CBMC 1 OPERATIONS MANAGEMENT WITH TQM

HANDOUT #9
Performance Measurement

Introduction:
Performance measurement is a vital process for evaluating and improving organizational
effectiveness. By systematically assessing performance, organizations can identify strengths,
address weaknesses, and drive continuous improvement. This handout covers key aspects of
performance measurement, including its scope, benefits, and techniques for presenting
results effectively. It also provides insights into designing efficient performance measurement
systems and examines the cost of quality as a critical factor in achieving organizational goals.
Whether in business, education, or other fields, understanding and applying these principles
is essential for success.

Date and Time Allotment:

Week 14 & 15 (6 hours)

Objectives:
 Know the scope of performance measurement
 Analyze, evaluate and solve performance issues using the different performance
measure presentation.
 Understand the different measurement and management performance measure to
ensure excellent performance.
 Overview of quality cost programs and their implementation

Lecture:

Scope of Performance Measurement

Performance measures plays an important part in the overall success or failure of a

business organization. It measures quantitatively tell us something important about our
products, services, and the process that produce them. They have a tool to help us
understand, manage, and improve what organizations do.

Essential Elements of Performance Measures (by Ray F. Boedecker):

1. Objectives - Performance measurement as used to achieve one or more
objectives.

2. Typical Measurement - What should be measured is frequently asked by managers

and teams. The information below suggests some items that can be measured.
a. Human Resources: Lost time due to accidents, absenteeism, turnover,
employee satisfaction index, number of suggestions for improvement, number
of suggestions implemented, number of training hours per employee, training
cost per employee, number of active teams, and number of grievances.
b. Customers: Number of complaints, number of on-time deliveries, warranty data
such as parts replacement, customer satisfaction index, time to resolve
 complaints, telephone data such as response time, mean time to repair, dealer
satisfaction, report cards.
c. Production: Inventory turns, SPC charts, Cp /Cpk, amount of scrap/rework,
nonconformities per million units, software errors per 1000 lines of code,
percent of flights that arrive on time, process yield, machine downtime, and
actual performance to goal, number of products returned, and cost per unit
d. Research and Development: New product time to market, design change
orders, R & D spending to sales, average time to process proposal, recall data,
cost estimating errors.
e. Suppliers: SPC charts, Cp /Cpk, on-time delivery, service rating, quality
performance, billing accuracy, average lead time, percent of suppliers that are
error free, just-in-time delivery target
f. Marketing/Sales: Sales expense to revenue, order accuracy, introduction cost
to development cost, new product sales to total sales, new customers, gained
or lost accounts, sales income to number of salespeople, number of successful
calls per week.
g. g. Administration: Revenue per employee, expense to revenue, cost of poor
quality, percent of payroll distributed on time, number of days accounts
receivable past due, number of accounts payable past due, office equipment
up-time, purchase order errors, vehicle fleet data, order entry/billing accuracy.

3. Criteria - All organizations have some measurements in place that can be adapted
for TQM. However, some measurements may need to be added. In order to
evaluate the existing measures or add new ones, the following ten criteria are
recommended:
a. Simple: Measures should be understandable by those who will use them.
b. Few in number: The important measures must be distinguished from the
unimportant ones so that users can concentrate on just a few. Two or three
measures should be sufficient for any work group, with the number increasing
for departments, functional areas, plants, and corporations. Quality councils
may wish to use composite measures such as a customer satisfaction index. It
is composed of several weighted metrics such as on-time delivery, cost,
product or service quality, and complaints.
c. Developed by users: In order to ensure ownership of the measures, they must
be developed by the user. Measures dictated by a higher authority will usually
not receive support from downstream units. However, in some cases,
measures are mandated by the customer.
d. Relevance to customer: Measures must be relevant to the needs of internal or
external customers. Control over important changes should be vested in the
people who are held responsible for the performance measure. They also
decide what measures to use and set target goals.
e. Improvement: Although correcting non-conformances and making current
decisions are important, the focus should be on improvement, prevention, and
strategic long-term planning and goal setting. Measures are used to promote
improvement, not to identify poor performance and penalize the low
performers. They should be sensitive to the improvements made.
f. Cost: Of course, the bottom line is that cost and profit must reflect an improved
financial picture, as shown by the cost of poor quality system and other financial
data. In addition, the cost of measurement should be considered
g. Visible: Facility-wide measures should be posted in a central location, such as
the lunch or break room, where everyone can see them. Likewise, unit
measures should be posted at the machine or work center.
h. Timely: Financial and accounting data are often presented too late to be
actionable. This may require that measurements are taken hourly, daily, or
weekly rather than monthly or quarterly as in traditional.
Why do we need to measure?
1. Control — measurements help to reduce variation.
2. Self-assessment — measurements can be used to assess how well a process is doing,
including improvements that have been made.
3. Continuous improvement — measurements can be used to identify defect sources,
process trends, and defect prevention, and to determine process efficiency and
effectiveness, as well as opportunities for improvement.
4. Manaqement assessment — without measurements there is no way to be certain we
are meeting value added objectives or that we are being effective and efficient.

The basic concept of performance measurement involves:

 Planning and meeting established operating goals/ standards;
 Detecting deviations from planned levels of performance; and
 Restoring performance to the planned levels or achieving new levels of performance.

Benefits of Measurement:
 To identify whether the company is meeting customer requirements. How do we know
that we are providing the services/ products that our customers require?
 To help us understand the companys process. To confirm what we know or reveal
what we don't know Do we know where the problems are?
 To ensure decisions are based on fact, not on emotion. Are our decisions based upon
well documented facts and figures or on intuition and gut feelings?
 To show where improvements need to be made. Where can we do better? How can
we improve?
 To show if improvements actually happened Do we have a clear picture?
 To reveal problems that bias, emotion, and longevity cover up. If we have been doing
our job for a long time without measurements, we might assume incorrectly that things
are going well. (They may or may not be, but without measurements there is no way
to tell.)
 To identify whether suppliers are meeting the companys requirements are being met?

Six Basic Techniques for Presenting Performance Measures.

1. The simplest and most common is the time series graph. Time as measured by days,
weeks, months, and so forth, is shown on the horizontal axis, and the performance
measure is shown on the vertical axis. This type of graph benchmarks the process and
shows favorable and unfavorable trends in the measure.
2. A second form of presentation is the control chart. A control chart for percent
nonconforming.
3. A third presentation technique is the capability index, which is the ratio of the
tolerance to the capability. There are tho measures: one indicates the ability of the
process to meet specifications, and the other indicates the centering of the process on
the target
4. Another way of measuring quality is Taguchi's loss function. This technique
combines target, cost, and specifications into one measurement
5. The fifth method of presenting performance measures is the cost of poor quality.
Money attracts the attention of senior management; quality costs are described in the
next section of this chapter.
6. The last method includes the performance measurement based on the criteria of
national/international quality awards such as Malcolm Baldrige National Quality Award
(US), Deming Prize (Japan) or Rajiv Gandhi National Quality Award (India). The criteria
for such awards quite effectively measure the performance of TQM effort, on an annual
basis.
Key performance indicators (KPls) and metrics

KPls and metrics provide a way to measure how well companies, business units, projects or
individuals are performing in relation to their strategic goals and objectives.

 Performance appraisals - Alongside KPls, performance appraisals are probably the

most commonly used performance management tool. When used properly,
performance appraisals are incredibly powerful for aligning the goals of individuals with
the strategic aims of the organization.

 360 degree feedback - This tool is all about answering the question, "How well are our
people performing in the eyes of those who have a stake in their performance?" It
provides individuals with a broad assessment of their performance based on the views
of those around them, including their supervisor or manager, direct reports, peers,
customers, suppliers, and so on. Results are confidentially tallied and presented to the
employee, usually by a manager.

 Manaqement by objectives (MBO) - MBO is the process of defining specific objectives

and then setting out how to achieve each individual objective. It's particularly powerful
for specific work that needs to be done one step at a time, and is a great way to create
a culture of working towards common goals.

 Performance manaqement frameworks - Without a doubt, one of the most popular and
best-known management frameworks is the Balanced Scorecard (BSC). The BSC is
a strategy execution tool that helps companies to clarify their strategy and
communicate their business priorities and objectives, monitor progress by measuring
to what extent priorities and objectives are being delivered; and define and manage
action plans to ensure initiatives are in place to deliver the business's priorities and
strategic objectives.

 Reward and recognition programs - When employees feel that good performance goes
unrecognized and unrewarded, motivation plummets, and people disengage from the
company’s overall mission.

 Personal development plans (PDP) effectively a tailored action plan that is based on
reflection and awareness of an individual's performance and needs, setting out goals
for future performance and actions that will support personal development

Designing Effective Performance Measurement Systems

In the ever-changing business scenario and the evolving workforce dynamics,
performance management systems have become a useful way to better manage the human
resources in an organization. Companies across the globe have adopted various methods and
strategies to improve the performance of their employees but many are not happy with what
they have.

Steps in Developing Actionable KPls

1. Establish goals
2. Establish Critical Success Factors
3. Establish KPls from the CSFs
4. Collect Measures for all Aspects of Operations
5. Calculate Metrics from Measures

Cost of Quality
 Relating Quality Cost to Business Measures While sharing the results of quality cost
with the management, quality manager should relate it to the overall business measures. It
will have great impact on the management if cost of quality relates to the other figures, such
as total sales, total profit, etc., with which managers are familiar. For this purpose, some base
line is required and the examples are:

1. As a percentage of sales: Most of the financial reports extensively use total sales or
business value as a key performance index. When quality costs are related to total
sales, its impact on top management is inevitable. It gives valuable input for decision
making and arriving at annual planning.

2. As compared to profit: In the initial studies of quality cost, it comes as a surprise that
quality costs are even higher than the company profit

3. As related to production: Quality cost per unit (say dollar) of production cost is also a
commonly used index. Production cost consists of material, labor and overheads and
is often used in several other indices. It can be similarly indexed with design cost or
purchase cost.

4. As related to unit of production: Quality cost per unit, such as an engine, one meter of
cloth, etc. is a very simple index and effective for comparison when production lines
are similar. In case of dissimilar production lines, the comparison is rather difficult.

Accounting departments normally issue quality cost reports. The report contains quality
costs per month (or any suitable period) for each element and also data of the previous year.
Comparison of current costs and historical data enables the management to arrive at budgets
for next period and strategy for control.

 Analysis of how quality costs are distributes amongst various categories indicates
focus areas. Most common tools are trend and Pareto analysis. Trend analysis over a
long period helps in monitoring the progress of improvement actions.
 Improvement Action Strategy and Plan - The most evident step is to control the number
of defects. On this path, companies invariably increase the inspection. This approach
fails because it does not eliminate root because it should lead to undertaking several
improvement projects.
 Limitations of Quality Cost - Quality cost analysis is useful for setting priority for upper
management but usually does not suggest specific actions. It provides a broad
direction but requires further detailed analysis of data such as item-wise analysis of
rejections, warranty, customer complaints etc. to decide action plan.

Activity:
Discussion on the Scope of Performance Measurement, Benefits of Measurement, Basic
Techniques on Performance Measure Presentation, Designing Effective Performance
Measurement Systems, Cost of Quality.

Assessment:
The students will take a 30-point multiple-choice quiz to gauge their understanding of
performance measurement.

References:
 J.R. Evans. And W.M. Lindsay, Total Quality Management, Cengage Learning Asia,
2013.
  J. Heizer, B. Render, Operations Management, 10th Global Edition, New Jersey:
Pearson Education, 2011.
 S. Kale, Production and Operations Management, New Delhi, McGraw-Hill education,
2013.
 W.J. Stevenson, Operations Management 12th Edition. New York: McGraw-Hill
education, 2015.
 W.J Stevenson and S.C. Chuong, "Operations Management". 2nd Edition. New York:
McGraw-Hill education, 2014.
 Slack, N., Chambers, S., & Johnston, R. (2023). OPERATIONS MANAGEMENT (10th
ed.). Pearson Education Limited, 2023
 David Alan Collier, James R. Evans, William Lindsay (2020) Operations Management
and Total Quality Management, Cengage Learning Asia Pte Limited, 2020
 Facility Planning and Management Retrieved from:
https://www.mitsde.com/media/student%20corner/Next-Gen-
Learning/Sample%20PPT_Facility%20Location%20and%20Layout.pdf
 https://www.pmi.org/about/learn-about-pmi/what-is-project management
 https://www.projecttimes.com/articles/does-people-behavior-impact-projects-how-
and-what-do-we-do-about-it.html
 https://www.workamajig.com/blog/guide-to-work-breakdown-structures-wbs
 https://keydifferences.com/difference-between-pert-and-cpm.html
 https://hbr.org/1984/07/budget-choice-planning-versus-control
 https://en.wikipedia.org/wiki/Risk_management
 https://blog.hubspot.com/marketing/free-project-management-software

Prepared by:
Ryan O. Maramba, CHRA, CHRP, COMS, CSPE, LPT, DBA