Operations Measurement & Improvement

Measuring Operations Performance at Analog Devices (Language of Money vs. Language of Physical Operations) Middle managers must be bilingual translators Senior managers speak the “Language of Money” EPS, ROI, NPV, etc. Factory staff speak the “Language of Things” Flow rates, defects, downtime, etc. Alternatives to middle management translation: 1. Teach language of money to the factory (Texas Eastman) 2. Teach language of things to executives (Analog Devices) 3. Teach both (Goldratt) Cost Allocation Distortions Consider Two Pen Manufacturing Plants Same Capital Equipment, Different Product Mix Plant A 1,000,000 Blue Pens How much and what types of indirect and overhead costs will these plants have? Plant B 500,000 Blue Pens 200,000 Black Pens 100,000 Green Pens 50,000 Red Pens . . 100 Fuschia Pens ________________________________________________________ 1,000,000 Pens How Should Indirect/Overhead Costs Be Allocated? Cost Allocation Distortions Plant A Plant B 1,000,000 Blue Pens 500,000 Blue Pens . 100 Fuschia Pens ________________________________________________________ 1,000,000 Pens Plant B Will Have Higher Costs Attributable to: More Inventories, More Setup Labor, More Purchasing More Manufacturing Engineering, More Information Processing More Scheduling Effort, More Scrap and Waste Under a Traditional (Direct-Labor-Based) Cost Allocation System in Plant B, Fuschia Pens Will Only Differ in Cost From Blue Pens by the Differences in Material Costs Cost Allocation Distortions Plant A Plant B 1,000,000 Blue Pens 500,000 Blue Pens . 100 Fuschia Pens ________________________________________________________ 1,000,000 Pens Under a Traditional (Direct-Labor-Based) Cost Allocation System in Plant B, Fuschia Pens Will Differ in Cost From Blue Pens by the Differences in Material Costs Volume-based overhead allocation schemes over cost the high volume products (Blue Pens) and under cost the low-volume products (Fuschia Pens) The Death Spiral TOTAL SALES $300M DIRECT COSTS $9OM TRANSP $9OM R&D NET EAST $100M CENTRAL WEST $100M $100M $30M $30M $30M $10M $30M $50M $9OM $30M $30M $30M _________________________________ $30M $30M $10M $-10M Mandate: Close the West Division The Death Spiral TOTAL SALES $200M DIRECT COSTS $6OM TRANSP $4OM R&D NET EAST $100M CENTRAL WEST $100M $100M $30M $30M $30M $10M $30M $50M $9OM $45M $45M $30M _________________________________ $10M $15M $-5M $-10M Mandate: Close the Central Division The Death Spiral TOTAL SALES $100M DIRECT COSTS $3OM TRANSP $1OM R&D NET EAST $100M CENTRAL WEST $100M $100M $30M $30M $30M $10M $30M $50M $90M $45M $30M $9OM _________________________________ $-30M $-30M $-5M $-10M Mandate: EXIT THIS LOUSY BUSINESS Analog Devices (Team assignments) 1. Describe of the half-life system and its rationale. 2. What are the strengths and weaknesses of the half-life system? Important underlying assumptions? How to get started? 2. Examples from the case that illustrate conflicts between operational and financial measures? 3. Describe of the scorecard system and its rationale. 4. What are the strengths and weaknesses of the scorecard system? Analog Devices (1. Describe of the half-life system and its rationale.) 1. Measures improvement progress in some metric (e.g., defects, cycle time, accidents, time-to-market) 2. Tracks length of time to 50% improvement (= “half-life”) 3. Focuses measurement on dynamics of improvement Analog Devices (2.Strengths and weaknesses of the half-life system) Strengths 1.Quantitative Improvement Measurement System 2.System to measure progress in any metric 3.Consonant with continuous improvement themes & PDCA 4. Enables comparisons across organizations on rates of improvement. 5. Focuses on results 6. Understandable, data-driven Weaknesses 1. Assumes constant learning rates 2. No guidance on process 3. Logarithms not intuitive 4. No packaged programs 5. No benchmarks 6. Not process oriented Analog Devices (3. Examples from the case that illustrate conflicts between operational and financial measures) 1. As wafer yields improved, fewer wafer starts were increasing cost/wafer. 2. End-of-Quarter revenue needs lead to focusing on large (rather than late) orders, so OTD suffers. 3. Expediting engineering lots in the factory can degrade factory production performance. 4. Overall yield improvement can mask degradation on some categories 5. When operations are efficient, the are tradeoffs across Service, Inventory, and Cost. 6. Exhibits 10 & 11 versus 12 & 13 Analog Devices (Describe of the scorecard system and its rationale) 1. Part of an executive information system that captures multiple domains of metrics. 2. Recognizes the need for balance across metrics for a. Financial Reports b. Customer Satisfaction c. Internal Business Processes d. Innovation, Learning, and Growth 3. Explicitly addresses existence of category tradeoffs Analog Devices (5. Strengths & weaknesses of the scorecard system ) Strengths Weaknesses 1.Recognizes need for balance 1. Doesn’t tell how to make across metric domains tradeoffs • Recognizes the existence of • No simple objectives tradeoffs 3.Recognizes that no single metric captures it all 4. Can provide cross-functional basis for discussions Design your own Scorecard Financial Goals 1. xx 2. yy 3. zz Objectives 1. aa 2. bb 3. cc Internal Processes Objectives Goals 1. aa 1. xx 2. bb 2. yy 3. cc 3. zz Customer Goals 1. xx 2. yy 3. zz Objectives 1. aa 2. bb 3. cc Innovation, Learning, Growth Goals 1. xx 2. yy 3. zz Objectives 1. aa 2. bb 3. cc Design your own Half-Life system What metrics would you like to track continuous improvement on? FUNCTIONS OF ACCOUNTING AND MEASUREMENT SYSTEMS 1. EXTERNAL REPORTING/ INVENTORY VALUATION 2. PRODUCT COSTING FOR PRODUCT LINE DECISIONS 3. PROJECT EVALUATION/ CAPITAL BUDGETING 4. OPERATIONS CONTROL AND IMPROVEMENT 5. PERFORMANCE MEASUREMENT AND ASSESSMENT 6. COMMUNICATION AND TRANSLATION 7. INFLUENCE BEHAVIOR 8. INFLUENCE WORLDVIEW