PERFORMANCE

MEASUREMENT FRAMEWORK
OPERATIONS MANAGEMENT
Performance Measurement and
Improvement Cycle
In the cycle of never ending improvement,
measurement plays an important role in:
• Tracking progress against organizational goals.
• Identifying opportunities for improvement.
• Comparing performance against internal standards.
• Comparing performance against external standards.
 Performance Measurement and
Improvement Cycle
Measures are used in process control, e.g. control charts, and in
performance improvement, e.g. improvement teams, so they should give
information about how well processes and people are doing and motivate
them to perform better in the future.
Various problems include systems that:
• Produce irrelevant or misleading information.
• Track performance in single, isolated dimensions.
• Generate financial measures too late, e.g. quarterly, for mid-course
corrections or remedial action.
• Do not take account of the customer perspective, both internal and external.
• Distort management’s understanding of how effective the organization has
been in implementing its strategy.
• Promote behaviour that undermines the achievement of the strategic
objectives.
 Performance Measurement and Improvement Cycle

The critical elements of a good performance measurement

framework (PMF) are:
• Leadership and commitment.
• Full employee involvement.
• Good planning.
• Sound implementation strategy.
• Measurement and evaluation.
• Control and improvement.
• Achieving and maintaining standards of excellence.
 Performance Measurement and Improvement Cycle

The Deming cycle of continuous improvement – Plan, Do,

Check, Act – clearly requires measurement to drive it, and yet it
is a useful design aid for the measurement system itself:
• PLAN: establish performance objective and standards.
• DO: measure actual performance.
• CHECK: compare actual performance with the objectives and
standards – determine the gap.
• ACT: take the necessary actions to close the gap and make the
necessary improvements.
 Performance Measurement and Improvement Cycle

• Before we use performance measurement in the

improvement cycle, however, we should attempt to
answer four basic questions:
• Why measure?
• What to measure?
• Where to measure?
• How to measure?
Why measure?
• In a quality-driven, never-ending improvement environment,
the following are some of the main reasons why measurement
is needed and why it plays a key role in quality and
productivity improvement:
• To ensure customer requirements have been met.
• To be able to set sensible objectives and comply with them.
• To provide standards for establishing comparisons.

• To provide visibility and provide a ‘balanced scoreboard’ for people to

monitor their own performance levels.
• To highlight quality problems and determine which areas require priority
attention.
• To give an indication of the costs of poor quality.
• To justify the use of resources.
• To provide feedback for driving the improvement effort.
 What to measure?
• A good start-point for deciding what to measure is to look at what
are the key goals of senior management; what problems need to
be solved; what opportunities are there to be taken advantage of;
and what customers perceive to be the key ingredients that
influence their satisfaction.
• No one can provide a generic list of what should be measured but
once it has been decided in any one organization what measures
are appropriate, they may be converted into indicators. These
include ratios, scales, rankings and financial and time- based
indicators. Whichever measures and indicators are used by the
process owners, they must reflect the true performance of the
process in customer/supplier terms and emphasize continuous
improvement. Time-related measures and indicators have great
value, especially in the elimination of non-value adding activities.
 Where to measure?
If true measures of the effectiveness of TQM are to be
obtained, there are three components that must be examined –
the human, technical and business components.
The human component is clearly of major importance and the
key tests are that wherever measures are used they must be:
• transparent –understood by all the people being measured
• non-controversial – accepted by the individuals concerned
• internally consistent – compatible with the rewards and
recognition systems
• objective – designed to offer minimal opportunity for
manipulation
• motivational – trigger a response to improve outcomes.
How to measure?
Effectiveness

Effectiveness then looks at the output side of the process and is about the
implementation of the objectives – doing what you said you would do.
Effectiveness measures should reflect whether the organization, group or
process owner(s) are achieving the desired results, accomplishing the right
things. Measures of this may include:
• Quality, e.g. a grade of product, or a level of service.
• Quantity, e.g. tonnes, lots, bedrooms cleaned, accounts opened.
• Timeliness, e.g. speed of response, product lead times, cycle time.
• Cost/price, e.g. unit costs.
How to measure?
Efficiency

Clearly, this is a process input issue and measures the

performance of the process system management. It is, of
course, possible to use resources ‘efficiently’ while being
ineffective, so performance efficiency improvement must be
related to certain output objectives.
Cost of Quality
• Manufacturing a quality product, providing a quality service, or
doing a quality job - one with a high degree of customer
satisfaction – is not enough. The cost of achieving these goals
must be carefully managed, so that the long-term effect on the
business or organization is a desirable one. These costs are a
true measure of the quality effort. A competitive product or
service based on a balance between quality and cost factors is
the principal goal of responsible management and may be
aided by a competent analysis of the costs of quality (COQ).
• The analysis of quality related costs is a significant
management tool that provides:
• A method of assessing the effectiveness of the management of quality.
• A means of determining problem areas, opportunities, savings and action
priorities.
 Cost of Quality
• The costs of quality are no different from any other costs. Like
the costs of design, sales, production/operations, maintenance
and other activities, they can be budgeted, measured and
analysed. Having said this, a major difficulty in some sectors is
capturing the totality of the costs. Where value-adding
processes are fragmented with many parties incurring costs,
such as in construction, infrastructure or health care industries,
unless costs are to be recovered from another party, it can be
difficult to get people interested in recording the costs.
• Having specified the quality of design, the operating units have
the task of matching it. The necessary activities will incur costs
that may be separated into prevention costs, appraisal costs
and failure costs, the so-called P-A-F
 Cost of Quality
Prevention costs
• These are associated with the design,
implementation and maintenance of the quality
management system. Prevention costs are planned
and are incurred before actual operation. Prevention
includes:
• Product or service requirements
• Quality planning
• Quality assurance
• Inspection equipment
• Training
• Miscellaneous
 Cost of Quality
• Appraisal costs
• These costs are associated with the supplier’s and
customer’s evaluation of purchased materials,
processes, intermediates, products and services to
assure conformance with the specified requirements.
Appraisal includes:
• Verification
• Quality audits
• Inspection equipment
• Supply chain and vendor rating
 Cost of Quality
• Internal failure costs
• These costs occur when the results of work fail to
reach designed quality standards and are detected
before transfer to the customer takes place. Internal
failure includes the following:
• Scrap
• Rework or rectification
• Re-inspection
• Downgrading
• Failure analysis
Cost of Quality
• External failure costs
• These costs occur when products or services fail
to reach design quality standards but are not
detected until after transfer to the consumer.
External failure includes:
• Repair and servicing
• Warranty claims
• Complaints
• Returns and recalls
• Liability
• Loss of good will
Cost of Quality
Process Cost Modeling
• Process cost modeling is a methodology that
lends itself to stepwise analysis; while the
following example is for the retrieval of medical
records, it illustrates the process clearly and
could be applied to any routine process in a
volume production or service setting within the
construction sector.
Sample Flow Chart for Process Model