Enterprise performance measurement

Asbjrn Rolstads
The Norwegian University of Science and Technology, Trondheim, Norway
Introduction During the last ten years, we have experienced a high degree of pressure on the manufacturing industry to improve its competitiveness. Several international trends justify the strong focus on competitive issues: globalisation; customer orientation; process orientation; high productivity. Globalisation includes two aspects: markets and manufacturing (Rolstads, 1995). Products are produced for a global market. Trade barriers have been torn down, and competitive companies today regard the world as their market. They are competing in an international arena. To survive they must be world champion. The days of the national championships are gone. Manufacturing is also becoming global. Enterprises are moving in a multinational direction. Their production units are spread all over the world. They are located where the total conditions for operation are most favourable. The same is true for design, product development, technology development, and other crucial business processes in the enterprise. The modern enterprise will regard its customers and suppliers as part of its own company by establishing strategic alliances. Some have started to talk about the virtual enterprise. Globalisation is a very important development trend for industry. The virtual enterprise is, in part, a response to this. This means that the enterprise is run as one single unit but that the various parts of the enterprise may be geographically distributed. The virtual enterprise is no doubt a technology that many believe in. Kurihara discusses next generation manufacturing enterprises and mentions support for the virtual enterprise as key characteristic number one (Kurihara et al.,1996). The strong Japanese focus on quality as a competitive factor, has led the whole world to focus on customer satisfaction. This means excellence in all respects. It involves zero defects, short delivery times, customization, and low costs amongst others. Every part of the company is focused on the customer. All

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employees are trained to think customer satisfaction. The global situation with the virtual or extended enterprise, extends the customer satisfaction approach beyond the customer. It actually includes suppliers, vendors, financial institutions, and even owners. To have the best suppliers is considered an asset. There is therefore an open competition in the marketplace not only for customers, but also for suppliers and owners. The stakeholders model (Bredrup, 1995) clearly explains this situation. The third major trend is process-oriented thinking (Harrington, 1991). As competition becomes global, it also becomes fiercer. To stay competitive is a continuous race. Industry must continuously improve itself. There is no time to lean back and take a break. This environment has led industries to focus on their core activities. Non-core activities are outsourced. The core activities are refined and rationalised. The company tries to strengthen its competitive advantage in this way. The process-oriented approach identifies the business processes of the company. Each process is examined and reengineered to be as competitive as possible. The most commonly used buzzword for this is business process reengineering. However, when re-engineering the business process, it becomes necessary to compare it with other similar processes to learn and improve. Such benchmarking is perhaps the most promising technique for productivity improvement. The fourth trend is high productivity. The classical definition of productivity is the ratio between output and input. It is the product of efficiency and effectiveness (Sink and Tuttle, 1989) where efficiency expresses the utilization of resources. Many enterprises look at this as a cost-cutting exercise. It has led to a number of buzzwords like lean manufacturing and agile manufacturing. Several studies have thrown light over the competitive balance between enterprises in various geographical regions. One example is the MIT study Made in America that focuses on the competitiveness of US industry compared with Japan and Europe (Dertouzoz et al., 1989). Even more famous is probably the work of Porter documented in three books (Porter, 1980; 1985; 1990) addressing both the national and international levels. Other significant work could also be mentioned, like Hayes and Wheelwrights Restoring Our Competitive Edge (Hayes and Wheelwright, 1984), and Sink and Tuttles books on measurement techniques (Sink, 1985; Sink and Tuttle, 1989). Performance measurement The classical approach to performance measurement can best be described by the Sink and Tuttle model (Sink, 1985; Sink and Tuttle, 1989). The model claims that the performance of an organizational system is a complex interrelationship between the following seven performance criteria: (1) Effectiveness which involves doing the right things, at the right time, with the right quality, etc. Defining the criterion as a ratio, effectiveness can be defined as actual output/expected output. Figure 1 illustrates this.

(2) Efficiency. This is an input- and transformation process-question, defined as resource expected to be consumed/resources actually consumed, as shown in Figure 2. (3) Quality, where quality is an extremely wide concept. To make things more tangible, quality could be measured at five or six checkpoints, as Figure 3 shows.

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Upstream system

Input

Transformation Process

Output

Downstream system

Effectiveness A.O. E.O.

Figure 1. Operational definition of effectiveness

Upstream system

Input

Transformation Process Efficiency R.E.C R.A.C Quality management process: Q6

Output

Downstream system

Figure 2. Operational definition of efficiency

Customers, Suppliers, Providers

Customers

Upstream systems: Q1 Inputs Q2

Downstream systems: Q5 Outputs Q4

Transformation Value adding process: Q3

Organizational system

Figure 3. The six quality checkpoints

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(4) Productivity , which is the traditional ratio of output/input. For an illustration, see Figure 4. (5) Qual ity of work l ife , which is an essential contribution to a wellperforming system. (6) Innovation , which is a key element in sustaining and improving performance. (7) Profitability/budgetability, which represents the ultimate goal for any organization. Figure 5 shows how Sink and Tuttle view the interrelationship between the seven performance criteria. The focus must first be on effectiveness, i.e. what are the right things to do. Then it is time to start aiming for efficiency and quality. If these three concepts are in place, the result is very likely to be a productive organization. Quality of work life and innovation are viewed as moderators to the equation; they can both increase and decrease performance. Maintaining high performance in these areas, the short-term result is often profitability for profit organizations and budgetability for non-profit organizations. This again supports the long-term outcomes of excellence, survival, and growth. A more recent work done in the TOPP project looks at performance as the integration of three dimensions as depicted in Figure 6 (Moseng and Bredrup, 1993): (1) Efficiency. (2) Effectiveness. (3) Adaptability. The two first dimensions are the same as those used by Sink and Tuttle (1989). The third expresses to which extent the company is prepared for future changes. TOPP was a research program carried out in Norway (1992-1996) studying productivity issues in Norwegian manufacturing industry. TOPP has
Upstream system Transformation Process Downstream system

Input

Output

Figure 4. Operational definition of productivity

Expected

Actual Productivity

Upstream system

Input

Transformation Process

Output

Downstream system

Figure 5. The interrelationship between the seven performance criteria

Profitability/ budgetability

developed two sets of methodologies for measuring productivity in a company (Moseng and Bredrup, 1993): (1) Self-audit based on a questionnaire answered by the companies. (2) External audit performed by experts analysing the companies. There are some similarities between TOPP and the methodology used for awards like Malcolm Baldrige, Deming, and the European Quality Award. However, TOPP focuses on more aspects concerning the competitiveness of the whole company, while the awards mentioned have their main focus on quality. The self-audit uses a questionnaire which is answered by each company. It consists of three parts: Part 1. Facts about the company, products, cost, finance, manpower, capacities, production, etc. Part 2. Overall evaluation of different functions and system variables. This part is answered confidentially by 20 individuals in the company. Part 3. Detailed evaluation of primary and support functions and system variables (products, facilities, personnel, etc.). This part is answered by specialist groups in the company. Management is represented in all groups. The scale of assessments comprises an interval from 1 to 7 with 7 as best practice. The external audit is done using external experts. An expert team analyses the company and scores indicators on the scale from 1 to 7 with 7 still as best practice. The company is analysed in two ways: (1) Company-level using indicators focusing on the overall performance of the whole enterprise. (2) Company split-up, using indicators focusing on limited areas of the company. The company-level analysis is split into four sets of indicators as shown in Figure 7. Within each area a number of items has been identified. For each item up to ten indicators are given. Each indicator is supported by a checklist of key
EFFICIENCY

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ABILITY TO CHANGE EFFECTIVENESS

Figure 6. Performance model from TOPP

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questions. The expert team scores on each indicator, based on this list. The scores are weighed together depending on their importance, and one key indicator is given for the item. This may be aggregated to an area indicator, but this is only done for the company-level approach. The TOPP methodology has also been applied in the EUREKA project TIME GUIDE which aims at developing software products for process assessment, process benchmarking, and gaming. It also includes building a European benchmarking database for identification of benchmarking partners. Further the TOPP methodology has been revised and forms, together with other research results, a baseline for a new EU ESPRIT research project called ENAPS (Strandhagen and Rolstads, 1995). ENAPS is a European network. The end result is an operational network with capabilities and competence to perform benchmarking and performance measurement. The network has nodes in most EU countries referred to as agents. The research team comprises a set of partners from five different countries. These partners will develop the necessary tools. Essential here is the development of a benchmarking database. The actual benchmark is performed by agents. The agents may be consultants or research organizations. They will approach industry and will do data collection using the ENAPS methodology. The data are fed into the database, from which the agents can retrieve information for comparison. The concept of agents is fundamental in ENAPS and is the main vehicle to operate the network. Agents have the following commitment: Serve as national node and point of contact. Apply methods and tools to do local performance studies. Engage experts where necessary. Be involved in development of network. Serve as pilot company for benchmarking and studies if appropriate. Act as advisers and help in quality assurance.
EXTERNAL RELATIONS INTERNAL RELATIONS ABILITY TO CHANGE

ECONOMY

1. PROFITABILITY 2. CASH FLOW

1. MARKET 2. BOUNDARY CONDITIONS 3. EXTERNAL RESOURCES

1. COST-EFFECTIVE USE OF RESOURCES 2. WORK ENVIRONMENT

1. STRATEGIC AWARENESS 2. CONDITIONS FOR CHANGE

Figure 7. Company level-analysis areas

3. FINANCIAL STABILITY

The ENAPS network is intended to play a critical role in helping European industry, government, and educational leaders appreciate and prepare for this reality based on business processes engineering by: providing a platform for interaction and collaboration across national boundaries within Europe through a permanent network focused on advancing the understanding of performance for mutual benefit; researching best practices in performance and their causes, such as the use of supplier/customer contract relationships, self-managed teams, concurrent engineering, supply, chain management, etc; stimulating regional strategies by which governments can begin developing an infrastructure that will attract networks of businesses; educating key players that productivity is the ratio between value added in the entire enterprise and the cost of resources consumed, rather than the narrow definition of output per man-hour, and that the key issue in this respect is engineering or re-engineering of business processes; enhancing the blue collar human capital through appropriate training; shaping educational curricula for university students and professionals to prepare them for working in cross-cultural, process and team-oriented environments that stress collaboration within and between companies rather than the old adversarial, win-lose model of business. Enterprise modelling In order to do performance measurement, an enterprise model is needed. A number of modelling tools already exists, like CIMOSA (Kosanke, 1991), IDEF0, SADT, and the GRAI method (Marcotte, 1990). In this context the TOPP and the ENAPS models will be briefly described. The TOPP model is based on theoretical work carried out in the ESPRIT project FOF Factory of the Future, and this model will therefore also be described (Falster et al., 1991). The FOF conceptual model is intended to design/redesign or test a production system. In applying the model, some information is given as input. This basically includes the products to be delivered and the resources that the company has available. Both may be inadequately, insufficiently or only partly defined. They may all be changed or modified in the process of designing or redesigning the manufacturing system. The company exists to satisfy a requirement for products from its customers. This demand pattern is also assumed to be one of the basic input data of the manufacturing system. Finally, the company may operate different working hours on different resources. The operating hours are another set of basic input data, of the same type as demand. All these input data can be categorised into either design choices (DCs). In designing/redesigning the system, the various design choices are changed to

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demonstrate different performance. The performance is measured by performance indicators (PIs). For reasons of simplification, and to reflect major different design objectives, it is convenient to consider the model from different views. In this context, three views have been selected: (1) Workflow view, defining and describing the workflow through the production system. (2) Resource view, defining and describing the human and physical resources in the system, and how these resources respond to different input and system designs. (3) Organisational/decision view, defining the decisions and decisionmaking structure in the total organisation of the manufacturing system. These views are integrated into a conceptual model, or more correctly a conceptual framework, that ties these fragmented theories together. The components of the FOF design reference model are depicted in Figure 8. The TOPP model describes an enterprise and its activities along four different dimensions: (1) System variables which are the design choices of the FOF model. (2) Functions which are described according to the value chain. (3) Cycles which are in reality processes. (4) Management philosophies. The functions along the value chain are classified according to Porter (1985) as primary and support functions. The TOPP model has been further developed for self-assessment purposes. It has then adopted a business process approach. The TOPP business processes are shown in Figure 9. The processes have according to Porter (1985) also been

PERFORMANCE INDICATORS (PI)

PRIMITIVE SYSTEM (UNIT MODEL)

INTERMEDIATEVARIABLE (IV)

CONSTRAINTS (RELATIONSHIP MODEL)

Figure 8. Components of a design reference model

DESIGN CHOICES (DC)

PRIMITIVE SYSTEM (UNIT MODEL)

TOPP BUSINESS PROCESSES

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PRIMARY PROCESSES

SUPPORT PROCESSES

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1. 2. 3. 4. 5. 6. 7. 8. 9. Sales and marketing Procurement Technological planning Design and engineering Production planning and control Production and assembly Distribution Order processing Invoicing and reimbursement 10. Strategic management 11. Financial management 12. Personnel administration 13. Information management 14. Maintenance 15 Internal control of health, environment, and safety 16. Continuous improvement 17. Market development 18. Product development 19. Technology development 20. Human resource development 21. Supplier development 22. Development of external relations

Figure 9. The TOPP business process

split into primary and support processes. In addition development processes have been added. The ENAPS model follows to a certain degree the same approach. It is based on a business model developed in the EU AMBITE project (Browne and Jackson, 1995). This model shows four business processes: (1) Customer service. (2) Obtaining customer commitment. (3) Order fulfilment. (4) Product development. In addition there are two secondary processes: (1) Support processes. (2) Evolution processes. Figure 10 shows the ENAPS generic framework with the six processes and the associated function. One function may belong to more than one process. Performance is measured at three levels of performance indicators: (1) Enterprise level. (2) Process level. (3) Function level. In total there are 117 indicators which fall under the following eight headings: (number of indicators in parentheses): (1) Accounts (13). (2) Product development (20). (3) Marketing and sales (22). (4) Planning and production (20).

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BUSINESS PROCESSES

SECONDARY PROCESSES

CUSTOMER SERVICE After sales-service Product take back OBTAINING CUSTOMER COMMITMENT Market development Marketing and sales Tendering ORDER FULFILMENT Distribution and outbound logistics Invoicing and payment Manufacturing and assembly Order processing Procurement and inbound logistics Production planning and control PRODUCT DEVELOPMENT

SUPPORT Maintenance Financial management Human resource management Information management Internal control health, environment, safety EVOLUTION Continuous business process improvement Development of external relations Human resource development Product research Production technology research Strategic planning Supplier base development

Figure 10. The ENAPS generic framework

Co-engineering Process engineering and design Product engineering and design Product research

(5) Customer service (8). (6) Purchasing (11). (7) Personnel (16). (8) Other (7).
References Bredrup, H. (1995), Performance Measurement in a Changing Competitive Industrial Environment: Breaking the Financial Paradigm, University of Trondheim. Browne, J. and Jackson, S. (1995), AMBITE: Advanced Manufacturing Business Implementation Tool for EUROPE, CIMRU, University of Galway. Dertouzos, M.L., Lester, R.K., Solow, R. M. and the MIT Commission on Industrial Productivity (1989), Made in America: Regaining the Productive Edge, The MIT Press, Cambridge, MA. Falster, P., Rolstads, A. and Wortmann, H. (1991), FOF Production Theory, WP2 Report: Design of a Conceptual Model, Trondheim.

Harrington, H.J. (1991), Business Process Improvement: The Breakthrough Strategy for Total Quality, Productivity and Competitiveness, McGraw-Hill, New York, NY. Hayes, R.H. and Wheelwright, S.C. (1984), Restoring Our Competitive Edge: Competing through Manufacturing, John Wiley & Sons, Boston, MA. Kosanke, K. (1991), The European approach for an open system architecture for CIM, Computing and Control Journal, Vol. 2 No. 3. Kurihara, T., Bunce, P. and Jordan, J. (1996), Next generation manufacturing systems in the IMS program, in Okino, Tamura, and Fujii (Eds), Advances in Production Management Systems, IFIP WG5.7, pp. 17-22. Marcotte, F. and FOF (1990), Organizational/Decisional View, FOF/GRAI/200. Moseng, B. and Bredrup, H. (1993), A methodology for industrial studies of productivity performance, Production Planning and Control, Vol. 4 No. 3. Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York, NY. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York, NY. Porter, M.E. (1990), The Competitive Advantages of Nations, Macmillan, London. Rolstads, A. (1995), The future role of IT, Business Technology International, pp. 6-9. Sink, D.S. (1985), Productivity Management: Planning, Measurement, and Evaluation, Control, and Improvement, John Wiley & Sons, New York, NY. Sink, S. and Tuttle, T. (1989), Planning and Measurement in your Organization of the Future, Industrial Engineering and Management Press, Norcross, GA. Strandhagen, J.O. and Rolstads, A. (1995), ENAPS A European Network for Advanced Productivity Studies, SINTEF, Trondheim.

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