Operational Strategy Metrics

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Operational and marketing strategies alignment
In today’s world, the life cycles of many products and services are measured in months. The proliferation of consumer choices in today’s world corresponds to an increase in purchasing alternatives created by newly created production systems. Whereas several decades ago an organization’s operational strategy was stagnant, in today’s world it changes dynamically in response to marketing and sales requirements, which are driven by customer needs and value expectations at a local market level. This new competitive environment requires flexible process workflow systems and management methods. In other words, organizations must understand what products and services customers want and provide them within very short cycle times, but at high quality and low per unit cost.
To ensure the efficient translation of strategic goals and objectives throughout an organization, its goals and objectives must be mapped using a strategic flow-down methodology. An organization’s operational strategy and the execution of that strategy should correspond to its strategic goals and objectives. In particular, its operational systems should be designed to execute marketing strategies. As an example, several years ago, the operational strategies of Burger King and McDonald’s were obviously different. If we had compared and contrasted them, we would have found that Burger King had a customization strategy based on its marketing promise of “Have it your way.” To support this marketing strategy, its operational design allowed customers to customize their orders. When customers visited Burger King, their food was processed through a “flame broiler.” This operational strategy was based on a batch-and-queue process workflow system in which the flame broiler set the throughput rates of the system on a batch-by-batch basis for each customer order. So when customers arrived at Burger King, they expected to wait for their customized food for a longer period of time than they would at McDonald’s, which was highly standardized based on its marketing strategy. There was a higher variation of waiting time in Burger King’s batch-and-queue system because the waiting time was impacted by the length of the waiting line as well as the types of orders processed through the system. In summary, at Burger King, customers received customized food, but expected to wait longer than they would at McDonald’s. In contrast to the operational strategy of Burger King, the operational strategy of McDonald’s was to provide fast and standardized service. Customers arriving at McDonald’s would find food products designed in a more standardized way to improve the process workflow efficiencies. McDonald’s also maintained a small inventory of food, i.e., finished-goods inventory that was ready to sell to its customers on demand. The types and quantities of food were determined by historical customer demand patterns by the time of day.

Although McDonald’s and Burger King targeted different market segments, they were successful businesses. This simple example shows that an organization’s operational strategy should be aligned with its marketing strategy relative to the types of customers expected to be served by the process workflow. In either restaurant system, it is important that customer expectations are met on a day-to-day basis. In fact, in its simplest form, customer satisfaction is determined by how well an organization keeps its marketing promise. To the extent that an organization’s process workflows fail, customer satisfaction and organizational productivity deteriorate.

An operational linkage with marketing strategy is necessary to ensure operational systems are available to meet customer needs and value expectations. Operational linkage must be achieved through both the design of the process workflow and its day-to-day management and control. Also, there must be a clear line of sight between resource allocation within a process workflow and anticipated business benefits in terms of its productivity and shareholder economic valued added (EVA). This is especially important in larger and more complex systems in which many interrelated process workflows exist and several initiatives have been deployed to improve organizational effectiveness and efficiency. As an example, if the rolled throughput yield (RTY) of a process workflow is low, Six Sigma methods can be applied to identify, analyze, and eliminate the root causes of low process yields. To the extent that process yields are increased, scrap and rework percentages will decrease. This situation will result in material and direct labor cost savings as well as reductions in workflow cycle time, which will increase productivity. In a second example an inventory turns ratio is increased by applying Lean tools and methods to reduce the lead time for a hypothetical product. Inventory turns is a ratio of the annual cost of goods sold (COGS) divided by the average on-hand monthly inventory investment. As an example, if COGS is $12 million annually and the average inventory investment necessary to maintain operations on a month-to-month basis is $1 million, then the inventory turns ratio is 12. The business benefits realized through a reduction in inventory investment include increases in cash flow, reductions in the interest expense required to purchase and maintain the inventory in a warehouse, and reductions in warehousing costs. In summary, all operational activities within an organization should be strategically linked with higher-level organizational goals and objectives to increase operational efficiencies and productivity.

As the world becomes more integrated and geographical barriers to free trade are systematically eliminated, an organization’s marketing strategies continue to evolve to serve culturally diverse customer needs and value expectations through globally deployed workflow systems. This evolution has been accelerated by technology improvements, changes in the geopolitical and macroeconomic environments, and increasing sophisticated and diverse operations management tools, methods, and concepts. In fact, the information available to organizations through the World Wide Web has leveled the playing field relative to the ability of organizations to keep in touch with their customers and productive workflow systems across the world to increase the exchange value of per unit value in products and services.

The increased availability of information-related demand and supply has enabled customers to satisfy their specific needs and wants rather than relying on products and services designed for other people and cultures. This situation has enabled organizations to compete broadly across the world, by market segment, based on value elements related to price, speed, utility, and functionality through the mass customization of products and services. Mass customization is also focused through understanding customer needs as determined through Kano analysis. In Kano analysis, customer needs are described using three categories: basic needs, performance needs, and excitement needs. Basic Kano needs include product or service characteristics expected by the customer. Basic needs are common to every product and service regardless of the industry. As an example, when a person rents an automobile, he expects it not to break down during normal usage. He does not get excited if the automobile takes him where he needs to travel. On the other hand, performance needs differentiate one supplier from another based on relative performance exceeding basic levels. As an example, if a person is routinely upgraded by an automobile rental service, provided free navigation systems, or given a lower rental price, then she would differentiate this supplier as superior to others who do not provide these additional service features with the automobile rental. Excitement needs include product or service features that are initially unexpected by a customer, but once experienced create a “wow” effect. An example of an excitement need relative to renting an automobile would be giving free fuel or collision insurance, or perhaps the rental vehicle has a rear-view camera to help the driver back the car up. The competitive differentiation is significant when excitement needs are satisfied by a supplier.

In recent years, collaboration within global supply chains has accelerated. This has reduced the cycle time of order to receipt for products and services across diverse industries. In large part, this situation has been accelerated through aggregation or desegregation of process workflows across global supply chains. As an example, the marketing research for a product or service may be done in several countries or regions across the world, and the product might be designed in Taiwan, manufactured in China, and then distributed throughout the world. Also, as organizations build diverse work teams to interact within the globally deployed process workflows, the number of available ideas and unique solutions rapidly increases. In fact, when properly facilitated, collaboration within a diverse team increases, because team members tend to ask questions from several different perspectives rather than immediately moving off in a predetermined direction, which may yield a sub optimum solution.

The differentiating competitive advantages among organizations usually are due to differential process workflow designs and more efficient process management. In other words, they use the same labor, materials, capital, and infrastructure, but exhibit differential levels of productivity and EVA. Toyota is a good example of this phenomenon in that it executes the basics of operations management well, as opposed to many of its competitors who use similar resources. The Toyota success story has shown that low cost is not the only differentiating factor in gaining market share in automobile manufacturing. However, there are islands of competitive excellence scattered across the world in which the cost structure is very low, such that competitive threats do exist for an organization, but these situations do not always fully explain the apparent relative differences in organizational competitiveness and productivity.

Metrics and operational maturity
Metrics are used to define, measure, control, and identify metric performance gaps for improvement in the process workflows characterizing organizational systems. Metrics have several important characteristics.

1. Aligned with strategic goals and objectives
2. Links across organizational functions
3. Helps improve performance
4. Easy to use every day
5. Controllable by people who are responsible for its performance
6. Tough to manipulate and may require compensating metrics

First, it is important that they are aligned with high-level strategic goals and objectives and link across an organization. As an example, a high-level strategic goal might be to reduce warranty expense across an organization. As a first step, warranty expense should be clearly defined, including the informational components used to calculate its value. This is because, at an organizational level, warranty expense represents an aggregated amount of all lower levels within an organization. This aggregated expense can be delayed or disaggregated level by level down through the organization to ensure linkage. Strategic disaggregating ensures alignment of the metric throughout an organization. Metric alignment is also important to ensure that resource allocations are made within those areas of an organization that will provide the greatest productivity opportunities. This is important because high productivity drives high ROE and EVA for shareholders.

Alignment of metrics also ensures that they are linearly additive level by level throughout an organization. As an example, warranty expense is clearly linear because its unit of measure is in dollars. Time is also a linear metric. However, at a local operational level, there may be specific operational metrics that must be improved to reduce warranty expense. These metrics are often seen at a project level and must be correlated to higher-level financial metrics. A second important concept of metric definition includes its data collection, analysis, and presentation. A third important consideration is the display of metrics using automated and visual displays of their status to ensure real-time dissemination within an organization. As an example, in modern call centers, process workflow status is displayed in real-time using visual display boards. These visual display boards show the number of calls per unit time within a call center by function, including incoming call volumes, average call durations, and other operational and service metrics throughout the call center. These automated and visual systems allow realtime process measurement and control by call center personnel. A fourth important characteristic of metrics is that they are actionable by the people using them. As an example, if a material planner is assigned responsibility to control inventory investment for his product groups, then he must also be able to control product lead times and demand variation or forecasting error because these drive inventory investment at a target unit service level. Of course, lead time and demand variation cannot usually be controlled by material planners. This means inventory investment metrics must be clearly defined to specify inventory investment within a range of lead time and variation of demand or forecasting error. Once a metric is clearly defined, reasonable, and actionable, it is very difficult to manipulate or distort over time.

Metrics can also be classified in several ways relative to their organizational impact and specific format. Organizational impact can be broken into the categories of time, cost, and quality. Within these categories each organizational function develops and uses metrics specifically designed to measure, analyze, control, and continuously improve process performance. metrics can also be broken into four categories based on their format: business, financial, operational, and compensating metrics. Business metrics are used by an organization to linearly deploy metrics throughout the organization to enable their aggregation. As an example, business metrics can be aggregated at an organizational, local business unit, or local process workflow level. Business metrics are typically measured on a percentage-of-total basis. Examples include percentage of recordable accidents, percentage of equipment uptime, percentage of forecasting accuracy, percentage of on-time delivery, warranty cost as a percentage of sales, and scrap and rework as a percentage of cost. There are many other metrics that can be measured at a local level and aggregated throughout an organization. Financial metrics are directly correlated to business metrics and show the impact of the business metric on organizational financial performance and productivity. However, at a local process workflow level, operational metrics are used to measure, analyze, improve, and control local operations within the process workflow. As one example, warranty expense at a facility level might be due to three different types of defects. These defects might include a dimensioning problem, an off-color product, or damaged packaging. The operational metrics corresponding to these defects would be defined in units of inches, color coordinate using an instrument to measure color, and the tear strength of the packaging. These local operational metrics must align and be translatable into the warranty expense metric. Compensating metrics are used to balance the impact of business and project metrics on the process workflow operations. As an example, reducing lead time to reduce inventory investment would require a compensating metric such as maintaining the customer service-level target. Reducing internal scrap and rework without increasing external warranty expense is another example of a compensating metric.

Metrics are important because they require resources to develop, deploy, and use very day. Also, important decisions are made based on their performance levels.
Best-in-class metrics are characterized by their focus on customer value, how well an organization designs its process workflow systems to meet its customer needs and value expectations, the speed of product or service delivery, the flexibility of its systems to increase or decrease available capacity, the ability to foster continuous process improvement, and the ability to increase productivity and align operational performance with an organization’s strategic goals and objectives. These characteristics can help today’s organizations enhance their relative competitiveness.

Key Competitive metrics include:
1. Customer satisfaction by market segment
2. Percentage new customers in last 12 months
3. Percentage customer retention in last 12 months
4. Percentage of international sales
5. Percentage of new products in last 12 months
6. Sales growth by market segment
7. Employee satisfaction
8. Employee cultural and global diversity
9. Month-over-month productivity
10. Month-over-month percentage cycle time reduction
11. Month-over-month first-pass yield
12. Month-over-month safety index
13. Order fill rate
14. Delivery to request
15. Delivery to promise
16. Sales, general, and administrative (SG&A) cost
17. Delivery cost
18. Manufacturing cost
19. Working capital
20. Income from operations

The 20 key competitive metrics enable best-in-class organizations to compete in their global supply chains. Many of these metrics measure improvements to the metric over time and impact customer satisfaction, organizational productivity, or employee empowerment. This is a small subset of metrics currently used by organizations.
Relative competitiveness depends on many factors, but at an operational level (neglecting the effectiveness of strategy), it can be represented in matrix format as operational efficiency as measured by productivity versus the degree of competitive transparency. But productivity and transparency vary by industry, so they must be evaluated relative to mutual competitiveness within a particular product or service marketing space. Competitive transparency is broken down by regional, national, and international levels. Higher competitive transparency occurs when competitors are able to sell within an organization’s market space due to geographical transparency, have an ability to provide similar technology and performance to customers, or enjoy comparative marketing advantages relative to the political and cultural environment. Operational efficiency or productivity can be broken into low, medium, and high levels using readily available benchmarking data from numerous studies over the past few decades.

Organizations that exist in low competitive transparency environments tend to have lower operational efficiencies and productivity levels, whereas organizations having low competitive transparency tend to have high productivity levels, or they cease to exist. The real question is: Where is your organization relative to productivity today? Also, what is your productivity level relative to your competitors’? Organizations have two choices when they design and manage their operations. Either they can manage their operations with high effectiveness and efficiency regardless of the geographical, technical, or other factors that impact the degree to which they must compete, or they can become inefficient and eventually lose their market share to more productive competitors as their relative isolation evaporates. Now some organizations may argue that the reason they are losing market share is because competitors have lower labor costs. This may very well be true, but the complaining organizations must then find other ways to lower their operational costs or find niche markets that enable them to charge higher prices based on customer perceived value. Of course, there are situations in which the products or services are so highly driven by labor costs that low labor costs dictate who will be in the market space. Finally, availability of information through the Internet has increased competitive transparency across major supply chains in today’s world. This has created a situation in which inefficient organizations lose their market share. In the absence of artificial competitive barriers, this trend will accelerate over time as consumers demand high per unit transaction value.

Product and Service design competitive metrics
Building a core competency in the design of products and services will help an organization mitigate competitive advantages. These competitive advantages may include direct labor, materials, available capital, and similar advantages. Also, best-in-class design practices are widely known throughout the world, and competitors have access to the tools, methods, and concepts associated with the efficient design of products and services. As a result, organizations located in geographical locations having high direct labor costs have much to gain by using best-in-class design methods such as quality function deployment (QFD), concurrent engineering (CE), design for manufacturing (DFM), failure-mode-and-effects-analysis (FMEA), and design for Six Sigma (DFSS) to ensure their products and services will be competitive in today’s world.

How does an organization measure the effectiveness and efficiency of its design activities? Ten metrics are listed that enable an organization to measure key attributes of its design process and workflows.
Product and Service design competitive metrics include
1. Time from concept to market
2. Number or changes to final design
3. Percentage of warranty cost to revenue
4. Percentage of maintenance cost to revenue
5. Total customer life cycle cost
6. Percentage market share of new products and new products introduced within the past five years
7. Actual standard cost versus target cost
8. Percentage excess and obsolete inventory caused by design changes
9. Design costs as a percentage of total revenue
10. Function-to-cost ratio versus competitive designs

The first metric is time from concept to market. The ability to quickly and efficiently bring a new concept to market or commercialize it greatly increases an organization’s market share because it allows it to be first to market. This is important because in some industries, an organization’s market share significantly increases if it is the first to market with a new product or service. A second important metric is the number or changes to the final design after it is released to operations. Getting to market first is important, but if a product or service contains many defects, then its life cycle cost will dramatically increase due to process breakdowns that result in customer complaints. These process breakdowns may cause customers to ask for refunds or additional money for economic losses caused by use of defective products or services. As a result, percentage of warranty cost to revenue is an important metric because it measures defects in the field. Percentage of maintenance cost to revenue is an important criterion when evaluating the design process because high maintenance costs adversely impact customers. At a higher level, products or services that represent a large monetary investment by customers can be measured using the total customer life cycle cost metric. Total customer life cycle cost is a major competitive weapon for an organization in that, although products may cost more up front, the overall life cycle cost to customers may be less than products or services that are less expensive to purchase. An example is the purchase of an automobile based on energy costs. Automobiles having a higher miles per gallon or liter ratio will normally be more attractive to consumers, all other things being equal — even if the selling price of the more energy efficient automobile is a little higher than that of similar models. If an organization’s design function is performing well, then the ratio of new products to old should be higher than that of poorly performing organizations.

Also, the relative market share of newly introduced products and services should be higher than that of an organization’s competitors. This performance characteristic of a design function can be measured using the percentage market share of new products, or perhaps another metric, such as the percentage of products introduced within the last five years. Metrics that evaluate the cost efficiency of new products and services include the actual standard cost versus target cost, percentage excess and obsolete inventory caused by design changes, and design cost as a percentage of total revenue. Finally, the function-to-cost ratio versus competitive designs is a measure of the value of a product or service relative to competitors’. This metric should be based on an external customer viewpoint.

The appliance industry is an example of an industry that was previously characterized by product designs that evolved very slowly over time. However, in response to competitive pressures, this industry rapidly adopted best-in-class process workflows and manufacturing systems. In today’s world, smaller organizations can effectively dominate their market space and eliminate larger and historically more entrenched organizations through implementing these product and service competitive metrics.