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CHAPTER 6 - PERFORMANCE MEASURE AND INFORMATION

MANAGEMENT
Data are simply representations of facts that come from some type of
measurement process.
Measurement is the act of quantifying the performance dimensions of products,
services, processes, and other business activities.
Measurement and Indicators refer to the numerical information that results
from measurement.
The term Indicator is often used for measurements that are not a direct or
exclusive measure of performance.
The aim of measurement and analysis is to guide an organization toward the
achievement of key business results and strategic objectives and to anticipate and
respond to rapid or unexpected internal or external changes.
Osborne and Gaebler make three insightful observations:
1. If you dont measure results, you cant tell success from failure.
2. If you cant see success, you cant reward it and if you cant reward
success, you are probably rewarding failure.
3. If you cant recognize failure, you cant correct it.
Information
Is data in context of a business or organization.
Is derived from the analysis of data.
Good information allows managers to make decisions on the basis of facts,
not opinions.
THE STRATEGIC VALUE OF INFORMATION

Organizations need information and performance measures for three reasons.


1. To lead the entire organization in a particular direction; that is, to drive
strategies and organizational change.
2. To manage the resources needed to travel in this direction by evaluating the
effectiveness of action plans.
3. To operate the processes that make the organization work and continuously
improve.
Data and Information support analysis at the three levels of quality

Individual Level
Process Level
Organization Level

Good data and information management provide many benefits:

They help the company know that customers are receiving appropriate levels
of service because indications are used to measure service attributes.

They provide concrete feedback to workers to verify their progress.


They establish a basis for reward and recognition.
They reduce the costs of operations through better planning and
improvement action.
LEADING PRACTICES

Data and Information are the forces that drive quality excellence and improve
operational and competitive performance. Some of the key practices are
summarized here.
1. They develop a comprehensive set of performance that reflect internal and
external customer requirements and key factors that drive the organization.
2. They use comparative information and data to improve overall performance
and competitive position.
3. They continually refine information source and their uses within the
organization.
4. They review organizational performance using sound analytical methods to
assess organizational success, competitive performance, and progress toward
achieving strategic objectives, and they use the result to identify priorities for
improvement and daily decision making.
5. They involve everyone in measurement activities and ensure that
performance information is widely visible throughout the organization.
6. They ensure that data and information are accurate, reliable, timely, secure,
and confidential as appropriate.
7. They ensure that hardware and software system are reliable and user-friendly
and that data and information are accessible to all who need it them.
8. They systematically manage organizational knowledge and identify and share
best practices.
THE SCOPE OF PERFORMANCE MEASUREMENT
THE BALANCE SCORECARD
The purpose of the balanced scorecard is to translate strategy into measures that
uniquely communicate your vision to the organization. Their vision of the balanced
scorecard consists of four perspectives:
Financial Perspective
Internal Perspective
Customer Perspective
Innovation and Learning Perspective
The Malcolm Baldrige Criteria for Performance Excellence Results category groups
performance measures into six sets:
Customer
Product and Service
Financial and Market
Human Resource
Organizational Effectiveness
Governance and Social Responsibility
THE ROLE OF COMPARATIVE DATA
Looking at data without a basis for comparison can easily lead to a false sense of

achievement. It would be difficult for an organization to recognize the need for


further improvement or an accelerated pace of change to close the gap.
Comparative and benchmark information also provides the motivation to seek
breakthrough improvements.
DESIGNING EFFECTIVE PERFORMANCE MEASUREMENT SYSTEMS
The purposes of a performance measurement system include the following:

Many

Providing direction and support for continuous improvement


Identifying trends and progress
Facilitating understanding of cause-and-effect relationships
Allowing performance comparison to benchmarks
Providing a perspective of the past, present, and future
organizations make two fundamental mistakes:

1. Not measuring key characteristics critical to company performance or


customer satisfaction and
2. Taking irrelevant or inappropriate measurements.
PROCESS LEVEL MEASUREMENTS
Many organizations use the acronym SMART to characterized good measures and
indicators: simple, measurable, actionable, related (to customer requirements and
to each other), and timely. At the process level, product and service quality
indicator focus on the outcomes of manufacturing and service processes. A common
indicator of manufacturing quality is the number of non-conformities per unit, or
defects per unit. In services, a measure of quality analogous to defects per unit is
errors per opportunity. Each customer transaction provides an opportunity for
many different types of errors.
Nonconformities per unit or errors per opportunity are often reported as rates per
thousand or million. A common measure is dpmo-defects per million
opportunities. Thus, a defect rate of 2 per 1,000 is equivalent to 2,000 dpmo.
Many companies classify defects into three categories:
1. Critical Defect
2. Major Defect
3. Minor Defect
IDENTIFYING AND SELECTING PROCESS MEASURES
To generate useful process performance measures a systematic process is required.
1. Identify all customers of the system and determine their requirements and
expectations.
2. Define the work process that provides the product or service.
3. Define the value - adding activities and outputs that compose the process.
4. Develop specific performance measures or indicators.
5. Evaluate the performance measures to ensure their usefulness.
Many organization use dashboards, which typically consists of a small set of
measures that provide a quick summary of process performance (this term is
sometimes also used to describe a balanced scorecard at the organizational level).

Dashboards often use graph, chart, and other visual aids to communicate key
measures and alert managers when performance is not where it should be.
ALIGNING STRATEGIC AND PROCESS-LEVEL MEASUREMENT
Aligning strategic and process-level measurements is vital to a high-performing
organization and can be viewed as an approach for strategy deployment. Alignment
might even go further, down to the team and individual levels.

Enterprise Resource Planning (ERP) systems are software packages that


integrate organizational information systems and provide an infrastructure for
managing information across the enterprise. ERP systems allow companies to share
different databases in a networking environment, and store and process all
company data in a unique database, and distribute it to a large group of users.

ANALYZING AND USING PERMORMANCE DATA


Analysis refers to an examination of facts and data to provide a basis for effective
decisions.
Interlinking is the term that describes the quantitative modeling of cause-andeffect relationships between external and internal performance measure, such as
the relationship of customer satisfaction measures to internal processes.

THE COST OF QUALITY


Al organizations measure and report costs as a basis for control and improvement.
The reporting of quality-related costs had been limited to inspection and testing,
other costs were accumulated in overhead accounts.
Quality Cost Classification
Quality costs can be organized into four major categories:
Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs
Quality Costs in Service Organizations

The nature of quality costs differ between service and manufacturing


organizations. Process-related costs, such as customer service and complaint
handling staff and lost customers are more critical.
Consumer surveys and other means of customer feedback are also used to
determine quality costs for services.
In general, however, the intangible nature of the output makes quality cost

accounting for services difficult.


Capturing Quality Costs through Activity-Based Costing
Most accounting systems are not structured to capture important cost of quality
information. Traditional accounting systems focused on promoting the efficiency of
mass production, particularly production with few standard products and high direct
labor. Traditional systems accurately measure the resources that are consumed in
proportion to the number of unit produce of individual products.
Activity-based costing organizes information about the work (or activity) that
consumes resources and delivers value in a business. Activity-based costing
allocates overhead costs to the products and services that use them.
The accounting department supports the manufacturing and other departments by
providing information on product costing and operating activities to evaluate
performance, identify deficiencies, and assess quality costs arising from internal and
external failure of products and customer product requirements.

MEASURING THE RETURN ON QUALITY


Balancing quality costs against expected revenue gains has become known as
return on quality (roq). ROQ is based on four main principles.
Quality is an investment
Quality efforts must be made financially accountable
It is possible to spend too much on quality
Not all quality expenditures are equally valid
MANAGING INFORMATION AND KNOWLEDGE ASSETS
Data Reliability
Reliability of a measurement refers to how well the measuring instrument - manual
instruments, automated equipment, or surveys and questionnaires consistently
measures the true value of the characteristic. Measurement reliability in
manufacturing demands careful attention to metrology the science of
measurement.
Data Accessibility and Security
Data accessibility empowers employees and encourages their participation in
quality improvement efforts.
Sharing data is becoming increasingly important in business networks and
supply chains.
Modern information technology plays a critical role in data accessibility.
Knowledge Management

Explicit knowledge includes information stored in documents or other forms of

media such as databases, policies and procedures, and technical drawings.


Tacit knowledge is information that is formed around intangible factors resulting
from an organizations or individuals experience and is content-specific.
Knowledge management involves the process of identifying, capturing,
organizing, and using knowledge assets to create and sustain competitive
advantage.
Internal benchmarking is the ability to identify and transfer best practices within
the organization.

MEASUREMENT AND INFORMATION MANAGEMENT IN THE BALDRIGE


CRITERIA, ISO 9000, AND SIX SIGMA
The criteria ask how an organization gathers and integrates data and information
for monitoring daily operations and supporting organizational decision making and
how measures are selected and used.
ISO 9000:2000 provides a basic framework for managing data and information. The
document and data control requirements of ISO 9000 require companies to define a
process for ensuring that any critical information that is required for the
performance of a business process is accurate, up-to-date, and effective for its
intended purpose.
Using a balanced scorecard approach or the Baldrige measurement framework can
clearly provide the foundation for meeting these requirements for firms that pursue
ISO 9000.
Six Sigma emphasizes fact-based decisions and provides organizations with tools to
generate measurable results from Sig Sigma projects. Sig Sigma methodology
requires measuring and reporting performance goals and using performance
indicators to control and sustain improvements.