five generic areas of performance

 quality: are you doing things right?

 speed: are you doing things fast enough?
 dependability: are you doing things as promised, on time?
 flexibility: are you able to cope with change?
 cost: are you working within budget?

Performance area Importance Some typical

Quality Quality means consistently
producing services and
products to customer
expectations. In other words,
it means doing things right,
which is why all operations
need to consider quality. By Warranty claims
minimising
errors, quality saves costs
and increases the
dependability of the
operation.
Speed Speed refers to the time
between customers
requesting and receiving a
product or service. Speed of
delivery influences customer
purchasing, with customers
frequently willing to pay
more for speedy delivery
over a slower alternative.
Internally, speed influences
the extent to which
operations need to plan
ahead.
Dependability Dependability means doing
things in the time expected
by customers and which has
been promised. It is also
about reliance on a product
to perform to its capabilities
or function. Operations with
high dependability are more
effective than those which
are not because, for
example, they are less at risk
of unscheduled
interruptions. High
measures
Number of defects per
unit
Level of customer
complaints
Scrap level
Mean time between
failures
Customer satisfaction
score
Customer query time
Order lead time
Frequency of delivery
Actual versus
theoretical throughput
time
Cycle time
Percentage of orders
delivered late
Average lateness of
orders
Proportion of products
in stock
Mean deviation from
promised arrival date
Schedule adherence
 dependability fosters
customers’ trust in the
operation and allows
operations to focus on
improvement rather than
dealing with problems.
Flexibility Flexibility refers to
the capacity of an operation
to adapt to change. This may
be the operation’s ability to
introduce new or modified
products and services,
produce a different mix of
products and services,
change the level of output or
change delivery times.
Flexibility is important
because most operations
serve markets that are
affected by change.
Cost Low costs are critical for
companies that compete by
offering low prices, but all
operations have a need to
keep their costs as low as is
compatible with the levels
of quality, speed,
dependability and flexibility
that their customers expect.
A focus on costs
increases productivity and
increase the effectiveness of
operations.
Note: We will discuss how
to measure productivity in a
later section of this module.
Time needed to
develop new
products/services
Range of
products/services
Machine changeover
time
Average batch size
Time to increase
activity rate
Average capacity as a
proportion of
maximum capacity
Time to change
schedules
Minimum delivery time
as a proportion of
average delivery time
Variance against
budget
Utilisation of resources
Labour productivity
Added value
Efficiency
Cost per operation
hour
The balanced scorecard approach.

1.     How do we look to shareholders (financial perspective)?

Typical financial goals have to do with profitability, growth and shareholder values. Financial
measures such as quarterly sales figures have been criticised as being short sighted and not
reflecting contemporary value-creating activities. Moreover, critics say that traditional financial
measures do not improve customer satisfaction, quality or employee motivation.

However, financial success is ultimately required if an organisation is to survive – so financial

measures will always need to be part of performance measurement.

2.     How do customers see us (customer perspective)?

Many organisations make taking care of the customer a high priority. The balanced scorecard
translates the mission of customer service into specific measures of concerns that really matter to
customers; for example:

 the time between placing an order and taking delivery

 quality in terms of defect level

 satisfaction with products and service

 cost.

3.     What must we excel at (internal business perspective)?

This part translates what the company must do internally to meet its customers’ expectations. These
are business processes such as quality, employee skills and productivity.
Top management’s judgment about key internal processes must be linked to measures of employee
actions at the lower levels, such as the time taken to:

 process customer orders

 get materials from suppliers

 produce products

 deliver products to customers.

Computer information systems can help; for example, to identify late deliveries, trace a problem to a
particular plant.

4.     Can we continue to improve and create value (innovation and learning perspective)?

Learning and growth of employees is the foundation for innovation and creativity. Thus, the
organisation must create a culture that encourages employees to make suggestions and to question
the status quo; it must also provide employees with the environment and resources needed to do
their jobs. The company can use employee surveys and analysis of training data to measure the
degree of learning and growth.

These correspond to the three principal managerial levels found in most large organisations:

 strategic – planning by top managers

 tactical – planning by middle managers

 operational – planning by first-line (supervisory) managers.

Strategic control is monitoring performance to ensure that strategic plans are being implemented
and taking corrective action as needed. Strategic control is mainly performed by top managers.

Tactical control is monitoring performance to ensure that tactical plans – those at the divisional or
departmental level – are being implemented and taking corrective action as needed.
Tactical control is done mainly by middle managers, those with such titles as ‘division head’, ‘plant
manager’ and ‘branch sales manager’.

Operational control is monitoring performance to ensure that operational plans – day-to-day goals –

are being implemented and taking corrective action as needed. Operational control is done mainly
by first-level managers, those with titles such as ‘department head’, ‘team leader’ or ‘supervisor’.
Productivity
Productivity is a key measure to look at in more detail because it captures how well operations are
managing their costs – a consideration that is important to all operations. It is also a measure that
can be used in various ways, which we look at below. This makes it applicable to a wide range of
situations.

Productivity is different to production. Productivity measures the ratio of production to inputs,

whereas production measures output.

The distinction between productivity and efficiency is less clear than that between productivity and

production.

For operations managers, who are likely to encounter the perspectives of both economists and
industrial engineers in their work, the main message is always check how terms such
as productivity and efficiency are being defined by those using them.

Measuring productivity
Productivity is the ratio of what is produced by an operation (its ‘production’) to what is required to
produce it. This general formulation is usually applied as a measure of single or multi-factor
productivity 
Formulas for calculating different measures of productivity.

Single factor productivity is a partial measure of productivity as it examines only how much of one
type of resource is required per unit of output. For example, productivity in the automobile industry
is frequently measured in terms of the number of vehicles assembled per year per employee. This is
a partial measure as it considers only one input into assembling a car: employees. It ignores the
contribution of plant, raw materials, equipment and so on.

Labour hours are the most common input in productivity calculations. Labour is an easily identified
input to virtually every production process. As labour also frequently represents a high proportion of
production costs so it is a measure that operations managers are particularly interested in. Multi-
factor productivity relates output to a combination of two or more inputs. Total factor
productivity considers all outputs and inputs.

Sometimes it may not be evident whether a particular productivity measure is based on labour hours

or some other single factor, or whether it is a multi-factor measure of productivity. In a particular
context, if it is customary to measure productivity in a particular way, it may just be stated as the
operation’s productivity. Formally, however, a single measure of productivity is a measure of the use
of that individual resource and so should be expressed as labour productivity, energy productivity or
whatever.

A productivity measure is of most use where it can be compared with another. For example, if one
worker at a pizza shop produces 19 pizzas in two hours, the (single factor) productivity of that
worker is 8.5 pizzas per hour. This number by itself does not tell us very much. A comparison with
the productivity of another pizza store worker, on the other hand would be of interest.

Looking at how productivity changes over time is a particularly useful comparison. It can show

whether efforts to improve the efficiency of processes are working. The general pattern is that
investment in new technology helps to increase productivity, but this is not guaranteed.
Productivity data need to be interpreted with care. Examining the formula for productivity,
output/input, it becomes apparent that productivity can be increased in different ways. For example,
an operation may increase productivity by decreasing input faster than output. This is why
increased productivity can be reported after organisations make workers redundant. However,
sustaining this productivity increase may be difficult unless investment is made in equipment to
replace the need for the workers who lost their jobs, or processes are redesigned to be able to
operate with fewer workers.

A risk is that if productivity increases in one part of the operation it simply leads to mismatched
operations. For example, suppose that an operation consists of a sequence of two processes, with
the output of one being an input to the other. If both processes have a capacity to deliver 20 units of
output per hour, increasing the productivity of one process only will have no effect on the
overall productivity. It remains at 20 units per hour.

As a performance measure, another limitation of productivity is that it measures output produced,

not output sold. If output produced is not sold, increases in productivity are of little benefit and in a
worst case situation may even accelerate an operation’s demise.

Nonetheless, productivity measures are important because they say something about how

competitive an operation is. A high level of productivity saves input costs compared with an
operation producing the same level of output with low productivity. The
higher productivity operation can use this advantage to charge a lower price and consequently can
expect to increase its market share or the firm could keep its prices unchanged and gain a higher
profit than the less productive firm.

Productivity in the service sector

Productivity of service operations is harder to measure than productivity in manufacturing
operations. There can be a high degree of variability in the amount of effort required to produce the
same service. Many services are customised to individual customer requests. This makes every
service delivery different whereas the output of a manufacturing process can be highly standardised
(one computer or telephone of a certain model, for example, is identical to all others of the same
model). As well, the fact that customers vary in their behaviour and previous experience can mean
more or less effort is required to deliver the same service. For example, visiting a restaurant for the
first time you may require assistance making your meal choice. After you have visited the restaurant
many times, you probably know what you want before you get there.

Process yield is a measure closely related to productivity. This again can be easier to measure for
manufacturing operations but it can be applied to service operations too.

Where products are involved, process yield measures the ratio of the output achieved (ignoring any
defective and rejected output) to the quantity of raw material input. Applied to service
operations, process yield is measured in ways specific to the service and the aspect of its operation
of interest. For example:

 in a car rental service, process yield is the ratio of cars hired to cars available for hire over a
given time period.

 in education, a measure of admission yield is the ratio of student acceptances to the total
number of students approved for admission.
  for subscription services, process yield is the number of new subscriptions obtained as a
ratio of the number of potential subscribers called or mailed information about the service.

Utilisation is a similar measure but is focused on the ratio of the time a resource is actually used
versus the time it is available for use. Given that utilisation does not measure the value or volume of
output (unlike productivity) it is more readily applied to service operations.

Six reasons why  control is needed.

Reason for control Explanation

To adapt to change and Control systems can help managers anticipate, monitor and react to shifts in m
uncertainty competitors, new technologies and changes in government regulations.

To discover irregularities and Small problems can mushroom into big ones. Cost overruns, manufacturing de
errors errors and customer dissatisfaction are all matters that may be tolerable in the
bring about the downfall of an organisation.

To reduce costs, Control systems can reduce labour costs, eliminate waste, increase output and
increase productivity or add value can also help add value to a product by ensuring quality standards are adhered

To detect opportunities Controls can help alert managers to opportunities that might have otherwise g
alert managers to products experiencing a rush of demand or where prices hav

To deal with complexity When a company becomes larger or when it merges with another company, it
materials purchasing policies, multiple customer bases and/or a workforce with
Controls help managers coordinate these various elements.

To decentralise decision making Controls allow top management to decentralise decision making to lower level
and facilitate teamwork employees to work together in teams.
Feedback Control
Feedback control
With feedback control, the control takes place after the activity is completed.

Although it may appear that leaving control until after an event has occurred is too late, feedback
control has two advantages over feedforward and concurrent control.

 Feedback control provides managers with meaningful information on how effective their

planning efforts were. Feedback that indicates little variance between standard and actual
performance is valuable in confirming that activity has performed as expected. If processes
have not worked as expected, evidence of the nature and scale of the failure enables
appropriate corrective action to be taken before the next round of activity.
  Feedback control can enhance employee motivation. In Management

people generally want information on how well they have performed. Feedback controls provide this
information.

SUMMARY
Operations managers measure things to control and/or improve them. Performance
management uses performance measurement to guide actions that are aimed at control or
improvement.

The balanced scorecard is the most widely accepted framework for measuring performance. It
recommends using a mix of developmental, operational, external and financial measures to properly
assess their short and long-term performance. Developmental and operational performance
measures identify determinants or drivers of success. External and financial measures show the
results or measures of success.

Strategy maps are a further development of the balanced scorecard. They are used to ensure
performance measures are designed to support operational objectives. Through a strategy map,
performance objectives are part of a system that cascades objectives across an organisation in
support of overall strategy.

Most operations are concerned with five dimensions of their performance: quality, speed,
dependability, flexibility and cost. Productivity and throughput time provide the basis for widely
used performance measures applicable to these five areas of performance.

One of the main purposes of performance measurement and management is to control operations.

Performance measures provide information as to whether operations are working and whether
corrective action needs to be taken.

Control responds to the information obtained and determines when and where corrective action is
needed. Control can also help to provide information, feedback to employees and help organisations
identify new opportunities. Three types of control are:

 feedforward (takes place before work activities)

 concurrent (takes place while work is in progress)

 feedback (takes place after work is completed).

Throughput efficiency captures the extent to which no useful work is being done to the materials,
information or customers that are progressing through a process. The measure can be taken a stage
further by examining how much of the work content time is actually needed.

Value-added throughput efficiency

A goal of changing a process can be to greatly reduce the time that is needed to complete a task.
The value-added throughput efficiency is important in such a context as it restricts the work content
time to only the time when tasks are actually adding value to whatever is being processed.
When process performance is being managed, it makes sense to focus on the value-added
throughput efficiency as this can lead to the identification of steps in a process that are not adding
value.

Value-added throughput efficiency is calculated by the following formula:  

Value-added throughput efficiency = throughput time / value added time  

END OF M4
Capacity management
Capacity management is the task of setting the effective capacity of an operation to meet the
demands placed on it. In this section, we examine the following aspects of capacity management:

 measuring capacity

 optimum capacity level

 capacity strategies.

Five complications in measuring capacity are:

 Capacity depends on the product or service mix. For example, a hotel that mainly
accommodates guests for single overnight stays has potential to accommodate many more
guests than a hotel with a similar number of rooms but which serves guests who stay for
week-long holidays.

 Capacity is influenced by customer behaviour. For example, the number of customers that a
ticket agency can serve per hour depends greatly on how long individual customers take to
make ticket selections and how they choose to pay for their tickets.

 Capacity depends on the duration over which output is required. The capacity that is

possible to satisfy peak demand is generally not sustainable over the long term. For
example, during busy times staff may be denied leave and/or asked to work extra time, and
any downtime for equipment maintenance is avoided. Such procedures can push capacity up
for a time but cannot be sustained indefinitely.

 Capacity depends on the specification of the output, particularly for services that have some
discretion in the level of service provided. For example, during lunchtimes popular
restaurants may reduce the number of meal choices to help them accommodate more
diners during the midday peak.

 Capacity depends on sensitivity to practical problems. The theoretical capacity of an

operation may be hard to achieve in practice. Labour shortages, staff
turnover, quality problems, machine breakdowns and/or delays in obtaining products or
services are all reasons why capacity may be lost.

Capacity utilisation

Capacity utilisation refers to the extent to which available capacity is used. Three concepts are
associated with capacity utilisation :

design capacity

effective capacity

achieved capacity.
To illustrate the difference between design, effective and achieved capacity, consider a
bottling process with the followed characteristics:

 designed to operate 24 hours a day, 7 days a week

 planned weekly maintenance results in 28 hours of machine downtime

 material shortages and quality concerns result in a further 40 hours lost production.

Design capacity                 = 24 x 7 = 168 hours

Effective capacity             = design capacity – planned downtime

                                           = 168 – 28 = 140 hours

Achieved capacity            = effective capacity – unplanned downtime

                                           = 140 – 40 = 100 hours

It is also possible to calculate a utilisation rate using the ratio of achieved capacity to design capacity:

Utilisation                          = achieved capacity / design capacity

                                           = (100/168) x 100 = 59.5%

Note that it is possible to measure utilisation relative to either design or effective capacity, which
gives a measure of design utilisation or effective utilisation respectively.

A similar ratio of achieved capacity to effective capacity provides a measure of the efficiency of the

operation:

Efficiency                           = achieved capacity / effective capacity

                                           = (100/140) x 100 = 71.4%

Utilisation and efficiency scores may be misleading if a proportion of the output fails to meet

expected quality standards. Overall equipment effectiveness (OEE) is a way of measuring
the effectiveness of capacity utilisation that includes assessment of the quality of the output.

OEE is based on three aspects of performance.

 The time that equipment is available to operate (the availability rate, indicated by a in
the OEE formula).

 The speed – or throughput rate – of the equipment (the performance rate, indicated by p in
the OEE formula).

 The quality of the product or service it produces (the quality rate, indicated by q in

the OEE formula).

OEE is normally expressed as a percentage and is measured by the following formula:

          OEE = Availability rate (a) x performance rate (p) x quality rate (q)

Figure

shows what the components of this formula represent and how they are calculated.

Note that loading time differs from effective capacity in that it takes account of the time that
equipment is planned not to work. With OEE, product changeovers are captured by the availability
rate.

To achieve a high OEE score the operation needs to achieve a high level of performance against all
three of the dimensions (availability rate, performance rate and quality rate).

OEE is more easily measured for manufacturing than service operations. To measure speed and
throughput, the service operation must be highly standardised. Also, service quality is in part a
function of the customer’s perception of their service experience, not just objective factors that are
the same for each service delivery.

Capacity cushions
Capacity cushions refer to the gap between maximum capacity and the usual expected capacity that
operations plan to maintain. Having reserve capacity enables operations to handle sudden increases
in demand or temporary losses of production capacity. The reserve capacity is known as a capacity
cushion and is calculated by the following formula:

                Capacity cushion = 100 (%) – average utilisation rate (%)

Example:

Calculate the OEE for a machine operation with the following characteristics.

 Although the machine could operate 24 hours a day, 7 days a week, in a typical 7 day period,
the machine is expected to operate for 150 hours (the ‘load time’).

 Changeovers between jobs and set-up times take an average of 10 hours per 7 days.

 Breakdowns and machine faults typically average 5 hours per 7 days.

 Time waiting for materials to arrive from other parts of the operation is typically 5 hours per
7 days

 During the time it is operating, the machine runs at 90 per cent of its potential maximum
speed

 A 3 per cent rejection rate of items produced by the machine exists because of failure to
meet quality standards.

AnswerSolution:

Although the machine could operate 24 hours a day, 7 days a week, in a typical 7-day period,
the machine is expected to operate for 150 hours (the ‘load time’).

 Changeovers between jobs and set-up times take an average of 10 hours per 7 days.

 Breakdowns and machine faults typically average 5 hours per 7 days.

 Time waiting for materials to arrive from other parts of the operation is typically 5 hours per
7 days

 During the time it is operating, the machine runs at 90 per cent of its potential maximum
speed
  A 3 per cent rejection rate of items produced by the machine exists because of failure to
meet quality standards.

Total machine availability time

= Total time available for operations – total machine availability loss

= Load time – total machine availability loss
= Load time – (setups + unexpected downtime)
= 150 – (10 + 5)
= 135 hours (includes 5 hours idle time)

Note: The 135 hours is the total time the machine is available for operations. It is considered as the
total availability time, or the total operating time. 

Idle time indicates that the machine is not running, although it is available for operations. Speed is
zero, therefore it is considered as part of speed loss. 

Speed losses

Note: Speed loss is when speed is zero and when speed is low. Both the idle time and when the
machine is running slow should be used to calculate total speed loss.

Idle time = 5 hours

Time when machine is running slow = 10% of total operating time = 10% x (135 - 5) hours = 13 hours.

Total speed loss

= 5 hours (idle) + 13 hours (slow)
= 18 hours

Net operating time

= total operating time – speed losses 

= 135 – 18 
= 117 hours

Quality losses

There is a 3% rejection rate, so this is considered a loss in quality. 

= 117 (net operating time) x 3% (rejection rate)

= 3.51 hours

Valuable operating time 

= net operating time – quality loss 

= 117 – 3.51  
= 113.49 hours

Calculating OEE

OEE = a x p x q

Availability rate (a)                   

= (total operating or available time / loading capacity) x 100%
= (135 / 150) x 100%
= 90%

Performance rate (p)

= (net operating time / total operating time) x 100%
= (117 / 135) x 100%      
= 86.67%

Quality rate (q)                                 

= (valuable operating time / net operating time) x 100%
= (113.49 / 117) x 100%
= 97%

OEE (a x p x q)
= 90% x 86.67% x 97%
= 75.7%

Solve This:
Calculate the capacity of a one kilometre stretch of highway with the
following characteristics.

 Single lane

 Speed limit 120 km/hour

 All cars drive at the speed limit

 Average length of a car is 5 metres

 Average distance between cars is 40 metres (including allowance

for the length of each car)

Forecasting techniques
We shall now consider some of the techniques that can be used to predict future demand. For
simplicity, we shall focus on forecasting sales, although the techniques discussed are equally
applicable to the other fields where forecasts are required.

Forecast by past average in this straightforward technique, the forecast for the next period is
calculated from the cumulative average of past periods’ sales.

Forecast from last period’s sales When a high impulse response is required, you can use the actual
sales for the current period as the forecast for the next period. This technique, however, has no
noise dampening effect at all, and wide fluctuations in sales will be reflected in the forecast.
Forecast by moving average This method, a compromise between the two previous methods,
attempts to secure the best feature of each, that is, good noise dampening and good impulse
response. This method, using a three-period moving average,

The forecast for period 4 is (20 + 18 + 21) ÷ 3 = 19.67 rounded to 20, and for period 5 is (18 + 21 +
22) ÷ 3 = 20.33 rounded to 20, and so on.

The forecast error clearly shows that the moving average method reduces the effect of noise and
responds to trends more quickly than the past average method does. One problem that arises with
this method is the choice of how many periods to include in the moving average. If the sales pattern
has a distinct cyclic pattern, the moving average is best based on the number of periods in that cycle.
If, however, no cycle is apparent, the most accurate average period can be found by trial and error.
The accuracy of the forecasts can be measured by the following accuracy measures. 1. Total absolute
deviation (TAD): This is the total sum of all the errors, ignoring the plus or minus sign. 2. Mean
absolute deviation (MAD): This is calculated by dividing TAD by the number of periods forecasted. 3.
Deviation spread (DS): This is the sum of the highest minus error and the highest plus error rate.

Exponential smoothing

The main disadvantages of the moving average method are

1. The lengthy calculations involved;

2. The need to retain quantities of historical data;

3. The fact that the normal moving average method places equal weight on each of the historical
figures used; and

4. The age of the data, which increases with the number of periods used. All these disadvantages are
overcome by the exponential smoothing technique.

Qualitative forecasting
1. Salesforce opinions. Members of the sales staff or the customer service staff can provide insight
because of their direct contact with customers. This should provide some understanding of their
future purchasing intentions. The limitations are that staff members may be unable to distinguish, or
perhaps wish to confuse, what customers would like to do versus what they actually will do. Another
limitation is that frontline staff may be overly 4 © The Open Polytechnic of New Zealand influenced
by recent events. For example, after several periods of low sales, they may tend to think
pessimistically about future sales. Conversely, after several periods of good sales, they may tend to
be too optimistic. If sales staff are going to have their own performance judged by how far they meet
sales quotas, there may be a tendency to underestimate future demand potential.

2. Consumer surveys. As it is consumers who will ultimately determine future demand, it seems like
a good idea to conduct a survey to gather insight into future purchasing intentions. Generally, it will
not be possible to speak with all customers and so organisations will need to rely on a survey of a
sample of customers. Undertaking such surveys can be expensive and time consuming. A well
designed survey can obtain valuable information, but consumer judgements of their future
purchasing are not necessarily based on careful thought and are made with incomplete knowledge
of what may be the alternative expenditure options.

3. Panel groups. A panel in this context refers to a group with some expert knowledge of the issue
for which a future forecast is sought. A panel can act like a focus group allowing everyone to talk
openly and freely. Bringing several ‘brains’ together is often better than seeking one expert’s
opinion, although it can be difficult to reach a consensus. Sometimes the views of the loudest or
highest status may emerge (something which is called a bandwagon effect).

4. Delphi method. Perhaps the best-known approach to generating forecasts using experts is the
Delphi method. This is a more formal method which attempts to reduce the influences from biases
and bandwagon effects that can occur with group or intend any faceto-face meeting. It is based on a
questionnaire form to gather initial views on a set of issues relevant to the future forecast. The
questionnaire is mailed or posted on a website for individual access with each member of the Delphi
group providing their response. The responses are then processed and summarised and sent back to
all the experts, in a form that does identify who said what or necessarily revealing who the other
members of the group are. The experts are then asked to re-think their original response in the light
of the replies and arguments put forward by the other experts. This process is repeated several
more times to conclude with either a consensus or at least a narrower range of decisions. A modified
version of this approach allocates weights to individuals whose judgement is seen to be particularly
worthy of consideration. This may be based on their experience, their past success in forecasting or
other people’s views of their abilities. Constructing an appropriate questionnaire and selecting an
appropriate panel of experts make the method challenging to use. A further problem is that experts
can have strong views to which they are committed regardless of countervailing evidence and they
may be reluctant to take the process as seriously as the forecasters would like.

5. Scenario planning. One method for dealing with situations of even greater uncertainty is scenario
planning. This is usually applied to long-range forecasting, again using a panel. The panel members
are usually asked to devise a range of future scenarios. Each © The Open Polytechnic of New
Zealand 5 scenario can then be discussed and the inherent risks considered. Unlike the Delphi
method scenario planning is not necessarily concerned with arriving at a consensus but looking at
the possible range of options and putting plans in place to try to avoid the ones that are least desired
and taking action to follow the most desired. This approach can be helpful for mapping out the
alternative ways that new technology may develop.

SUMMARY
Forecasting supplies the information that enables operations managers to make

planning decisions about the products, processes, and facilities that are the long-term

strategic objective of the organisation.

Normally, operations start with the sales forecast. In operations management, where

input resources are scarce, the forecasting technique is often reversed.

The steps in production planning are

1. forecasting sales
2. making or buying decision

3. selecting measures of aggregate demand

4. developing aggregate plans

Sales forecasting is therefore important in the production planning process.

The three qualitative forecasting methods are

1. panel surveys

2. Delphi method

3. scenario planning

Quantitative forecasting methods use past data to predict the future.

The accuracy of a forecast can be determined only when the future forecast has

become the past.

Capacity planning
Capacity planning is the process of determining the amount of capacity required to meet market
demand for products and services.

Production planning
Production planning is a process to develop tactical plans based on setting the overall level of
production output to best satisfy the current planned levels of sales, while meeting general business
objectives of profitability, productivity, competitive customer lead times, and so on, as expressed in
the overall business plan. Sales is compared with production capabilities, and a business strategy
that includes a sales plan, a production plan, budgets, pro forma financial statements, and
supporting plans for materials and workforce requirements is developed. One of the primary
objectives is to establish a production rate that will achieve management's objective of satisfying
demand by maintaining, raising, or lowering inventories or backlogs, while usually attempting to
maintain a stable workforce. This plan affects most functions of the organisation and requires inputs
from marketing, sales, production, finance, new product development, service, and distribution.

Steps in production planning

Forecasting is essential to the production planning process, which consists of the following steps, or
their equivalents:
Step 1: Forecast sales: These forecast sales for each product or service within each future time
period. The initial forecasts will be adjusted to the known trends in actual sales and, in some
organisations, by differentiating between estimated or forecast sales and expected and expressed
(or actual) sales.
Step 2: Make-or-buy decision: This is based on both strategic and tactical perspectives. Previous
decisions are reviewed, and proposed changes have to be measured in capacity terms.

Step 3: Select common measures of aggregate demand: The demand for all products or services is
aggregated into statements of common or like-capacity groups. For single product or service
organisations, this is often straightforward. For the brewer it could be litres of beer; the doctor,
patient visits; a coal mine, tonnes of coal. For multi-product or multi-service organisations, arriving
at appropriate measures needs great care.
Step 4: Develop aggregate plans: These need to be aimed towards agreed corporate objectives. The
primary objective is usually to meet demand at lower cost, but agreed secondary objectives such as
continuity of employment must also be planned for because they are part of the base on which
decisions can be made.

Production planning approaches

Production planning approaches

Production planning approaches are taken by the organisation to develop the overall production
output to meet customer demand by setting production, inventory and backlog levels. The main
methods used are chase production method, level production method, and demand management
process.

Chase production method

The chase production method varies production to meet demand. The plan adds and removes
production resources as required to maintain a stable inventory level or a stable backlog (queue).
This suits organisations that experience significant changes in demand and can add and remove
resources easily and effectively.

Level production method

The level production method maintains resources at a constant level resulting in a relatively level
production rate. This suits organisations with scarce or expensive resources or when building up
stock levels in anticipation of seasonal demand.

Demand management process

The demand management process attempts to modify demand to meet available capacity. It is used
in conjunction with either a level production method or a chase production method. Methods
employed include pricing to promote off-peak demand, restricted service at peak times, advertising,
promotion, reservations, and appointments.

The three main approaches for determining how to use capacity to balance demand are the level
production method, the chase production method, and the demand management process.

Level production method

 The lean-thinking approach to production planning is to follow a level production schedule, which
focuses on holding production and available workforce constant for a period. When there is a
difference between the constant rate of production and the varying rate of demand, inventory levels
rise or fall, the number of orders in the backlog increases or decreases, or the length of the customer
queue changes.

Operations managers often prefer this method since production rates are usually dependable,
quality of outputs tend to be consistently high, and operating costs tend to be low. The emphasis is
on production efficiency, and service goals are secondary. Staff levels remain constant and supply
lines deliver at a steady rate.

The disadvantage is that inventory levels do change and this requires substantial warehousing
arrangements to handle periods of low demand. Service organisations may require a process for
handling lengthy customer queues.

As a summary, the level production method:

• maintains scarce or expensive resources at a constant level• meets resource utilisation goals•
produces a relatively level production rate• makes production efficiency goals paramount • makes
service goals secondary• minimises employing, training, and terminating of employees• minimises
overtime • makes resource planning less complicated• allows supply lines to operate at a steady
rate.

Chase production method

The chase production method allows the production capacity to vary each period to match the
forecast aggregate demand in that period exactly. Workforce levels vary by employing workers and
terminating their employment as and when the needs arise. Overtime and temporary staff fill short
periods of high demand. Often, subcontractors add additional capacity during peak periods. The
main advantage of this method is that almost no finished goods inventory is required and this
eliminates the cost of holding inventory. Customer queues, if present, are constant. However, labour
and material costs are much higher because of the disruptions caused by frequently scaling the
workforce up and down and adjusting the volume of materials supplies. Essentially, the available
supply matches the demand.

As a summary, chase production method:

• matches capacity with demand • varies production rate so volume flexibility is required • needs
supply lines with in-built flexibility • maintains service availability and levels • may have idle
resources at times since resource utilisation is not an issue • employs staff members on flexible
contracts • uses overtime and temporary staff to fill short-term needs • uses subcontractors to take
load during peak periods • presents a real challenge to control costs.

Demand management process

Some organisations have the ability to modify demand to suit their available capacity. One obvious
way is to adjust prices. A business increasing the price would normally expect demand to fall;
likewise, a business decreasing the price would normally expect demand to rise. A business
forecasting lower demand might elect, as a strategy, to lower the prices to increase demand.
Likewise, a business forecasting higher demand than could be reasonably handled with given
capacity might increase prices in an effort to reduce demand. Pricing can be an effective tool to
promote off-peak demand.

In summary, the demand management process:

• attempts to modify demand by using advertising and promotion • is used in conjunction with the
level and/or chase production method • uses pricing to promote off-peak • may offer a restricted
service at peak times • designs specialist service channels such as medical practice hours for
immunisations • uses reservation systems and appointment books to level demand.

Production planning model

The production planning model balances the mismatches between demand and capacity by
recognising that demand is variable and capacity is adjustable. The model considers the forecast
demand, the available capacity, the required capacity, cost of production, cost of regular and
overtime labour, cost of hiring and training new staff, cost of making employees redundant or laying
them off, cost of holding inventory, cost of backlogging, cost of managing the queue, and
subcontracting costs.

the development of a production plan uses the demand, the capacity and the costs associated with
production as inputs. The generated output shows the required production rate, the level of
inventory, the length of the customer queue, the staffing levels required, and the rate of
subcontracting required.

The following represent a sample of questions to ask: • Should we use inventories to absorb changes
in demand? • Should we vary the size of the workforce? • Should we use part-timers, casuals,
overtime, or idle time? • Should we use subcontractors? • Should we change prices to influence
demand?
Scheduling
As part of their day-to-day production planning, operations managers concern themselves with how
to make the best use of the capacity that they have available. This centres on creating a ‘schedule’ or
timetable that is consistent with the capacity plan. Schedules can take various forms, but essentially
are concerned with specifying three aspects of an operation.

 Loading: the allocation of staff, equipment, facilities and customers to activities that will be
completed during the period covered by the schedule.

 Sequencing: setting the order in which work will be completed, including the sequence in
which customers or orders will be dealt with.

 Scheduling: setting the time that each activity will start and finish.

Scheduling

It is described as a system for controlling operations. This is because schedules frequently need to be
updated and amended to cope with changes as they happen; for example, affecting the availability
of resources to complete work or to reprioritise customer orders

As control systems are about identifying when operations need to be adjusted, and this includes
adjustments to ensure that capacity continues to be available to meet work commitments.

Scheduling losses.

There are times when staff are idle with too much capacity for the demand, whereas at other times
there is too much demand for the capacity to deal with. This often arises because demand profiles
are not understood or are too volatile, or where staff preferences for work patterns do not fit with
the business need.

Forward Scheduling

With forward scheduling, processing starts immediately when a job is received, regardless of its due
date. Each job activity is scheduled for completion as soon as possible, which allows you to
determine the job's earliest possible completion date. Figure 15-5 shows an example of forward
scheduling. The job is due at the end of week 10, but it can be finished as early as the end of week 7.
With forward scheduling, it is not unusual for job~ to be finished before their due date. The
disadvantage to finishing a job early is that it causes an inventory buildup if items are not delivered
before the due date.

Forward scheduling Schedule that determines the earliest possible completion date for a job.

.... Due date Time when the job is supposed to be finished.

Backward Scheduling

With backward scheduling, you begin scheduling the job's last activity so that the job is finished
right on the due date. To do this, you start with the due date and work backward, calculating when
to start the last activity, when to start the next-to-last activity, and so forth. Figure 15-5 gives an
example of backward scheduling. Backward scheduling shows you how late the job can be started
and still be finished on time. When you are using backward scheduling and forward scheduling
together, a difference between the start time of the first activity indicates slack in the schedule.
Slack means that you can start a job immediately, but you do not have to do so. You can start it any
time up to the start time in your backward schedule and still meet the due date.

Backward scheduling: Scheduling method that determines when the job must be started to be done
on the due date. .....

Slack: The amount of time a job can be delayed and still be finished by its due date.

Priority Rules

Job priority is often set by a priority rule. (See Table 15-1 for explanations of some commonly used
priority rules.) Priority rules are typically classified as local or global. A local priority rule sets priority
based only on the jobs waiting at that individual work centre. For example, the highest priority might
be given to the job that arrives first or the job that can be done the fastest. Global priority rules, like
critical ratio or slack over remaining operations, set priority according to factors such as the
scheduled workload at the remaining workstations that the job must be processed through.

Commonly Used Priority Rules

 Sequencing rules for prioritising customer orders

Sequencing
rule Explanation
First-in, Where customers arrive at a similar time and can observe each other, there is generally little
first-out option to the first-in, first-out sequencing rule.
(FIFO)
Earliest Work is sequenced according to when it is ‘due’ for delivery, irrespective of the size of each
due date job or the importance of each customer. Due date sequencing ensures delivery reliability, but
(EDD) it may not give the most efficient sequencing of work. It can be flexible to deal with new,
urgent work.
Last in, first A sequencing method usually selected for practical reasons, for example, unloading a
out (LIFO) container. It is not an equitable approach if there is a long gap between the time the ‘first out’
customer order and the ‘last out’ customer order being satisfied.
Most This is a sequencing rule used by airlines that give priority to frequent flyers; many hotels also
valuable have valued customer programmes. It is a sequencing rule that gives recognition to important
customer customers, which can be important for retaining their business. The rule works for airlines
first because it tends to be non-frequent flyers who are disadvantaged and they are partly
compensated through lower prices.
Longest Sequencing the longest jobs first has the advantage of occupying work centres for long
operation periods compared with relatively small jobs because of the need to change over from one job
time/most to the next. The longest operation time sequencing keeps utilisation high, but may mean that
work customers with less time consuming jobs miss out.
content
first
 Least Cash flow is a big advantage to operations of tackling short jobs first as it means a proportion
operation of the workload can be invoiced quickly. The downside is that sequencing in this way may
time/least adversely affect total productivity and can damage service to larger and possibly more
work important customers.
content
first
Most Emergency services adopt variants of this rule, grading the nature of patients’ needs between
critical first critical and non-essential. In a production context, most critical can be determined according
to the ratio of time remaining before the date due for completion to the processing time
remaining.
A distinction can be made between two types of sequencing or priority rule.

 Local priority rules: rules implemented in relation to a single workstation.

 Global priority rules: rules governing how work will be prioritised over multiple
workstations.

How to Use Priority Rules

Using priority rules is straightforward. Just follow these steps.

Step 1 Decide Which Priority Rule to Use. Different priority rules achieve different results. We will
discuss this when we look at performance measurements.

Step 2 List All the Jobs Waiting to Be Processed at the Work Centre and Their Job Time. Job time
includes setup and processing time.

Step 3 Using Your Priority Rule, Determine Which Job Has the Highest Priority and Should Be
Worked on First, Second, Third, and So On.

Performance Explanation
measure
Job flow time This considers the amount of time it takes from when a
job arrives until it is complete. It includes processing
and waiting time. Long job flow time may be considered
a risk because the longer jobs are in process the more
chance there is of job completion being interrupted by
delays. Also, time in process represents a cost in
managing work in progress.
Job lateness This considers the amount of time the job completion
date is expected to exceed the date the job was due or
promised to a customer. It is the difference between
the actual completion date and the due date.
Operations concerned with how customers judge their
reliability will be concerned to minimise job lateness.
Makespan This is a measure of the total time needed to complete
a group of jobs. It is the length of the time between the
start date of the first job and the completion of the last
job in the group. Makespan captures the efficiency of
 completing a batch of jobs but does not in itself
guarantee that customer service expectations are met. 

 the difference between forward and backward scheduling

END OF MODULE 5
Supply chain performance
measurement and management
Five operations performance objectives for supply chain management

Supply Explanation
chain co
mponent
Quality Errors at any stage in the supply chain can multiply in their
effect on end-customer service. For example, if seven
stages each have a 1% error rate, 6.8% of products/services
received by the customer will be of poor quality. Rolled yield
is a measure of this cumulative defect rate, in which the
overall yield is obtained by multiplying the yields of all the
individual producers. To maximise rolled yield, every stage
of a supply chain must take responsibility for its own and its
suppliers’ performance.
Speed How fast a customer’s order can be satisfied is one
dimension of speed to be considered, but more important is
the speed with which products can move through the supply
chain. Fast throughput time saves the need for inventory,
offering significant cost savings.
Dependa Dependability in terms of on-time, in-full order completion
bility together with fast throughput times is the mark of a highly
performing supply chain. Dependability in the supply
chain gives operations confidence to operate with
low inventory.
Flexibility The ability to cope with changes and disturbances is
 important. It enables changes in customer demand to be
accommodated and provides customers with an extra level
of service if they can vary their order levels.
Cost There are potentially high transaction costs in establishing
a supply chain. Appropriate suppliers need to be located and
selected, supply contracts negotiated, supply performance
monitored, goods transported and held as inventory at
various points along the chain. Supply chain
management aims to minimise these costs; for example, by
reducing the number of supply relationships that an
operation may need to maintain. 

Inventory management
Inventory is generally thought of in terms of as raw materials and finished and unfinished products
that are in storage and that have not yet been sold or drawn upon for use. It is hard to envisage any
organisation existing without some inventory, even ones that deliver services rather than supply
physical goods. For example, a tertiary education institution does not have an inventory of degrees
but it does have inventory of various forms of office equipment to be kept ready for use by staff.

As we have seen, minimising inventory is one of the objectives of supply chain

management. Inventory will never be eliminated, however, partly because inventory serves various
purposes.

Some key pointers in inventory management are to:

 make sure the purpose of an inventory is clear

 consider both the costs and the benefits of holding inventory

 make sure that there is a good match between the purpose of an inventory and the type
of inventory system used.

 determine when to replenish inventory and by how much: the quantity and timing decisions.

You are expected to understand two specific aspects of inventory management for the purposes of
this course.

 The stock turnover ratio (or inventory turnover ratio) that shows the annual cost of goods
sold to average inventory investment.

 The economic order quantity model that is used as a guide to determine how much to order
and when to order so as to minimise the costs of receiving and holding inventory.

Types of inventory
Inventory comes in many different forms. In a production context, six types of inventory can be
distinguished.

Raw materials that are intended to be transformed into components or products.

Components that are the parts and subassemblies used in making the final product.

Work-in-progress refers to the items in process throughout the operation that exist because
products typically pass through several production stages.

Finished goods in storage waiting to be sold or sent to distributors.

Distribution inventory comprises finished goods and spare parts at various points in the distribution
system; for example, in storage in a warehouse.

Maintenance, repair and operational inventory are supplies that are used in manufacturing but do
not become part of the finished product, such as hand tools and cleaning supplies.

Usage value is a way of discriminating between different items in an inventory. It is calculated by

multiplying the usage rate by the individual value.

Usage value = usage rate x value of each item

The usage rate is usually the annual usage and the value is usually the cost of purchasing the item.

Supply fluctuation-the
bullwhip effect
Given that demand is variable and as just discussed may follow some sort of normal

distribution over time, it should be possible for companies in a supply network to calculate safety
stocks for key items based on expected demand at a certain confidence level

to avoid future supply problems. However, life is not that straightforward and supply

fluctuation can occur outside these confidence limits, which can have serious consequences further
down the supply network. This is known as the bullwhip effect.

Examples of stock level formulas

Suppose we have the following information about a material:

Reorder quantity (RQ) 2,000 units

Reorder period (RP) 4 - 6 weeks

Maximum consumption (MAX C) 500 units per week

Normal consumption (NC) 400 units per week

Minimum consumption (MIN C) 300 units per week

Reorder level = MAX C × MAX RP

= 500 × 6

= 3,000 units

In fixing the reorder level, we have used the worst possible expected conditions to ensure

that stock will not be exhausted, at least in the short run. However, the system we are

discussing is not a very sophisticated one. It is cheap to operate but not entirely reliable.

It should normally be satisfactory, but circumstances could arise when a stockout could

occur.

Minimum stock level = RL - (NC × NRP)

= 3,000 - (400 × 5)

= 3,000 - 2,000

= 1,000 units

In fixing the minimum stock level, we have used the normal or average conditions. This

would ensure that, under normal conditions, the buffer stock would not be required for

consumption.

Maximum stock level = RL - (MIN C × MIN RP) + RQ

= 3,000 - (300 × 4) + 2,000

= 3,000 - 1,200 + 2,000

= 3,800 units

In fixing the maximum stock level, we have used the best possible conditions. This

should ensure that, even if there is a quick delivery from suppliers and a low demand for

materials, stocks should not rise higher than the maximum stock level authorised.
The ABC classification uses the monetary value of the annual usage of each item as a measure
of inventory usage. The absolute value of inventory at any point in time can also be calculated.

Inventory value = number of items in stock x value of each item

Value is usually the cost of purchasing the item.

Stock cover = stock/demand Stock turnover = demand/stock

WASTE
The seven types of waste

The seven types of waste Identifying waste is the first step towards eliminating it. Toyota have
identified seven types of

waste, which have been found to apply in many different types of operations - both service

and production - and which form the core of lean philosophy:

1 Over-production. Producing more than is immediately needed by the next process in the

operation is the greatest source of waste according to Toyota.e

2 Waiting time. Equipment efficiency and labour efficiency are two popular measures which

are widely used to measure equipment and labour waiting time, respectively. Less obvious

is the amount of waiting time of items, disguised by operators who are kept busy producing WIP
which is not needed at the time.

3 Transport. Moving items around the operation, together with the double and triple

handling of WIP, does not add value. Layout changes which bring processes closer

together, improvements in transport methods and workplace organization can all reduce

waste.

4 Process. The process itself may be a source of waste. Some operations may only exist because

of poor component design, or poor maintenance, and so could be eliminated.

5 Inventory. All inventory should become a target for elimination. However, it is only by

tackling the causes of inventory that it can be reduced.

6 Motion. An operator may look busy but sometimes no value is being added by the work.

Simplification of work is a rich source of reduction in the waste of motion.

7 Defectives. Quality waste is often very significant in operations. Total costs of quality are

much greater than has traditionally been considered, and it is therefore more important

to attack the causes of such costs. This is discussed further in Chapter 17.

Between them, these seven types of waste contribute to four barriers to any operation achieving
lean synchronization. They are: waste from irregular (non-streamlined) flow, waste from

inexact supply, waste from inflexible response, and waste from variability. We will examine

each of these barriers to achieving lean synchronization.

Eliminate waste through streamlined flow

The smooth flow of materials, information and people in the operation is a central idea oflean

synchronization. Long process routes provide opportunities for delay and inventory buildup, add no
value, and slow down throughput time. So, the first contribution any operation

can make to streamlining flow is to reconsider the basic layout of its processes. Primarily,

reconfiguring the layout of a process to aid lean synchronization involves moving it down

the 'natural diagonal' of process design that was discussed in Chapter 4. Broadly speaking,

this means moving from functional layouts towards cell-based layouts, or from cell-based

layouts towards product layouts. Either way, it is necessary to move towards a layout that

brings more systematization and control to the process flow. At a more detailed level, typical

layout techniques include: placing workstations close together so that inventory physically

just cannot build up because there is no space for it to do so, and arranging workstations

in such a way that all those who contribute to a common activity are in sight of each other

and can provide mutual help, for example by facilitating movement between workstations

to balance capacity.

Examine all elements of throughput time

Throughput time is often taken as a surrogate measure for waste in a process. The longer

that items being processed are held in inventory, moved, checked, or subject to anything else

that does not add value, the longer they take to progress through the process. So, looking at

exactly what happens to items within a process is an excellent method of identifying sources

of waste.
Supply chain management is a broad concept that includes the management of the entire supply
chain from the supplier of raw material to the end customer. Its component activities include
purchasing, physical distribution management, logistics and materials management.

Supply chain management has been driven by:

changes in the business environment

reactions to longstanding problems

opportunities for value creation.

Among the longstanding problems motivating efforts to build greater cooperation is the ‘bullwhip’
effect that occurs when there is little communication along a supply chain. The bullwhip effect shows
how small changes at the demand end of a supply chain are progressively amplified for operations
further back in the chain.

Changes in supply chain management are encouraging greater coordination among participants in a
supply chains through information-sharing. The efficient distribution of information throughout the
supply chain can reduce demand fluctuations along the chain by linking all operations to the source
of demand. Efforts are also being made to increase operational efficiency, particularly in terms of the
throughput speed of operations in the chains.

Supply chains are made up of individual pairs of buyer–supplier relationships. Supplier relationships
are of the most interest in operations management terms.They can be characterised on two
dimensions: what is outsourced to a supplier, and the number and closeness of the relationships.

Traditional market supplier relationships are where a purchaser chooses suppliers on an individual
periodic basis. No long-term relationship is usually implied by such adversarial or ‘arm’s length’
relationships, but this operational method makes it difficult to build internal capabilities. Partnership
supplier relationships involve customers forming long-term relationships with suppliers. In return for
the stability of demand, suppliers are expected to commit to high levels of service. True partnerships
can be difficult to establish and rely heavily on the degree of trust that is built up between partners.

The Supply Chain Operations Reference model (SCOR) is a highly structured framework for supply
chain improvement that has been developed by the Supply Chain Council (SCC).

Inventory, or stock, is the stored accumulation of the transformed resources in an operation. Almost
all operations keep some kind of inventory. Inventory occurs in operations because the timing of
supply and the timing of demand do not always match, although there is increasing effort to improve
the matching. Inventories are needed, therefore, to smooth the differences between supply and
demand.

Inventory is controlled by discriminating between the levels of control applied to different stock
items. The most common way of doing this is by what is known as the ABC classification of stock.
This uses the Pareto law to distinguish between the different values of, or significance placed on,
different types of stock.

How much inventory should be kept depends on balancing the costs associated with holding stocks
against the costs associated with placing an order. The main stock-holding costs are usually related
to working capital, whereas the main order costs are usually associated with the transactions
necessary to generate the information to place an order. The best-known approach for determining
the amount of inventory to order is the economic order quantity (EOQ) model. The EOQ formula can
be adapted to different types of inventory but the model relies on assumptions that it can be argued
have become unrealistic. ‘Lean synchronisation’, ‘lean thinking’ or just ‘lean’ was originally called
‘just-in-time’ (JIT) when it started to be adopted outside its birthplace, Japan. It is both a philosophy
and a method of operations planning and control. Lean synchronisation aims to meet demand
instantly, with perfect quality and no waste. It involves supplying products and services in perfect
synchronisation with the demand for them. These principles were once a radical departure from
traditional operations practice but have now become orthodox in promoting the synchronisation of
flow through processes, operations and supply networks.

How to apply INVENTORY

Inventory management includes purchasing, distribution and warehousing.

Types of inventory include

½ materials (inputs)

½ work in process

½ finished products (outputs)

½ inputs into services, such as stationery supplies and equipment

½ customers in a service or transportation situation.

Purchasing is concerned with buying all the materials, parts, subassemblies, and

services required by the productive processes to produce a finished good.

Distribution uses customer channels, as does marketing. Physical Distribution

Management is involved.
Logistics is the organisational function that manages the carriage of all incoming

goods from suppliers and all outgoing goods to customers.

Warehousing is the management of all materials from when they appear on

the organisation’s premises to when they leave the premises as finished goods.

Warehousing involves decisions about forward and back placement.

Expediting focuses attention on a particular order or batch of production with the

goal of speeding it up to overcome some unforeseen event.

There are two types of inventory control system:

½ deterministic

½ probabilistic.

Inventories are maintained at an adequate level by setting

1. a minimum stock level

2. a maximum stock level

3. a reorder level

4. a reorder quantity.

Benchmarking

Benchmarking is used to learn from others to give insights into how to improve your own processes.
The use of benchmarking is justified by two considerations.

Problems in managing processes are rarely unique to one operation and most probably have been
experienced elsewhere.

There is probably another operation somewhere that has developed a better way of doing things.

Benchmarking is essentially about stimulating creativity in improvement practice which can include
aspects of quality management.

Type of benchmark Features

Internal

A comparison between operations or parts of operations existing within the same organisation.
Mostly available only in large organisations. Openness to sharing information and experience within
organisations can make this a particularly valuable form of benchmarking.
Non-competitive external

A comparison between operations or parts of operations that exist within a different

organisation that is not a competitor. A benefit is that this can encourage comparison with different
types of organisation that share some similar types of processes. This can help bring in new ideas
(see the Formula One example below).

Competitive external

A comparison between operations or parts of operations that exist within a different organisation
that is a competitor. There is a tendency to assume that your competitors (and particularly the best
in your industry) will provide the best benchmark. Competitors can be willing to share information,
partly because they may judge that imitators will always be behind their own performance.

Performance

A comparison between the levels of achieved performance in different operations. Also

known as metric benchmarking. This relies on collecting some of the measures and targets used by
other operations and comparing them to your own performance. This requires careful attention to
the data selected for the comparison as different organisations, and/or department within an
organisation, may collect data in different ways. Applied successfully, this can show whether the
performance of a process is relatively better or worse and by how much it might be improved.

Practice

A comparison between an organisation’s operational practices, or way of doing things, versus those
adopted by another operation. This form of benchmarking can inform how a process may be
improved. Generally benchmarking at the level of an individual process is likely to yield more insight
than attempting to benchmark against an operation as a whole.

END OF MODULE 6