Common Operational Performance Metrics

Lesson Transcript
Instructor: Beth Loy

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.

This lesson reviews common operational metrics. Measures of production, service measures, and customer satisfaction are examined, showing how they can be used to improve a company's performance.

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.

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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

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.

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