Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.
Operational Performance Metrics
Ever watch a baseball pitcher? Each pitch is amazing. An excellent pitcher with good mechanics will meet the marks on control, smoothness, stride, arm strength, speed, timing, stretch, and balance. These metrics can be analyzed to predict not only wins, but also longevity. Although we are familiar with common operational performance metrics for pitchers, let's look into those that apply to entire operations. We actually apply the same principles.
Operational performance metrics means we look at the performance of an entire production process, from creation to consumer. We want to know if all parts of the operation are working efficiently. Each part is a piece of a large machine. This ranges from inputs to outputs and includes looking at inventory, personnel, management, maintenance, quality control, production, packaging, and distribution. All should function fluidly and without interruption.
The key to analyzing operational performance metrics is that you must have numbers that tell the story about how things are working. These quantifiable outputs will answer a lot of questions about how your operation is functioning. For baseball pitchers, scouts look at strikeouts, walks, hits, wins, pitch distribution, fly balls, and contacts made. Once all these metrics are measured, the pitcher's efficiency can be evaluated. This is similar to analyzing an operation.
From a strategic standpoint, a company might measure time, errors, excesses, incidences, faults, breakdowns, returns, and costs. These are areas that are important and relatable to stakeholders within the company. They can also cause problems with customers. Any problems receiving a quality product is going to drive customers elsewhere and directly reduce profit.
If there is a way to quantify something, you can use it as a performance measure. We want to use performance measures and discover problem areas before they affect quality and sales. Common operational metrics fall under the umbrellas of measures of production, service measures, and customer satisfaction. Let's look into each of these.
Measures of Production
Measures of production are those that are used to evaluate the efficiency of converting inputs into outputs. These outputs are the goods and services a company produces and consumers purchase. We can measure one person, department, division, subsidiary, or company. Usually it's more cost effective to measure the production of departments or divisions.
Depending on what a company wants to measure, it can be a very simple measurement. Let's use Sam, a baseball pitcher, as an example. His efficiency can be measured by an earned run average, which is the number of earned runs allowed per nine full innings. In simple terms, productivity = output / input, or ERA = earned runs / number of nine full innings.
Let's say we want to know our total productivity per week. We have $100,000 worth of output from $20,000 of input. So, we go back to our productivity equation and get productivity = 100,000 / 20,000 = 5. For a business, we may want to measure widgets made, waste discarded, time per unit, labor efficiency, or breakdowns per month. Anything that evaluates the efficiency of the production process is a measure of production.
Service measures are similar to measures of production in that we can apply metrics to different parts of a company. These measures can also vary depending on what a company sees as important. Most often companies do agree on certain important elements of service performance.
Say you purchase a baseball mitt and after one month the threads begin to tear. Working with the company to get a refund, replacement, or repair is a reflection of a company's service. For example, if you are making automobiles, do you provide routine maintenance to extend the longevity of your product?
That's where service measures come in. Service measures include finding ways to measure how we are serving customers, stockholders, and wholesalers. Being responsive, for example, is vital. A company could look at how long it takes to respond to complaints, whether it is reliable when completing priority wholesale orders, and if the company makes it easy for customers to place and receive replacement orders.
If we get the runaround when returning our baseball mitt, we probably aren't going to be satisfied with how the company treated us. Customer satisfaction is low when companies don't create a quality product. Finding ways to measure this is how we can measure customer satisfaction.
Customer satisfaction measures factors such as how something looks, whether it is reliable, and knowing that it is safe to use. Being courteous and appearing to understand customer needs are also important. One of the most common ways to measure customer satisfaction is by using surveys. We can ask customers directly whether they received the information they needed, if a technician was helpful, whether the price was reasonable, and how polite the representative was when responding.
Operational performance metrics are measures that we need to evaluate the efficiency of an entire production process. We are looking to identify ways to improve an operation, from the development of a product or service to the end of its life. The metrics we choose depend on what we want to measure.
To evaluate production performance, we use three categories of metrics. Measures of production are those that tell us how efficient a process is in converting inputs into outputs. Service measures look at how we are serving our constituents, both internally and externally. Whether something works as it should and lasts a reasonable lifetime are factors that affect customer satisfaction, which are measures that look at how happy customers are. These operational performance metrics are important to every business in removing inefficiencies and improving profits. They give a company flexibility in identifying what is and isn't important.
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