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Manufacturing Strategy

Lecture 9

Professor Bernard HonProfessor Bernard Hon

School of EngineeringSchool of Engineering

Outline of LectureOutline of Lecture

Evolution of Performance Measures.

Benchmarking Process.

Balanced Scorecard.

Performance Measures for Manufacturing.


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A QuotationA Quotation

When you can measure what you are speaking about

and express it in numbers, you know something

about it; but when you cannot measure it and express

it in numbers, your knowledge is of a very meagre

and unsatisfactory kind.

Lord Kelvin

Benchmarking in the Premier LeagueBenchmarking in the Premier League

This Time Last YearThis Time Last Year

Manchester United

Chelsea

Arsenal

Tottenham


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Benchmarking in the Premier LeagueBenchmarking in the Premier League

TodayToday

Manchester City

Manchester United

Tottenham

Chelsea

Benchmarking in EuropeBenchmarking in Europe

Real Madrid

AC Milan

Manchester United

e sea


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International BenchmarkingInternational Benchmarking

Sao Paolo ?

Benchmarking in ResearchBenchmarking in Research

2008 20012008 Ranking

. .

Oxford 2.959 6.58

LSE 2.957 6.46

Imperial College 2.943 6.68

UCL 2.844 6.19

Manchester 2.823 6.09/5.71

Warwick 2.799 6.20 York 2.780 5.93

Essex 2.772 6.06

Edinburgh 2.747 5.96


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World University RankingWorld University Ranking-- 20092009

Rank Universit

1 Harvard University

2 University of Cambridge

3 Yale University

4 University College London

5 Oxford University

5 Imperial College

Times Higher QS, 2009

7 University of Chicago

7 Princeton University

9 Massachusetts Institute of Technology

10 California Institute of Technology


Rank Universit




4 Stanford University




6 University of Oxford

8 University of California Berkeley

9 Imperial College

10 Yale University


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Rank Universit



2 Stanford University

4 University of Oxford





8 Imperial College

9 University of Chicago

10 University of California Berkeley

TheThe RoleRole ofof Performance MeasurementPerformance Measurementinin Modern ManufacturingModern Manufacturing

Performance

Execute

Measurement

Control

Why?

What?

When?

Where?

How?

Plan


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Generic Functions of ManufacturingGeneric Functions of ManufacturingPerformance MeasuresPerformance Measures

To reflect the current state of manufacturingsituation.

To monitor and control operational efficiency

To drive improvement programme

To gauge the effectiveness of manufacturingec s ons .

Functions of a PerformanceFunctions of a PerformanceMeasurement SystemMeasurement System

Monitoring and

Performance

Measurement

Look ahead

Look back Succinctoverview

improvement

Roll up Strategyalignment

Motivate andcompensate

Cascade down

CompareBenchmarking

Decision effectiveness


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Evolution of performance measuresEvolution of performance measures

ofComprehensiveness

Productivity

Quality

Multi-dimensional

D

egree

60s 70s 80s 90s

Cost

Management School approachManagement School approach--Four Types of MeasuresFour Types of Measures

Market Evaluation Share price

Financial Measures ROI

Non-Financial Quality level


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Baldridge Assessment SchemeBaldridge Assessment Scheme

Points

Leadership 100

Information and Analysis 70

Strategic Quality Planning 60

Human Resources Utilisation 150

Quality Assurance of Product and Services 140

Quality Results 180

Consumer Satisfaction 300

Properties of an ideal Performance MeasureProperties of an ideal Performance Measure

Simplicity and fit-for-purpose

Predictive ability

Pervasive throughout the enterprise.

Comprehensible equation

Appropriateness for process improvement

Data requirement.


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SevenSeven PPurposesurposes ofofa Performance Measurea Performance Measure

Rollup

Rolldown

Look Back Look Ahead

Compare

Compensate Motivate

MW Meyer, 2002

Definition of BenchmarkingDefinition of Benchmarking

A continuous, systematic process of evaluating

companies recognised as industry leaders, to

determine business and work processes that

represent Best Practices and establish rational

performance goals.

Xerox


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What is Benchmarking?What is Benchmarking?

+

Best-in-class

performance

Currentrformance

2

34

2. Benchmarking helps

to set strategy and learn

new approaches

4. Benchmarking

maintains the stimulus

for continuous

improvement

Time

performancePe

1. Benchmarking identifies

and calibrates gap

3. Benchmarking helpsto measure success

in closing the gap

+

Dynamic Model of BenchmarkingDynamic Model of Benchmarking

Best-in-class+

ompany

Improving

company

rformance

Time

P

+


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Benchmarking in the Real WorldBenchmarking in the Real World

Best-in-classCompany

+

Performance

RegressingCompany

ImprovingCompany

Time+

Types of Comparators UsedTypes of Comparators Used

Best

in

Class

Industry

Competitors

Internal


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Benchmarking CharacteristicsBenchmarking Characteristics

Relevance Data InnovativeBenchmarking

Ease

Internal X X

Direct Competition X

Industry Leader

XGeneric Process X X

Reasons for Using BenchmarkingReasons for Using Benchmarking

To access the companys competitive performance 85

As an occasional review of the companys performance 80

As an integral part of managing performance improvement 77

As a key element in the companys Total Quality programme 75

In the companys planning and budgeting process 54

To solve specific problems 51

Coopers & Lybrand


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Benefits of BenchmarkingBenefits of Benchmarking

Helps companies gain new insights 91

Enables meaningful and realistic targets to be set 90

Motivates staff by showing what is possible 84

Provides early warning of competitive disadvantage 79

Fosters step change and quantum leap improvements 58

Promotes team work and cross-functional learning 58

Coopers & Lybrand

Main Difficulties of BenchmarkingMain Difficulties of Benchmarking

%

Access to confidential competitor information 83

Verifying data obtained 71

Comparability of data from different companies 69

Lack of co-operation from other companies 62

Lack of resources to collect and analyse information 59

Being already top in the industry 18

Coopers & Lybrand


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Areas for Performance ManagementAreas for Performance Management

Market standing

Innovation

Productivity

Physical and financial resources

Profitability

Manager performance and development

Worker performance and attitude

Public Responsibility

Peter Drucker

The Purposes of ProfitThe Purposes of Profit

Measures the net effectiveness and soundness of a

business.

Serves as the premium that covers the costs of

staying in business- replacement, obsolescence,

business and technical risks and uncertaint .

Ensures the supply of future capital for innovation

and expansion.


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Rate of Return on Capital EmployedRate of Return on Capital Employed

risk and uncertainty attached to their investments.

Provide for the normal expansion of the business.

Provide, in times of inflation, adequate reserves to

maintain the real capital of the business intact.

Attract new external capital when required.

Satisfy creditors and employees of the likelihood ofthe continued existence and/or growth of the

business.

Relationship of Factors affectingRelationship of Factors affecting

Return on Capital EmploymentReturn on Capital Employment

Return on Capital Employed

Asset turnover multiplied by Profit as % of sales

Sales divided by Capital employed Sales divided into Profit

Stocks Net

Debtors

Liquid

Assets

Production

Cost

Selling

Cost

Distribution

Cost

Administration

Cost


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Using the RatioUsing the Ratio

External comparison with competitors

Trend analysis

Internal comparison between business

Variances analysis

Financial Ratio Analysis used by GECFinancial Ratio Analysis used by GEC

ro t

Capital employed

Profit

Sales

Sales

Stock

Capital employed

Sales

Fixed Assets

Employees

Profits

Employees


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Measures of Performance 1Measures of Performance 1

SizeSales volume

Total assets

Absolute

Performance

Level

Profitability

Net income

Working Capital

Return on equity

Return on capital

Return on assets

Return on sales

Return per employee

Productivity

Stock-market

performance

Sales-to-assets

Sales per employee

Sales-to-capital

Return to investors

Stock-price increases

Dividend yield

P/E Ratio

Measures of Performance 2Measures of Performance 2

SalesSales-volume growth

Total-assets rowth

Performance

Improvement

Profitability

Growth

Net-income growth

Working-capital growth

Return-on-equity growth

Return-on-capital growth

Return-on-assets growth

Return-on-sales growth

Return-per-employee growth

ProductivityGrowth

Stock-market

Performance

Sales-to-assets growthSales-per-employee growth

Sales-to-capital growth

Return to investors growth

Stock-price increase growth

P/E ratio


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Metrics for Performance MeasurementMetrics for Performance Measurement --11

Strategic

Efficiency metrics and lagging indicators for

management assessment, strategic planning

and resource allocation.

Examples: ROIC, EVA, net operating profit,

inventory turnover, revenue, cash flow, market

position, stock market expectation.

Tactical

Concerned with accuracy and timeliness of

reporting and control.Examples: financial turnover, costs and

expenses, productivity, supply chain

performance, regulatory and social compliance.

Metrics for Performance MeasurementMetrics for Performance Measurement-- 22

Operational

Concerned with short term operation, financial

and manpower performance.

Examples: quality, safety, environment, yield,

delivery, time to market, learning and training,

time to recruit.

Value

Delivery

customer satisfaction.

Examples: stock price, on-time delivery,

customer satisfaction and loyalty, employee

satisfaction, new product introduction


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Perceived Benefits of PM SystemsPerceived Benefits of PM Systems

ocuses on e wea nesses an e u ure.

Enhances pro-active decision-making.

Provides a basis for continuous improvement.

Provides opportunity for improving relationship with

customers and su liers.

Disseminates key performance information for

performance tracking and optimization.

Encourages positive behaviour and culture.

Characteristics of PM FrameworkCharacteristics of PM Framework

Provide a balanced picture of the organisation.

Concise summary of the performance.

Multi-dimensional measures.

Alignment with company goals and objectives.

Support for continuous improvement.


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Summary of Performance MeasurementSummary of Performance Measurement

ModelsModels

Performance Measurement Ori inatorModel

Performance Criteria SystemPM MatrixPM for WCMPM QuestionnaireSMART pyramidResults & determinants

Globerson, 1985Keegan, et al, 1989Maskell, B.H, 1989Dixon et al, 1990Lynch and Cross, 1991Fitzgerald et al., 1991

rameworBalanced Scorecard

Performance PrismPM SystemIntegrated PM system

Kaplan & Norton, 1992

Neely & Adams, 2000Medori & Steeple, 2000Bititci et al., 2000

The Performance PyramidThe Performance Pyramid

Lynch and Cross, 1991


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Balanced Scorecard ApproachBalanced Scorecard Approach

A Multi-dimensional Performance

Management System proposed by Robert

Kaplan and David Norton in 1992.

Translate the companys vision and strategy

into a comprehensive set of strategic

objectives and tangible measures from fourProf. R Kaplan and Dr. D Norton

.

Assign targets, accountabilities and

initiatives to each of the Balanced Score-

card measures.

The Balanced Scorecard SystemThe Balanced Scorecard System

How do we look

to shareholders?

Financial

Perspective

Customer

Perspective

What must

we excel

at?

How do

customers

see us?

InternalBusiness

PerspectiveVision and

StrategyGoals Measures

Goals Measures

Goals Measures

Can we continue to

improve and create?

Innovation &Learning

Perspective

Goals Measures

R Kaplan and D Norton, 1996


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Balanced ScorecardBalanced Scorecard

Financial PerspectiveFinancial Perspective

Goals

Survive

Succeed

Measures

Cash flow

Quarterly sales growth

and operating income

Prosper

y v s on

Increased market shareand ROE


Customer PerspectiveCustomer Perspective

Goals Measures

New products

Responsive

Percent of sales from

new products

Percent of sales from

proprietary products

On-time delivery (defined

supp y

Preferred

supplier

Customer

partnership

y cus omer

Share of key accounts

purchases

Ranking by key accounts

Number of co-operative

engineering efforts


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Internal Business PerspectiveInternal Business Perspective

Manufacturing geometry

vs. competition

Cycle time

Unit cost

yield

Technology

capability

Manufacturing

excellence

Silicon efficiency

Engineering efficiency

Actual introduction

schedule vs. plan

Design

productivity

New product

introduction


Innovation and Learning PerspectiveInnovation and Learning Perspective

Technology

leadership

Manufacturing

learning

Time to develop next

generation

Process time to maturity

Product focus

Time to market

Percent of products thatequal 80% sales

New product introduction

vs. competition


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The Balanced ScorecardThe Balanced Scorecard

A performance management system

that monitors the organizations current

operating performance as well as the

drivers of its long term success,

,

objectives and measures under four

perspectives.

Balanced Scorecard Table


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New Orientation of theNew Orientation of theBalanced ScorecardBalanced Scorecard

BeforeNow

Strategic

Objective

Strategic

Objective

Financial Perspective

Customer Perspective

Internal Business PerspectiveStrategic

Objective

Time

Performance

of the firm

Performance

of the firm

Performance

of the firm

Innovation and Learning PerspectiveStrategic

Objective

R Kaplan and D Norton, 2000

Increasing Popularity of theIncreasing Popularity of the


success

Places emphasis on the importance of all

stakeholders, not just investors

Encourages consideration of linkages among

erformance measures in all areas of the firm,

and among all levels in the hierarchy

Recognizes the need for some measures which

comment of preparedness for future success


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Benefits of the Balanced ScorecardBenefits of the Balanced Scorecard

Describe the vision of the future for the entire

organisation.

Focus the entire organisation on key areas/activities

necessary to create breakthrough performance.

Help to integrate cross-functional corporate

programmes such as quality and customer services.

Break down strategic measures to local operational

measures so that everyone understands what is

needed to achieve overall excellence.

Problems with the Balanced ScorecardProblems with the Balanced Scorecard

Unsystematic nature of the measurement set

Unclear connection between the measures and

achievement of shareholder value

Difficult & costly to capture the data required to

measure what is needed

Focus is on the present, but the key to strategic

success s prepar ng or e u ure Insufficient focus on the drivers underlying each

measure

Difficult to identify gaps, conflicts and redundancies in

the measurement system


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How Many Perspectives for a BSC?How Many Perspectives for a BSC?

There is no mathematical theorem whichstate that four perspectives are bothnecessary and sufficient (for a balancedscore card).

Kaplan and Atkinson,Advanced Management Accounting, Prentice Hall,1998, pp 378

Rationale for the 5 Metrics forRationale for the 5 Metrics for

Manufacturing EnterpriseManufacturing Enterprise

TimeSynchronization of process, supply and

demand chain.

Costlow cost driver for market share and

business survival

Qualit Functionalit , de endabilit and reliabilit .

Flexibility Responsiveness to change.

ProductivityEffectiveness and efficiency of overall

activity.


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5 Metrics for Manufacturing5 Metrics for Manufacturing

EnterpriseEnterprise-- Example MeasuresExample MeasuresAverage batch processing time, set-up time, cycle time,

, , , -

delivery,

CostSetup cost, tooling cost, overhead cost, unit labour cost,

unit mfg cost, unit material cost, work in progress

QualityAOQL, incoming quality, MTTF, process capability index,

return rate, rework %, scrap %, warranty claim %.

Flexibilityomponen reusa y, no. o eren par s, e very

flexibility, machine flexibility, process similarity, volume

flexibility, total system flexibility.

ProductivityDirect labour productivity, overall equipment

effectiveness, return on assets, stock turn, value-added

per employee.

Performance Measurement FrameworkPerformance Measurement Frameworkfor Manufacturing Systemsfor Manufacturing Systems

Machine

Cell

Line

Factory

Network


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Summary of Performance MeasuresSummary of Performance Measures

for Manufacturing Systemsfor Manufacturing Systems

76

109

132

Machine

Cell

Line

12

12

33

18

39

33

25

22

28

8

18

18

13

18

20

121

4

442

Factory

Network

20

0

77

26

0

116

17

0

92

22

1

67

36

3

90

518 measures: 58% Practical, 42% theoretical.G Serna & KKB Hon

Barriers of Performance MeasurementBarriers of Performance Measurement

Data is distributed at di erent sources

Time and effort required for data collection,

analysis and reporting

Problems with accuracy and timeliness

Chan es in riorities

Fear of exposure

Resistance to change


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Design for Performance MeasurementDesign for Performance Measurement

Production and product characteristics.

Company size.

Simplicity of system.

Data collection requirements.

Fitness for purpose.

NonNon--Quantitative MeasuresQuantitative Measures

Leadershipvision, autocratic, participative, delegative,

motivation.

Culturevalue system, practices, team dynamics,

learning.

Or anisat ion classical, matrix, lobal, virtual.

Personnelrecruitment, training, morale, job

satisfaction, retention.


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Technological MeasuresTechnological Measures

Tool Tool life, tool wear, G ratio.

Process Cutting force, power, AE emission.

Geometry Tolerances, roundness, straightness.

Surface roughness, surface integrity,

HAZ.

Workpiece Material utilization, location, scrap rate.

Quality

DPM/Rolled Yield

Potential MeasuresPotential Measures

Cycle Time

Material Order to Recei t Time

Cost of Non-Conformance

Acceptance Rate

Schedule

On-time Delivery

Master Production Schedule Attainment

Cost

Standards Roll-up Comparison Year Over

Year

Operations Cost as % of Collins Revenue

Build/Test Start to Stores Time, Run:Queue

Order Entry to Product Delivery Time

Transition

New Product Prototype Development Time

Maturity at Transition - Manufacturing

Readiness Level, # of Jumper Wires

Flexibility

Metrics? Anything, Anywhere, Anytime, Any

Rate

Assets Inventory Weeks/Turns

Active Inventory vs. Inactive Inventory

For Production Stock, WIP, Finished Goods

Productivity

Productivity - Metric Definition?

Safety - Incident Rate, Lost Workdays

Variation Reduction Cost of Non-Conformance

Cpk of Defined Set of Representative

Processes?

Standardization

Metrics? Equipment, Work Center/Routing

Setup, Write-ups

Rockwell Collins


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Finally........Finally........A CautionA Caution

You tend to focus on what you measure

for at the expense of other imperatives.

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