Performance Measures John Wu, Ph.D. Professor of Supply Chain and Transportation CSU San Bernardino [email protected] 1 You Can’t Manage What You Can’t Measure? Please read this: http://thedx.druckerinstitute.com/2013/07/measurement-myopia/ 2 Or is it you can’t manage what you DON’T measure? See the differences between the slide title and this statement? Which one is true or truer? While you are at it, read about Peter Drucker. It would be a shame graduating with a management/business degree without knowing about him. Business Performance Dashboard 3 Modeled after a car’s dashboard, business performance dashboards collect information and present a visual display in a glance for managers. Dashboards are usually color coded, again, just like traffic lights with red signaling warning, yellow, caution, and green, good. Dashboards direct managers’ attention to where it is needed and enable quick actions taken by the management. Key Performance Indicator (KPI) KPI is an industry jargon term for a type of measure of performance, usually used to evaluate success of a particular strategic activity or some operational goals (zero defects, 10/10 customer satisfaction etc.). (Wikipedia) KPIs are tied to an organization’s reward system, strategic objectives, and long term sustainable successes. KPIs are part of the performance metrics and the overall performance measure in an organization. KPIs can change employees’ behaviors with goals and incentives tied to KPIs. 4 What are your organization’s KPIs? Does everyone know about them and does everyone agree to their measurements? KPI: Financial Ratios Liquidity ratios Current ratio, quick ratio Leverage / Solvency ratios Debt equity ratio Turnover / Activity ratios Inventory turnover, average collection period, fixed assets turn over ratio Profitability ratios Gross/net profit margin, return on investment Valuation ratios Earning per share, PE, dividend yield Traditionally, firms use financial ratios to measure their performance. They are easy to use, standardized, and sometimes required by regulatory agencies and stakeholders. However, financial ratios are not all leading indicators and they lack the performance details that managers need to improve operations. They are only unidimensional. 5 Other Competitive Priorities Speed/Lead Time Flexibility Quality Costs 6 2 There are other measurements in addition to fiancials. From the PPT on competition, these are the other measurable dimensions. Everything here can be measured: performance, cost, quality, speed, flexibility. How do we create values and how do we measure them? Value Revisited The value equation Value = Performance / cost where Performance = f [quality, speed, flexibility] When, then, do we mean by: Quality Speed Flexibility Cost 7 Organizations create values. Everything here in the formulas can be measured: performance, cost, quality, speed, flexibility. How do we create values and how do we measure them? .

1. Performance Measures
John Wu, Ph.D.
Professor of Supply Chain and Transportation
CSU San Bernardino
[email protected]
1
You Can’t Manage What You Can’t Measure?
Please read this:
http://thedx.druckerinstitute.com/2013/07/measurement-myopia/
2
Or is it you can’t manage what you DON’T measure? See the
differences between the slide title and this statement? Which
one is true or truer? While you are at it, read about Peter
Drucker. It would be a shame graduating with a
management/business degree without knowing about him.
Business Performance Dashboard
3

2. Modeled after a car’s dashboard, business performance
dashboards collect information and present a visual display in a
glance for managers. Dashboards are usually color coded, again,
just like traffic lights with red signaling warning, yellow,
caution, and green, good. Dashboards direct managers’ attention
to where it is needed and enable quick actions taken by the
management.
Key Performance Indicator (KPI)
KPI is an industry jargon term for a type of measure of
performance, usually used to evaluate success of a particular
strategic activity or some operational goals (zero defects, 10/10
customer satisfaction etc.). (Wikipedia)
KPIs are tied to an organization’s reward system, strategic
objectives, and long term sustainable successes.
KPIs are part of the performance metrics and the overall
performance measure in an organization.
KPIs can change employees’ behaviors with goals and
incentives tied to KPIs.
4
What are your organization’s KPIs? Does everyone know about
them and does everyone agree to their measurements?
KPI: Financial Ratios
Liquidity ratios
Current ratio, quick ratio
Leverage / Solvency ratios
Debt equity ratio
Turnover / Activity ratios
Inventory turnover, average collection period, fixed assets turn
over ratio
Profitability ratios

3. Gross/net profit margin, return on investment
Valuation ratios
Earning per share, PE, dividend yield
Traditionally, firms use financial ratios to measure their
performance. They are easy to use, standardized, and sometimes
required by regulatory agencies and stakeholders. However,
financial ratios are not all leading indicators and they lack the
performance details that managers need to improve operations.
They are only unidimensional.
5
Other Competitive Priorities
Speed/Lead Time
Flexibility
Quality
Costs
6
2
There are other measurements in addition to fiancials. From the
PPT on competition, these are the other measurable dimensions.
Everything here can be measured: performance, cost, quality,
speed, flexibility. How do we create values and how do we
measure them?
Value Revisited

4. The value equation
Value = Performance / cost
where Performance = f [quality, speed, flexibility]
When, then, do we mean by:
Quality
Speed
Flexibility
Cost
7
Organizations create values. Everything here in the formulas
can be measured: performance, cost, quality, speed, flexibility.
How do we create values and how do we measure them?
Value Analysis/Value Engineering
These tools seek to improve an existing product’s design while
maintaining its functional characteristics and market appeal.
These methods ask questions such as:
Can the function be eliminated entirely?
Can the function be done some other way?
Can the part or product be simplified?
Can standard materials do the job as well?
Can the specs be changed to enhance the product?
8
What do you find when you Google value analysis and value
engineering? Every component, part, package, color, and
mechanism in your cell phone is there for a reason. Every form,
process, motion, and activity in the manufacturing or service
process serves a purpose as well. Everything has to justify its
existence. The first thing I did when I bought my Harley was to
give it an upgrade by replacing the muffler and the air filter

5. with more powerful ones. My question is, why the hell did
Harley put them on in the first place? An average Harley buyer
spends 30% of purchase price accessorizing their new “toy.” Is
Harley doing any value analysis?
Scope of Performance Measures
9
Financial measures are the most common and standardized ones.
Customer and market measures are also typical and can compare
across companies and industries. Quality is more subjective and
usually involves customer perceptions, rather than objective
measures. Time is getting more recognized because customers
are becoming more impatient and consistency of deliveries is
getting more important. Time measures include length and
variability. Sustainability has also become an important
measure as more organizations are feeling the need to be
socially and environmentally responsible. The other dimensions
are important to future growth but are more difficult to measure
and cannot easily compare against benchmarks.
Examples of SCM Metrics (SCOR)
10
Developed by the Supply Chain Council, SCOR has over 200
performance metrics for organizations. What are they? What do
they measure? Does your organization use any of these or
something similar to these? Why or why not?

6. The Balanced Scorecard
11
Kaplan and Norton proposed the balanced scorecard model to
replace the traditional financial measures that overemphasized
one dimension, instead of all four that are critical to
organizational growth.
Benchmarking
BENCHMARKING: the process of comparing your own
practices against similar practices of firms in the same or
different industries, recognized as the most effective at some
specific task.
Types of Benchmarking
Product–goods or services
Process–manufacturing or management processes
Strategic–management directions
Customer surveys and benchmarking are used to establish
standards.
Examples: customer experience against Disney, quality against
Toyota, e-commerce against Amazon
12
What is your organization’s benchmarking? How do you set
standards with or without benchmarking? Do you constantly
measure yourself against competition? Do you change your
benchmarking over time?

7. Productivity
Productivity is output/input
Different types of productivity measures:
labor productivity
capital productivity
Partial factor vs. total factor productivity
Importance of measuring productivity and productivity changes:
benchmarking, longitudinal studies, management
Ways to increase productivity: increasing outputs vs. decreasing
inputs
13
Output and input can be measured in different terms, money,
time, man-hours, physical units, or otherwise. Each production
factor has its own productivity measurement and combined
factors can measure either partial or total factor productivity.
Productivity changes over time or comparisons between one’s
own organization and competitors are more meaningful than
productive measures alone. Once we know how we compare in
productivity with previous year/quarter/time period or against
our peers, the next question is how we can improve our
productivity? There are only two ways to do it: increase your
output or decrease your input (or both of course). How does one
do it in reality?
Effectiveness vs. Efficiency
Effectiveness is doing the right things
Peter Drucker’s quest
Don’t touch it if you are not adding value…
Teachers should teach while nurses nurse.

8. Efficiency is doing things right
Fred Taylor’s quest
Do more with less
What’s the one best way to get things done?
14
Fred Taylor asks how we can do things faster with less
resources. Peter Drucker, on the other hand, asks the
fundamental question of why we do it. The fact that we can do
it faster doesn’t mean we are doing the right things. One has to
ensure that one adds value whenever one does things or there is
no reason to do it. Google search Drucker and Taylor to find out
what they advocate and their fundamental differences.
Effectiveness vs. Efficiency
Dr. Wu shredding papers, fastest in the department.
Let nurses nurse and professors profess…
15
Fred Taylor asks how we can do things faster with less
resources. Peter Drucker, on the other hand, asks the
fundamental question of why we do it. The fact that we can do
it faster doesn’t mean we are doing the right things. One has to
ensure that one adds value whenever one does things or there is
no reason to do it. Research Drucker and Taylor to find out

9. what they advocate and what their fundamental differences are.
(The fact that Dr. Wu shreds papers the fastest in the
department does not mean he should focus on shredding
papers…or does it?)
Triple Bottom Line (TBL) Reporting
Economic
Typical financial reporting
Balanced scorecard: customers, suppliers, employees
Social
Bribery and corruption, political contributions
Child labor, indigenous rights
Training and diversity
Environmental
Energy
Water
Biodiversity
Emissions, effluents, and waste
An increasing number of companies are adopting TBL reporting
standards. What else are they reporting other than the economic
performance of the firm? Are they useful in helping managers
run a better operation? Do consumers pay attention to these
reports?
16
Measuring Academic Success?
What is a successful graduate? Definition first!
Measurements:

10. 17
When a graduate of CSUSB walks in the commencement, what
is this person? How do we measure success?
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM
Operations Strategy
4
COLLIER/EVANS
5
1
Explain how organizations seek to gain
competitive advantage
Explain approaches for understanding customer wants and needs
Describe how customers evaluate goods and services
LEARNING OUTCOMES
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

11. OM5 | CH4
2
Explain the five key competitive priorities
Explain the role of OM, sustainability, and operations in
strategic planning
Describe Hill’s framework for operations strategy
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
LEARNING OUTCOMES (continued)
Competitive Advantage
Firm’s ability to achieve market and financial superiority over
its competitors
Requires:
Understanding customer needs and expectations
Building and leveraging operational capabilities to support
desired competitive priorities
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4

12. 4
Understanding Customer Wants and Needs
Customers are categorized into various segments based on their
needs and wants
By understanding the unique needs of each segment, a company
can design:
Appropriate customer benefit packages
Competitive strategies
Processes to create goods and services
Order qualifiers: Basic customer expectations for the minimum
performance level required to stay in business
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
5
Understanding Customer Wants and Needs
Order winners: Goods and service features and performance
characteristics that differentiate one customer benefit package
from another and win the customer’s business
‹#›

13. Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
6
Evaluating Goods and Services
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
7
Search attributes
Experience attributes
Credence attributes
Aspects of a good or service that a customer can determine prior
to purchase

14. Aspects of a good or service that can be discerned only after
purchase or during consumption or use
Aspects of a good or service that the customer believes in and
cannot be discerned even after purchase and consumption
4.1 How Customers Evaluate Goods and Services
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

15. OM5| CH4
Exhibit
8
Competitive Priorities
Strategic emphasis that a firm places on certain performance
measures and operational capabilities within a value chain
Types
Cost
Quality
Time
Flexibility
Innovation
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
9
Cost
Each industry has a low price market segment
Low cost results from:
High productivity
High capacity utilization

16. Economies of scale
Continuous improvement is essential to achieve a low-cost
competitive advantage
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
10
Quality
Businesses offering premium quality goods have large market
shares and were early entrants into the markets
Positively and significantly related to a higher return on
investment for all kinds of market situations
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
11
Quality

17. Strategy of quality improvement leads to increased market share
High goods quality producers can charge premium prices
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
12
4.2 Interlinking Quality and Profitability Performance
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH4
Exhibit
13
Time
Important source of competitive advantage
Customers demand quick response, short waiting times, and
consistency in performance

18. Speeding up work processes improves customer response
Deliveries can be made faster and on-time
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
14
Time
Reductions:
Accomplished only by streamlining and simplifying processes
and value chains
To eliminate non-value-added steps such as rework and waiting
time
Drive improvements in quality, cost, and productivity
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
15

19. Flexibility
Success in global markets requires design and demand
flexibility
Visible in mass customization strategies
Mass customization: Ability to make goods and services that the
customer requires at any:
Volume
Time for anybody, and for a global organization
Place in the world
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
16
Innovation
Discovery and practical application or commercialization of a
device, method, or idea that differs from existing norms
Innovative companies focus on:
Outstanding product research, design, and development
High product quality
Ability to modify production facilities to produce new products
frequently
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly

20. accessible website, in whole or in part.
OM5 | CH4
17
OM and Strategic Planning
Strategy: Pattern or plan that integrates an organization’s major
goals, policies, and action sequences into a cohesive whole
Direction an organization takes and the competitive priorities it
chooses are driven by its strategy
Effective strategies to develop key competitive priorities
Low cost or fast service time
Exploit an organization’s core competencies
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
18
Strategic Planning
Process of determining long-term goals, policies, and plans for
an organization
Objective - Build a strong position for the organization to
achieve its goals despite unforeseen external forces
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May

21. not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
19
Levels of Strategy
Corporate strategy - Businesses in which the corporation will
participate and develop plans for the acquisition and allocation
of resources among those businesses
These businesses in which the firm participates are called
strategic business units (SBUs)
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
20
Levels of Strategy
Business strategy - Defines the focus for SBUs
Major decisions involves:
Pursuing the target markets
Best way to compete in target markets
Functional strategy - Set of decisions that each functional area
develops to support its particular business strategy

22. ‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
21
Levels of Strategy
Organization will decide on the execution of its chosen business
strategies
Development - Translating competitive priorities into
operational capabilities
By making variety of choices and trade-offs for design and
operating decisions
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
22
Sustainability
Organizational strategy in many firms

23. Dimensions
Environmental
Social
Economic
Requires major changes in the culture of an organization
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
23
A Framework for Operations Strategy
Operations design choices: Management decisions taken for the
appropriate type of process structure to be adopted while
producing goods or creating services
Key areas it addresses
Types of processes
Value chain integration and outsourcing
Technology, capacity and facilities
Inventory and service capacity
Trade-offs
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4

24. 24
A Framework for Operations Strategy
Infrastructure: Focuses on the non-process
features and capabilities of the organization
Workforce
Operating plans and control systems
Quality control
Organizational structure
Compensation systems
Learning and innovation systems
Support services
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
25
4.3 Hill’s Strategy Development Framework
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May

25. not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH4
Exhibit
26
4.4 Four Key Decision Loops in Terry Hill’s Generic
Strategy Framework
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH4
Exhibit
27
Operations Strategy at McDonald’s
Vision - World's best quick service restaurant experience
Worldwide strategies
Be the best employer
Deliver operational excellence
Achieve enduring profitable growth
‹#›

26. Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
28
Operations Strategy at McDonald’s
Sustainability initiatives
Build a sustainable McDonald’s that involves all facets of
business
Commit to a three-pronged approach
Reduce
Reuse
Recycle
Strive to provide eco-friendly workplaces and restaurants
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
29
Operations Strategy at McDonald’s
Sustainability initiatives
Work with suppliers and outside experts to continuously
improve:
Purchasing decisions
Evaluation of supplier performance regarding animal welfare

27. ‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
30
4.5 McDonald’s Customer Benefit Package
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH4
Exhibit
31
Competitive advantage is required to show the firm’s ability to
achieve superiority over competitors
Customers perceive greater risks when buying services than
when buying goods
Understanding competitive priorities provides basis for
designing the process that create and deliver goods and
services

28. SUMMARY
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
When an organization takes a direction and the decisions on
competitive priorities are driven by its strategy
Framework for operations strategy is designed for goods-
producing organization and to be applied to service-providing
firms
SUMMARY
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
Competitive advantage
Competitive priorities
Credence attributes
Experience attributes
Infrastructure
Innovation
Mass customization
Operations design choices
Operations strategy

29. KEY TERMS
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
Order qualifiers
Order winners
Search attributes
Strategy
KEY TERMS
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH4
Copyright ©2016 Cengage Learning. All Rights Reserved. May

30. not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM
Measuring Performance in Operations
3
COLLIER/EVANS
5
1
Describe the types of measures used for decision making
Explain the use of analytics in OM and how internal and
external measures are related
Explain how to design a good performance measurement
system
Describe four models of organizational performance
LEARNING OUTCOMES
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
2

31. Measurement
Act of quantifying the performance criteria of:
Organizational units
Goods and services
Processes
People
Other business activities
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
3
Measurement
Good measures:
Provide scorecard of performance
Help identify performance gaps
Make accomplishments visible to:
Workforce
Stock market
Other stakeholders
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3

32. Types of Performance Measures
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
5
Financial
Customer and market
Quality
Time
Flexibility
Innovation and learning
Productivity and operational efficiency
Sustainability

33. Financial Measures
Take top priority in for-profit organizations
Traditional financial measures
Revenue including earnings from new goods and services and
growth
Return on investment
Operating profit
Pretax profit margin
Asset utilization
Earnings per share and other liquidity measures
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
6
Customer and Market Measures

34. Customer and market feedback is used by organization to:
Evaluate the customer and stakeholder’s satisfaction
Customer-satisfaction measurement system: Provides a company
with customer ratings of specific goods and service features
Indicates the relationship between those ratings and the
customer’s likely future buying behavior
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
Quality
Measures the degree to which the output of a process meets
customer requirements
Goods quality: Relates to the physical performance and
characteristics of a good
Service quality: Consistently meeting or exceeding customer
expectations and service delivery system performance for all
service encounters
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
Service Quality
Dimensions

35. Tangibles
Reliability
Responsiveness
Assurance
Empathy
Every service encounter provides an opportunity for error
Service failures: Errors in service creation and delivery
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
9
Time
Relates to types of performance measures
Speed of doing something
Processing time
Queue time
Variability of the process - Measured by statistics such as:
Standard deviation or mean absolute deviation
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3

36. 10
Flexibility
Ability to adapt quickly and effectively to changing
requirements
Goods and service design flexibility: Ability to develop a wide
range of customized goods and services to:
Meet different or changing customer needs
Volume flexibility: Ability to respond quickly to changes in the
volume and type of demand
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
11
Innovation and Learning
Innovation: Ability to create new and unique goods and services
that:
Delight customers and create competitive advantage
Learning: Creating, acquiring, and transferring knowledge, and
modifying the behavior of employees in:
Response to internal and external change
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

37. OM5 | CH3
12
Productivity and Operational Efficiency
Productivity: Ratio of the output of a process to the input
Productivity = Quantity of output/Quantity of input
Operational efficiency: Ability to provide goods and services to
customers with minimum waste and maximum utilization of
resources
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
13
Sustainability
Triple bottom line (TBL or 3BL): Measurement of
environmental, social, and economic sustainability
Environmental sustainability measures
Energy consumption
Recycling
Air emissions
Solid and hazardous waste rates
‹#›

38. Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
14
Sustainability
Triple bottom line (TBL or 3BL)
Social sustainability measures
Consumer and workplace safety
Community relations
Corporate ethics and governance
Economic sustainability measures
Financial audit results
Regulatory compliance
Sanctions and fines
Accomplishment of strategic initiatives
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
15
Business Analytics
Helps operations managers to analyze data more effectively and
make better decisions

39. Applications of business analytics
Visualizing data to examine performance trends
Calculating basic statistical measures
Comparing results relative to other business units, competitors,
or best-in-class benchmarks
Using correlation and regression analysis
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
16
Linking Internal and External Measures
Cause-and-effect linkages between key measures of
performance explain the impact of operational performance on
external results
Interlinking: Quantitative modeling of cause-and-effect
relationships between external and internal performance criteria
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
17

40. 3.3 Interlinking Internal and External Performance
Measures
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH3
Exhibit
18
Value of a Loyal Customer (VLC)
Quantifies the total revenue or profit each target market
customer generates over the buyer’s life cycle
Total market value - Multiplying the VLC times the absolute
number of customers gained or lost
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
19
Designing Measurement Systems in Operations
Good performance measures are actionable

41. Actionable measures: Provide the basis for decisions at the level
at which they are applied
Meaningful to the user
Timely
Reflect the way organization generates value to customers
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
20
Models of Organizational Performance
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
21
Baldrige performance excellence framework
Balanced scorecard

42. Value chain model
Service-profit chain model
Baldrige Performance Excellence Framework
Primary purpose of the program - Provide a framework for
performance excellence through:
Self-assessment to understand an organization’s strengths and
weaknesses
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
22
3.4 Baldrige Model of Organizational Performance
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May

43. not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH3
Exhibit
23
The Balanced Scorecard Model
Purpose - Translate strategy into measures that uniquely
communicate an organization’s vision
Perspectives
Financial - Value to shareholders
Customer - Customer satisfaction and market growth
Innovation and learning - People and infrastructure
Internal - Processes that drive the business
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
24
3.5 The Balanced Scorecard Performance Categories and
Linkages

44. ‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH3
Exhibit
25
The Value Chain Model
Evaluates performance throughout the value chain by
identifying measures associated with:
Suppliers
Inputs
Value creation processes
Goods and service outputs and outcomes
Customers and market segments
Supporting management processes
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
26
Service-profit Chain Model
Most applicable to service environments
Based on a set of cause and effect linkages between internal and

45. external performance
Defines the key performance measurements on which service-
based firms should focus
Theory - Employees driven through the service delivery system,
create customer value and drive profitability
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
27
3.7 The Service-Profit Chain Model
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5| CH3
Exhibit
28
Different measures are used to provide scorecard of
performance and to identify gaps in performance

46. Applications of business analytics helps operations managers to
arrive at effective decisions
Good performance measures are actionable
First two models of organizational performance are known as
big picture
SUMMARY
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
Last two models of organizational performance provide more
detailed frameworks for operations managers
SUMMARY
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
Actionable measures
Customer-satisfaction measurement system
Flexibility
Goods and service design flexibility
Goods quality
Innovation

47. Interlinking
Learning
Measurement
KEY TERMS
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3
Operational efficiency
Processing time
Productivity
Quality
Queue time
Service failures
Service quality
Triple bottom line (TBL or 3BL)
Value of a loyal customer (VLC)
Volume flexibility
KEY TERMS
‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3

48. ‹#›
Copyright ©2016 Cengage Learning. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
OM5 | CH3