Chapter 3Measuring Performance in Operations

TRUE/FALSE
1. Having a large number of performance measures is much better than having a selected few.
ANS: F

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2. Measuring and reporting performance results can be a motivator for many workers.
ANS: T

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3. The only important measurement category in business is financial.

ANS: F

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4. Return on assets would normally be classified as a productivity measure.

ANS: F

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5. Good customer satisfaction measurement systems are designed to provide information about future
buying behavior.
ANS: T

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6. Quality measures the degree to which the output of a process conforms to management's expectations
and requirements.
ANS: F

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7. Service quality measures are generally based on data collected from observing front-line operations.
ANS: F

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8. Reliability is the ability to perform a service dependably and accurately.

ANS: T

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9. Assurance is the willingness to help customers and provide prompt recovery to service upsets.
ANS: F

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10. Empathy is the caring attitude and individualized attention provided to customers.
ANS: T

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11. Measures and indicators of product and service performance that have a strong correlation with
customer satisfaction are appropriate to monitor.
ANS: T

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12. Most of the five dimensions of service quality pertain to behavioral characteristics, which makes them
easier to measure.
ANS: F

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13. Errors in service creation and delivery are sometimes called service upsets.
ANS: T

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14. Speed is usually measured in clock time, whereas reliability of a time-based measure is usually
measured in quantifying the variances in average performances or targets.
ANS: T

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15. Queue time is a fancy term for service time variance.

ANS: F

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16. Having intensive care nurses on call in case of a dramatic increase in patient demand is an example of
design flexibility.
ANS: F

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17. Design flexibility is the ability to respond quickly to changes in the volume and type of demand.
ANS: F

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18. Productivity is more closely related to effectiveness than efficiency.

ANS: F

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19. As output decreases for a constant level of input, productivity also decreases.
ANS: T

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20. It costs 3 to 5 times more to keep an existing customer than to acquire a new customer.
ANS: F

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21. The "value of a loyal customer" links customer satisfaction and loyalty to a firm's profitability
measures.
ANS: T

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22. Any measure a firm chooses to use should provide the basis for making executive-level strategic
decisions.
ANS: F

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23. Health care and educational organizations were eligible for the Malcolm Baldrige National Quality
Award since its inception in 1987.
ANS: F

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24. Although the award from the Malcolm Baldrige National Quality Award Framework receives the most
attention, the primary purpose of the program is to provide a framework for performance excellence
through self-assessment to understand an organization's strengths and weaknesses, thereby setting
priorities for improvement.
ANS: T

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25. In the Baldrige Award criteria, the Business Results category focuses on how an organization selects,
gathers, analyzes, manages, and improves its data, information, and knowledge assets.
ANS: F

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26. The Leadership category of the Baldrige criteria includes how an organization addresses its public and
community responsibilities.
ANS: T

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27. Employee satisfaction might be considered as a lagging indicator of employee turnover.

ANS: F

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28. The balanced scorecard is designed to be linked to an organization's strategy.

ANS: T

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29. The balanced scorecard model uses the same categories as the Baldrige Award.
ANS: F

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30. The value chain model is probably the dominant model for operations managers.
ANS: T

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31. The service-profit chain model is based on understanding cause-and-effect linkages among
performance measures.
ANS: T

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32. The quote "Happy employees create happy customers" best characterizes the Service-Profit Chain
(SPC) model.
ANS: T

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MULTIPLE CHOICE
1. Which one of the following statements is true with regard to the case study BankUSA: Credit Card
Division?
a. Service upsets represented 17 percent of total transactions.
b. Current performance reports indicate that the credit card division is meeting 99.2
percent of its service requirements.
c. The correlation between customer satisfaction and operating costs was negatively

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correlated.
d. The ultimate (real) service level for this organization is internal performance metrics.
ANS: B

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2. Which of the following is true?

a. The theory of the Balanced Scorecard model of performance is leadership drives the
operating system that creates business results.
b. The Service-Profit Chain focuses on learning, internal business, customers, and financial
performance.
c. Volume flexibility allows the firm to change their learning behavior of employees as
conditions change.
d. In the BankUSA: Credit Card Division case study internal and external performance
was negatively correlated.
ANS: D

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3. The triple bottom line (TBL or 3BL) refers to the measurement of sustainability in all of the following
areas except
a. Economic
b. Social
c. Technological
d. environmental
ANS: C

PTS: 1

4. Customer satisfaction rating increases as time-on-hold waiting decreases is an example of

a. productivity index
b. Interlinking
c. value of a loyal customer
d. operational definitions
ANS: B

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5. Interlinking is the quantitative modeling of cause-and-effect relationships between

a. internal performance criteria
b. external performance criteria
c. internal and external performance criteria
d. competing organizations performances
ANS: C
6.

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Which of the following is not a key dimension of service quality?

a. conformance
b. Tangibles
c. Empathy
d. Reliability
ANS: A

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7. Which of the following would not be a typical organizational-level financial performance

measure?
a. labor and material costs
b. revenue and profit
c. return on assets
d. earnings per share
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ANS: A

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8. Which of the following would be a typical operational-level quality performance measure?

a. customer ratings of goods and services
b. customer retention
c. service representative courtesy
d. product recalls
ANS: C

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9. At a basic level, quality should be measured in three areas. Which of the following is not one
of those areas?
a. goods
b. services
c. environment
d. Employee
ANS: D

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10. Which of the following would be an example of an innovation and learning performance measure?
a. employee satisfaction
b. earnings per share
c. design flexibility
d. product-related litigation
ANS: A

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11. Dell's ability to provide a wide range of customized computer hardware to accommodate customers'
needs best describes
a. volume flexibility
b. design flexibility
c. cycle time
d. queue time
ANS: B

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12. The number of patent applications and the number of improvement suggestions implemented relate
best to which operational performance measure category?
a. Financial
b. customer and market
c. innovation and learning
d. Productivity
ANS: C

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13. When Bill Gates stated that "Microsoft is always two years away from failure," he was emphasizing
the importance of
a. innovation and learning
b. Productivity
c. design flexibility
d. Speed
ANS: A

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14. The ability to respond quickly to changes in the amount and type of demand is called
a. Learning

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b. service quality
c. design flexibility
d. volume flexibility
ANS: D

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15. Productivity is the

a. quality of output/quantity of input
b. quality of input/quantity of output
c. quantity of output/quantity of input
d. quantity of input/quantity of output
ANS: C

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16. In choosing performance measures, an organization might consider all of the following criteria except
a. Is the measure actionable?
b. Is the measure based on behavioral performance?
c. Is the measure important to customers?
d. Does the measurement support the firm's mission?
ANS: B

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17. Airline revenue per passenger mile and hotel revenue per full-time employee are examples of
a. Reliability
b. value of a loyal customer
c. Sustainability
d. Productivity
ANS: D

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18. Of the four models of organizational performance, which two focus on the "big picture" of
organizational performance rather than on operational-level framework?
a. Malcolm Baldrige National Quality Award Framework and the Value Chain model
b. Balanced Scorecard and the Service-Profit Chain
c. Malcolm Baldrige National Quality Award Framework and the Balanced Scorecard
d. Value Chain model and Service-Profit Chain
ANS: C

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19. Of the seven categories of the Malcolm Baldrige National Quality Award criteria, which is least
relevant to an operations manager?
a. Leadership
b. Workforce Focus
c. Customer Focus
d. Measurement, Analysis and Knowledge Management
ANS: A

PTS: 1

20. Which category of the Malcolm Baldrige National Quality Award examines how the
organization fulfills its ethical, legal, and societal responsibilities, and supports its key
communities?
a. Leadership
b. Strategic Planning
c. Customer Focus
d. Results

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ANS: A

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21. Of the four performance perspectives of the balanced scorecard model, which is most relevant to
operations managers?
a. Financial
b. Customer
c. innovation and learning
d. Internal
ANS: D

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22. Employee satisfaction and other workforce-related measures fall into which perspective in the
Balanced Scorecard?
a. Financial
b. Customer
c. Innovation and Learning
d. Internal
ANS: C

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23. In regard to the value chain model, efficiency, cost and cycle time would be most related to
a. Suppliers
b. Inputs
c. value creation processes
d. outputs and outcomes
ANS: C

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24. Value chain measures would generally be less valuable to

a. top management
b. middle managers
c. first-line supervisors
d. employees to monitor any control
ANS: A

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25. The service-profit chain model

a. is based on a set of cause-and-effect linkages
b. is only focused on internal performance
c. was designed first for manufacturing organizations
d. is focused on equipment utilization
ANS: A

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26. Regarding the service-profit chain model, which of the following is not viewed as internal
performance?
a. customer satisfaction
b. employee satisfaction
c. employee retention
d. employee productivity
ANS: A

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27. Which one of the following statements is true regarding FedExs Service Quality Indicator (SQI)?
a. FedExs SQI is an example of volume flexibility.
b. FedExs SQI places the most weight (importance) on late pickups.
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c. FedExs SQI places the most weight (importance) on damaged and lost packages.
d. FedExs SQI places the most weight (importance) on delivery on the wrong day.
ANS: C

PTS: 1

SHORT ANSWER
1. Why is measurement important?
ANS:
Measurement provides an objective basis for making decisions. Good measures provide a "scorecard"
of performance, help identify performance gaps, and make accomplishments visible to the work force,
the stock market, and other stakeholders. Knowing that one is doing a good job -- or a better job than
before -- is a powerful motivator for most workers.
PTS: 1
2. What are the major categories of organizational performance measures? Provide an example measure
for each category.
ANS:
Financial return on assets, earnings per share

Customer and Market customer satisfaction, market share

Quality customer ratings of goods and services, product recalls

Time speed, reliability

Flexibility design flexibility, volume flexibility

Innovation and Learning employee satisfaction, employee turnover

Sustainability product-related litigation, financial audits

PTS: 1
3. Explain the difference between goods quality and service quality, and how they are measured.
ANS:
Goods quality relates to the physical performance and characteristics of a good. Goods quality is
generally measured using instruments, technology, and data collection processes. Service quality is
consistently meeting or exceeding customer expectations (external focus) and service delivery system
performance (internal focus) for all service encounters. Service-quality measures are based primarily
on human perceptions of service collected from customer surveys, focus groups, and interviews.
PTS: 1
4. Describe the five key dimensions of assessing service quality.
ANS:
1.
Tangibles - Physical facilities, uniforms, equipment, vehicles and appearance of
employees, i.e., the physical evidence.
2.
Reliability - Ability to perform the promised service dependable and accurately.
3.
Responsiveness - Willingness to help customers and provide prompt recovery to service
upsets.
4.
Assurance - Knowledge and courtesy of the service-providers and their ability to inspire
trust and confidence in customers.

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5.

Empathy - Caring attitude and individualized attention provided to its customers.

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5. Explain the difference between design flexibility and volume flexibility.
ANS:
Design flexibility is the ability to develop a wide range of customized goods or services to meet
different or changing customer needs. Volume flexibility is the ability to respond quickly to changes
in the volume and type of demand. This might mean rapid changeover from one product to another as
the demand for certain goods increases or decreases, or the ability to produce a wide range of volumes
as demand fluctuates.
PTS: 1
6. Define interlinking. Why is this concept significant?
ANS:
The quantitative modeling of cause-and-effect relationships between external and internal performance
criteria is called interlinking. Interlinking tries to quantify the performance relationships between all
parts of the value chain - the processes ("how"), goods and services outputs ("what") and customer
experiences and outcomes ("why"). With interlinking models, managers can objectively make internal
decisions that impact external outcomes, for example, determining the effects of adding resources or
changing the operating system to reduce waiting time.
PTS: 1
7. Provide some examples of criteria that can be used to help select and delete performance measures
from an organization's information system.
ANS:
Does the measurement support our mission?

Will the measurement be used to manage change?

Is it important to our customers?

Is it effective in measuring performance?

Is it effective in forecasting results?

Is it easy to understand/simple?

Is the data easy/cost-efficient to collect?

Does the measurement have validity, integrity, and timeliness?

Does the measurement have an owner?

PTS: 1
8. Briefly discuss the seven categories of the Malcolm Baldrige National Quality Award.
ANS:
1.

2.

Leadership - This category examines how the personal actions of an organizations

senior leaders guide and sustain the organization. Also examined are an organizations
governance system and how the organization fulfills its ethical, legal, and societal
responsibilities, and supports its key communities.
Strategic Planning - This category examines how an organization develops strategic

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3.

4.

5.

6.

7.

objectives and action plans. Also examines is how the chosen objectives and plans are
deployed and changed if circumstances require, and how progress is measured.
Customer Focus - This category examines how an organization engages its customers
for long-term marketplace success and builds a customer-focused culture. Also
examined is how the organization listens to the voice of its customers and uses this
information to improve and identify opportunities for innovation.
Measurement, Analysis and Knowledge Management - This category examines how
an organization selects, gathers, analyzes, manages and improves its data, information
and knowledge assets, and how it manages its information technology. Also examined is
how the organization reviews and uses reviews to improve its performance.
Workforce Focus - This category examines how an organization engages, manages, and
develops its workforce to utilize its full potential in alignment with the organization's
overall mission, strategy, and action plans. Also examined is the organizations ability to
assess workforce capability and capacity needs and to build a workforce environment
conducive to high performance.
Operations Focus - This category examines how an organization designs its work
systems and how it designs, manages, and improves its key processes for implementing
those work systems to deliver customer value and achieve organizational success and
sustainability. It also examines an organizations readiness for emergencies.
Results - This category looks at the organization's performance and improvement in key
business areas product outcomes, customer-focused outcomes, financial and market
outcomes, workforce-focuses outcomes, process-effectiveness outcomes, and leadership
outcomes. Performance levels are examined relative to those of competitors and other
organizations providing similar products and services.

PTS: 1
9. Briefly discuss the four performance perspectives of the Balanced Scorecard Model.
ANS:
1.
Financial Perspective - Measures the ultimate value that the business provides to its
shareholders. This included profitability, revenue growth, stock price, cash flow, return
on investment, economic value added (EVA) and shareholder value.
2.
Customer Perspective - Focuses on customer wants and needs and satisfaction as well
as market share and growth in market share. This includes safety, service levels,
satisfaction ratings, delivery reliability, number of cooperative customer-company
design initiatives, value of a loyal customer, customer retention, percent of sales from
new goods and services and frequency of repeat business.
3.
Innovation and Learning Perspective - Directs attention to the basis of a future
success - the organization's people and infrastructure. Key measures might include
intellectual and research assets, time to develop new goods and services, number of
improvement suggestions per employee, employee satisfaction, market innovation,
training hours per employee, hiring process effectiveness, revenue per employee and
skills development.
4.
Internal Perspective - Focuses attention on the performance of the key internal
processes that drive the business. This includes such measures as goods and services
quality levels, productivity, flow time, design and demand flexibility, asset utilization,
safety, environmental quality, rework and cost.
PTS: 1
10. Explain the concepts underlying the service-profit chain model.
ANS:

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The model is based on a set of cause-and-effect linkages between internal and external performance,
and in this fashion, defines the key performance measurements on which service-based firms should
focus. Because much of the value created in service processes is at the service encounter level, the
Service-Profit Chain focuses on employees or service-providers. Healthy, motivated, well-trained, and
loyal employees demonstrate higher levels of satisfaction that result in higher retention and
productivity. This leads to higher levels of external service value to customers. External service value
is created by service-providers mainly at the service encounter level. Buyers of services focus on
outcomes, results, and experiences. Ultimately, good value creates higher customer satisfaction and
loyalty, which in turn leads to higher revenue growth and profitability.
PTS: 1
PROBLEM
1. Using the information provided in the table below, determine the percentage change in
productivity from 2009 to 2010.
OUTPUTS
Units
INPUTS
Direct Labor Costs
Energy Cost
Raw Material Cost

2009

2010

110,000

150,000

$250,000
$6,000
$40,000

$310,000
$5,800
$42,000

ANS:
Total inputs for 2009 = $296,000; total inputs for 2009 = $357,800
Productivity for 2009 = 110,000/$296,000 = 0.37
Productivity for 2010 = 150,000/$357,800 = 0.42
Change in productivity = 0.42 0.37 = 0.05. This is a (0.05/0.37)(100) = 13.5% increase.
PTS: 1
2. Using the information below, determine the productivity (measured as output per dollar input) for the
each quarter and calculate the percentage change in productivity.
Total Units Sold

First Quarter
12,000

Second Quarter
11,500

Labor Hours
Labor Cost/Hour

10,000
$8.00

9,500
$8.00

Material Usage (lbs.)

Material Cost/lb.

6,000
$12.00

5,500
$11.50

$25,000

$23,000

Other Costs

ANS:
For the first quarter: total labor cost = $80,000; total material cost = $48,000. Total cost = $153,000.
Productivity = 12,000/$153,000 = 0.078/dollar input
For the second quarter, total labor cost = $76,000; total material cost = $44,000. Total cost = $143,000.
Productivity = 11,500/$143,000 = 0.080. Productivity increased by (0.02/0.78)(100) = 2.6%.

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PTS: 1
3. Jeff Camm, the president of Biometrics, Inc. has received the following data from his accountant:
Sales
Material
Labor
Overhead

Year 1
$26,000
$ 8,000
$10,000
$ 4,000

Year 2
$15,000
$ 5,000
$ 7,500
$ 2,000

Year 3
$17,000
$ 6,000
$ 8,000
$ 2,500

Year 4
$20,000
$ 6,000
$ 8,000
$ 4,000

How is productivity changing in Jeff's firm?

ANS:
Productivity measures for each year are calculated by dividing sales dollars by the sum of material,
labor, and overhead costs:
Year 1: 1.136, Year 2: 1.034, Year 3: 1.030, Year 4: 1.111
Productivity appears to have declined slightly over the first three years, but has increased slightly in
the fourth year. There does not appear to be any significant trend, and we could conclude that
productivity is relatively stable.
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4. A manufacturer of business copier workstations has a 75 percent customer retention rate. Their
accounting department estimates the incremental contribution to profit and overhead as 40 percent.
Customers purchase the workstations every three years at an average cost of $1,500.00. Determine the
average value of a loyal customer.
ANS:
VLC = P*CM*RF*BLC
VLC = (1500)(0.4)(1/3)(1/.25) = $800
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5. A computer manufacturer currently has a 15 percent customer defection rate. Their accounting
department estimates the incremental contribution to profit and overhead as 30 percent. Customers
purchase computers every four years at an average cost of $1,200.00. In an effort to reduce the
defection rate, the company is improving both the quality of its computers and its post-sale service.
Determine the increase in the average value of a loyal customer if the defection rate drops to 5 percent.
ANS:
Current VLC = P*CM*RF*BLC
VLC = (1200)(0.3)(1/4)(1/.15) = $600
If the defection rate drops to 5%,
VLC = (1200)(0.3)(1/4)(1/.05) = $1800
The value of a loyal customer triples.
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6. A family rents videos from a local video store. On average, they spend $80.00 a month. The store's
contribution margin is 45 percent and the average customer defection is 40 percent. Determine the
value of a loyal customer.
ANS:
VLC = P*CM*RF*BLC
VLC= (80)(.45)(12)(1/.4) = $1,080.00
PTS: 1
7. A guest at Raphael's Italian Restaurant generally spends $150.00 on a meal. Most of Raphael's
customers are local and eat at the restaurant twice a month. If the restaurant's margins are 60 percent,
and a loyal customer is estimated to be worth $3000, determine the average defection rate.
ANS:
VLC = P*CM*RF*BLC
3000 = (150)(.6)(24)(1/D), where D is the average defection rate
D = 2160/3000 = 0.72
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8. A retail store sells a popular cosmetic called Devine and the store manager was given $100,000 by the
corporate office to improve store performance any way she thinks best. The "base case" information is
a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 17%, and a
repurchase frequency of 3 times a year. If these improvement funds could be used to either increase the
contribution margin to 0.58 or reduce the customer defection rate to 15% or increase the repurchase
frequency to 4 times per year, what is the best way to spend these funds? (Assume all other variables
remain at the base case level for each improvement option.)
You may want to use the table below to help organize your computations and answer.
Price
$30
$30
$30
$30

Contribution Margin
0.50
0.58
0.50
0.50

Repurchase Frequency
3
3
3
4

Defection Rate
17%
17%
15%
17%

VLV in $
$264.69
$307.00
$300.00
$352.92

Note: BLC is 1/.17 = 5.882 years and 1/.15 = 6.67 years.

ANS:
Spend improvement dollars to increase repurchase frequency
PTS: 1
9. A manufacturer of paint has two factories located in France and Spain and due to economic conditions
must close one of them. The factory productivity data is as follows:

Factory (France)
Factory (Spain)

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Produced (in 1,000s)
4,600
3,900

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Resource Cost
per Gallon
$4.25
$4.00

13

ANS:
France: Productivity = .235 gallons/dollar
Spain: Productivity = .250 gallons/dollar
Based solely on this productivity measure, close the factory in France.
PTS: 1
10. A retail store sells a popular cosmetic called Devine and the store manager was given $300,000 by the
corporate office to improve store performance any way she thinks best. The "base case" information is
a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 20%, and a
repurchase frequency of 3 times a year. If these improvement funds could be used to either (a)
increase the contribution margin to 0.60 or (b) reduce the customer defection rate to 12% or (c)
increase the repurchase frequency to 4 times per year, what is the best way to spend these
improvement funds? (Assume all other variables remain at the base case level for each of the three
improvement options.) VLC = P*CM*RF*BLC
a. What is the value of a loyal customer (VLC) for improvement option (a)?
b. What is the best way to use the $300,000 in improvement funds?
ANS:
Improvement
Option
Base case
(a)
(b)
(c)

Price
$30
$30
$30
$30

Contribution
Margin
0.50
0.6
0.5
0.5

Repurchase
Frequency
3
3
3
4

Defection
Rate
20%
20%
12%
20%

VLC in $
$225
$270
$375
$300

a. $270 (as seen in the table above)

b. Improvement option (b), with the greatest VLC value of $375 (as seen in the table above)
PTS: 1
11.

Consider the following information.

First Quarter
$15.00
12,000

Second Quarter
$17.00
11,500

Labor Hours
Labor Cost/Hour

10,000
$8.00

9,500
$8.00

Material Usage (lbs.)

Material Cost/lb.

6,000
$12.00

5,500
$11.50

$25,000

$23,000

Unit Selling Price

Total Units Sold

Other Costs

a. Which quarter, First or Second, had the higher labor productivity (output quantity per
labor dollar input)?
b. Which quarter, First or Second, had the higher material productivity (output quantity per
material dollar input)?
c. Which quarter, First or Second, had the higher total productivity (dollar output per total
dollar input)?
ANS:

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a. Labor productivity, First Quarter: 12,000/$80,000 = 0.1500 units/labor dollar

Labor productivity, Second Quarter: 11,500/$76,000 = 0.1513 units/labor dollar
Second Quarter was just slightly higher.
b. Material productivity, First Quarter: 12,000/$72,000 = 0.1667 units/material dollar
Material productivity, Second Quarter: 11,500/$63,250 = 0.1818 units/material dollar
Second Quarter was higher.
c. Total productivity, First Quarter: $180,000/($80,000 + $72,000 + 25,000) = 1.017
Total productivity, Second Quarter: $195,500/($76,000 + $63,250 + 23,000) = 1.205
Second Quarter was significantly higher
PTS: 1
12. A coffee shop's average transaction price is $3, the contribution margin is 60 percent, the typical
customer makes a purchase once a week or 52 weeks per year, and management estimates the value of
a loyal customer over the buying life cycle as $520. What is the customer defection rate?
ANS:
VLC = (P)(RF)(CM)(BLC)
520 = (3)(52)(.60)(BLC)
BLC = 1/customer defection rate
5.5556 = 1/customer defection rate
Customer defection rate = 1/5.5556 = 0.18 or 18%
PTS: 1

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