Operating Performance Measures

Organizations use both nonfinancial performance measures and financial performance measures in evaluating management performance. While financial measures help senior managers understand the results of what other managers in the organization do, they do not measure specifically what drives organizational performance. For example, sales volume and revenue measurements are good ways to summarize the results of efforts that focus on increasing sales of a product within an organization. They do not, however, detail what specific efforts led to the increase in sales. Did sales increase because marketing did a better job of presenting the product to customers? Or did product quality increase, making the product more attractive to the buying public? Maybe sales increased because the company became better at customer service and faster at shipping out customer orders, allowing for more sales volume. Financial performance measures will not capture this level of detail, but operations performance measures will.

Operations performance measurement is a combination of qualitative and quantitative evidence that shows progress toward achieving specific defined organizational goals. There are three primary operating performance measures that many organizations use.

The first measurement is throughput time, which is a manufacturing cycle measurement that details how long it takes to manufacture a product from the start of production until the product ships. Some companies use the term cycle time instead of throughput time. Each term in the throughput time formula has a specific meaning.

• Process time is how long it takes to go from raw materials to a finished product.
• Inspection time is how long it takes to make sure a product meets quality standards. A company may inspect raw materials, partly finished products, and products that are ready to sell. There may be multiple inspections of the same product at different stages.
• Move time refers to how long it takes for a product to go into and out of the production area and from stage to stage as it is being manufactured. For instance, a product may need to sit for a specified period to allow parts to cool off or paint or varnish to dry.
• Queue time refers to the length of time a product sits in a warehouse or other storage facility before the company ships it to a customer.

The second common measurement is the delivery cycle time, which is a measurement of the hours, days, or months from when a customer makes an order until the finished goods are shipped out by the company. Delivery cycle time is calculated as throughput time plus wait time.
The third common operation performance measurement is manufacturing cycle efficiency. Manufacturing cycle efficiency (MCE) is a measurement of the relationship between value-added time to throughput time in the entire process of making a product. Value-added time is the time spent that improves the outcome of a process, service, or product . It does not include the other parts of the throughput time, such as waiting for a production line to be ready, safety or quality inspections, move time, and queue time. (Non-value-added time is what accountants call periods when a product is sitting around and nobody is working on it.) Manufacturing cycle efficiency divides the specific amount of time it takes to build the product by the other components of throughput time, such as time spent on inspection time, move time, queue time, and wait time.
Companies sometimes separate value-added time from the rest of the manufacturing process when they are looking for inefficiencies in their manufacturing methods.