Manufacturing Strategy
 - Part 10: Performance measurement

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Introduction

In the previous page I discussed the increasing lack of relevance of the conventional accounting model and measurements in terms of running a factory. This model, which is tied to the financial accounts via stock valuation, gives lots of financial types of numbers but these generally mean little to the actual factory. We need to start defining the sort of measurements that we require to run the factory and this month I hope to give you some pointers in the types that might be relevant to your operation.

  The old efficiency measures (Doing Things Right)

The traditional accounting numbers were efficiency measures and were designed for the old manufacturing environment where direct labour and machine utilization were more important. These measures include:

All of these measurements are concerned with doing tasks faster or with less material/ labour and don't consider if you should be doing the task or not. You can be the most efficient slide rule manufacturer in the world but that won't help you if the market has moved on to pocket calculators. Efficiency in making aluminium windows will not help you if the market has moved on to PVC-U products. These efficiency measurements are fine for cost accountants but they have little relevance to the shop floor and are generally treated as unapproachable and a mystery by the average worker. They 'cannot' be improved so why try?

We need to be concentrating on measures of real effectiveness that directly affect our success in the market place.

The new effectiveness measures (Doing the Right Things)

We need new performance measurements that are more relevant to the manufacturing area and can be used to drive the production process. These will be our new effectiveness measurements and will relate directly to the areas we must be effective in to survive in the market place.

These measures must share some common characteristics:

They should be directly related to the Key Factors for Success as identified and communicated in our original Manufacturing Strategy (see Part 1):

'I will succeed if you tell me what you want me to do and where you want me to improve'.

They should be non-financial and widely used by operational staff. Manufacturing at the shop floor level is best controlled by non-financial measures:

'Tell me in terms I can understand'.

They should vary between locations to reflect the performance required at each location:

'Give me something that is relevant'.

They should vary with time to reflect the changing goals of the organisation:

'I've got that right so lets move on to the next priority'.

They should be simple and easy to use. For motivation and monitoring, people must see the measures as relevant to their jobs and their perception of the company's performance:

'I understand that'.

There should be fast feedback to give quick response:

'Is today soon enough?'.

They should aim to teach rather than monitor. The traditional measures are designed for assessment rather than improvement:

'OK, now I see where I can get better'.

Performance measurements that meet these criteria will drive a factory much more effectively than pure financial numbers. It is really the case that when these numbers are right then the financials will fall into place for both the short and long term.

Data collection for effectiveness measurements can usually be done manually and it is recommended that the measurements be recorded on a blackboard or chart in the factory as the information is available. The production staff can mark the results on the board themselves to give a real feeling of ownership. We used this technique in an injection moulding operation where the changeover time for moulds was quite long. We monitored the time taken for each changeover and the technicians marked their times on a prominent blackboard. Without doing anything else we saw an immediate 30% drop in changeover times. Ownership and self-monitoring are powerful incentives to improvement. The display of any measurement gives control, visibility and immediate feedback.

Remember the golden rules:

Make it visible. Manage it.

'People react to what you inspect and not to what you expect.'

'People react to what you audit and not to what you plaudit.'

Typical performance measures used

The choice of the performance measurements to be used depends on which areas of your business you want to improve and this naturally goes back to your Key Factors for Success (KFS) i.e. what is it you need to be good at in order to improve or maintain your business? If quality is one of the KFS for your business then you should include a measure of quality in your performance. Similarly if customer satisfaction or service is important then you need to develop a measure for this in your system.
Some examples of measures that fit the requirements are:

These are just a few of the possible measurements that you could use. The important thing is to decide where you need to get better and then measure that area. If you are in doubt about where you could improve then ask your customer, they will always have some ideas!

Changing the Measurements

In various parts of the world there are different of measures used and these reflect the degree of movement towards the aim of World Class Manufacturing. The European Management School INSEAD looked at the top ten manufacturing performance measures used in various parts of the world and these are listed in Figure 1.

Figure 1: Performance measures listed in order of importance

Europe

USA

Japan

Outgoing quality

Incoming quality

Manufacturing lead times

Unit manufacturing cost

Inventory accuracy

Direct labour profitability

Unit material cost

Direct labour productivity

WIP turnover

Overhead cost

Manufacturing lead times

Incoming quality

On-time deliveries

Vendor lead times

Vendor lead times

Incoming quality

WIP turnover

Indirect labour productivity

Direct labour productivity

Materials yield

Materials yield

Material yield 

Outgoing quality 

Inventory turnover 

Forecast accuracy

 Indirect labour productivity

Inventory accuracy 

Unit labour cost 

Raw materials inventory 

Absenteeism 

In the Japanese view the concern for quality has moved away from control of outgoing quality to control of incoming goods only. They have got their internal quality in control and believe that if you purchase good materials and make no mistakes then the outgoing quality is automatically good. Quality as such is no longer the real competitive issue as far as the Japanese are concerned. They have now moved on to treat responsiveness to the customer as the major priority! This strong focus on the flexibility with regard to customer and lead times means that forecast accuracy does not appear on the Japanese list. They make to order and do not manufacture to forecast.

Meanwhile in the West we are still fighting the battle on the quality (conformance to specification) front when really the battle has moved on. We are about to be outflanked on the responsiveness front where time becomes a real competitive weapon.

This change of focus was made even clearer when INSEAD looked at the competitive priorities (or the KFS) for manufacturing in the three countries. The relative assessments by country are listed in Figure 2.

Figure 2: Competitive priorities in manufacturing

Europe

USA

Japan

Conformance quality

Conformance quality

Reliable products

Dependable delivery

Dependable delivery

Dependable delivery

Reliable products

Reliable products

Rapid changes

High performance

High performance

Conformance quality

Fast delivery

Price competition

Customised products

The Japanese view is that reliable products (as distinct from products that simply conform to specification as they leave the factory), dependable delivery and rapid design changes are the new competitive weapons while Western companies are still locked into dealing with conformance quality.

The important point here is that the market is constantly moving and that just when you think you've got it made then along comes a new challenge. Without constant improvement then yesterday's leader is today's average and tomorrow's business failure. Manufacturing strategy will show you the way but only when you constantly measure yourself against the best competition will you really stay in front.

"The Manufacturing Strategy" Series

"The Manufacturing Strategy" series is designed to give production managers and their staff some insights into new manufacturing methods and to prompt the industry into considering the benefits of alternative approaches to manufacturing. The series is:

Part 1: Setting the strategy

Part 2: The systems and MRP II

Part 3: Just in time (1) 

Part 4: Just in time (2) 

Part 5: Just in time (3) 

Part 6: Optimised Production Technology (OPT)

Part 7: A fundamental quality

Part 8: Quality management techniques & tools

Part 9: ‘There's no accounting for manufacturing strategy’

Part 10: Performance measurement (This section)

Part 11: Changing roles and things to do NOW!

 

Last edited: 11/03/10

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