improve operational performance

7/29/2019 Improve Operational Performance

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Improve Operational PerformanceVisualizing and Analyzing Relevant KPI and KPD

Metrics

Executive Summary

Companies, organizations and government agencies are all seeking to improve their

customer value, efficiency and effectiveness. While there are many approaches to

improving performance, it is the combination of management perspective, an

appropriate improvement methodology and visibility into and the ability to analyze

relevant measures of performance that will yield best results.

This paper outlines the use of Key Performance Indicators (KPI metrics) together with

associated Key Performance Drivers (KPD metrics) within the context of value stream

management to support continuous operational performance improvement.

Of course, any improvement must start with behavioral change and alignment of

management and operational decision makers. Rather than managing the business in

functional silos, value stream management looks at the value created across functional

areas to support a particular business outcome. This is fundamental to ensuring the

entire business process is optimized. This is the first of a multi-step process as outlined

below:

1. Identify and map the customer value stream and identify the major segments.

2. Determine the most appropriate Key Performance Indicators (KPIs) and the Key

Performance Drivers (KPDs) that affect those outcomes for each major segment within

the value stream.

3. Ensure that the KPI objectives are aligned across functions and individual roles.

4. Monitor and analyze KPI and KPD metrics in right-time to support operational decisions.

5. Share knowledge as it is gained in the course of analyzing operational performance.

6. Review and refine the value stream map, the KPI and KPD metrics and the alignment of

these metrics across functions and roles.

The remainder of this paper outlines a performance improvement model and uses a

sample value stream to demonstrate the process of breaking it into segments and

identifying appropriate performance metrics. It goes on to illustrate how an interactive


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dashboard can be used to visualize and understand operational performance and to

analyze the root cause of a performance issue.

1. Introduction

In todays competitive environment, organizations, regardless of industry manufacturing, metals and mining, energy, financial services and hospital management

are focused on two key objectives: delivering value to customers and profitability.

However, these objectives are, more often than not, disparate goals that are not aligned

across departments, plants or enterprise boundaries. Disconnected, outdated methods

of reporting and inconsistent metrics make it nearly impossible for todays businesses to

get a holistic view of company performance drivers. Information is often available only

after the fact and lacks contextual knowledge, which leads to poor decision making.

This paper examines an approach to improving operational performance by delivering

timely, relevant performance information within the context of the value being created

and delivered to customers.

2. Definitions

Operational Performance Management, also referred to as Business Performance

Management (BPM), Corporate Performance Management (CPM) and Enterprise

Performance Management (EPM), is the combination of a set of processes and an

improvement methodology that together help organizations optimize their business

performance. It is a framework for organizing, automating and analyzing business

methodologies, metrics, processes and systems that drive business performance.

Value Stream Management utilizes lean process methodology to link the metrics and

reporting required by managers with the people and tools needed to achieve desired

results. With consistent data in the context of a value stream, organizations can deliver

optimized performance and efficiency, predictable customer value and accurate cost

and profitability management.

Operational Intelligence provides near-real-time (or right-time) metric information on

business processes, activities and outcomes to support operational decision making.

Key Performance Indicators (KPI) provide the most relevant financial and non-financial

measurements used to help an organization define and measure progress toward

organizational goals. These tend to be outcome oriented and to be most useful, there


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should be a small number of KPIs (less than 10) associated with any one aspect of

business performance.

Key Performance Drivers (KPD) are the leading indicators that affect the achieved KPI

results. While KPIs tend to relate to outcomes, KPDs tend to relate more to activities

and there is a cause and effect relationship between KPDs and KPIs.

3. A Performance Improvement Model

As illustrated above, there are three primary aspects to any improvement model:

The Management Perspective;

The Improvement Methodology; and

The Measurement Philosophy.

Traditional approaches have used outcome measures revenue, profitability,

production quantity, etc typically represented as Key Performance Indicators (KPIs).

While these are important indicators of business success, they are not in themselves

actionable. To be able to affect these outcomes, we really need to identify and measure

the performance drivers (KPDs) things like sales win rates, cost of goods sold


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(COGS), discount percentages, equipment availability, etc. These can be monitored and

actions taken to improve each measure.

Similarly many organizations are still managed in functional silos. Actions taken within

one silo to improve effectiveness or efficiency might have a negative impact on another

silo or a detrimental effect on the overall business process or value stream. By

examining an entire value stream across all functional areas that contribute to the value

created, we can ensure were optimizing the desired outcome rather than optimizing

individual piece-parts of the process.

Finally, the improvement methodology should be one of continuous improvement. In

any process or system, there is always a bottleneck that limits performance. As soon as

we optimize around one bottleneck, another performance limitation will be identified.

Continuous improvement is therefore mandatory if we are to ensure that we are

delivering optimal performance.

The value stream starts with the initial contact with a prospective customer, continues

through the sales cycle to the customer placing an order, and completes when payment

is received from a customer following the customers receipt of the ordered goods.

In order to simplify this value stream model, we can divide it into segments and each will

have specific KPIs and KPDs associated with each significant step:


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1. Contact to sales order:

Metrics include leads (number, cost); qualification (lead conversion ratio); quote (gross

margin, average discount); closing (win/loss ratio, time to close/sales cycle.)

2. Order fulfillment:

Order to delivery performance data includes metrics related to customer orders (numberof new or open orders, number or orders with errors); distribution center and shipments

(number of orders ready to pick, number of orders shipped on time or shipped

complete); transport (number of order lines shipped by air vs. ground); customer

satisfaction (number of units returned due to error or reject.)

3. Invoice to cash:

Metrics include number and value of invoices created, sent and disputed; as well as

cash received or AR days outstanding.

4. Procurement:

Includes metrics related to POs (cost per unit); supplier (on time in full delivery, reject

rate); transport (delivery time, freight costs); parts warehouse (inventory value, inventory

days/turns.)

5. Manufacturing:


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Includes metrics related to production plan (planned utilization or cost per unit);

production (material handling time, changeover time); assembly (OEE); distribution

center (inventory value, inventory days/turns.)

6. Concept to launch:

Product development metrics relate to concept (market opportunity, projected ROI);design (project unit costs); prototype (revised unit cost); marketing (revised opportunity

size, projected gross margin, revised ROI.)

4. Understanding and Analyzing OperationalPerformance

Capturing base metrics and calculating the KPIs is a necessary starting point for

understanding business performance. Understanding cause and effect, and hence

identifying and capturing KPDs is the next step in providing the information required to

understand, analyze and improve operational performance. The KPIs and KPDs mustthen be presented to decision makers in the most appropriate, timely and relevant

manner.

A typical approach to presenting this information is the use of Role-based Business

Intelligence (BI), which presents information tailored to each persons role and scope of

authority. While this is helpful for providing visibility into specific performance metrics, it

is not sufficient in todays disperse business environment. Ro le-based information is

only effective if performance information is presented within the context of a value

stream, or the individual value stream segments as outlined above.

Without this perspective, it is too easy to fall into the trap of functional silos of

information, and while each person will optimize their area of responsibility to meet their

objectives, the overall effectiveness of the organization, operation or value stream can

be sub-optimal.


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Looking at unrelated individual metrics in isolation, or metrics based solely on a

knowledge workers role, is ineffective. Metrics within each of the above value stream

segments have implications across different areas, making it a necessity for companies

to have operational intelligence solutions that provide the appropriate context.

myDIALS is leading a new breed of operational intelligence solutions, or performance

management platforms, to extend the benefits of traditional BI beyond the availability of

massive amounts of potentially irrelevant data and beyond metrics and analytics that

are solely role-based.

These new tools combine both financial and operations metrics, and deliver them to

users in context. Additionally, these new operational BI tools are delivered as Software-

as-a-Service (SaaS), a web-based model which makes it easier for decision makers to

securely combine information across traditional functional and enterprise boundaries

and share consistent metrics that span the various value stream segments and

associated roles. Combined with intuitive, interactive visualization and analysis, this

empowers decision makers, enabling them to make better decisions within the context

of improving profitability and delivering value to customers.

Metrics that span multiple value streams, and that are delivered in context, eliminate

conflicts of interest across different roles, and across different aspects or process steps

within a value stream.

It is important to ensure consistency of targets for KPIs and KPDs. Typically, everyemployee or department will have their own set of goals, depending on how theyre

incented. In order to achieve alignment, organizations need to assign targets and link

metrics across functional areas, roles and the overall value stream. This will address the

challenge of managing to silos of KPIs and ultimately increase efficiencies and

maximize profits.

When it comes to improving performance within a value stream context, it is critical to

look at the intersection points of the different segments of the value stream and ensure

that multiple people arent managing to conflicting KPIs.

The information presentation should be intuitive, interactive and provide context and

embedded knowledge to ensure consistency of behavior and actions. Ideally accessible

from wherever the decision maker is located, web-based applications lend themselves

to providing relevant information where and when it is required.


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The following screen shots provide some insight into how information can be presented

logically; the ability to drill into the information to get more detail or identify the cause of

issues; and the ability to access clarifying information as well as suggested diagnosis

and actions.

5. The Role of Performance ImprovementMethodologies

There are a number of performance improvement methodologies such as lean process,

six sigma, total quality management and theory of constraints which can be used to

improve operational performance. In all of these cases, having appropriate KPI and

KPD metrics are necessary to establish baselines, identify opportunity areas for

improvement and track progress toward goals.

These methodologies can be combined with value stream mapping and management toensure performance across the complete value stream (or segment) is improved.

Focusing on one specific process step in the value stream and optimizing that step in

isolation might cause issues in other areas of the value stream.

More importantly perhaps, is sustaining the improvements achieved using these

methodologies. Using an operational intelligence system ensures decision makers

continue to monitor the most important KPIs and KPDs; understand the implications of

not achieving targets; quickly identify issues; and analyze the information to determine

causes. Embedding knowledge within the system also helps improve the quality and

consistency of decision making.

6. Conclusion

Operational performance can be improved using a combination of value stream

management and operational intelligence. This ensures that maximum value is

delivered to customers while optimizing the effectiveness and efficiency of the business

processes hence improving profitability.

Below is an outline of the steps that can be used to implement such a performance

improvement initiative:

1. Identify and map the complete customer value stream.

2. Simplify the metrics map by identifying the various segments of the overall value stream

that are related to a specific customer process, product or internal business process.


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3. Determine the most appropriate KPIs for each major step within the value stream

segments these can be identified in support of performance improvement

methodologies such as lean / six sigma etc.

4. Look across the value stream to identify potential conflicts and synergies between KPIs,

and group these KPIs so they can be reviewed in combination.5. Assign KPIs to individual roles using the KPI groupings above.

6. Where possible, link the KPI objectives across individual roles to ensure alignment.

7. Continuously monitor and analyze KPIs on a right-time basis to ensure effective

operational decisions.

8. Review the appropriateness of KPI objectives looking for cause and effect relationships.

9. Modify KPIs, objectives and their assignment to roles based on this review and actual

results achieved.

10. During the regular corporate planning exercise start at number 1 with a review of the

overall customer value stream.

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