Measuring Performance for Business Results

Measuring Performance for

Business Results

Mohamed Zairi B.Sc. (Hons), M.Sc, Postgrad. Dip., PhD., FRSA

Unilever Lecturer in T Q M Bradford University

m SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.

© 1994 Springer Science+Business Media Dordrecht Originally published by Chapman & Hall in 1994

Commissioned and produced by Technical Communications (Publishing) Ltd.

ISBN 978-94-010-4568-1 ISBN 978-94-011-1302-1 (eBook) DOI 10.1007/978-94-011-1302-1

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the U K Copyright Designs and Patents Act, 1988, this publication may not be reproduced, stored, or transmitted, in any form or by any means, without the prior permission in writing of the publishers, or in the case of reprographic reproduction only in accordance with the terms of the licences issued by the Copyright Licensing Agency in the U K , or in accordance with the terms of licences issued by the appropriate Reproduction Rights Organization outside the U K . Enquiries concerning reproduction outside the terms stated here should be sent to the publishers at the London address printed on this page.

The publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions that may be made.

A catalogue record for this book is available from the British Library

To

Nadir, Bilal, Adel and Alweena

Contents

Foreword

Preface

Special acknowledgements

Part One: Measuring performance

xi

xiii

xviii

1

1 Introduction 3 1.1 Is performance measurement a mystery? 3 1.2 The meaning of performance measurement 4 1.3 TQM - the trigger for better performance measurement

systems 4

2 The meaning of performance measurement systems in a quality context 6 2.1 Measurement: the umbilical cord 6 2.2 The evolution of financial measurement systems 7 2.3 Limitations of existing measurement techniques 8 2.4 The traditional approach to performance measurement 9 2.5· Economic models of performance measurement 10 2.6 Productivity measurement limitations 11 2.7 Shortcomings of performance to standard 12 2.8 Traditional and improvement measures: a comparison 13 2.9 Why do we need new measures? 14

References 15

3 Measuring TQ performance in,all functions 17 3.1 Measurement in new product development (NPD) 17 3.2 Measurement in the supply chain 22 3.3 Measurement in Research and Development (R&D) 25 3.4 Performance measurement for customer satisfaction 27 3.5 Performance measurement for people productivity 28

References 30

4 The strategic management of qUality: negative vs. positive quality 31 4.1 Benefiting from the use of quality 31 4.2 The evolution of TQM: moving from negative to positive

quality 31 4.3 The concept of negative quality 33 4.4 The concept of positive quality 33

Vlll Contents

4.5 From crisis management to strategic quality management 33 4.6 Best practice in performance measurement 34 4.7 Effective management of positive quality 35 4.8 Effective measurement through goal deployment 40 4.9 Summary 41

5 Measuring for total customer satisfaction: the role of QFD 43 5.1 Introduction 43 5.2 Definition of QFD 43 5.3 How does QFD work? 44 5.4 What is the house of quality? 44 5.5 Reported benefits of QFD 45 5.6 Problems with the use of QFD 48 5.7 QFD: an enabling tool for performance measurement 48 5.8 The dynamics of QFD as an enabling tool for

measurement 50 5.9 QFD - an integral tool of TQM 53 5.10 The measurement of speed and QFD 54 5.11 QFD: an integral part of performance measmement 56

6 Measuring for competitiveness: the role of benchmarking 60 6.1 The meaning and origins of benchmarking 60 6.2 Types of benchmarking 62 6.3 How does benchmarking work? 63 6.4 The link between benchmarking, TQM and competitiveness 65 6.6 Critical factors in benchmarking 67 6.6 The link between benchmarking and performance

measurement 68 6.7 Integrating performance measurement with benchmarking:

a methodology 69 6.8 Maintaining the effectiveness of the measurement-

benchmarking blend 70

7 Measuring for quality culture: the role of self-assessment tools 73 7.1 Introduction 73 7.2 The Deming Prize 74 7.3 Criteria used for assessment of Deming Prize applications 75 7.4 Benefits of the Deming Prize 79 7.5 The Malcolm Baldrige National Quality Award (MBNQA) 81 7.6 Purpose of the MBNQA 81 7.7 Criteria for assessment of the MBNQA 83 7.8 Benefits of the MBNQA 85 7.9 The European Quality Award (EQA) 87 7.10 Other self-assessment frameworks 88

Contents ix

8 Performance improvement through performance appraisal 93 8.1 Introduction 93 8.2 How is performance appraisal used? 93 8.3 TQM and performance appraisal: are they two

incompatible approaches? 95 8.4 Performance appraisal in Japan 96 8.5 Critical factors of performance appraisal in Japan 97 8.6 Process-based performance appraisal 100 8.7 Best practice performance appraisal 101

References 107

9 Quality policy deployment: the key driver for performance measurement 108 9.1 The link between quality policy deployment (QPD) and

performance measurement 108 9.2 Defining quality policy deployment 114 9.3 Examples of quality policy deployment models 114

References 125

10 Implementing effective performance measurement systems 126 10.1 Introduction 126 10.2 The meaning of TQ-based performance measurement 127 10.3 Benchmarking TQ-based performance measurement

systems 128 10.4 Towards a more complete approach to performance

measurement 136 10.5 Implementation strategy for performance measurement

systems 137 10.6 People involvement 138 10.7 The auditing of performance measurement 140 10.8 The planning stages of performance measurement 140 10.9 The implementation of performance measurement

systems 141 10.10 Performance measurement review procedures 142

References 142

11 Linking performance measurement to bottom line results: where is the evidence? 144 11.1 Introduction 144 11.2 Reports on TQM failures 150 11.3 Reports on TQM benefits - link with bottom line results 151 11.4 Process management vs. financial management 161

References 162

x Contents

Part Two: Case studies Case A: Florida Power and Light Case B: Philips Taiwan Case C: Motorola Case D: IBM Rochester Case E: Rank Xerox Corporation Case F: Federal Express Corporation Case G: Cadillac Motor Company Case H: Milliken & Co. Case I: Wallace Co. Case J: Globe Metallurgical Inc. Case K: Marlow Industries Inc. Case L: Solectron Case M: Zytec Corp Case N: Granite Rock Co. Case 0: Ritz-Carlton Hotel Co. Case P: Texas Instruments: DSEG Case Q: Rank Xerox Ltd

Part Three: Endmatter Bibliography Index

167 167 182 195 204 209 218 223 229 233 238 242 247 251 258 261 267 276

285 287 307

Foreword

Financial measures have traditionally been the cornerstone of the perform­ance measurement system. In recent years, there has been a shift from treating financial figures as the foundation for performance measurement to treating them as one among a broader set of potential financial measures. Changes in cost structures and the manufacturing and competi­tive environment have been responsible for the change of emphasis.

In today's worldwide competitive environment companies are compet­ing in terms of product quality, delivery, reliability, after-sales service and customer satisfaction. None of these variables are measured by traditional financial measures, despite the fact that they represent the major goals of world-class manufacturing companies. By focusing mainly on financial variables there is a danger that the performance reporting system will motivate managers to focus exclusively on cost reduction and short-term profitability and ignore many of the critical factors that determine long-term business success.

The key to success, in today's global economy, is total customer satisfaction. To achieve this, companies must develop performance measures that drive employees to control processes that satisfy customer expectations. In particular, performance measures should provide process-level information that motivates employees to achieve the responsiveness and flexibility that companies require to compete on a global basis. Responsiveness is achieved by building relationships that lead to satisfied customers, suppliers and employees. Flexibility is achieved by reducing output variation in proceSfes; for example, the reduction of lead times and delays are both necessary for sustained competitive excellence and long-term profitability.

The need to focus on improving customer satisfaction has resulted in many companies focusing on quality to help them to survive the competitive challenges of the 1990s. Only those companies able to develop new products quickly, and to supply them at a consistently high level of quality (and on time), will commend positions of leadership in this decade. Unfortunately, traditional accounting performance measures often motivate behaviour that is inconsistent with TQM programmes. For example, many managers are motivated by their accounting systems to focus on output, rather than quality, so that they can report favourable volume and efficiency variances. To achieve their quality goals, organiza­tions must replace traditional accounting measures with a performance reporting and measurement system that will motivate and evaluate

xii Foreword

employees' efforts to improve quality and that are consistent with a TQM philosphy.

Traditional performance measures have also been criticized because they are heavily biased towards internal comparisons of costs and revenues, and relatively little attention is given to the external environ­ment in which the business operates. A more strategic perspective is required - one which reports information relating to a firm's markets and its competitors. A successful business strategy requires the develop­ment and maintenance of some form of sustainable relative competitive advantage. Performance measures should therefore highlight the relative competitive postitioning of the organization. To protect an organization's strategic position, managers require externally based comparisons that indicate by whom, by how much and why they are gaining or being beaten. Traditional performance measures do not provide this information.

The weakneses of traditional performance measures and the chang­ing manufacturing and competitive environment have created a need for organizations to re-design their performance measurement systems. Developing and implementing a new performance measurement system is not an easy task. Introducing new performance measures cuts across traditional hierarchies and can result in a significant culture change.

It is against this background that Dr. Mohamed Zairi has written this book. It provides invaluable assistance to those managers who wish to obtain a better understanding of contemporary performance measurement systems. A major feature of this book is that it contains a com.pilation of case studies explaining how leading worldwide companies have all been pioneering total quality principles in all aspects of their business operations over a large number of years. Information regarding customer satisfaction and variation in processes provides the feedback that will encourage actions that will move companies closer to competi­tive excellence. Defining the information requirements and the actions required to achieve competitive excellence is one of the major objectives of this book.

Professor Colin Drury University of Huddersfield

Preface

Expressions such as '6 Sigma', 'you only get what you have measured', 'quantum', 'standard', 'benchmark' and many others are increasingly becoming part of everyday business language. It seems that the business community has come to realize that without measurement there can be no improvement and that measurement must become a way of life.

In addition to the various arguments on the limitations of financial performance measures and the need for new measures capable of supporting modern business requirements, there are other issues which are being given prominence in various business circles. For example, the following points are often made.

• We have many measures. Why do we need some more? Many organizations tend to measure for the sake of measurement, where most information generated is used for decision making or even carrying out improvements. In addition, many measures intro­duced tend to be peripheral to the process and to measure activity rather than quality.

• We are only interested in measures which reflect bottom line results. In many organizations the whole effort of measurement tends to be devoted to tangible areas where costs and economic benefits can be identified and measured. These organizations quantify the short term benefits in terms of profit improvement and are not necessarily interested in measuring quality.

• We would like to develop new measures - where do we need to start? And how many measures do we need? Many organizations have come to realize that there is an urgent need to develop a new set of measures which capture outputs from their various processes. However, they tend to be lacking in terms of understanding how to implement new performance measurement sys­tems, how often the measurement exercises should be carried out, what the critical aspects of processes to be measured are and how/where the core processes of the business are. This lack of knowledge and understanding leads them to query how many performance measures should be introduced.

• We have attempted to introduce new measures on numerous occasions and failed. Improvement measures are too costly, too complex and people tend to abuse them - they are a waste of time. Often, these comments can be associated with organizations that have not really managed to encourage process ownership and understanding

xiv Preface

and whose employees were not sufficiently empowered and motivated to subscribe to the new measures and more importantly to make them work by linking them to the true voice of their process. This begs the question: Does failure in introducing performance measurement sys­tems mean that TQM is failing?

• Improvement measures take a long time to develop - however business has to go on; we have to ensure our survival in the market place. These comments tend to reflect a culture of short-termism and an interest in economic benefits only. This also indicates that organizations of this sort have no appreciation of the usefulness of TQM and the level of positive impact it could have on their short-term and long-term goals.

These are some of the many comments often made by managers in relation to TQ-based performance measures or improvement measures. But surely the issue should be decided by the customer rather than the provider of goods and services? In today's business environment, most organizations tend to express their commitment to their cus­tomers explicitly, in their vision/mission statements and also by various endeavours geared towards satisfying customer requirements consistently and competitively.

I aim to answer a wide variety of questions related to issues such as:

• the meaning of TQ-based performance measurement; • understanding measurement in the context of lagging quality (improve­

ment) and attractive quality (learning); • the influence and relationship of techniques such as quality function

deployment (QFD) on performance measurement; • the link between benchmarking and TQ-based performance measure-

ment; • examples of performance IT1easurement in a wide variety of functions; • the strategic deployment 01 performance measurement; • implementation of TQ-based performance measurement; • the relationship between performance appraisal and performance

measurement; • the role of self-assessment using various frameworks in the context of

performance measurement; and • performance measurement and business results.

In addition, the book contains a compilation of case studies representing leading companies worldwide and how they go about measuring quality performance. All the selected companies have been pioneering total quality principles in all aspects of their business operations and over a large number of years. They have all won prestigious quality prizes such as the Deming Prize, the Malcolm Baldrige National Quality Award and the European Quality Award. These companies have also commanded

Preface xv

respect from the global business community and gained the loyalty of their customers and dedication of their suppliers.

The book represents a clear advancement in terms of TQ thinking. It is not concerned with the 'mechanics' of understanding and implementation of TQ principles, since generally these are well understood. On the whole, most organizations are at least at an advanced stage of introducing some of the quality principles and various initiatives and programmes geared towards meeting customer requirements at the outset, with consistency and with a high degree of effectiveness and competitiveness, but also aiming for total customer satisfaction.

TQM has come under a lot of fire and a barrage of criticism recently, both from the media and some sceptical writers. Various studies have reported that, generally speaking, TQM fails in many organizations. What these studies do not do, however, is qualify the nature of the reported failures, what causes them to happen, what the impact and implication on these organizations concerned is. For instance these studies do not describe whether the reported failures are:

• failures in the introduction of TQM, with poor planning, poor commit­ment, lack of readiness, etc, or

• failure of TQM to deliver results in financial and non-financial terms.

Another point that the reported studies do not discuss in great detail is how TQM tends to be defined and how long the companies concerned have been experimenting with it.

TQM, in broad terms, can be defined as any positive attempt to bring about change and to re-align the whole organization in order to achieve goal congruence and total focus on the customer (both internally and externally). As such, the introduction of TQM presents a big challenge and requires a long time to lead to effective results. Unfortunately, many organizations, and perhaps some of the sceptics who claim that TQM is 'a complete waste of time', tend to define TQM in very simplistic terms. For instance, should we call companies that have ISO 9000 and trained their employees in some basic tools, TQ organizations? Should we describe organizations that have produced a mission statement and signed a quality policy by their executives and nothing else, TQ organizations?

Before passing sentence on TQM and wanting to eradicate it, it may perhaps be useful to ask three questions.

• Why are the Japanese still unrelentingly committed to quality? • Why is it that quality programmes do not fail in Japan? • Why is it that companies that have won the Deming Prize in Japan are

still performing much better than their industry peer groups?

On a positive front there is ample evidence to suggest that commitment to TQM does payoff. It comes from credible research and thorough

xvi Preface

investigation. Amongst the most pioneering studies are the JUSE study carried out in Japan in 1982, the GAO study carried out in the USA in 1990/1991 and the Bradford study carried out by Dr M. Zairi, Mr S. Letza and Prof. J. S. Oakland at the University of Bradford in the UK in 1992.

There is general consensus that TOM succeeds because there is measurement. Measurement focuses peoples' minds on improvements. It triggers curiosity, investigation, the need to know, the need to learn and the challenge to solve problems. At senior management level, measure­ment means action, proper planning and the development of realistic goals through accurate understanding of the 'voice of the process'.

As it is often said: 'Measure and it will improve'. All those companies that have attempted to measure are still committed to rOM. The case studies described in this book illustrate some of the benefits reported by the companies concerned, as a result of measuring performance.

This book therefore represents a unique contribution. It presents ample evidence on the pay-off resulting from the use of TO principles, various know-hows and guidelines, how to integrate performance measurement with other aspects of TO such as benchmarking, OFD and performance appraisal. It also includes many best practices, good examples and tips for senior managers and TO practitioners. It has to be considered as a must for all senior managers including:

• those who are still questioning the value of TOM and therefore are still hesitant to recommend it to their business organizations;

• those who have just started and have not reaped any benefits S9 far; and

• those who are at very advanced stages of TOM implementation, and who have captured benefits -in all operational areas.

This book is essential reading for quality training managers and other training agencies and consultancies offering TO training packages. It is also relevant to undergraduate and post-graduate students undertak­ing courses in Business Studies, Industrial Engineering and Industrial Management, TOM courses and short courses for middle managers and executive development.

An attempt is made to answer many key questions critical to the sustain ability and strengthening of TOM as a philosophy of conducting modern business. I believe that many questions will remain unanswered. Nonetheless, in the true spirit of never-ending improvement, I and other TO enthusiasts will take the challenge forward and try to make TO a deep-rooted concept and a tool that is capable of helping the global business community improve and prosper.

I am grateful to a number of people and organizations for their help during the writing of this book. Many ideas reported in this

Preface xvii

book are applied in various leading organizations. Sharing them more widely can only enhance the body of knowledge and make continuous learning a pace faster.

I am particularly grateful to my colleagues and students at the European Centre for TOM for comments, ideas and moral support. I am also grateful to Mrs. Barbara Ward and Mrs. Wendy Docherty for typing neatly some of my handwritten scribbles which even I find difficult to read.

Dr Mohamed Zairi

Special Acknowledgements

I will always remain very grateful to a large number of individuals and organizations for ideas, information and examples covered in this book. In particular, I am very appreciative for the help received from the following people and organizations who provided information which formed the basis for writing the case studies.

• Mr Junji Noguchi, Executive Director (Union of Japanese Scientists and Engineers)

• Mr Jeffrey Clark, Manager - Baldrige Communications (Cadillac Motor Car Division, General Motors Corporation)

• Quality Improvement Department, Florida Power & Light (FPL) • Mr Paul A Noakes, Vice President and Director of External Quality

Programs (Motorola Inc.) • Mr. Michael E Spies, Vice President (Wallace Co., Inc.) • Ms Susan Baker Lentz, Quality Consultant (International Business

Machines Corporation, Rochester) • Mr Terry J May, Director of Public Affairs (Milliken & Company) • Mr Lorell W Wash, Administrative Coordinator, Corporate Quality

Improvement (Federal Express) • Mr Sam M Malone, Jnr, Project Manager - Corporate Communications

(Rank Xerox Corporation) • Mr Wayne Cassatt, Associate Director, Office of Quality Programs,

National Institute of Standards and Technology (NIST) • Ms Karen Scheldroup, Baldrige" Office (Zytec Corp) • Ms Joy B Janco, Baldrige Activities Coordinator (Marlow Ind) • Mr Patrick Mene, Corporati Director of Quality (Ritz-Carlton

Hotels) . • Ms Margaret Smith, Marketing Program Specialist (Solectron) • Mr Greg Diehl, Marketing Services Manager (Granite Rocks) • Ms Karen Hollingsworth, TQM Communications Team Leader,

Baldrige Response Center (Texas Instruments, DESG) • Business Excellence Certification Team (Rank Xerox Ltd) • Philips Taiwan