Managing through measures: Improving performance measurement system in a service operation

Managing through measures:

Managing through measures:

Improving performance measurement system in a

service operation

Msc BA Operations and Supply Chains

Faculty Economics and Business Msc Business Administration

Total Quality Department Operation and Supply Chain Supervisor: Ms. Y. v. d. Rijken 1st Supervisor: Dr. H. Broekhuis

Preface

To graduate from the master program of Operation and Supply Chain at Groningen University, conducting a thesis is the final step to the completion of this program. Combining theoretical thinking with practical experience is the most challenge, yet the fun part of doing this project. The confusion and hard working throughout the entire period of this project, is proved worthwhile and hard to compare with the happiness of achieving the goal of the research.

The author would like to thank Dr. Broekhuis for her critical feedback during construction of this research. Her suggestions and questions are highly valuable to this research.

The author would also like to thank Ms. van der Rijken for giving me this opportunity to work with her teams. Her instruction, patience and effort are critical to the completion of this research.

In addition, the author is also grateful to all her colleagues in Company X, for their support and the helping hands during the six months internship period.

Great thanks to the family and friends who have always been there for the highs and lows. They are the reason to the existence of this thesis.

Sincerely Yours

Yun He

TABLE OF CONTENT CHAPTER ONE ... 5 INTRODUCTION... 5 1.1. Company Overview... 5 1.2. PSG Distribution process ... 6 1.3. Organizational structure ... 9 CHAPTER TWO... 11 THEORITICAL CONSTRUCTION... 11 2.1. Context ... 11

2.1.1. Function of Performance Measurement System ... 11

2.2. Content of PMS ... 13

2.2.1.Performance elements ... 13

2.2.2. Requirement of Performance Indicators ... 14

2.3.1. Process requirements... 15

2.4. Principles for an efficient PMS ... 17

2.5. Conclusion... 18

CHAPTER THREE... 20

RESEARCH DESIGN ... 20

3.1. Scope of the research... 20

3.2. Conceptual Model ... 21

3.2.1. Strategy of the organization ... 21

3.2.2. Authority and Responsibility ... 22

3.2.3. Content of measurement... 23 3.2.4. Process of measurement ... 23 3.3. Research Methodology... 24 3.3.1. Research framework... 25 3.3.2. Research methodology ... 26 CHAPTER FOUR ... 33 FINDINGS ... 33

4.1 Accessing the strategy and BSC... 33

4.2. Authorities and responsibilities... 35

4.3. Content of the measures ... 36

4.3.1. Quality performance measures... 36

4.3.2. Customer oriented measures ... 38

4.3.3. Cost related measures... 39

4.4. Process of measurement ... 40

4.4.1. Data capturing ... 41

4.4.2. Data analysis ... 43

4.4.3. Data interpretation... 44

4.4.4. Communication ... 45

4.4.5. Decision making and action taking ... 46

CHAPTER FIVE... 50

ANALYSIS ... 50

5.1. Function of Performance Measurement System ... 50

5.1.1. Align operational performance measures to BSC ... 51

5.2. Authorities and responsibilities... 54

5.3. Employee involvement... 56

5.4. Process of measures ... 56

5.4.1. Data capturing ... 57

5.4.2. Data Analysis ... 57

5. 4.3. Interpretation and information provision ... 61

5.4.4. Decision making and action taking ... 61

CHAPTER SIX ... 63

CONCLUSION AND RECOMMENDATIONS... 63

6.1. Conclusion... 63

6.2. Discussion ... 65

6.3. Recommendations ... 67

6.3.1.Context of the PMS ... 67

6.3.2.Content of the measures ... 68

6.3.3. Process of the PMS ... 69

REFERENCE ... 75

I. Y Distribution Value Stream Map (Confidential) ... 78

II. Organizational chart Y Distribution ... 79

III. List of interview questions ... 81

IV. Pattern and coding of the research result ... 82

V. List of reaction/comments from interview ... 83

VI. Observation on authority decision on current measures (Confidential) ... 84

VII. Current In-House performance indicators (Confidential)... 84

VIII. CASE STUDY (Confidential)... 84

IX. Align current PI to BSC (Confidential) ... 84

X. Causal relationship delay in delivery (Confidential)... 84

XI. Responsibility Process of measurement (Confidential) ... 84

XII. Reporting structure measurement at operation (Confidential) ... 84

CHAPTER ONE

INTRODUCTION

1.1. Company Overview

Company X is an international company operates in 30 countries; offers a wide range of Electronics Manufacturing Services from design resources to integrate global supply chain services. The company designs, builds and delivers products for its Original Equipment Manufacturer (OEM) customers and provides after sales and field services to support customer supply requirements. Company X also provides more value to customers in manufacturing, logistics, procurement, engineering and Original Design Manufacturer services across a wide range of products and customer segments.

Company X operates as one of the business units under Company X Global Service of Company X group. Being a Third Party Logistics (3PL), Company X provides value added services for their customers, which covers warehousing, storage, repackaging, consolidation, rework and delivery.

Currently Company X is dealing with 8 customers, among which customer Y is the biggest. Five sub-units have been set up for customer Y, namely, IPG, Enchilada, Techhub and Triad (Company X, 2008). IPG is the only unit that performs production activities, as the printer assembly for customer Y. Unit Y is a logistic hub and consolidation center, while Enchilada, Techhub and Triad are all reverse logistic hubs. The focus of this research is mainly on unit Y.

Management Dilemma

arriving at Fixed Hub have already been ordered by customers (unlike Distribution, whose products are still waiting for orders to be placed). The average cycle time of Distribution is longer than that of Fixed Hub.

Being service oriented, Company X considers quality as an important factor to success. Furthermore, maintaining an efficient operation process network and low cost for customers are extremely relevant. To ensure the quality provided to the customers, the company implemented the Balanced Scorecard as the main quality model. A Performance Measurement System (PMS) has been developed throughout the company which uses Key Performance Indicators as a tool to monitor the process.

The Balanced Scorecard at Company X is implemented and maintained with defined and structured PIs by the highest top management level. However, the PIs at the lowest operational levels have not been included into the BSC, thus the management has no control and overview on those measurement. Therefore, the management of the company, especially the operation manager of Y, is in need of a more visualized, structured and efficient use of measures at the operation floor. They also need a performance measurement system that is more related to strategic objectives. For this reason, the assignment thus formulized:

Evaluate and investigate the existing Performance Measurement at the operation level of Distribution in order to improve the efficiency and usefulness of the PMS. Secondly, bond the current operation measures to the strategic BSC. The management seeks to develop a PM system in which clear ownerships of the measures are identified, and to help establish a structure by which it is clear to allocate responsibilities. Finally, authorities to initiate corrective actions for root cause of failures in order to improve performance.

1.2. PSG Distribution process

(known as OEM, Suppliers of customer Y). Pre-Alert informs the date, time and amount of the products to be delivered. Such information signals the inbound planning team to plan incoming products into the inbound receiving operation.

Once the truck reaches the dock of the warehouse, the inbound department needs to unload the truck and place the products in a temporary receiving area. Company X needs to book all arrived products into the central IT system called Atlas. Company X shares this IT system with the customer to ensure the inventory and all transaction data are synchronized with the customer. The time required for all products to be booked into the system is no more than four hours after the products are signed over from forwarders to Company X.

When all products are stored and linked to the storage locations by scanning a barcode, the transaction of production receiving (from forwarder/OEM to Company X) is completed. The products are thus waiting to be picked when an order initialed. Upstream from this point, planning and control are based on forecasts provided by customer Y itself and OEMs. Downstream from this point the movement of products is triggered by actual customer orders of Y. This can thus be defined as the Decoupling Point. Decoupling point is a location along the value–added process, where inventory is placed to create independence between processes or entities (Schonsleben, 2007)or sometimes refer to as Customer Oder Decoupling Point (CODP) or Order Penetration Point (Olhager et al, 2006). After products arrived at the warehouse and have been booked into Atlas, they are inventoried in the warehouse waiting to be ordered by customers. Figure 1 shows the Distribution process is drawn. It identifies the CODP to be at the beginning of the production process.

Waybill processing starts with waybill picking. Products are picked according to specific customer orders. Further down the line there are two different processes within the waybill processing: 1) Monitors & Personal Computers (PCs) Picking; and 2) Bundel picking. Monitors and PCs picking is to sort PC monitors and main boards into the same pallet, according to customer requirement. The process of Bundel line is more complicated. Process department needs to pick and sort various monitors, PCs, keyboards and other computer accessories into a single combo box, according to varied customer orders.

Figure 1. Distribution production process

Batch processing is a relatively simpler production process. The Picking department first picks products by batches, which are already configured and consolidated by suppliers. These products are then resorted, arranged and sealed into different pallets, based on the destination of the shipments (countries).

All products go through the same production process after picking regardless waybill

Book-in

CODP Waybill picking

Finished productsshipped in

sealing “doggie door”1, relabeling, applying shipment labels, re-stacking the box, inserting slid sheet and changing to the treated pallets according to different custom regulations. Each of the processes is considered to be value added service provided by Company X to their customers.

The final production process is to seal each of the pallets. The sealing is done by the sealing machines. These machines automatically seal the pallets with transparent plastic foil. There are two mega automatic sealing machines and six semi-automatic ones on the production floor. After the pallets are sealed, they are temporally stored in the ship-lanes and ready to be shipped out to the customers.

When the order release team drops the orders, they also trigger a signal for the outbound team to arrange pickup by the forwarders (to the customer). Shipments are arranged one day in advance, giving forwarders and operation departments enough time to prepare the shipment. Once the truck is loaded and leaves the dock, the production process is finished and the goods shifts from Company X to the forwarders.

1.3. Organizational structure

Company X employs over 700 people campus wide. Y is one of the biggest operations units within the company. The unit employs 110 direct Full Time Equivalent (FTEs) (40hour/week) and a substantial fluctuate number of indirect employees due to seasonal demand. The strategy for the entire organization is established by the corporate of Company X. The strategy at each business level is derived from corporate strategy and amended to meet local requirement and customer needs. Strategy of Company X is carried out via Balanced Scorecard (BSC) and reviewed frequently by the top management of the company. The board of management consists of seven members. General Manager, Finance Director, Human Resource Director, Total Quality Director, IT Director, Engineering Director, and Program Director. The board of management is

1 _{“Doggie door” is an opening at the box so that the cables and manuals can be inserted without reopening}

responsible for setting up strategy and ensuring the balanced scorecard is conducted and carried out throughout each operation unit of the company.

Unit Y has a distinct hierarchical organizational structure. The operation manager is in charge of the entire operation, responsible for the profit and loss, safety, process efficiency and operation efficiency. Two process managers are currently supporting the operation manager. They are in charge of process efficiency for unit Y Distribution and Fixed Hub. Meanwhile, they are the decision makers on daily production planning and operation processes. Four supervisors assist the process manager on daily operations and are responsible for distributing tasks in a more detailed level. The warehouse manager is in charge of daily operations in the warehouse of Fixed Hub. Two warehouse supervisors are responsible for the daily operation of PSG Distribution.

Both Distribution and Fixed Hub share the same administration team. The team is under the direct management of inbound and outbound administration supervisors. Inbound and outbound supervisors need to ensure that administrational tasks are correctly executed and the related paperwork is documented. Team leaders are at the lowest level of management in the operation. Their responsibilities are to distribute daily tasks to each operator, to monitor the execution of the tasks and provide immediate solutions to operational issues, and to assist warehouse supervisors for daily warehouse operations.

CHAPTER TWO

THEORITICAL CONSTRUCTION

Applied Pettigrew’s framework of context, content and process (Pettigrew et al, 1989); Bourne et al (2004) points out specific processes are required to continuously align the performance measurement system with strategy. The context, content and process all have impact on the outcome of the measurement system.

2.1. Context

Pettigrew et al (1989) defined context as internal context and external context. Internal context includes organization’s structure, culture, management styles and resources. These factors influence PMS effectiveness in terms of the choice of PMS, interfaces between measurement systems and determines the maturity of the system. External context concerns an organization’s external environment. Factors such as market uncertainty, changing environment and governmental policies all have impact on the use of PMS and the perceived measurement system efficiency (Bourne et al, 2004)

2.1.1. Function of Performance Measurement System

Until the 80s many organizations relied on performance measurement system based on traditional cost accounting systems to control, monitor and improve their operations. However, it has been showed that these systems do not capture the relevant performance issues for fast changing environment. Rather, these systems focus on monitoring and controlling versus supporting process improvement, promoting overall system optimization and addressing the dynamic of changing systems (Ghalayini et al, 1996).

serves three basic functions, i.e. to co-ordinate, to monitor and to diagnose. Through these functions, performance measurement, if implemented and used properly, can actually change the live of people and organization. Rose (1995) states that performance measurement is the language of progress for the organization. It indicates where the organization is and where it is heading. It functions as a guide to whether the organization is on route to achieve its goals. Webster and Hung (1994) state that measurement is a key management activity that provides decision makers with information necessary for decision making, monitoring performance and effective allocation of resources. In the study of Kueng (2000) the function of PMS is categorized as an information system which:

(1) Gathers -through a set of indicators- performance relevant data of one or several business processes;

(2) Compares the current values against historical and target values;

(3) Disseminates the results (Current value, target value, gap and trend for each selected indicator) to the process actors;

One of the most popular PMS tools is Balanced Scorecard. Ever since Balanced Scorecard being cited by Harvard Business Review as the most important managing tool in the last 75 years, performance measurement has been attracting a great deal of interests (Bourne et al, 2005). It is a multi-dimensional approach designed to link performance measurement and management to specific strategy. This model also acts as a road map to translate vision and strategy into actions by focusing on these four perspectives, being Financial, Internal Business Process, Customer and learning & Growth.

2.2. Content of PMS

Pettigrew et al (1989) conclude that context, content and process have impact on the outcome. The content of the measurement system is concerned with what is being measured and how the measures are structured. It consists of the definition of the measurement ( how an organization defines each of their performance measurement), the different dimensions of the measures used, which can be important as they are directing management focus, and the structure of the system i.e. the way the individual measures are interrelated. This structure can be a pyramid, a matrix of results and determinants, or a strategy map.

2.2.1.Performance elements

The essential performance elements of the BSC include operational measures on customer satisfaction, internal processes and the organization’s innovation and improvement activities, as well as financial measures (Kutucuoglu et al, 2001). Otley (1999) points out that there is no universally applicable system for management control in the contingency theory. A central contingent variable is the strategy and objectives that an organization decides to achieve. These objectives heavily influence the choice of performance measures to be used, and they also must act as the criteria against which the choices that have been made can be evaluated.

Kueng (2000) states that a modern performance measurement system should also support a process-oriented view. This implies that a company needs a system which fulfills two requirements: 1) the measurement system should be focused on processes, not on the whole organization or organizational units; 2) the measurement system should evaluate performance holistically by measuring both quantitative aspects as well as qualitative aspects (Kueng, 2000).

Measuring incorrectly, a measure should be both “validated” and “reliable”. More important, they emphasize that a causal model should be used to identify the cause and effect relationship between the drivers of strategic success and outcome.

2.2.2. Requirement of Performance Indicators

The drive for ‘total quality control’ has strongly enhanced the interest for performance indicators in many companies. All effort to improve the quality of products and to integrate the control of the flow of goods is sensible only if progress is monitored. Performance indicators (PIs) are a means to this end: they provide management with a tool to compare actual results with a pre-set target, and to measure the extent of any deviation (Fortuin, 1988). Flapper et al (1996) pay special attention in developing the relationship of PIs in the measurement system, to conduct an effective and consistent PMS, that “offer management quickly insight into how well the organization is performing its tasks and to what extent the organizational objectives are realized”.

Fortuin (1988) also recommends that:

• PIs should be well-defined, simple, understandable and available promptly to their users.

• The presentation of PIs should be accompanied by an indication of the target to be achieved.

• Targets have to be challenging but realistic.

• Upon reaching a target, a new target (more difficult and challenging) should be set.

• PIs should be relevant, i.e. referring to affairs or parameters that are controllable by the recipient of the PI.

• 'Supplier' and 'consumer' of the PIs should agree on their relevance and meaning. Preferably, they select the PIs to be used in close cooperation. • When implementing PIs, an organization should concentrate on a limited

number (say, between five and ten) of the most important indicators. • PIs have to be used in combination with each other so as to cover all

2.3.1. Process requirements

The process of the measurement system involves the design of the system, the implementation, use and refreshing. An effective PMS should also be allocated resources for review and monitor purpose. The process of measurement is important in keeping the measures and measurement system relevant for the organization and its users. Seven stages are identified as to impact on the effectiveness of the measurement system (Bourne et al, 2005):

1) Linking to strategic objectives: the goal of the performance measurement system is to help allocate resources, to access and communicate progress towards strategic objectives. (Ittner & Larcker; 2004)

2) Method of data capture: the tools and systems that used for collecting data, be they automatically collected by IT systems, or manually collected by employees. 3) Data analysis: the methods, tools and applications that used to analysis the data

collected. It should represent the intensity and extensiveness of the result of the data analysis.

4) Data interpretation: is concerned with extracting meaning from the performance measurement system.

5) Provision information and communication: concerns how the results of the performance measurement data analysis are communicated throughout the organization

6) Decision making: concerns how a decision is made for a process, and what information it is based upon

7) Taking action: concerns who is carrying out an action.

2.3.2. Responsibility and Authorities

delegating authorities to the lowest level in an organization as near as possible to the scene of action.

The distinct definition of responsibility and authority along PMS enables the assignation of tasks and follow-up actions. Kutucuoglu et al (2001) argue that ownership of the measures is one of the principles that help efficient the PMS. A sufficient PMS should be managed by allocating resources to constant reviewing and monitoring performance measurement processes and results. More specifically, Neely et al (1997) suggest that responsibilities on collect measurement data and act on measurement data should be identified. The tasks and responsibilities of measuring performance should be linked to company structure. In the process of measuring performance, authority and responsibility of decision making and action taking should also be clarified.

2.4. Principles for an efficient PMS

The aforementioned functions and requirements of the PMS can be summed up into several key components for an effective system. Several authors summarized into several elements:

Kutucuoglu et al (2001) propose that for an effective PMS a series of questions should be asked:

• Why measure is required? ( Purpose)

• What should be measured? (Finding factors that are important) • How it should be used? (Method)

• When should it be measured? (Timing and time frame)

• Who should measure it? (Owner of the process versus independent party) • How should the result be used? (Assessment, improvement purposes.)

Based on the principle of an Effective PMS system, Kutucuoglu et al (2001) further remarks a key feature in designing and maintaining a quality performance measurement system as:

• Appropriateness of the performance indicators in the relation to the strategic objectives of an organization.

• Vertical alignment of performance indicators to translate the strategic objectives into different level of hierarchy

• Include both objective and subjective measures

• Employee involvement: employees are the individuals who operate the processes and who know the task best and thus, getting them involved will not only result in commitment toward efficient performance measurement, but also influence the actual performance too (Sinclair and Zairi, 1996).

Similarly, Neely et al also propose a performance record sheet for specifying a good performance measure constitution, this sheet consists of 10 elements (Neely et al, 1997), as:

1. Measure: title of the measure should be clear

2. Purpose: a measure with no purpose should not be introduced

3. A measure that is not related to any of the business objectives should not be introduced

4. Target: the objectives of any business are a function of the requirements of its owners and customers.

5. Formula: one of the most challenging elements to specify because the formula – the way performance is measured- affects how people behave.

6. Frequency: The frequency with which performance should be recorded and reported is a function of the importance of the measure and the volume of data available

7. Who measures: the person who is to collect and report the data should be identified

8. Source of data: the source of the raw data should be specified

9. Who acts on the data: the person who is to act on the data should be identified.

2.5. Conclusion

The literature review shows several factors that have impact on PMS. It is determined that context, content and process have impact on the outcome. All factors which can influence the effectiveness of a PMS within an organization can also be categorized into three main factors as context of the organization, content of the PMS and the process of the PMS. Such categorization helps to further identify principles of efficient PMS of an organization. The responsibilities in managing performance measures should be linked to organization structure which has clear identification of authorities.

CHAPTER THREE

RESEARCH DESIGN

3.1. Scope of the research

This research aims at evaluating the Performance Measurement System (PMS) at the operational level of Company X unit Y Distribution Hub. The intension is to visualize and fine-tune the PMS, seek improvement and make its usage more efficient. The focus is only on the Distribution Hub; other business units are not taken into account in the research.

The research is carried out within current departments which are intimately related to the production process that is described in the Distribution Value stream map. Bourne et al (2004) discuss that an efficient PMS is influenced by Context, Content and Process of measures (see chapter 2). In this research, context of measures is not considered. The external environmental factors, as well as the internal factors are not within the scope of the research. The research investigates the functions of the PMS, Content and Process of a PMS. The performance measures cover both financial and nonfinancial perspectives. The focus of the research is on nonfinancial measures. It is agreed with the company that due to the complexity of the research, financial measures are excluded from the study.

3.2. Conceptual Model

The research question has been further developed by using the literature of Performance Measurement System reviewed in above chapter. Figure 2 displays the conceptual model used in this research.

Figure 2: Conceptual Model

Figure 3. 2 above describe factors that influence the effectiveness and efficiency of a performance measurement system. It is suggested that performance measurement is more effective when the measures are appropriately designed to reflect strategy. The measures should include multiple dimensions and are interrelated and structured in a way that they can be understood and managed (Bourne et al, 2004; Neely et al, 1997; Kaplan & Norton, 1992). Bourne et al (2004) also suggest that the content and process of the measurement system has an impact on the performance management system. Furthermore, an efficient PMS should have distinctive responsibilities and authorities in managing the performance measures. Hence, these four factors are the main variables in this research that affect the effectiveness and efficient usage of a PMS.

3.2.1. Strategy of the organization

The strategy of the Company X is defined by management at the corporate level and frequently reviewed by top management at each business unit. Accessing the strategy helps to guide the research in evaluating if current PMS is properly designed and used. More specifically, if the performance measures currently used are properly designed to

Effective and efficient measurement system at operational level Affects Content of measurement • Choice and definition of

current measures • Structure of measurement

(dashboard)

Process of measurement

describe the need of the top management. To ensure that the strategy is carried out by operation level of the company, it needs to investigate if the PMS at operation level reflects management interests. Given that Company X uses BSC as the framework of their performance system. The PMS used on operation level should be in line with the criteria pre-defined in different perspective of BSC by the top management.

The functions of the PMS regard how the current PMS is used within the company. In the empirical research, Bourne et al (2005) indicates that high performing business units use PMS as a management system. PMS is not only used as measures to compare present performance with historical data or target, but also acts as a system that managers used to confirm their assumption. In the research, the use of PMS is observed to provide information on how the system functions in the operation. The observation of PMS includes attending meetings with operation management and operational employees, discussion with operation management, discussion with operation employee on PI usage, tracking daily work activities with operational employees in PI collection, experimenting primary quality data collection on the shop floor.

3.2.2. Authority and Responsibility

decisions are made and actions are taken. Most importantly, the positions (employees) which authorized for decision making are identified and related to each PIs in the system. Furthermore, Ahaus and Van de Water (1994) propose a TRA tool to specify decision authority, implementation (action) authority, and advice authority. By using this theory as a supplement method, the structure of reporting measurement is evaluated. Consequently it leads to allocation of ownership and provides more insight into the process of measurement at the operational level of Y Distribution.

3.2.3. Content of measurement

The content of measurement explains the focus of the management. In addition it gives details on what is measured and how the measures are performed. At this stage, definition and usage of measurement are investigated. Definition of the measurement should be simple to understand, clearly defined (Neely et al, 1997), and it needs to act as focal communication point from up to down. The linkage of PMS to the performance measures is made basically on the demonstrated casual relationship between the PIs.

The structure of the measurement system is another factor that has impact on the PMS of the company. Structure of measurement describes how the measure interrelated, helps managers to understand the interrelationship, how it reflects strategy (Bourne et al, 2004), and visually displays the current measurements for higher management to monitor and control the process. The structure of measure, combined with the organizational hierarchy reporting structure, should provide a more clear view in efficiently managing the PMS. Nevertheless, at the view point of management, by structuring a performance measurement system, a cause and effect relationship should be identified; controlling the causes of performance failure thus makes the use of PMS more effective. One way for structuring and visualizing performance measures is to display PIs in a standard format that shows management focuses, which also provides a platform for communication.

3.2.4. Process of measurement

and Taking action should provide an insight into the level of control in the usage of PMS at the operation floor. At the same time, the investigation should also show if the PIs used are continuous updated and reviewed. Many authors confirmed that measures and measurement system should be continuously reviewed. A performance measure often loses its efficiency over time if it is not updated with organizational needs. Meanwhile, accessing the process of measurement also classifies the level of control used in the PMS within the organization.

The following sub questions are derived from the conceptual model:

1. What is the impact of strategic objectives of the business unit on the content of the PMS?

a. Are current measures (PIs) aligned to Balanced Scorecard of the company? b. Is the PMS seen as a measure or as a management system?

2. What is the impact of authorities and responsibilities on the process of the measurement?

a. Is the ownership of PIs clearly defined?

b. Have the owners of PIs been given authorities and responsibilities to influence the process of the PMS?

3. What is the impact of the content of measures on the effectiveness of the PMS? a. Are current PIs clearly defined and categorized?

b. Does the reporting structure aligned to organizational hierarchy?

4. What is the impact of the process aspects of measures on the effectiveness of the PMS?

a. How are the seven factors of the measurement (i.e. Linkage to strategy objective, Data capture, Data analysis, Interpretation, Communication, Decision making and Taking action) indicated in the conceptual model being process at the operation level of Y?

3.3. Research Methodology

the measurement and evaluation of each variable. After that it explains what and how data and information is collected and analyzed, and what personnel has been contacted for gathering information.

3.3.1. Research framework

The Research is guided by the Company X project management method of Lean Six Sigma, more specifically; it consists of five phases as Define, Measure, Analyze, Improve and Control (DMAIC). Following the concept of Six Sigma, figure 3 displays a research layout.

Figure 3: Research Layout

3.3.2. Research methodology

Two fundamental elements need to be reviewed and described in order to roll out the research. The company strategy map and corresponding PMS provide guideline for the scope and the structure of the research. The value stream map is used to display the production process and help to identify the area of focus. The research was conducted over a six month period in three phases.

Phase 1

This was the orientation stage of the entire research. First the strategy of Company X needed to be reviewed. Top management conducted and reviewed the strategy of the

Theoretical background Research Design Methodology

Project Orientation Problem Identification Process of measurement Content of the measurement Authority and Responsibility Strategic Objective

M A

I

Structure for effective PMS

Thus the BSC was set as the base of the PMS of the entire company. Reviewing BSC was essential to orientate the research. By reviewing the BSC, the key criteria of the four perspectives of the PMS were identified, these criteria showed the focus of the management of Company X. Evaluation of the BSC at the high management level was beyond the scope of the research. Therefore, BSC was not evaluated or examined, but simply set as the foundation of the research for later stages.

After reviewing strategy and BSC, the second task was to get acquainted with the current PMS at the operational level. This task was conducted by taking the following steps:

1. Explored the operation process of unit Y to identify key processes of the operation. This exploration was essential to be familiar with the operation to roll out the research. The Value Stream Map was used as a key document in this step. Supplementary activity to explore the operation process included warehouse touring by Lean Professional of Y to explore operation processes on site.

2. The structure of the operation was then studied to identify departments and employees alongside the operation process to be interviewed for next stage. Organizational chart and job description helped to identify the related parties at this step.

3. Quality department collected a series of information of current measurements (PIs) that are reported. At this step all current PIs of Y that were reported are collected.

Phase 2

Phase 2 started with interviewing key employees identified in phase one. 16 employees of the operation and supporting departments from all levels of the hierarchy were interviewed. The interviews were done in one-to-one basis. Interview questions were asked to find out:

• What were the current PMS at the operation level of unit Y

• The authorities and responsibilities of each interviewee in regard to the measurement of performance. Thus to find out if they were given sufficient authorities to perform performance measure activities.

• How PIs were used in their specific position, what were their responsibilities towards the usage and reviewing of PIs.

• What was the report structure, how was the data collected and reported to what level within the operation

The ownership of the PIs was neither clarified nor documented. All interviewees were provided a list of PIs that currently recorded by the quality department and asked to make a link between their functions to the reporting, and reviewing structure of the PIs. By collecting this information, the factors of process of measures i.e. Data capture, Data analysis, Interpretation, Communication Decision making Taking action were investigated. In order to minimize the bias of the interview, field trips to the warehouse and administration office were conducted to observe the process of PMS on site. This observation provides evidence on how the PMS is used. Therefore, it provides information on the function of the PMS within unit Y

Phase 3

Various documents and information is used for answering the questions listed above. Information about organization strategic objectives the following resources that has been used:

• Company X intranet site for collecting information on company strategy and vision

• The Balanced Score Card used at this company was analyzed to have a closer look at the strategic objectives of the company. Data about the BSC was derived from the quality system

For data about the authorities and responsibilities regarding the performance measurement system, the research looked at job descriptions that were available on the process network. To collect data on current PMS used at unit Y, the following documents were reviewed:

• List of key performance indicators that were currently recorded by the quality department at Company X internal database.

• Value Stream Map was also a helpful tool to identify current measurement performance and to pinpoint potential “Room for improvement”.

Apart from the documents listed above, a series of documents were also studied for completing the overview of the process measurement system:

• Documentation on customer requirements • Process flow chart

Other than researching existing data stored in the organization internal system, several interviews and discussion were conducted:

• Frequent meetings with the operation manager and the warehouse supervisor, who often gave his expert opinion on what and to which scale the important processes should be under surveillance of measurement.

• Participating in operation and performing quality audit activities together with frontier employees to experience measurement performance on actual operation activities.

• Regular meetings with the Total Quality Director for reporting progress of the project.

Data coding and validation

This research was conducted as on a field research. During the research, a list of interview questions was generated in order to answer the research questions. As the analysis was based on qualitative data, data coding was used to define the relationship of the information. For this research seventeen interview questions were conducted, and further coded for linking the answers to each research questions. The list of interviewees and the coding of interview questions are shown in Table 1.

Table1: list of interviewees

Interviewees

Operation departments Support department Operation Manager OPC Supervisor

Process Manager OPC Coordinator Warehouse Supervisor shift A Inventory Supervisor Warehouse Supervisor shift B Quality Engineer Inbound Administration Supervisor Quality Engineer Assistant Outbound Administration Supervisor

Table 2 demonstrates the relationship between interview questions and research questions. However, as mentioned in 3.2.1, the analysis of the strategy and the observation of the linkage of BSC to PIs were observed at a higher level. Therefore, no question relates to research question one was asked in the interviews. The interview questions were focused on the process of PMS and the responsibilities when using PMS. See Appendix III Table2: relationship of interview questions to research questions

Interview Questions Coding 1 2 3 Q2 4 Q3 5 Q2 6 Q2 7 Q4 8 Q4 9 Q4 10 Q4 11 Q4 12 Q2 13 Q4 14 Q4 15 Q4 16 Q3 17 Q3,Q4

CHAPTER FOUR

FINDINGS

4.1 Accessing the strategy and BSC

Company X’ strategy is derived from its purpose and mission. The purpose of Company X is to “Create values that increases customer competitiveness”. The meaning of existence defines its mission into five key values as

• Intensive collaboration (Intensive corporation and communication to maintain revenue growth)

• Passionate customer service (Customer orientation to improve customer satisfaction)

• Thoughtful fast discipline execution (Improve responsiveness by efficient process design)

• Tenacious commitment to continuous improvement (Enhance competitiveness by maintaining process and product quality by applying total quality management) • Relentless drive to win ( Reduce cost to maintain profitability)

The vision and mission are constructed by corporate of the organization. The entire organization is using BSC as the strategic planning tool to monitoring the progress of its achievement to its strategic goal. At each business unit, the BSC needs to be derived from the five key values and further developed according the local market requirement. BSC of Company X is conducted as a road map rather than a simple mission statement.

Currently the BSC of the company is further developed into two different levels of performance measurements. Lower level of performance measurements are more in- depth, detailed and specific than the higher level performance measurements.

Figure 4: Management BSC of Company X (Confidential)

documented therefore the PMS structure is incomplete. The finding and alignment of the BSC to operational PIs are discussed in later sections.

Figure 5: Pyramid structure of PMS

4.2. Authorities and responsibilities

Functional authority and responsibility is distinct and well defined within the operation of unit Y. The Operation manager is the ultimate decision maker on the issues regarding the operation of the hub, while the process manager needs to ensure a smooth daily operation on both production floor or administration office. The inbound supervisor is in charge of issues concern incoming goods and relative documentation, while the outbound supervisor manages product deliveries and shipment arrangement. The warehouse supervisors, on the other hand, need to make sure that orders will be executed and processed on time for delivery. The quality engineer and quality engineer assistant are responsible for the product and process quality. The inventory team is in charge of the accuracy of inventory recording and performs cycle counting and physical inventory counting.

In regards to performance measures, Appendix VI demonstrates an observation on how authorities are distributed to current functional positions in current PMS, by using the TRA method of Ahaus & van de Water (1994). Decision authority describes the decision power on which a position has to direct actions and takes corrective actions. Advisory

authority demonstrates the advisory authority that a position has towards providing information to help make decisions. It needs to point out that the process manager and operation manager have the ultimate decision power and advisory power toward all activities in the Y hub. Therefore their position was not conducted in the analysis. Focus is given to the position on supervisors and parallel level of structural position.

Further in this chapter a process of PMS is also described, the distinctive of responsibilities in data collecting, analysis, interpretation, communication decision making and action taking are also displayed to provide contribution to this section.

4.3. Content of the measures

In this chapter the content of the measures are researched. This chapter describes the findings of what measures are currently used in the operation and how these measures are used. The current measures that are used at the operation can be categorized as Quality performance measures (see 4.3.1), Customer oriented measures (see 4.3.2), and Cost related measures (see 4.3.3). A full list of current In-House performance indicators can be found at Appendix VII.

4.3.1. Quality performance measures

The current quality performance indicators are reviewed and maintained by the Total Quality Department. Aiming at monitoring product quality and process quality, which are defined by higher quality management objectives. The intension is to document defect rate and number of non-conforming products produced during the operation process. The measures thus help to identify non-conforming activities which result in the faulty products being produced. The current quality performance measures are mainly defined as Quarantine D, Quarantine K, Out of Box Audit and Outbound Audit.

unacceptable products from acceptable ones, according to the specification for acceptance provided by the customer. If non-conforming products are identified, the operators need to fill in forms and report to the team leaders, the details of the non-conforming products then documented in a so called Quarantine D file and waiting for further investigation by customer service and quality engineer. Quarantine D separates unacceptable products provided by suppliers and faulty products produced in the warehouse during processing. All products documented in Quarantine D are not considered as Company X failure.

Quarantine K, on the other hand, is a profile used by the operation to discover numbers of non-conforming products produced during the production process within the warehouse. It is also measured by accessing defect rate, by calculating the percentage of total defect product as to the portion of total products processed. The customer has the specification towards how the product should be produced and configured. Non-conforming products are documented and filed according to different failure specifications. These data are also applied with trend analysis to compare against targets. Quarantine K is measured throughout the entire production process. The number of faulty products is recorded daily manually and reported through a weekly quarantine report.

Out of Box Audit (OBA) is another quality audit activity performs at the operation floor. A certain percentage of boxes need to be reopened for inspection. The metrics for measurement is number of unacceptable boxes to total opened boxes. OBA performs at department Resale, Monitoren and Budels. The audit is performed randomly to a certain percentage of outgoing products, operators perform inspections by following a predefined specification checklist. Criteria on the checklist include i.e. if the box is properly sealed, if the right manuals and cables are inserted correctly and if the configuration of orders are consistent with the content in the master box (combo box).

packaging of the pallets with a list of specifications established by customer Y. If the packaging does not meet the requirement of customer Y, the assistant QE has the authority to send it back for rework.

Other than the indicators mentioned above, there are also performance indicators to monitor the delivery performance of supplier quality. These indicators describe, in categories, the defect rate of the products that are delivered by each supplier and forwarder. This information is used to communicate with the customer over a time period.

4.3.2. Customer oriented measures Service Level Agreement

The customer always has a strong impact on service providers. Company X takes the customer as top priority and all efforts are taken to increase customer satisfaction. To ensure that the company provides services that are in line with customer expectation, Company X conducted a Service Level Agreement with Y. This agreement pinpoints the area of focus and also provides an insight into how customer perceives and evaluates the service delivered by Company X. Each month a business review is given by the customer to evaluate the service performance. The performance is accessed through criteria pre-agreed by both parties. The SLA thus referred by Company X as “Customer KPI”. Issues related to service performance are discussed, the current customer focus is targeting at speed, responsiveness and delivery performance.

Customer oriented performance indicators

The second group of performance indicators is conducted based on the requirement agreed in SLA. These indicators demonstrate performance from supply quality, forwarder delivery quality to Company X own process and delivery performance.

issues are generated and used as guideline to inspect supplier and forwarder performance. This measurement makes use of information of Quarantine D, but they are more specifically related to each provider and forwarder.

Dock to stock is one of the PIs currently used to measure the time taken from a product received by the warehouse until it is booked and available in the system. The set up of the measures is to ensure that the administration and process of paperwork in receiving products are limited in a certain time period, therefore improve speed and responsiveness. This PI reveals the percentage of the products that are booked within four hours after they are shipped in.

Outbound department measure a range of delivery performance based on the time. Specific pick up time, dock time, loading time, and cut off time is recorded. This information distinctly demonstrates how well the company achieves in on time delivery. The generated information leads to the cut-off performance that customer requires to measure. Cut off time is a time limit before which the orders should be shipped out of the warehouse location in order to meet the shipment deadline at another delivery hub to final customers.

Delivery performance of suppliers, forwarders and Company X itself are also being measured. The measurement includes forwarder arrival time against pre-alert arrival time, warehouse loading time against allowance loading time pre-agreed with customer and the time that trucks taking off from warehouse location against cut off time. These indicators are all time performance measurements. All this information is reported to unit Y on daily basis. Customer Y uses this information to evaluate the on time delivery performance of their suppliers and service providers.

4.3.3. Cost related measures

focus is on cost control to ensure a low cost achieving maximum customer satisfaction. Unlike other indicators which focus on recording data, cost measures are performed based on a series of sophisticated metrics and formulas. These formulas consist of both engineering norm setting and financial norm setting. Engineering norm setting measures standard output produced during a certain time period, while financial norms focus on calculating the cost allocated to each production activities. The financial norms include direct labor allocation, indirect labor allocation and overhead allocation. The description of Warehouse Utilization is an example of cost related PIs:

Confidential

Currently the inventory department is also in the process in developing performance indicators. Due to the reason that all inventory are owned by unit Y, Company X only acts as an inventory storage point. The performance indicators that are developed focus on inventory accuracy, value accuracy, physical inventory accuracy and cycle count. These indicators need to be developed in line with Y’s inventory control policy, and at the same time, it also needs to monitor the inventory holding cost that Company X charges to their customer. The inventory measures are still under developing process.

4.4. Process of measurement

This case study is also demonstrates as an example of the current issue of using the PI within Y.

4.4.1. Data capturing

The process of order information, such as order drop, release, product book-in, shipment information and inventory control are communicated with Y via the shared IT system Atlas. Other daily operation data recording on product processing, delivery performance are done manually input by operation employees. All production data is kept in separate excel files stored on company wide intranet locations, and maintained by different departments. As mentioned, there are four main measurement points, each department maintain their own excel file.

Quality data is retrieved by quality employees, partially from the Atlas system, and partially from the daily tracking sheet filled in by operators during quality auditing. Cost related performance data is downloaded everyday from the central IT system and a specific clocking system called Core.

Customer related performance data are managed by inbound and outbound administration, relied on human data input. Such information includes production data and delivery data. They are all manually processed into a excel file called Daily Governance. Data on Daily Governance are maintained manually in a daily basis. Everyday before 11 o’clock all data reported by inbound and outbound administration need to be updated, and send to the customer for performance review. Performance of operation of the previous day is discussed during the meeting. If the performance did not reach target, Company X has to provide explanations. Therefore, administration employees need to ensure that the causes for each of the delivery failures are documented. Such information also triggers managers and supervisors to provide solutions for corrective action and preventive actions.

and retrievable from Atlas. Operation Process Control (OPC) department captures and calculates cost related data from Atlas and the central clocking system Core (time monitoring system). Quality department captures product and process quality data by auditing and from Atlas. While outbound uses the manually updated file Daily Governance and an outbound delivery file to capture data on process and delivery performance.

There are currently 108 PIs in the system, appendix VI displays a list of performance indicators that are currently used in the operation. All these performance indicators are captured in different systems and files. Data is reported to operation manager and process managers by different reporting formats and forms. Figure 6 shows the data and information flow of the performance measures.

4.4.2. Data analysis

“I don’t believe in the data I don’t trust, for measurement I only trust the data I use everyday.”

“We have so many KPI in the system; I just need the ones that really tell me what I should know about.”

Company X is not using any IT tools for automatically reporting measurement data. However, the company does have large amount of data to support extensive and time consuming analysis. Data analysis is calculated by metrics and formula, then compare against targets and historical performance data, with month-to-date and year-to-date figures presented in charts and graphs. These measurements are used as managing tools. Managers and supervisors make decision based on the data collected. However, observation discovers that at the operation level, mangers and supervisors tend to review and rely more on the data and information captured at Inbound and Outbound departments. As data captured by these two departments are more intimate to customer. And at the same time they are much more accurate in reflecting actual daily production process. This reaction thus creates inconsistence towards the analysis of performance data in different departments. Some reporting departments spend a significant amount of time in data analysis, whilst operation department may just use a few minutes to go through the results. Another drawback from current separated data analysis is that operation departments are reactively receiving organized data reported by other departments, rather than analyzing data proactively by themselves.

Observation also discovers that mangers tend to use analysis reported by support departments as merely a references. Especially with the cost measurement reported by OPC, it shows that the productivity data analyzed by OPC, due to processing issue, can only be analyzed and reported accurately two days later. Consequently, manager at operation floor formulize their own analyze method to review operation cost data. Measurements reported by other support departments are up to date.

Each reporting department, herein Quality, OPC, Inbound & Outbound Administration and Inventory, has its own way of sorting, organizing and reporting of the measures. These reporting are sent by email, to operation management and warehouse supervisors, in a daily, weekly, bi-weekly or monthly basis. The different reporting is due to the need of the operation and conveniences of each department. The reporting formats are also varied depends on the choice of the reporting department. Therefore, operation management receives several emails each week, which consist of different measures reporting in various formats.

4.4.3. Data interpretation

“I don’t know how it works, if it is not good today I just hope tomorrow it will be fine again”

“Some of the data are old and I don’t think they are revealing the truth, because the calculation, to my opinion, is out of date.”

“We are comparing apples with pears”

indicators collected by other support departments. More focus is placed on performance that is not reaching the target (or some indicators bellows limit allowance). By interpreting the data, managers and supervisors try to sort out the cause of failure and pinpoint place for improvement. They are experienced and able to retrieve information from data presented to reveal operation issues. Indicators supplied by supporting department are simply used as substitute information.

Although all PI are presented against target setting, the observation discovers that most of the users are interpreting the data without considering the accuracy and viability of the setting of the target to each of the PIs. Most of the target settings of performance indicators are either referenced by customer requirement, or established by former employees. None of the data collecting or reporting parties understands how the target is calculated or conducted, or if they are conducted through a reliable statistical analysis. Therefore, no one ensures if the targets are achievable or maintainable. Unless customer indicated, most of the target and limits are considered as “supposed to be reasonable and realistic.”

The only PI that is currently used at the operation floor is productivity. This data indicates time used and output produced by the operation. Warehouse supervisors are the key users of these indicators. However, observation shows that the data is not used efficiently. Supervisors do not consider the data to be accurately reflecting actual performance of the shop floor. Besides, there are at least two days between performance reporting date and reviewing date, meaning that supervisor reviews the data which are two days old. Interpretation of the data is thus a challenge. Users of the indicators simply hope for a “fine number” the next day. Therefore, performance measurement in the warehouse is based on experience rather than performance indicators.

4.4.4. Communication

There is an intensive communication within the operation regarding daily performance. Daily meetings are held by the operation to discuss daily performance of the operation. The meetings are given by managers to supervisors to exchange information on the data presented. At a lower level, daily meeting is held twice at the operation floor. These meetings are host by supervisors to discuss performance of the previous day and distribute tasks. Customer related indicators are all discussed daily by conference calls with customer Y everyday. Indicators from quality and OPC are discussed less frequent, in weekly or bi-weekly meetings. Every month a meeting is held with all departments to discuss performance issues.

Observation shows that although OPC reports production and cost related performance, the communication towards the meaning; measurement metrics and format of formulas are only known to manager level. KPI measured by OPC does not communicate to the supervisor level or below.

Current communication flow within production departments and reporting department is not stimulated. There is disconnection in communication between all departments towards performance measures. Weak communicational circulation results in misunderstanding in defining performance measure and indicators between production departments and supporting departments. Such weakness also creates double reporting problems within the operation. With some specific performance indicators, several departments report them, but assigning different meaning towards the same indicator. Or even use different formulas or metrics, eventually leading to more confusion.

4.4.5. Decision making and action taking

the data captured daily in the Daily Governance file. With issues that are not directly related to production process, or cannot be solved instantly, managers and supervisors take time to react, or delegate to subordinates. Important decisions are normally discussed in the regular meeting host by the manager to sort out the best solutions. Decision makings towards using unfamiliar data information or analysis are limited. For example, outbound department only makes decision on the data that they are using, without including information that is reported by other departments. When deciding certain critical issues, process manager only look at data captured in daily governance file. Managers sometimes even delegate decision making authorities to the supporting departments on issue related to performance indicators that they are reporting.

However, if urgent issues occur on the production floor which can lead to failure in process efficiency or quality, immediate decision can be made at the lowest level disregarding the functional authority. For instance, if during a quality auditing Assistant Quality Engineer discovers a faulty product, she/he has the power to require a rework, without permission from warehouse team leaders or supervisors.

4.5. Conclusion

Figure 7 current measure management system (Confidential)

Company X has a rather complex performance measurement system. There are currently 108 performance indicators used within the operation, these indicators are captured through five different systems. The data is maintained and reported by different departments. In addition, this performance information is reported to the users in different forms and formats, making the system more complicated. Because of its complexity; there are problems lie within current PMS. The problems of current PMS are described in each section of the aforementioned process of measurement. Table 3 below is the summary of the problems that exist in the current PMS.

Table 3: problem summarizing

Perspective Section Problems Responsibilities /

Authorities 4.2.

No distinctive responsibilities for the performance measurement system

Process of

Data capturing

4.4.1.

Performance data are collected in different systems in various forms

Data analysis _4.4.2. Formulas and norms are not up to date

Performance measures, including methods, formulas, are not reviewed frequently Data interpretation

4.4.3.

Performance users interpret the data differently than reporters

Some performance data is considered not reliable by the users

Communication

4.4.4.

Lacking communication of performance measures between users and reporting departments

No standardized format for data reporting; varied data reporting formats create confusion in interpreting the data

Decision making

Due to reason of data analysis, some users tend to make decision based on experience rather than using indicators

Action taking

4.4.5.

Reactive actions rather than proactive actions

(Operation/Process) managers evaluate operation performance through a set of PIs consist of Quality, Cost and Customer satisfaction performance indicators. Though all primary data for performance measures analysis are contributed by production departments, performance indicators are reported by support departments other than the production ones. The reporting is done daily, weekly, bi-weekly or monthly basis due to the nature of the measures, or by customer requirement. Highest operation management reviews performance measures on different levels, while the lowest management