Savi chapter11

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1 Chapter 11, Six Steps of Performance Measurement Our new corporate motto is READY…FIRE…AIM

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  • 1. Chapter 11, Six Steps ofPerformance MeasurementOur new corporate motto is READY FIREAIM1

2. Figure 11.1,The Management Cycle Operating plansand budgetsProjectmanagementNeedsAssessmentPerformanceMeasurement2 3. The perfect world In a perfect world, a measurement system will actively promoteperformance improvement by; measuring what matters, providing corrective feedback andpositive reinforcement to enthusiasticpeople who enjoy being measured andtake improvement on as a challenge. 3 4. ATTRIBUTES OF A GOODMEASUREMENT SYSTEM An effective performance measurementsystem 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 5. 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 6. EXAMPLES OF KEYRESULT AREAS Customer Product/service Public/society/natural environment Marketing Human Resources Production Maintenance Operations Finance Good measurement systems dont justmeasure things done according to theorganizational chart. Good systems measurethings done to satisfy stakeholders. 6 7. Key PerformanceIndicators KPIs This is the essence of measurement. Letsmake sure the concept of Key PerformanceIndicator is understood. An indicator is a gauge or a measure thatreports information. Performance is the result or activity we arelooking for that fits in to strategic goals. Key means that this measure has beenpinpointed so carefully that management knowsprecisely what to do. Measures are developed to capture both the inputand output elements of a business system. 7 8. SPEED INDICATORS response time records turn around time records cycle time records project completion dates meeting scheduled time records 8 9. 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 aninspection point that ensures the product works. Customer returns or warranty claims.9 10. VOLUME INDICTORS Measures the amount (Number of) ofoutputs or results from a specificactivity or program. number of unitsproduced number of completed transactions % market share Back order statistics Number of failed sales due to being out ofstock10 11. INVESTMENT INDICATORS Measures the amount of resourcesexpended on a specific program oractivity or the unit cost (cost/number ofunits 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 areper something 11 12. Six Steps of aMeasurement System1. Separate Strategic Goals Into Input and Output Dimensions2. Develop Output and Results Measures for each goal3. Develop Input Measures for each goal4. Check with SAVI to see if the set of measures is complete5. Use an Effective Recognition System6. Build the Culture12 13. Step 1, Separate StrategicGoals Into Input andOutput Dimensions Following from Vision, Mission and Values,organizations create strategic goals thatidentify Key Result areas of theorganization where change and improvementis possible and desirable. Our first step in developing measures toreflect the goal is to dissect the goal into itsinput and output dimensions. 13 14. BroadFigure 11.2,measurement concept of inputs unit cost efficiencyInputHow well are materials used, (excessive waste)dimensionHow well is labour used, (excessive idle time) How well is overhead used (idle capacity) 14 15. Broad Figure 11.3,measurement concepts of OutputsInternal maintaining and improving qualityResultslower consumer prices Output Dimension financial returnsExternalResults improve market share meet current and future demand15 16. Step 2, Develop OutputMeasures or Each Goal Outputs are accomplishments. In mostorganizations, accomplishments can becategorized into three groups. Investment returns Customer Satisfaction Social Impacts16 17. Measures of Figure 11.4,outputs or Results. OUTPUT MEASURES PERFORMANCE GOAL MEASUREMENTPERFORMANCECATEGORY(changes of specific amounts over CONCEPTMEASUREspecific time frames)% return oninvestment All should increase by a specificFinancial % return on assets % change, to be accomplished returnsemployed by a specific date.Profit margin onsalesInvestment The proportion of the marketReturns % market share share against the competitionrelative to theshould increase. Market competitionThe proportion of the market share% market share share relative to the total marketrelative to totalshould increase at a rate that ismarket sizefaster than the rate of change in total market size.17 18. Measures of outputs orResultsRejection rates in Product or the productionBoth should decline by a specificservice process amount in a specific timeframe. quality Sales returnsDeliver on CustomerBackorders should decline and time and in Backorder andSatisfaction delivery cycle times shouldsufficient delivery statistics improve. quantityConsumer Retail price by The retail price matched to value pricesproduct should decline. Children using these toys shouldChildImprovement in show a measured improvement development reading skills in reading skillsSocial Benefits Impact on landfills Environment The proportion of toys presented when the toy isal impactfor re-cycling should go up. finished18 19. Step 3, Develop InputMeasures For Each Goal We normally develop input measuresafter we have developed outputmeasures because it is a good idea toknow where you are going before youdecide how to get there. Financial operating resources Financial capital resources Other organizational resources 19 20. Measures ofFigure 11.5,Inputs or EfficienciesINPUT MEASURES for UNIT COST EFFICIENCY MEASUREMENT CATEGORYPERFORMANCE MEASURE PERFORMANCE GOAL CONCEPT Material and labour cost and orDirect materials and directMaterials andconsumption per unit shouldlabour per unit, expressed inlabour decline over a specified timeboth dollar and quantity terms periodFinancial Operating Overhead consumed per unitOverhead charged per unit Resources produced should declineOverhead %capacity utilized should% utilization of capacityincrease to or remain at optimal levelsFinancial CapitalDollars per unit of capitalCapital investment in Dollars of capital investmentinvested should decline over Resourcesoperating assetsper unit producedtime as capital resources are used more efficientlyManagement estimates of the OtherNon-financial resources of talent and energy The amount consumed willresources consumedand other non-financialincrease as the project is Organizational by the performanceresources that have been developed and decrease after itResources areadedicated to this performanceis implementedarea 20 21. Step 4, Check with SAVI tosee if the set of measuresis complete Before we can be sure that we have acomplete set of measures, we need toapply the SAVI framework to categorizethe measures as to Speed, Accuracy,Volume and Investment. 21 22. Figure 11.6,Linking OutputMeasures to SAVIOUTPUT MEASURES MEASUREMENT CATEGORY CONCEPT PERFORMANCE MEASURESAVI% return on investment financial returns% return on assets employed AccuracyProfit margin on sales Investment Returns% market share relative to the competition market share% market share relative to total market size VolumeProduct or serviceRejection rates in the production process Accuracy & qualitySales returnsVolumeCustomer Speed &Deliver on time and Satisfaction Backorder and delivery statistics in sufficient quantityVolumeConsumer prices Retail price per productInvestment Child developmentImprovement in reading skills AccuracySocial BenefitsEnvironmental impactImpact on landfills when the toy is finished Volume 22 23. Figure 11.7, Linking InputMeasures to SAVIINPUT MEASURES for UNIT COST EFFICIENCY MEASUREMENTCATEGORY CONCEPTPERFORMANCE MEASURESAVIMaterials and Direct materials and direct labour per unit, in labour both dollar and quantity terms. InvestmentFinancial OperatingOverhead charged per unit. Investment resourcesOverhead% utilization of capacity VolumeFinancial Capital Capital investment Resourcesin operating assetsDollars of capital investment per unit producedInvestment OtherNon-financial Management estimates of the resources of talent organizationalresourcesand energy that have been dedicated to thisInvestment resources consumed performance area.23 24. Testing the measures Once we are satisfied that the set iscomplete we need to subject each andevery measure to a test.Refer to figure 11.8 24 25. Step 5, Use an EffectiveRecognition System Use Measurement to Initiate Change An effective measurement system will use themeasured results as a management tool. Every result should have an automaticintervention strategy. When results are as expected we should offercongratulations and reinforcement to keep itgoing, when results are less than expected we shouldquickly isolate the cause and correct the process 25 26. Step 6, Build the culture Good systems need good people. There isno sense in examining a process unless atthe same time you examine the peoplewho govern the process. Improvement does not take place on paper. Improvement happens when people employ enthusiasm,dedication, commitment, leadership and morale in their dailyroutine. A good system on paper is a healthy beginning but if you wantresults you need to follow up a paper system with a peoplesystem.26 27. Closing remarks In the beginning of this chapter you werechallenged to find measures and see theresulting behavior. So how about the 30 minute pizza deliveryguarantee. That promotes speeding and if adelivery person has an order at 28 minutes andanother at 10, which does he deliver first? Andwhat happens if Pizza delivery people are offereda cash bonus for every delivery made within 30minutes, and what does this do to pizza quality?27 28. People are curious beings. We bring our ownpersonal values to the job, we react differently tocontrol systems, we are motivated by differentthings. A performance measurement system is auniform set of measures that is trying to motivate amost un-uniform set of people. Chapter 12 will deal with how we need to managepeople as part of the performance improvementprocess.28