate that is
                            market size          faster than the rate of change in
                                                 total market size.
                                                                                        17
      Measures of outputs or
            Results          Rejection rates in
                Product or
                             the production        Both should decline by a specific
                 service
                             process               amount in a specific timeframe.
                  quality
                             Sales returns

                Deliver on
 Customer                                          Backorders should decline and
               time and in   Backorder and
Satisfaction                                       delivery cycle times should
                sufficient   delivery statistics
                                                   improve.
                 quantity


                Consumer     Retail price by       The retail price matched to value
                 prices      product               should decline.


                                                   Children using these toys should
                  Child      Improvement in
                                                   show a measured improvement
               development   reading skills
                                                   in reading skills
 Social
Benefits
                             Impact on landfills
               Environment                         The proportion of toys presented
                             when the toy is
                al impact                          for re-cycling should go up.
                             finished
                                                                                       18
Step 3, Develop Input
Measures For Each Goal
• We normally develop input measures
  after we have developed output
  measures because it is a good idea to
  know where you are going before you
  decide how to get there.
  –Financial operating resources
  –Financial capital resources
  –Other organizational resources
                                          19
               Measures of
        Figure 11.5,
      Inputs or EfficienciesINPUT MEASURES for “UNIT COST EFFICIENCY”


                     MEASUREMENT
   CATEGORY                                  PERFORMANCE MEASURE                 PERFORMANCE GOAL
                       CONCEPT


                                                                             Material and labour cost and or
                                            Direct materials and direct
                    Materials and                                            consumption per unit should
                                            labour per unit, expressed in
                    labour                                                   decline over a specified time
                                            both dollar and quantity terms
                                                                             period

    Financial
   Operating                                                                 Overhead consumed per unit
                                            Overhead charged per unit
   Resources                                                                 produced should decline

                    Overhead
                                                                             %capacity utilized should
                                            % utilization of capacity        increase to or remain at
                                                                             optimal levels

Financial Capital                                                            Dollars per unit of capital
   Resources        Capital investment in   Dollars of capital investment    invested should decline over
                    operating assets        per unit produced                time as capital resources are
                                                                             used more efficiently

                                            Management estimates of the
     Other          Non-financial           resources of talent and          The amount consumed will
                    resources consumed      energy and other non-            increase as the project is
 Organizational     by the performance      financial resources that have    developed and decrease after it
  Resources         area                    been dedicated to this           is implemented
                                            performance area
                                                                                                               20
Step 4, Check with SAVI to
see if the set of measures
        is complete
• Before we can be sure that we have a
  complete set of measures, we need to
  apply the SAVI framework to categorize
  the measures as to Speed, Accuracy,
  Volume and Investment.




                                           21
    Figure 11.6,      Linking Output
                  Measures to SAVI          OUTPUT MEASURES


                     MEASUREMENT
 CATEGORY
                       CONCEPT
                                                     PERFORMANCE MEASURE                     SAVI

                                            % return on investment
                     financial returns      % return on assets employed                    Accuracy
                                            Profit margin on sales
 Investment
   Returns
                                            % market share relative to the competition
                      market share
                                            % market share relative to total market size
                                                                                            Volume


                   Product or service       Rejection rates in the production process      Accuracy &
                        quality             Sales returns                                    Volume

  Customer                                                                                  Speed &
                    Deliver on time and
 Satisfaction                               Backorder and delivery statistics
                   in sufficient quantity                                                   Volume


                    Consumer prices         Retail price per product                       Investment


                   Child development        Improvement in reading skills                  Accuracy
Social Benefits
                      Environmental
                         impact
                                            Impact on landfills when the toy is finished    Volume
                                                                                                        22
      Figure 11.7,   Linking Input
                Measures to SAVI
                              INPUT MEASURES for “UNIT COST EFFICIENCY”


                     MEASUREMENT
  CATEGORY
                       CONCEPT
                                                    PERFORMANCE MEASURE                       SAVI


                      Materials and       Direct materials and direct labour per unit, in
                         labour           both dollar and quantity terms.
                                                                                            Investment

    Financial
   Operating                              Overhead charged per unit.                        Investment
   resources
                        Overhead

                                          % utilization of capacity                          Volume


Financial Capital   Capital investment
   Resources        in operating assets
                                          Dollars of capital investment per unit produced   Investment



     Other            Non-financial       Management estimates of the resources of talent
 organizational        resources          and energy that have been dedicated to this       Investment
   resources           consumed           performance area.



                                                                                                         23
    Testing the measures

• Once we are satisfied that the set is
  complete we need to subject each and
  every measure to a test.


      Refer to figure 11.8


                                          24
  Step 5, Use an Effective
    Recognition System
• Use Measurement to Initiate Change

  – An effective measurement system will use the
    measured results as a management tool.
  – Every result should have an automatic
    intervention strategy.
  – When results are as expected we should offer
    congratulations and reinforcement to keep it
    going,
  – when results are less than expected we should
    quickly isolate the cause and correct the process
                                                        25
   Step 6, Build the culture
• Good systems need good people. There is
  no sense in examining a process unless at
  the same time you examine the people
  who govern the process.
• Improvement does not take place on paper.
• Improvement happens when people employ enthusiasm,
  dedication, commitment, leadership and morale in their daily
  routine.
• A good system on paper is a healthy beginning but if you want
  results you need to follow up a paper system with a people
  system.

                                                                  26
          Closing remarks
• In the beginning of this chapter you were
  challenged to find measures and see the
  resulting behavior.
  – So how about the 30 minute pizza delivery
    guarantee. That promotes speeding and if a
    delivery person has an order at 28 minutes and
    another at 10, which does he deliver first? And
    what happens if Pizza delivery people are offered
    a cash bonus for every delivery made within 30
    minutes, and what does this do to pizza quality?



                                                        27
• People are curious beings. We bring our own
  personal values to the job, we react differently to
  control systems, we are motivated by different
  things. A performance measurement system is a
  uniform set of measures that is trying to motivate a
  most un-uniform set of people.

• Chapter 12 will deal with how we need to manage
  people as part of the performance improvement
  process.



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