1. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 1 Performance Measurement and Strategic Information Management

2. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 2 Team decision Need to identify organization you will study for your “individual” case study.

3. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 3 Support for your organizational analysis assignment  Adapt the performance measurement tools in this chapter for your interviews with the organization you study. Ask about measurements they have in place by giving more everyday descriptions of the measuring process rather than using the terms presented in the textbook, unless they mention these.

4. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 4 Theme of this chapter In order to plan and achieve improvements toward a total quality process, an organization needs to perform baseline measurements, set operational goals, track progress, and record and disseminate the information relevant to these tasks in their information system.

5. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 5 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

6. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 6 Process Flow Measures and Indicators Data Analysis Information

7. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 7 Key Idea Measurement and the accompanying information system are the basis for Management by Fact (rather than opinion). Example of Florida Power & Light – assumed that outages due to lightning strikes Too much data is as bad as too little.

8. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 8 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

9. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 9 Key or Critical Success Factors  The things an organization needs to do well to accomplish its vision are often called key business drivers or key success factors.  These are characteristics of successful operation for organizations in a particular market – example competencies must a package delivery company have to succeed relative to the competition?

10. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 10 Leading Practices (1 of 2)  Develop a set of performance indicators that reflect customer requirements and key business drivers (CSFs)  Use comparative information and data to improve overall performance and competitive position -- benchmark  Continually refine information sources – antiquated measurement=bad decisions  Continually review performance, using statistical tools

11. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 11 Leading Practices (2 of 2)  Ensure that performance information is widely visible –hilite top performers  Good data are (1) accurate, reliable, timely, (2) secure, and confidential  Ensure that hardware and software systems are reliable and user-friendly  Systematically manage organizational knowledge – articulate internal knowledge and make it retrievable.

12. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 12 Basic Idea of Balanced Scorecard  In addition to traditional comptroller measures, focus on the internal processes that produce profit or the lack of it – quality level, cycle time, costs, customer satisfaction, employee satisfaction, turnover, scrap rate ….

13. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 13 Balanced Scorecard 1. 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 perspective Directs 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.

14. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 14 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. See Page 399 – example – objective=community satisfaction – lag ind = market share – lead ind= adult ed enrollment, stakeholder surveys, prospective homeowner requests. Lag predicts Lead.

15. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 15 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

16. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 16 Baldrige Classification of Performance Measures (2)  Figure 8.3 displays the entire spectrum

17. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 17 Customer Measures  Perceived value of product  Overall satisfaction  Complaints  Gains and losses of customers  Industry awards/recognition  Internal vs. external customers requirements – ex. Cycle times important for distributors

18. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 18 Product and Service Measures  Internal quality measurements  Field performance of products  Defect levels  Response times  Customer surveys on product and service performance  Determine what correlates with customer satisfaction

19. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 19 Financial and Market Measures  Revenue  Return on equity  Return on investment  Market share  New product sales  Earnings per share  Traditional but essential

20. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 20 Human Resource Measures  Employee satisfaction  Training effectiveness  Grievances & suggestion rates  Safety  Absenteeism  Turnover

21. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 21 Preface to Organizational Effectiveness Measures  Perhaps unlike what is suggested by the title, these are all measures of operational efficiency and effectiveness.

22. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 22 Organizational Effectiveness Measures  Cycle times  Production flexibility  Lead times and setup times  Time to market  Product/process yields  Delivery performance  Cost efficiency  Productivity

23. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 23 Governance and Social Responsibility Measures  Environmental and regulatory compliance  Financial and ethics audit results  Community service

24. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 24 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

25. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 25 Key Idea Major purpose of measurement is tracking progress relative to the competition. See figure 8.4 for Texas NamePlate

26. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 26 Practical Guidelines  2 frequent mistakes – not measuring key characteristics – and taking irrelevant or inappropriate measurements  IDS Financial Services used to measure 4000 individual tasks and often used 100% inspection – redesigned to 80 processes and sampling  Computer software company needs different measures from those of a pizza franchise.

27. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 27 Linkages to Strategy  Figure 8.6 – Merrill Lynch alignment of measures with strategies and processes.  Objectives on left, measures in middle, processes = 1.design. 2. market. 3. pre- origination. 4. order. 5. underwrite. 6. approve. 7. audit/fund. 8. setup service.  Shows level of impact of each process on each objective  Note possible use teams may make of this scheme for case study or organizational analysis

28. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 28 Process-Level Measurements  What makes a GOOD performance measurement system?  Does the measure have an owner? – Major!  Revised SMART acronym indicators employed should be: simple, measureable, actionable, related to customer requirements and the other indicators, timely.  Common indicator in use is defects per million opportunities or in polite version, nonconformities

29. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 29 Key Idea To repeat -- Good measures and indicators are actionable; that is, they provide the basis for decisions at the level at which they are applied.

30. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 30 Common Process Quality Measures  Nonconformities (defects) per unit  Errors per opportunity  Dpmo – defects per million opportunities

31. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 31 Creating Effective Performance Measures  Identify all customers and their requirements  Define the work process  Define value-adding activities – weed out what does not add  Develop performance measures for each value-adding activity  Make sure your measures are useful

32. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 32 Example of useful system of performance measures  # of pizzas by type per hour, relative to the kitchen’s capacity  Order accuracy to kitchen  # pizzas rejected per # prepared  Time to delivery  # errors in collections  Raw materials/finished pizzas inventory

33. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 33 Analyzing and Using Data  Analysis – after having measured, see what it means, including statistical analysis  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

34. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 34 Key Idea Organizations need a process for transforming data, usually in some integrated fashion, into information that top management can understand and work with.

35. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 35 Interlinking  Link internal and external performance measures – example, customer satisfaction correlates with employee satisfaction?  Johnson Controls – a 1% increase in overall satisfaction = $13 M in contracts  Data mining – garbage in, data out – example, a certain supplier has higher defect rate on parts costing < $5

36. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 36 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

37. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 37 Quality Cost Classification  Prevention—keep defects from reaching the customer – mainly at strategic level  Appraisal – actual inspection for conformance  Internal failure – unsatisfactory before delivery  External failure – unsatisfactory after delivery

38. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 38 Quality Costs  For companies starting up a quality process, it usually turns out that highest quality costs are external failure, then internal failure, then appraisal, then prevention. This is the reverse of what should be.  For service organizations, external failure costs are vastly higher than internal because the error is not found until the customer is involved.

39. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 39 Return on Quality (ROQ)  ROQ – measure of expected 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 – customers might be unwilling to pay  Not all quality expenditures are equally valid – focus on ones with major impact

40. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 40 Intuitive analysis of COQ/ROQ  Assigned problems – what do the ratios between the four categories of quality cost show?  What is shown by changes over time after initial efforts at improvement?