Metrics And Performance Measurement System For The Lean .

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Metrics and Performance MeasurementSystem for the Lean EnterpriseProfessor Deborah NightingaleOctober 24,2005

Overview Metrics and Performance measurement Why measure? What is performance measure? What are goodmetrics? Performance measurement and Lean Transformation Current practices and Performance measurementframeworks Performance measurement system for the leanenterpriseESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 2

Why Measure? “Performance control systems canserve two purposes, to measureStrategyand to motivate.”- H. Mintzberg,The Structure of Organizations, 1979 “The firm becomes what itmeasures”DecisionMakingFeedBack- Hauser and Katz,You are What You Measure, 2002Measures OutcomesActionsMetrics serve multiple purposes!Robert Nixon (1990)ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 3

What is performancemeasurement? Performance measurement is the process of measuringefficiency, effectiveness and capability, of an action or aprocess or a system, against given norm or target. Effectiveness is a measure of doing the right job - the extent towhich stakeholder requirements are met. Efficiency is a measure of doing the job right - howeconomically the resources are utilized when providing a givenlevel of stakeholder satisfaction. Capability is a measure of ability required to do both the jobright and right job, in the short term as well as the long term.This can be tangible, such as, resources, technology, orintangible, such as a corporate culture.ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 4

Characteristics of good metrics Metrics are meaningful, quantified measures Metric must present data or information that allowsus to take action Helps to identify what should be done Helps to identify who should do it Metrics should be tied to strategy and to “core”processes - indicate how well organizationalobjectives and goals are being met Metrics should foster process understanding andmotivate individual, group, or team action andcontinual improvement.ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 5

A “Good” Metric Satisfies ThreeBroad Criteria1. Strategic Enable strategic planning and then drive deployment of the actionsrequired to achieve strategic objectives Ensure alignment of behavior and initiatives with strategic objectives Focus the organization on its priorities2. Quantitative Provide a clear understanding of progress toward strategic objectives Provide current status, rate of improvement, and probability ofachievement Identify performance gaps and improvement opportunities3. Qualitative Be perceived as valuable by your organization and the people involvedwith the metricESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 6

Metric ElementsMetric ElementsExplanationTitleUse exact names to avoid ambiguityObjective/purpose The relation of the metric with the organizational objectives must be clearScopeStates the areas of business or parts of the organization that are includedTargetBenchmarks must be determined in order to monitor progressFormulaThe exact calculation of the metric must be knownUnits of measureWhat is/are the unit(s) usedFrequencyThe frequency of recording and reporting of the metricData sourceThe exact data sources involved in calculating a metric valueOwnerThe responsible person for performance of that part of the organization,collecting data and reporting the metricCommentsOutstanding issues regarding the metricAdapted from Neely, A., et al. (1995a) Performance measurement system design. 15, 80.ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 7

Role of Performance Measurement Monitoring Measuring and recording actual performance Control Identifying and attempt to close the gap between planned targetand actual performance Improvement Identify critical improvement opportunities Coordination Information for decision making – Leading Indicators Internal communication across processes External communication with stakeholders Motivation Align Behavior and encourage transformationSource: Vikram MahidharESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 8

Transformation to the Lean EnterpriseFunctional EnterpriseProcess EnterpriseLean EnterpriseValue DeliveryCUSTOMERCEOExecutive board373Processes611SuppliersEmployeesLifecycle ProcessesR&DManufacturingCenters ofExcellenceSalesManufacturing2EngineeringSal esEngi nee32DR & s ingha4rcPu12ring5Stakeholder ObjectivesShareholders Customer CommunityEnabling InfrastructureProcessesEnterprise Leadership &Governance ProcessesSource: Vikram MahidharESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 9

Metrics Challenge Today Hierarchical organizational architectures givingway to networked enterprise architectures The evolving structure and dynamics ofnetworked enterprises display immensecomplexity Metrics response to such complexity has been adisappointment: Hierarchical metrics mindset still continues Response to greater complexity has been a metrics explosion Challenge: How best to design metrics systemsfor networked enterprises?ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 10

Performance measurement system forLean TransformationMetrics and AssessmentsKnowledge and BehaviorIntegration of processes/methods &tools supporting transformation acrossthe value stream enabling newenterprise capabilitiesNew local behaviorShift in thinking and behaviorNew routines and ways of doingbusinessOrganization and group culture changeNew approaches (training andintroduction of new methods)Engagement in “LAI-venue” with likeminded peopleEnterprise simulation, Lean Now andLAI knowledge area teamsTransformation over TimeNew enterprise capabilityEnterprise impact and resultsIndustryGovernmentROICORPICLocal results and visible indicatorsIndustryGovernmentCycle time, quality, WIP, on-timedelivery, customer satisfaction,employee turnover and attitude,organizational climate and LESATmaturityLocal efforts and new capabilitiesIndustryGovernmentSkills, training hours, certification,lean deployment, joint assessmentsand effortsROIC Return on Invested CapitalORPIC* Operational Readiness per Invested CapitalAdapted from : Noel Nightingale, 2004ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 11

Generic Enterprise Management ProcessStrategy FormulationExternalEnvironmentManagement Assessment- Competitive Intelligence- Internal AssessmentStrategy ExecutionCascaded ObjectivesVSM and Project PrioritizationPerformance Mgmt ProcessCommunicationStrategic and Operational PlanningResource Allocation PlanValue deliveryShareholder ValueCustomer SatisfactionEmployee SatisfactionOther stakeholdersOperationsBalanced Score CardsOperations ManagementFinancial ManagementHuman ResourceInformation SystemsESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 12

Strategic Metrics ROIC (Return onInvested Capital) Economic Value Add(EVA) Net Operating ProfitStrategy FormulationManagement Assessment- Competitive Intelligence- Internal AssessmentStrategy ExecutionStrategic and Operational PlanningResource Allocation Plan Inventory TurnoverValue delivery RevenueOperations Cash flow Market Position Wall Street ExpectationsEfficiency metrics and Lagging indicatorsESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 13

Tactical Metrics Financial Turnover Budget/Cost andExpenses Cost of qualityStrategy ExecutionCascaded ObjectivesVSM and Project PrioritizationStrategy FormulationPerformance Mgmt ProcessCommunication ProductivityValue Delivery Supply ChainExcellenceOperations Regulatory and socialcomplianceAccuracy and timeliness of reporting and controlESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 14

Operational Metrics Safety Quality EnvironmentStrategy FormulationStrategy Execution Cost/ManufacturingEfficiency DeliveryValue DeliveryOperationsBalanced Score Cards Time to marketOperations ManagementFinancial Management Education anddevelopmentHuman ResourceInformation Systems Time to HireESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 15

Value Delivery Metrics Stock Price RevenueStrategy FormulationStrategy Execution On time delivery Customer satisfactionand loyaltyValue DeliveryOperationsShareholder Value Employee SatisfactionCustomer Satisfaction New productIntroductionMacro Economic TrendsESD.61J / 16.852J: Integrating the Lean EnterpriseCompetition Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 16

Time lags - PerformanceManagement ProcessStrategy FormulationExternalEnvironmentManagement Assessment- Competitive Intelligence- Internal AssessmentStrategy ExecutionCascaded ObjectivesVSM and Project PrioritizationPerformance Mgmt ProcessCommunicationStrategic and Operational PlanningResource Allocation PlanValue deliveryShareholder ValueCustomer SatisfactionEmployee SatisfactionOther stakeholdersOperationsBalanced Score CardsOperations ManagementFinancial ManagementHuman ResourceInformation SystemsESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 17

Time lags - PerformanceManagement onsReportingYearlyQuarterMonthDayESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 18

Performance Measurement &Management Frameworks Balanced Scorecard – More than 50%companies have implemented in the US Performance Prism European Foundation QualityFramework X-Matrix (EVSMA)ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 19

Balanced Scorecard/Strategy MapProductivity StrategyFinancialCustomerInternalProcessesImprove ion-Quality-LogisticsLong-TermShareholder ValueExpand RevenueOpportunitiesIncreased AssetUtilizationAvailabilityGrowth StrategySelectionCustomer hFunctionalityInnovation Process-Opportunity Ident.- R&D Portfolio- Design/Development- Time to marketEnhanceShareholder valueServicesPartnershipRegulatory and Social- Environment- Safety and Health- Employee development- CommunityHuman capitalLearning& GrowthInformation capitalCultureOrganization capitalLeadershipAdapted from : Kaplan and Norton, (2000) “Having Trouble with your strategy? Then Map it!” Harvard Business Review Sept Oct 2000ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 20

Primary Purposes of theBalanced Scorecard Align a balanced set of performance metricswith business strategy and vision Provide management and work teams withthe information necessary and sufficient tomeet their objectives and goals Create “line-of-sight” at lower levels of theorganization Foster and support process continuousimprovement initiativesESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 21

Desired Characteristics of PerformanceMeasurement Systems Performance Measures should support thestrategic intentions of the organizations Managers at all levels should understandboth drivers and results of their activities. Explicating Cause-Effect relationshipsbetween drivers and resultsESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 22

Lean Enterprise MetricInterdependenciesProcessQuality ctureProcessesESD.61J / 16.852J: Integrating the Lean EnterpriseEnterpriseLeadershipProcessesSource: Vikram ngQualityControlFinancialChangeManagement Management Deborah Nightingale, 2005 Massachusetts Institute of TechnologyStake holder ValueLife CycleProcessesCustomerValuePage 23

Process Control View –Performance Measurement d onInputProcessBehaviorPerformancemeasuresSource: Vikram MahidharESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 24

Understanding Performance MeasurementStructures – Causal ModelsIllustrativeExampleMetric ClusterMetric SetIndividual MetricSource: Vikram MahidharESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 25

No One “Right” Set of Metrics The balanced scorecard has to be tailored toeach specific company The resulting scorecard of indicators shouldbe driven by the firm’s strategy if it is not toconsist merely of a listing of indicators:“ although“ strategy.”strategy.”R.S. Kaplan and D.P. Norton, Harvard Business Review, January-February, 75-85 (1996)ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 26

Assessing a PerformanceMeasurement System Does it clearly define what constitutes business excellence? Does it provide the information required to set aggressive yetachievable strategic objectives and stretch goals? Does it accurately portray our progress and probability ofachieving both long-term strategic objectives and near-termmilestones? Does it identify the root causes of barriers? Does it focus the organization on the priority improvement needs? Does it drive the behavior and actions required to achieve theobjectives? Does it align work with value? Is it easy to use? Does it involve everyone?ESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 27

Metrics Will Change Over an Item’sLife ningConceptProductCoreCompetencyRaytheon Systems, 1998ESD.61J / 16.852J: Integrating the Lean EnterpriseAttributes Development In market Phase-out Recognition Learn Practice Expert Cash flowCompetitive advantageMarket shareCritical MassCreative backlogPotential product revenueCost per featureTime to marketPerformance requirementsPredicted product qualityDesign tocostProfitabilityMarket expansion rateVolume impact on costInventoryCustomersupportInventory of skills and capabilitiesCompetitive advantageAcquire knowledgeCycles of learningUseApplyLevels of use in organizationDeploymentTeachLeverage advantageCombine and evaluate Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 28

Process and Metric Maturity ModelProcessMaturityProcess management has providedworld-class competitiveadvantage (e.g., nodal influence,agile & forward looking)Support processes are integrated withand enable core business processesto provide competitive advantage.Customer-focused processmanagement is appliedunconsciouslyCommon process language & specsIntegrated core processes allow aseamless flow of work across egratedCoreProcessesIntegratedBusiness process management, whichCorebegins & ends with the customer isProcessesestablished, in control, and in theManagedconscious thinking of management.Little or no process focus. Thatwhich exists is primarily directedinternally toward local operationsESD.61J / 16.852J: Integrating the Lean EnterpriseRaytheon Systems, 1998InitialMetricMaturity5 ticalAlignmentInitialMetric-driven actions simulatedduring strategy setting process toensure organizational alignmentbefore metrics are implementedAll metrics (process, results,organizational, geographic, etc.)align with strategic objectives,provide competitive advantage& optimize the wholeMetrics reinforce & leverageactivities across all corebusiness processesLocal interests are subordinatedto the good of the wholeProcess metrics added &integrated with result metricsMetrics aligned betweenstrategy & daily activities incore processesMetrics are ad hoc andprimarily results oriented. Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 29

Level One: Initial Enterprise does not manage its businesswith a process focus Many metrics sub-optimized by local organizationalinterests rather than having them aligned withcustomer interests and with the strategicobjectives of the enterprise Organizations measure the results of past actions Results-oriented metrics cannot provide theleading indicators needed for timely correctiveaction to change outcomesESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 30

Level Two: Vertical AlignmentDefinitionVerticallignment andinforcement velsofofthetheorganization.organization. The business enterprise applies a process focus so it canmeasure leading indicators of the expected process output Defective process output is viewed as a process-capabilityproblem, not a people problem Carefully chosen metrics ensure that all levels of theorganization align with strategic objectivesESD.61J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 31

Level Two ExampleAAcorecore processprocess relatedrelated toto productproduct developmentdevelopment activitiesactivitiesmight), bemightbebe documented,documented,bebe he organization,organization,andandhavehavemeasurable improvementmeasurableimprovementgains.gains. lyatatorornearnearLevelLevel22 maturity.maturity. IfIfthethe metricsmetricsindicateindicate variationsvariationsininthethe restillstillatatLevelLevel11becausebecause thethe J / 16.852J: Integrating the Lean Enterprise Deborah Nightingale, 2005 Massachusetts Institute of TechnologyPage 32

Level Three: Horizontal AlignmentTwo phases:1. The global optimization of work flow across all processboundaries. These boundaries become transparent to the flowof work. Metrics are customer-focused and assess theenterprise-level capability of a process to provide value from thecustomer’s perspective.2. The global optimization of work flow across all organizationalboundaries that support or use a particular process. Metrics arecustomer-focused and assess how well th

Oct 24, 2005 · Human capital Information capital Culture Organization capital Leadership Learning & Growth Operations-Supply-Production-Quality-Logistics Customer h Innovation Process-Opportunity Ident. - R&D Portfolio - Design/Development - Time to market Regula

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