University of Warwick Warwick Manufacturing Group

The Performance Measurement in an Operations Environment

RICARDO MARCELO SCHULZ MONTEIRO ID: 1150131 2011

Table of Contents

1. Thesis statement .......................................................................................................... 1 2. Introduction .................................................................................................................. 2 3. Contextualisation of the operations performance measurement ............................... 3 3.1. Operations Management ....................................................................................... 3 3.2. Operations strategy ............................................................................................... 5 4. The importance of the operations performance measurement .................................. 6 5. Productivity as an assessment tool of operations performance measurement at operational level ............................................................................................................... 7 5.1. Operational Measurements ................................................................................... 7 5.2. Productivity ............................................................................................................ 7 6. Conclusion .................................................................................................................... 9 7. References .................................................................................................................. 10

Table of figures

Figure 3.1. Model input-transformation-output for operations. ................................... 3 Figure 3.2. Activities of operations management. ........................................................... 4

1. Thesis statement The present essay will address the topic performance measurement in an operations environment. The aim pursued by this essay is to describe this activity from the perspective of its vital importance to the welfare of every enterprise and, its desired objectives are the followings. Firstly, the contextualisation of the operations performance measurement; secondly, the establishment of the real importance of doing the measurement, and finally, the presentation of the productivity approach as a means to assess operations performance measurement at an operational level.

The Performance Measurement in an Operations Environment

2. Introduction The measurement of business operations performance always has been an important issue for every organisation, either it is for-profit or not and there have been very different approaches to it over time. In the period between the end of the Second World War and the year 1980, the focus of the operations managers was mainly centred on efficiency, which indicates that they were influenced by the situation given by that time, and that the management paradigm was sales instead of the costumer. Currently, when organisations are being forced to be quickly adapted to a new marketplace in an environment of globalisation and internationalisation, the management paradigm has turned to be centred in competition on the performance objectives for the operations function which are cost, dependability, flexibility, quality and speed. (Neely, 2002). Additionally, in recent years new methods have been developed to address the performance measurement. In addition, new frameworks have been established aiming to examine the assessment of business performance such as balance scorecard, business excellence model, new approaches to productivity measurement, to name but a few. Moreover, many organisations have become controlled by measurement. It is obvious when in the past there was just one parameter to assess the level of accomplishment of certain goal and now there are many of them to measure the same, this situation might be misleading for the operations manager. Nowadays, although business performance is extensively studied by people from different academic fields, there is a lack of knowledge transfer between the fields due to the fact that the knowledge is just shared among the people within a field; resulting in an overlapped effort. (Neely, 2002). In the next section a contextualisation of the topic addressed will be delivered.

The Performance Measurement in an Operations Environment

3. Contextualisation of the operations performance measurement To contextualise the concept behind the activity performance measurement in an operations environment it is necessary to refer to operations management and operations strategy, the macro-activities in which it is involved. 3.1. Operations Management Operations, marketing and product/service development are core functions of any company; The operations is the part of the organisation that creates and/ or delivers its products and services. (Slack, N., Lewis, M. 2011, p.2). Therefore, all organisations possess an operations function. The processes and resources of the company are used by the operations function to fulfil costumers needs, by transforming inputs into outputs as is proposed by the model input-transformationoutput of operations shown in the figure 3.1.

Figure 3.1. Model input-transformation-output for operations. Source: Prepared from Operations strategy (Slack, N., Lewis, M., 2011).

Operations Management is the activity of managing the resources which are devoted to the production and delivery of product and services. (Slack, N., Chambers, S., Johnston, R. 2007, p.25). The activities of the operations management activity which are usually seen in a broad spectrum of kinds of operations are summarised in the figure 3.2.

The Performance Measurement in an Operations Environment

Operations Strategy

Design

Operations Management

Improvement

Planning and control

Figure 3.2. Activities of operations management. Source: Adapted from Operations management (Slack, N., Chambers, S., Johnston, R., 2007). The activities undertaken by the operations management function form a cycle, which is composed for four of them. Operations strategy is the first activity, the aim of this activity is to understand the strategic objectives of the operation. Design is the second activity of the cycle, its responsibilities are basically the design of the products/service and processes of the company in terms of composition, physical shape and form. Planning and control is the third activity, its objective is to decide what the operation resources should be doing, then making sure that they really are doing it (Slack, N., Chambers, S., Johnston, R. 2007, p.21). Improvement is the fourth activity; it is concerned with the process of on-going enhancement of the operations performance. The operations strategy activity and its relation with the concept of performance measurement will be stated in the next part.

The Performance Measurement in an Operations Environment

3.2. Operations strategy Hayes, et al. (2005, p.33) define operations strategy as a set of goals, policies, and self-imposed restrictions that together describe how the organisation proposes to direct and develop all the resources invested in operations so as best fulfil ( and possibly redefine) its mission. However, other authors as Slack and Lewis (2011) claim that there is no agreement on the definition of operations strategy; they suggest that a complete description should be based in the four perspectives on operations strategy, which are: operations resources: operations strategy should build operations capabilities (Slack, N., Lewis, M. 2011, p.11)., bottom up: operations strategy should learn from day-to-day experience (Slack, N., Lewis, M. 2011, p.11)., market requirements: operations strategy should satisfy the organisations markets (Slack, N., Lewis, M. 2011, p.11) and top down: operations strategy should interpret higher-level strategy. (Slack, N., Lewis, M. 2011, p.11). The third perspective, which is related to the reconciliation between the markets requirements and the operations resources involve the idea of performance objectives (quality, speed, dependability, flexibility, cost), those aspects of performance are pursued by firms to satisfy markets requirements. (Slack, N., Lewis, M., 2011). A correct interpretation and translation of the markets requirements into the performance objectives enables the operations manager to make better decisions, taking into account the resources, the experience and the alignment necessary with at the corporate strategy. The importance of the measurement of the performance objectives achievement level will be discussed in the next section.

The Performance Measurement in an Operations Environment

4. The importance of the operations performance measurement The importance of this measurement underlies in the importance that operations function have for any company. It is compulsory for every firm to know how the operations function is performing due to, that an effective and efficient usage of the resources of the enterprise to satisfy its costumers, can offer different advantages to the business, such as: it can reduce the costs, it can increase revenue owing to the increment in the costumer satisfaction, it can reduce the amount of investment necessary to create the products/services and it can establish the platform for future innovations. (Slack, N., Chambers, S., Johnston, R., 2007). Thus, the operations performance measurement acts as a robust tool for the operations manager to assess the performance of the operations function. Moreover, a comprehensive knowledge of the characteristics of the performance might enable him/her to make the right decisions and deliver correct, important and relevant information to the managers of the other functions of the firm, to the CEO, to the executive board and to the subordinates. A methodological approach to the measurement of the productivity as an assessment of the operations performance at operational level will be delivered in the next part of the essay.

The Performance Measurement in an Operations Environment

5. Productivity as an assessment tool of operations performance measurement at operational level 5.1. Operational Measurements At operational level a group of three measurements are needed: Throughput: the rate at which money is generated by the system through sales. (Chase, R., Aquilano, N., Jacobs, F. 1998, p.794), Inventory: all the money that the system has invested in purchasing things intends to sell. (Chase, R., Aquilano, N., Jacobs, F. 1998, p.794) and Operating expenses: all the money that the system spends to turn inventory into throughput (Chase, R., Aquilano, N., Jacobs, F. 1998, p.794). Goldratt and Cox (1992) point out that the ultimate goal of a firm is to make money. Therefore, for a company to achieve its main aim it should pursue the operational goal, which is to raise the throughput while the operative expenses and the inventory should be reduced. (Chase, R., Aquilano, N., Jacobs, F., 1998). Productivity measurements can be used to assess the operational performance, always taking in to account the variations in throughput, inventory and operating expenses. 5.2. Productivity The measurement of the productivity has changed over the time from one narrow and fractionated to one which is broad an integrated, with its output side centred on whole products and its input side focused in human resources and operating cots. (Schonberger, R., Knod, E., 1994). Slack, et al. (2007) define productivity as the ratio of what is produced by an operation to what is required to produce it.(ec. 5.1). (5.1)

The Performance Measurement in an Operations Environment

Productivity is a relative measure, because of this situation it has to be compared to be meaningful. The comparison of productivity can be made; firstly, measuring the productivity rate on the same operation over time and secondly, a process of productivity benchmarking can take place. (Chase, R., Aquilano, N., Jacobs, F., 1998). Different measurements of productivity can be made, depending on the impact of which production factors are desired to be assessed. Thus, there is a partial (ec. 5.2), a multifactor (ec.5.3) and a total productivity measure (ec.5.4). (Slack, N., Chambers, S., Johnston, R., 2007). (5.2)

(5.3) (5.4)

The Performance Measurement in an Operations Environment

6. Conclusion To sum up, the performance measurement of the operations function in every company plays an essential role in the management process of the operations and in the management of the whole firm. Basically the data obtained from the performance measurement enables the operation manager to make correct decisions aligned with the corporate strategy. This is with the intention of looking for a better satisfaction of the customers needs taking into account the resources and the production factors possessed by the company. The ultimate goal of the performance measurement is to help in the decision making process in order to, at the end of the day, turn the operations function into a source of sustainable competitive advantage for the company to compete successfully in the current economic climate.

The Performance Measurement in an Operations Environment

7. References

Chase, R., Aquilano, N., Jacobs, F. (1998). Production an operations management: manufacturing and services. 8th ed. United States of America: Irwin/McGraw-Hill. Goldratt, E., Cox, J. (1992). The Goal: Excellence in Manufacturing. 2nd ed. New York: North River Press. Hayes, R., Pisano, G., Upton, D., Wheelwright, S. (2005). Operations, strategy, and technology: pursuing the competitive edge. United State of America: Wiley. Neely, A. (2002). Business performance measurement. Cambridge: Cambridge University Press. Schonberger, R., Knod, E. (1994). Operations management: continuous improvement. 5th ed. United States of America: Irwin. Slack, N., Chambers, S., Johnston, R. (2007). Operations Management. 5th ed. Harlow: Financial Times Prentice Hall. Slack, N., Lewis, M. (2011). Operations strategy. 3rd ed. Harlow: Financial Times Prentice Hall.

The Performance Measurement in an Operations Environment

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