Chapter 07 Measuring and Managing Process Performance

© 2012 Pearson Prentice© 2012 Pearson Prentice Hall. All rights reserved.Hall. All rights reserved.
Measuring and ManagingMeasuring and ManagingMeasuring and ManagingMeasuring and Managing
Process PerformanceProcess PerformanceProcess PerformanceProcess Performance
Chapter 7Chapter 7

Facility Layout SystemsFacility Layout SystemsFacility Layout SystemsFacility Layout Systems

There are three general types of facility designs:There are three general types of facility designs:
–  – Process LayoutsProcess Layouts
–  – Product LayoutsProduct Layouts
–  – GroupGroup TTeechnologychnology

Regardless of the type of facility design, aRegardless of the type of facility design, a centralcentral
goal of the design process isgoal of the design process is to streamlineto streamline
operations and thusoperations and thus increase the operating incomeincrease the operating income
of the systemof the system

heory of !onstraintsheory of !onstraintsheory of !onstraintsheory of !onstraints

The Theory of Constraints (The Theory of Constraints (TOC maintainTOC maintains thats that
operating income can !e increased !y carefullyoperating income can !e increased !y carefully
managing the !ottlenec"s in a processmanaging the !ottlenec"s in a process
–  – ## !ottlenec" is any!ottlenec" is any condition that impedes orcondition that impedes or
constrains the efficienconstrains the efficient flo$t flo$ of a processof a process
–  – ## !ottlenec" can !e identified!ottlenec" can !e identified !y determining!y determining
points at $hich e%c points at $hich e%cessi&e amessi&e amounts of $or"'in'ounts of $or"'in'
process in&en process in&entories are actories are accumulatingcumulating
–  – The !uildup ofThe !uildup of in&entories also slo$s the cyclein&entories also slo$s the cycle
time of productiontime of production

© 2012 Pearson Prentice Hall. All rights reserved.
heory of !onstraintsheory of !onstraints

The theory of constraints relies on the use of three
measures
– Throughput contri!ution is the difference !et$een
re&enues and direct materials for the uantity of
product sold
– )n&estments eual the materials costs contained in
ra$ materials, $or"'in'process, and finished goods
in&entories
– Operating costs are all other costs, e%cept for direct
materials costs, that are needed to o!tain
throughput contri!ution

heory of !onstraintsheory of !onstraints

*mphasis is on the short'run optimi+ation of
throughput contri!ution

#ssumes that operating costs are difficult to alter
in the short run

Process LayoutsProcess Layouts

#ll similar euipment or functions are grouped
together

Production of uniue products is done in small
!atches

Products follo$ a serpentine path, usually in
!atches

igh in&entory le&els

Products might tra&el for se&eral miles $ithin a
factory during the production process

"#P Accumulation"#P Accumulation

-or"'in'process in&entory accumulates at
processing stations in a con&entional organi+ation
for three reasons:
– andling $or" in !atches
– )f the rate at $hich each processing area handles
$or" is un!alanced, $or" piles up at the slo$est
processing station
– )f processing area managers are e&aluated on their
a!ility to meet production uotas

Product LayoutsProduct Layouts

)n a product layout, euipment is organi+ed to
accommodate the production of a specific product

Product layouts e%ist primarily in companies $ith
high'&olume production

The product mo&es along an assem!ly line !eside
$hich the parts to !e added to it ha&e !een stored

Placement of euipment or processing units is
made to reduce the distance that products must
tra&el

$rou% echnology$rou% echnology

The organi+ation of a plant into a num!er of cells

-ithin each cell all machines reuired to
manufacture a group of similar products are
arranged in close pro%imity to each other

The machines in a cellular manufacturing layout
are usually fle%i!le and can !e ad.usted easily or
e&en automatically to ma"e different products

$rou% echnology$rou% echnology

The shape of a cell is often a / shape

The num!er of employees needed to produce a
product can often !e reduced due to the ne$ $or"
design

/ shape also pro&ides !etter &isual control of the
$or" flo$

#nventory and Processing#nventory and Processing
imeime

0atch production
– Creates in&entory costs
– Creates delays associated $ith storing and mo&ing
in&entory
– These delays increase cycle times, there!y
reducing ser&ice to customers
– 1elays may e&en happen !efore manufacturing
!egins

#nventory&'elated !osts#nventory&'elated !osts

1emands for in&entory lead to huge costs in
organi+ations, including:
– The cost of mo&ing, handling, and storing the -)P
– O!solescence
– 1amage

2actory layouts and inefficiencies that create the
need to hold $or"'in'process in&entory may hide
other pro!lems leading to e%cessi&e costs of
re$or"

Processing timeProcessing time

Processing time is the time e%pended for the
product to !e made

Processing cycle efficiency (PC* is a measure of
the efficiency of the manufacturing process

PC* 3 Processing Time
Processing Time 4 5o&ing Time
4 6torage Time 4 )nspection Time

!ost of (onconformance!ost of (onconformance
and )uality #ssuesand )uality #ssues

Cost reduction has !ecome a significant factor in
the management of most organi+ations

The premise underlying cost reduction efforts
today is to decrease costs $hile maintaining, or
impro&ing, product uality in order to !e
competiti&e

)uality Standards)uality Standards

Glo!al competition has led to the de&elopment of
international uality standards

)n 897, the )nternational Organi+ation for
6tandardi+ation ()6O de&eloped the first )6O 8
6eries of 6tandards

These standards ha&e !een updated se&eral times and
the ne$ standard is called )6O 8';9

Company certification under these standards indicates
to customers that management has committed to the
production of the highest uality goods and ser&ices

)uality Standards)uality Standards

)f the uality of products and ser&ices does not
conform to uality standards, then the organi+ation
incurs a cost "no$n as the cost of nonconformance
(CO<C to uality standards

=uality usually may !e &ie$ed as hinging on t$o
ma.or factors:
– 6atisfying customer e%pectations regarding the
attri!utes and performance of the product
– *nsuring that the technical aspects of the product>s
design and performance conform to the
manufacturer>s standards

!osts *f )uality !ontrol!osts *f )uality !ontrol

Classification of uality costs:
– Pre&ention costs
– #ppraisal costs
– )nternal failure costs
– *%ternal failure costs

*%perience sho$s that it is much less e%pensi&e to
pre&ent defects than to detect and repair them after
they ha&e occurred

Prevention !ostsPrevention !osts

Pre&ention costs are incurred to ensure that
companies produce products according to uality
standards

*%amples:
– =uality engineering
– Training employees
– 6tatistical process control
– Training and certifying suppliers

A%%raisal !osts A%%raisal !osts

#ppraisal costs relate to inspecting products to
ma"e sure they meet !oth internal and e%ternal
customers> reuirements

*%amples:
– )nspection of incoming materials
– 5aintenance of test euipment
– Process control monitoring

#nternal Failure !osts#nternal Failure !osts

#n internal failure occurs $hen the manufacturing
process detects a defecti&e component or product
!efore it is shipped to an e%ternal customer

*%amples:
– Re$or"ing defecti&e components or products
– The cost of do$ntime in production

+,ternal Failure !osts+,ternal Failure !osts

*%ternal failures occur $hen customers disco&er a
defect

*%amples:
– #ll costs associated $ith correcting the pro!lem

Repair of the product

-arranty costs

6er&ice calls

Product lia!ility recalls

2or many companies, this is the most critical
uality cost to a&oid

!ost&of&)uality 'e%ort!ost&of&)uality 'e%ort

)nformation is compiled in a cost'of'uality
(CO= report, de&eloped for se&eral reasons:
– )llustrates the financial magnitude of uality factors
– elps managers set priorities for the uality issues
and pro!lems they should address
– #llo$s managers to see the !ig picture of uality
issues
– #llo$s managers to try to find the root causes of
their uality pro!lems

-ust&in&ime Manufacturing-ust&in&ime Manufacturing

?ust'in'time (?)T manufacturing is a
comprehensi&e and effecti&e manufacturing
system

?ust'in'time production reuires ma"ing a product
or ser&ice only $hen the customer, internal or
e%ternal, reuires it

)t uses a product layout $ith a continuous flo$

#m%lications of -##m%lications of -#
ManufacturingManufacturing

?ust'in'time manufacturing is simple in theory !ut
hard to achie&e in practice

Organi+ations that use .ust'in'time manufacturing
must eliminate all sources of failure in the system

#t the core of the ?)T process is a highly trained
$or"force $hose tas" is to carry out acti&ities
using the highest standards of uality

#m%lications of -##m%lications of -#
ManufacturingManufacturing

-hen an employee disco&ers a pro!lem $ith a
component, it is the responsi!ility of that
employee to call immediate attention to the
pro!lem so that it can !e corrected

6uppliers must !e a!le to produce and deli&er
defect'free materials or components $hen they are
reuired

Pre&entati&e maintenance is also employed so that
euipment failure is a rare e&ent

-# Manufacturing and-# Manufacturing and
Management AccountingManagement Accounting

?ust'in'time manufacturing has t$o ma.or
implications for management accounting:
– 5anagement accounting must support the mo&e to
?)T manufacturing !y monitoring, identifying, and
communicating to decision ma"ers the sources of
delay, error, and $aste in the system
– The clerical process of management accounting is
simplified !y ?)T manufacturing, due to the smaller
in&entory to monitor and report

-# Manufacturing and-# Manufacturing and
Management AccountingManagement Accounting

0alanced 6corecard process metrics include:
– 1efect rates
– Cycle times
– Percent of on'time deli&eries
– Order accuracy
– #ctual production as a percent of planned
production
– #ctual machine time a&aila!le compared $ith
planned machine time a&aila!le

ai/en !ostingai/en !osting

# system that pro&ides rele&ant data to support
lean accounting production systems

2ocuses on reducing costs during the
manufacturing stage of the total life cycle of a
product

Kaizen is the ?apanese term for ma"ing
impro&ements to a process through small,
incremental amounts rather than through large
inno&ations

!oncerns Aout!oncerns Aout
ai/en !ostingai/en !osting

The system places enormous pressure on
employees to reduce e&ery concei&a!le cost

@ai+en costing leads to incremental rather than
radical process impro&ements
– This can cause myopia as management tends to
focus on the details rather than the o&erall system

enchmaringenchmaring

# $ay for organi+ations to gather information
regarding the !est practices of others

Often highly cost effecti&e

6electing appropriate !enchmar"ing partners is a
critical aspect of the process

The process typically consists of fi&e stages

enchmaring 3 Stage 1enchmaring 3 Stage 1

)nternal study and preliminary competiti&e
analyses
– The organi+ation decides $hich "ey areas to
!enchmar" for study
– The company determines ho$ it currently performs
on these dimensions !y initiating:

Preliminary internal competiti&e analyses

Preliminary e%ternal competiti&e analyses
– 0oth types of analyses $ill determine the scope
and significance of the study for each area


1e&eloping long'term commitment to the
!enchmar"ing pro.ect and coalescing the
!enchmar"ing team
– The le&el of commitment to !enchmar"ing must !e
long term
– Long'term commitment reuires

O!taining the support of senior management to gi&e
the !enchmar"ing team the authority to spearhead the
changes

1e&eloping a clear set of o!.ecti&es to guide the
!enchmar"ing effort

*mpo$ering employees to ma"e change

4continued54continued5

The !enchmar"ing team should include
indi&iduals from all functional areas in the
organi+ation

#n e%perienced coordinator is usually necessary
to organi+e the team and de&elop training in
!enchmar"ing methods

Lac" of training $ill often lead to the failure of the
implementation


)dentifying !enchmar"ing partnersA$illing
participants $ho "no$ the process
– 6ome critical factors include:

6i+e of the partners

<um!er of partners

Relati&e position $ithin and across industries

1egree of trust among partners


)nformation gathering and sharing methods
– T$o related dimensions emerge from the literature:

Type of information that !enchmar"ing
organi+ations collect

5ethods of information collection


Ta"ing action to meet or e%ceed the !enchmar"
– The organi+ation ta"es action and !egins to change
– #fter implementing the change, the organi+ation
ma"es comparisons to the specific performance
measures selected
– The decision may !e to perform !etter than the
!enchmar" to !e more competiti&e
– The implementation stage is perhaps the most
difficult stage of the !enchmar"ing process, as the
!uy'in of mem!ers is critical for success

Chapter 07 Measuring and Managing Process Performance

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