WPC Operational WPC Operational WorkshopWorkshop

Klein-Kariba Recreation Klein-Kariba Recreation Resort, WarmbathsResort, Warmbaths

RECORDING OF WPC PERFORMANCE MEASUREMENTS

By: Conrad Sebego

26 July 2005

CONTENTSCONTENTS Title Problem Statement Research question Definition of terms Requirements for measurement Why measures fail Findings and conclusions Preliminary WPC system

TitleTitle “Optimum performance

measures to reflect competitiveness and productivity improvement of the companies participating in the Workplace Challenge Programme”

What prompted the What prompted the study?study? “Lack of uniform performance

measures by companies participating in Workplace Challenge Programme makes it difficult to determine the overall improvement in competitiveness and productivity resulting from implementation of the WPC programme.”

What is the single What is the single objective?objective? “What are the uniform

measurement variables within the dimensions of quality, speed, cost and morale that would be sufficient to reliably and validly indicate performance (competitiveness and productivity) of the companies participating in the WPC Programme?

What is productivity?What is productivity? It is not a measure of costs,

although it is one component of cost. It does not measure the cost of a resource, but it is a measure of the relationship between quantity of resources used and quantity (or value in constant terms) of output.

What is performance?What is performance? The word perform means to do, to

accomplish. The act of performing means to carry out a goal or responsibility. Performance is the thing done.

According to Drucker (1973: 455), performance is the pure essence of management, independent of time, place or type of business. To manage is synonymous with to perform. Management is independent of ownership, rank or power. It is objective function and ought to be grounded in the responsibility for performance.

Performance remains one of the classic problems of management: how to get people in the organisation to achieve its goals.

Watch out!Watch out! Measures such as machine or

labour utilisation encourage supervisors to keep machines and people busy producing products, even when there is no market demand. In extreme cases, local efficiencies can seem remarkable, but the business can be left to write off vast quantities of obsolete inventory.

Measuring performanceMeasuring performance If something can’t be measured

directly, it must have an effect, which can be measured. If a process has no intended effect, it is clearly not worth measuring in the first place.

More specifically, any production process can be measured if what it is supposed to accomplish and how it works are understood. As a minimum, every process must have at least one customer whose satisfaction can be determined.

Determining correct Determining correct measuresmeasures It is easy to underestimate

how hard it is to design good performance measures, and there are many examples that illustrate the dysfunctional behaviour that can result.

World-class World-class manufacturingmanufacturing

Robert Hayes, Steven Wheelwright, and Kim Clark, in their book Dynamic Manufacturing, identify these attributes of world

class manufacturers: Becoming the best competitor. “Being better than

almost every other company in your industry in at least one aspect of manufacturing.”

Growing more rapidly and being more profitable than competitors. “World class companies can measure their superior performance by observing how their products do in the marketplace and by observing their cashbox.”

Hiring and retaining the best people. “Having workers and managers who are so skilled and effective that other companies are continually seeking to attract them away from your organisation.”

Developing a top-notch engineering staff. “Being so expert in the design and manufacture of production equipment that equipment suppliers are continually seeking one’s advice about possible modifications to their equipment, one’s suggestions for new equipment, and one’s agreement to be a test site for one of their pilot models.”

World-class manufacturing World-class manufacturing (cont.(cont.

Being able to respond quickly and decisively to changing market conditions. “Being more nimble than one’s competitors in responding to market shifts or pricing changes, and in getting new products out into the market faster than they can.

Adopting a product and process engineering approach which maximises the performance of both. “Intertwining the design of a new product so closely with the design of its manufacturing process that when competitors ‘reverse engineer’ the product they find that they cannot produce a comparable one in their own factories without major retooling and redesign expenses.”

Continually improving facilities, support systems, and skills that were considered to be “optimal” or “state-of-the-art” when first introduced, so that “they increasingly surpass their initial capabilities. This emphasis on continual improvement is the ultimate test of a world class organisation.”

Performance successPerformance success

According to Eli Goldratt in his book “The Goal”, a manufacturing decision

is productive only if it: Increases throughput (the rate at which

money is generated through sales). Decreases inventory (things we buy

which we intend to sell). Decreases operating expense (money

spent to convert inventory into throughput).

A decision is productive if all three manufacturing performance criteria are satisfied simultaneously and no tradeoffs have been permitted.

How to measure?How to measure? George Sadler (1993: 3-3.1)[1]…for

productivity measurement, physical measures, properly weighted remain significantly more accurate than dollar-value measures (even when adjusted or “real”) can ever be. Purely value-based productivity measures can be useful, but in the basic simplified plant-level productivity measurement approaches, physical measures predominate. [1] William Christopher et al, eds. Chapter

Tradeoffs for measuring Tradeoffs for measuring performanceperformance

Financial measurement

Balanced Scorecard

ABPA

Favoured by: complex service firms; moderate levels of uncertainty

Favoured by: six single-product, single-customer, or commodity firms, low levels of uncertainty

Ease of implementation

Completeness of measurement

Caution about Caution about measurementmeasurement No firm should set up an elaborate

productivity analysis system for its current operations and anticipate substantial improvement unless the firm is one of the very few who have revolutionised their operations to become truly world-class, with a flexible output pattern, sound and interactive manager-foreman-employee relationships, ability to change rapidly as needed, and effective, customer oriented systems.

Requirements for measuring Requirements for measuring performanceperformance

According to Drennan et al: the principal requirements of measurement are that

it should be appropriate, accurate and objective: Appropriate: If the measure is achieved (actual against

standard or objective), the organisation will have achieved the organisational result it wants.

Accurate: The measure is believable and preferably quantifiable. While complete accuracy is a possibility there is usually a trade-off between accuracy and speedy reporting. The rule-of-thumb is that a measurement be sufficiently accurate to engender the right response in time to effect a better organisational result.

Objective: The final requirement is that the measure be objective. The presence of subjectivity inevitably raises dissent with the outcome of the measure, which may in turn lead to ambivalent or ineffectual responses to actual problem situation.

Requirements for measuring Requirements for measuring performance (cont.performance (cont.

Olve et al (1999: 189)… Criteria which we have found useful in determining what measures to use:

Measures should be unambiguous and defined uniformly throughout the company.

Taken together, the measures used should sufficiently cover the aspects of the business which are included in strategies and critical success factors.

The measures used in the different perspectives should be clearly connected. A scorecard may be said to portray the business as it is, or as we would like it to be. The picture should be interpreted as a coherent and convincing report which clearly shows how the efforts described in the lower portion of the card are logically justifiable for successfully attaining the criteria in the upper portion.

Measures should be useful for setting goals which are considered realistic by those responsible for achieving them.

Measurement must be an easy, uncomplicated process, and it is must be possible to use the measurements in different systems like the company’s intranet and data warehouse, for example.

Requirements for measuring Requirements for measuring performance (cont.performance (cont.

Meyer (2002: 6)… The rethinking of performance measurement begins

with a simple question: what properties do we look for in

performance measures? Ideally, the performance measures of choice

would meet the following requirements:

Parsimony Predictive ability Pervasiveness Stability Applicability to compensation

Requirements for measuring Requirements for measuring performance (cont.performance (cont.According to Marshall W. Meyer (Ed.

Neely, 2002: 52)… In a world of perfect measurement, managers would be able to design optimal

performance measurement systems. The measures chosen would meet the following requirements – note that I

am not saying what the measurements would be, only what the measures

would look like:

Requirements for measuring Requirements for measuring performance (cont.performance (cont. There would be relatively few measures to keep track of, perhaps as

few as three financial measures and three non-financial measures. This is a matter of parsimony. If there are too many measures, cognitive limits will be exceeded and information will be lost.

The non-financial measures would predict subsequent financial performance, in other words, the non-financials would serve as leading performance indicators (and the financials as lagging indicators). Non-financials not demonstrated to be leading indicators would be sidelined unless, of course, they were tracked as matters of compliance, ethics, and security – “most do’s” for the firms.

These measures would pervade the organisation – the same measures would apply everywhere. Measures pervading the organisation can be summed from the bottom to the top of the organisation and decomposed downward, the latter giving managers’ drill-down capability. Measures pervading the organisation, moreover, permit performance to be compared across units.

The measurement system would be stable. Measures would evolve slowly so as to maintain people’s awareness of long-term goals and consistency in their behaviour.

People would be compensated for performance on these measures, that is, for performance on both financial measures and the non-financial measures known to be leading indicators of financial results.

Why measures fail?Why measures fail? Firms are swamped with measures, and the problem

of too many measures is, if anything, getting worse, the balanced scorecard withstanding. It is commonplace for firms to have fifty to sixty top-level measures, both financial and non-financial. Many firms, I am sure, have even more top level measures.

Our ability to create and disseminate measures has outpaced, at least for now, our ability to separate the few non-financial measures containing information about future financial performance from the many that do not. To be sure, research studies show that a myriad of non-financial measures such as customer and employee satisfaction affect financial performance, but their impact is modest, often firm and industry-specific, ad discoverable only after the fact.

Why measures fail? (cont.Why measures fail? (cont. Few non-financial measures pervade the organisation. It

is easier to find financial measures that pervade the organisation, but keep in mind that many firms have struggled unsuccessively to drive measures of shareholder value from the top to the bottom of the organisation.

Performance measures, non-financial measures especially, never stand still. With use they lose variance, sometimes rapidly, and hence the capacity to discriminate good from bad performance. This is the use-it-and-lose-it principle in performance measurement. Managers respond by continually shuffling the measures.

Compensating people for performance on multiple measures is extremely difficult. Paying people on a single measure creates enough dysfunctions. Paying them on many creates more. The problem is combining dissimilar measures into an overall evaluation of performance and hence compensation. If measures are combined formulaically, people will game the formula. If measures are combined subjectively, people will not understand the connection between measured performance and their compensation.

WPC Focus (in the short WPC Focus (in the short term)term)

Dimension Emphasis

Financial results Low

Customer satisfaction Low

Business processes Low to Medium

Learning & Growth Medium to High

FindingsFindings The emphasis during the discussions was on

the learning and growth opportunities, the ability to change the employees’ attitude and behaviour in order to achieve better results. Once the minds of the people are focused and convinced as to why they should implement WPC, then the impact on the rest of the dimensions would take place by virtue of having motivated employees, clear team objectives and goals, clearly defined individual roles, increased teamwork, and improved communications between management and employees.

ConclusionsConclusions It became evident during the

discussions that most companies do not align the green area measurements with the overall business objectives. As such, measuring performance of the companies is currently achieved via different channels. A better way to integrate WPC into the company strategies is needed to present a cohesive picture all the time.

WPC ImpactWPC ImpactType of measurement

Level of organisation Hard Soft

Management × √

Factory floor √ √

Definition of factors Definition of factors (Quality)(Quality) To establish priorities, the relative impact or

importance of quality problems must be determined.

For internal quality problems, measuring the frequency of occurrence is not sufficient. The best measure is costs.

It is not very difficult to estimate the cost of rework, scrap, downtime, idle time, or inventory.

Determining the cost of queue or delay time is a less tangible problem, but for a specific process, it is possible to identify the effects of such delays.

Definition of factors Definition of factors (Cost)(Cost) An important consideration in calculating the

cost of rework and scrap is where a problem is discovered in the production process. Every step in a process is supposed to add value to the product.

This increase in value, means that the cost of a defect found at the end of the process is going to be much greater than finding the same defect at the beginning of the process.

The actual cost of any particular defect would also depend on the nature of the defect, its severity, and other product or process variables.

THANK YOU!THANK YOU!

Any questions?