Performance Metrics Essay Example

Performance Metrics Essay What are the ways you can measure how successful your Six Sigma project has been in improving quality or decreasing the number of defects? Before we go into the metrics and definitions, let’s say what â€Å"defects† and â€Å"defective† mean. Something has a defect if the result or outcome of a process is not what is expected. Something went wrong. The product may still be usable: a car with chipped paint can still be driven. So some engineers use â€Å"defective† to mean a product which is not usable. Oops, we forgot to put an engine in that car: well, that’s a defective car because it can’t be driven.However, for the purpose of quality control, â€Å"defective† simply means â€Å"contains a defect,† whether that defect is cosmetic or whether it actually affects the function of the part as intended. (So just be careful to make sure you are on the same page in terms of your definition as those you are communicating to). There ca n be different types of defects in a single part based on different causes. B. Performance Metrics–Definitions Here is a list of the Performance Metrics which are spelled out and then given an acronym if one is commonly used. The description is given of what this metric means. Performance Metric| Description| 1. | Percentage Defective| What percentage of parts contain one or more defects? | 2. | Parts per Million (PPM)| What is the average number of defective parts per million? This is the same figure in metric 1 above of â€Å"percentage defective† multiplied by 1,000,000. | 3. | Defects per Unit (DPU)| What is the average number of defects per unit? | 4. | Defects per Opportunity (DPO)| What is the average number of defects per opportunity? (where opportunity = number of different ways a defect can occur in a single part| 5. Defects per million Opportunities (DPMO)| The same figure in metric 3 above of defects per opportunity multiplied by 1,000,000| 6. | Rolled thro ughput yield (RTY)| The yield stated as a percentage of the number of parts that go through a multi-stage process without a defect. | 7. | Process sigma| The sigma level associated with either the DPMO or PPM level found in metric 2 or 5 above. | 8. | Cost of poor quality| The cost of defects: either internal (rework/scrap) or external (warranty/product)| C. Performance metrics–Discussion and examples 1. Percentage Defective This is defined as the Total number of defective parts)/(Total number of parts) X 100 So if there are 1,000 parts and 10 of those are defective, the percentage of defective parts is (10/1000) X 100 = 1% 2. PPM Same as the ratio defined in metric 1, but multiplied by 1,000,000. For the example given above, 1 out of 100 parts are defective means that 10,000 out of 1,000,000 will be defective so the PPM = 10,000. NOTE: The PPM only tells you whether or not there exists one or more defects. To get a clear picture on how many defects there are (since each unit can have multiple defects), you need to go to metrics 3, 4, and 5. . Defects per Unit Here the AVERAGE number of defects per unit is calculated, which means you have to categorize the units into how many defects they have from 0, 1, 2, up to the maximum number. Take the following chart, which shows how many units out of 100 total have 0, 1, 2, etc. , defects all the way to the maximum of 5. Defects| 0| 1| 2| 3| 4| 5| # of Units| 70| 20| 5| 4| 9| 1| The average number of defects is DPU = [Sum of all (D * U)]/100 = [(0 * 70) + (1 * 20) + (2 * 5) + (3 * 4) + (4 * 9) + (5 * 1)]/100 = 47/100 = 0. 47 4. Defects per OpportunityHow many ways are there for a defect to occur in a unit? This is called a defect â€Å"opportunity†, which is akin to a â€Å"failure mode†. Let’s take the previous example in metric 3. Assume that each unit can have a defect occur in one of 6 possible ways. Then the number of opportunities for a defect in each unit is 6. Then DPO = DPU/O = 0. 4 7/6 = 0. 078333 5. Defects per Million Opportunities This is EXACTLY analogous to the difference between the Percentage Defective and the PPM, metrics 1 and 2, in that you get this by taking metric 4, the Defects per Opportunity, and multiplying by 1,000,000.So using the above example in metric 3: DPMO = DPO * 1,000,000 = 0. 078333 * 1,000,000 = 78,333 6. Rolled through Yield This takes the percentage of units that pass through several subprocesses of an entire process without a defect. The number of units without a defect is equal to the number of units that enter a process minus the number of defective units. Let the number of units that enter a process be P. The number of defective units is D. Then the first-pass yield for each subprocess or FPY is equal to (P – D)/P. One you get each FPY for each subprocess, you multiply them altogether.If the yields of 4 subprocesses are 0. 994, 0. 987, 0. 951 and 0. 990, then the RTY = (0. 994)(0. 987)(0. 951)(0. 990) = 0. 924 or 92. 4% . 7. Process Sigma What is a Six Sigma process? It is the output of process that has a mean of 0 and standard deviation of 1, with an upper specification limit (USL) and lower specification limit (LSL) set at +3 and -3, respectively. However, there is also the matter of the 1. 5-sigma shift which occurs over the long term. The result is the following two charts, one without and one with the 1. 5-sigma shift. Performance Measurement Metrics for SuccessPerformance measurement metrics are critical for a successful supply chain management. Let’s assume that your company has implemented an advanced supply chain planning and execution system with logistics and other related systems. You’ve improved demand management and strengthened partnerships in your supply base. The company has also redesigned and changed all key business processes for conversion from â€Å"push† to â€Å"pull† lean manufacturing. Key suppliers and customers are beginning to sign on for col laborative participation in the supply chain process.In and of itself, just implementing these changes represents some major steps toward a high-speed lean supply chain. Currently, the right performance metrics for gauging everyone’s performance and level of improvement are essential to supply chain management’s success. Ineffective performance measurement will never reveal what really needs adjustment in your business and externally in the supply chain. Performance improvement, effective collaboration with suppliers and customers to streamline the supply chain is an iterative process. This means that how you measure that performance is a critical and continual process.Many manufacturing companies continue to evaluate their performance and make adjustments by focusing on financial data that looks to the past rather than the future. Why Conventional Measurements Fail In the traditional monthly operations review, senior management spends an inordinate amount of time disc ussing the financial results for the previous month or quarter. In addition, there is usually a lengthy review of the budget versus actual expenditures. What’s more, managers at different levels are expected to answer questions about variances and shortfalls, even though many such explanations end up being pure guesswork.Traditionally, monthly operations reviews rarely result in systematically changing the company’s future performance because the operations review process does not connect and coordinate strategy with operations and achieve lasting cost improvement results. These meetings actually encourage managers to modify their activities so that management will not grill them next month. Paradoxically, the modifications they institute in their units are often counterproductive to the company’s real strategy. Why? Because the managers are seeking to satisfy standards that fail to incorporate all of the real drivers of business success.Business process improve ment is sacrificed because the performance measurement system does not work effectively. For example, a purchasing manager may get his or her purchase price variance (PPV) in line with what the operations review team wants but possibly at the disconnected cost of shortages in materials and problems with quality. Strongly customer-focused metrics often do not figure in these traditional monthly financially-orientated reviews. And the common focus on plant utilization, production efficiency, and overhead absorption rewards behavior that has little to do with customer satisfaction.Performance Measurement Counter Productivity In fact, performance measurement systems can have everything to do with counterproductive actions such as building up inventory or controlling purchase price variance with vendors to satisfy ineffective management accounting methods. Here are some of the telltale symptoms of a management that focuses on the wrong metrics. * Engineering continues to design products that are not designed with a lean supply chain in mind. * Accounting is focused on historical, myopic measures that emphasize sub-process performance optimization without considering the performance of the entire process. Sales is encouraged to focus heavily on booking orders without regard for what product mix was planned to be sold and produced or for what margins will be realized. * Plant management is totally focused on shipping dollars, efficiency, utilization, and overhead absorption metrics that run counter to reducing cycle time and increasing customer satisfaction. Without properly focused and balanced performance measures you won’t see process and functional performance as it really could be. Instead, you will likely see process and functional performance as you think they are.That can lead you to make decisions that are less than optimal from the point of view of the whole business. Revising Performance Measurement to Match Strategy Any complete strategic plan must specify goals, strategic objectives, actions, and the final performance measures by which management and stockholders will gauge success. Top management’s performance can usually be measured by sales volume, market share, cash flow, profit, ROI, dividends, and, if publicly held, market value. Operating management, however, is often disconnected from the strategic plan.As a result, business processes and activities under the control of operations are not affected in the ways that will make the company more profitable or give it more market share. This misalignment of performance measurement between strategy and process performance in operations is often poorly understood. It certainly does not receive the priority it should from top management. The critical success factors management defines at the strategic level must be transferred to the operations level measures and clearly linked to business process performance (see Figure PM-1).Successfully linking the real drivers of o verall business performance at the operations level is a prerequisite for effective performance measurement. A primary purpose of measurement is to assess performance levels and to analyze what is happening and where. The most beneficial aspect of performance measurement, however, is pinpointing problem areas and focusing attention on actions that will have the best impact on overall business performance. Without good performance measurements, it is easy for companies to fall into a very common trap: Employees keep busy with all kinds of activities but achieve few of the desired results.Effective performance measurement is the compass that guides management toward meaningful results at the process level, results that will tie in directly with the company’s goals. Wrong Measures Cause Havoc It is very difficult to improve something that you fail to measure properly. The pressure to focus energy on activities that really matter must come from the highest levels of the manufactu ring enterprise. Top management may well know about the need for making improvements, but unless the right performance factors are measured and rewarded, nothing usually changes.Today’s world-class manufacturers are continually tracking process performance factors that ultimately impact business success, such as order-to-delivery cycle time, throughput, inventory levels, quality, operating expenses, and customer satisfaction. Inappropriate measures often lead managers to respond to situations incorrectly and to reinforce undesirable behavior. For example, if manufacturing’s goal is to focus on maximum overhead absorption, the result is often a bloated inventory and decreased customer service.Measuring and driving toward a singular metric, such as purchase price variance or labor efficiency, often leads to higher overall costs that are invisible to traditional accounting methods. Getting a low price on material is important, but ensuring an uninterrupted supply of neede d material to maintain the production schedule and meet customer deadlines is more important. Just think about the real cost of material shortages. The best purchased material value is a result of price, quality, and fast on-time delivery. Keeping an entire organization focused on the right objectives and moving in the right direction is no easy task.Of course, what managers think their superiors consider important, based on the formal or informal measurement system, determines what is going to get done. For example, if something like cycle time gets only lip service from top management, then cycle time essentially becomes a secondary issue. If your company has conflicting performance measures, your managers are certain to have differing values and directions, many of which will be disconnected from your company’s strategy. Without uniform expectations, it is virtually impossible to keep an organization marching toward the same goals.This, by itself, makes reevaluating how yo u measure business processes and functional performance a very high priority. Introduction Performance measurement is an important cornerstone of the contracts between the University of California and the U. S. Department of Energy for the operation of its laboratories. Performance metrics should be constructed to encourage performance improvement, effectiveness, efficiency, and appropriate levels of internal controls. They should incorporate best practices related to the performance being measured and cost/risk/benefit analysis, where appropriate.The Department of Energy has promulgated a set of Total Quality Management guidelines that indicate that performance metrics should lead to a quantitative assessment of gains in: * Customer Satisfaction | * Organizational Performance | * Workforce Excellence | The key elements of the performance metrics to these guidelines should address: * Alignment with Organizational Mission | * Cost Reduction and/or Avoidance | * Meeting DOE Requiremen ts | * Quality of Product | * Cycle Time Reduction | * Meeting Commitments | * Timely Delivery | * Customer Satisfaction | |The Process The first step in developing performance metrics is to involve the people who are responsible for the work to be measured because they are the most knowledgeable about the work. Once these people are identified and involved, it is necessary to: 1. Identify critical work processes and customer requirements. 2. Identify critical results desired and align them to customer requirements. 3. Develop measurements for the critical work processes or critical results. 4. Establish performance goals, standards, or benchmarks.The establishment of performance goals can best be specified when they are defined within three primary levels: Objectives: Broad, general areas of review. These generally reflect the end goals based on the mission of a function. Criteria: Specific areas of accomplishment that satisfy major divisions of responsibility within a function. Me asures: Metrics designed to drive improvement and characterize progress made under each criteria. These are specific quantifiable goals based on individual expected work outputs.The SMART test is frequently used to provide a quick reference to determine the quality of a particular performance metric: S = Specific: clear and focused to avoid misinterpretation. Should include measure assumptions and definitions and be easily interpreted. M = Measurable: can be quantified and compared to other data. It should allow for meaningful statistical analysis. Avoid yes/no measures except in limited cases, such as start-up or systems-in-place situations. A = Attainable: achievable, reasonable, and credible under conditions expected.R = Realistic: fits into the organizations constraints and is cost-effective. T = Timely: doable within the time frame given. Types of Metrics Quality performance metrics allow for the collection of meaningful data for trending and analysis of rate-of-change over tim e. Examples are: * Trending against known standards: the standards may come from either internal or external sources and may include benchmarks. | * Trending with standards to be established: usually this type of metric is used in conjunction with establishing a baseline. * Milestones achieved. | Yes/No metrics are used in certain situations usually involving establishing trends, baselines, or targets, or in start-up cases. Because there is no valid calibration of the level of performance for this type of measure, the should be used sparingly.Examples are: * Establish/implement a system. | * Reporting achieved (without analyses). | * System is in place (without regard to effectiveness). | * Threshold achieved (arbitrary standards). | * Analysis performed (without criteria). | Determining the Quality of Metrics The following questions serve as a checklist to determine the quality of the performance metrics that have been defined. 1. Is the metric objectively measurable? 2. Does the m etric include a clear statement of the end results expected? 3. Does the metric support customer requirements, including compliance issues where appropriate? 4. Does the metric focus on effectiveness and/or efficiency of the system being measured? 5. Does the metric allow for meaningful trend or statistical analysis? . Have appropriate industry or other external stands been applied? 7. Does the metric include milestones and/or indicators to express qualitative criteria? 8. Are the metrics challenging but at the same time attainable? 9. Are assumptions and definitions specified for what constitutes satisfactory performance? 10. Have those who are responsible for the performance being measured been fully involved in the development of this metric? 11. Has the metric been mutually agreed upon by you and your customers?