Support Continuous Improvement with Value Stream Management and Operational Intelligence
Companies, organizations and government agencies are all seeking to improve their customer value, efficiency and effectiveness. While there are many approaches to improving performance, it is the combination of management perspective, an appropriate improvement methodology and visibility into and the ability to analyze relevant measures of performance that will yield best results.
This paper outlines the use of Key Performance Indicators (KPI metrics) together with associated Key Performance Drivers (KPD metrics) within the context of value stream management to support continuous operational performance improvement.
Of course, any improvement must start with behavioral change and alignment of management and operational decision makers. Rather than managing the business in functional silos, value stream management looks at the value created across functional areas to support a particular business outcome. This is fundamental to ensuring the entire business process is optimized. This is the first of a multi-step process as outlined below:
- Identify and map the customer value stream and identify the major segments.
- Determine the most appropriate Key Performance Indicators (KPIs) and the Key Performance Drivers (KPDs) that affect those outcomes for each major segment within the value stream.
- Ensure that the KPI objectives are aligned across functions and individual roles.
- Monitor and analyze KPI and KPD metrics in right-time to support operational decisions.
- Share knowledge as it is gained in the course of analyzing operational performance.
- Review and refine the value stream map, the KPI and KPD metrics and the alignment of these metrics across functions and roles.
The remainder of this paper outlines a performance improvement model and uses a sample value stream to demonstrate the process of breaking it into segments and identifying appropriate performance metrics. It goes on to illustrate how an interactive dashboard can be used to visualize and understand operational performance and to analyze the root cause of a performance issue.
In today’s competitive environment, organizations, regardless of industry – manufacturing, metals and mining, energy, financial services and hospital management – are focused on two key objectives: delivering value to customers and profitability.
However, these objectives are, more often than not, disparate goals that are not aligned across departments, plants or enterprise boundaries. Disconnected, outdated methods of reporting and inconsistent metrics make it nearly impossible for today’s businesses to get a holistic view of company performance drivers. Information is often available only after the fact and lacks contextual knowledge, which leads to poor decision making.
This paper examines an approach to improving operational performance by delivering timely, relevant performance information within the context of the value being created and delivered to customers.
Operational Performance Management, also referred to as Business Performance Management (BPM), Corporate Performance Management (CPM) and Enterprise Performance Management (EPM), is the combination of a set of processes and an improvement methodology that together help organizations optimize their business performance. It is a framework for organizing, automating and analyzing business methodologies, metrics, processes and systems that drive business performance.
Value Stream Management utilizes lean process methodology to link the metrics and reporting required by managers with the people and tools needed to achieve desired results. With consistent data in the context of a value stream, organizations can deliver optimized performance and efficiency, predictable customer value and accurate cost and profitability management.
Operational Intelligence provides near-real-time (or right-time) metric information on business processes, activities and outcomes to support operational decision making.
Key Performance Indicators (KPI) provide the most relevant financial and non-financial measurements used to help an organization define and measure progress toward organizational goals. These tend to be outcome oriented and to be most useful, there should be a small number of KPIs (less than 10) associated with any one aspect of business performance.
Key Performance Drivers (KPD) are the leading indicators that affect the achieved KPI results. While KPIs tend to relate to outcomes, KPDs tend to relate more to activities and there is a cause and effect relationship between KPDs and KPIs.
3. A Performance Improvement Model
As illustrated above, there are three primary aspects to any improvement model:
- The Management Perspective;
- The Improvement Methodology; and
- The Measurement Philosophy.
Traditional approaches have used outcome measures – revenue, profitability, production quantity, etc typically represented as Key Performance Indicators (KPIs). While these are important indicators of business success, they are not in themselves actionable. To be able to affect these outcomes, we really need to identify and measure the performance drivers (KPDs) – things like sales win rates, cost of goods sold (COGS), discount percentages, equipment availability, etc. These can be monitored and actions taken to improve each measure.
Similarly many organizations are still managed in functional silos. Actions taken within one silo to improve effectiveness or efficiency might have a negative impact on another silo or a detrimental effect on the overall business process or value stream. By examining an entire value stream across all functional areas that contribute to the value created, we can ensure we’re optimizing the desired outcome rather than optimizing individual piece-parts of the process.
Finally, the improvement methodology should be one of continuous improvement. In any process or system, there is always a bottleneck that limits performance. As soon as we optimize around one bottleneck, another performance limitation will be identified. Continuous improvement is therefore mandatory if we are to ensure that we are delivering optimal performance.
The value stream starts with the initial contact with a prospective customer, continues through the sales
cycle to the customer placing an order, and completes when payment is received from a customer
following the customer’s receipt of the ordered goods.
In order to simplify this value stream model, we can divide it into segments and each will have specific
KPIs and KPDs associated with each significant step:
1. Contact to sales order:
Metrics include leads (number, cost); qualification (lead conversion ratio); quote (gross margin,
average discount); closing (win/loss ratio, time to close/sales cycle.)
2. Order fulfillment:
Order to delivery performance data includes metrics related to customer orders (number of new or open orders, number or orders with errors); distribution center and shipments (number of orders ready to pick, number of orders shipped on time or shipped complete); transport (number of order lines shipped by air vs. ground); customer satisfaction (number of units returned due to error or reject.)
3. Invoice to cash:
Metrics include number and value of invoices created, sent and disputed; as well as cash received or AR days outstanding.
Includes metrics related to POs (cost per unit); supplier (on time in full delivery, reject rate); transport (delivery time, freight costs); parts warehouse (inventory value, inventory days/turns.)
Includes metrics related to production plan (planned utilization or cost per unit); production (material handling time, changeover time); assembly (OEE); distribution center (inventory value, inventory days/turns.)
6. Concept to launch:
Product development metrics relate to concept (market opportunity, projected ROI); design (project unit costs); prototype (revised unit cost); marketing (revised opportunity size, projected gross margin, revised ROI.)
4. Understanding and Analyzing Operational Performance
Capturing base metrics and calculating the KPIs is a necessary starting point for understanding business performance. Understanding cause and effect, and hence identifying and capturing KPDs is the next step in providing the information required to understand, analyze and improve operational performance. The KPIs and KPDs must then be presented to decision makers in the most appropriate, timely and relevant manner.
A typical approach to presenting this information is the use of Role-based Business Intelligence (BI), which presents information tailored to each person’s role and scope of authority. While this is helpful for providing visibility into specific performance metrics, it is not sufficient in today’s disperse business environment. Role-based information is only effective if performance information is presented within the context of a value stream, or the individual value stream segments as outlined above.
Without this perspective, it is too easy to fall into the trap of functional silos of information, and while each person will optimize their area of responsibility to meet their objectives, the overall effectiveness of the organization, operation or value stream can be sub-optimal.
Looking at unrelated individual metrics in isolation, or metrics based solely on a knowledge worker’s role, is ineffective. Metrics within each of the above value stream segments have implications across different areas, making it a necessity for companies to have operational intelligence solutions that provide the appropriate context.
myDIALS is leading a new breed of operational intelligence solutions, or performance management platforms, to extend the benefits of traditional BI beyond the availability of massive amounts of potentially irrelevant data and beyond metrics and analytics that are solely role-based.
These new tools combine both financial and operations metrics, and deliver them to users in context. Additionally, these new operational BI tools are delivered as Software-as-a-Service (SaaS), a web-based model which makes it easier for decision makers to securely combine information across traditional functional and enterprise boundaries and share consistent metrics that span the various value stream segments and associated roles. Combined with intuitive, interactive visualization and analysis, this empowers decision makers, enabling them to make better decisions within the context of improving profitability and delivering value to customers.
Metrics that span multiple value streams, and that are delivered in context, eliminate conflicts of interest across different roles, and across different aspects or process steps within a value stream.
It is important to ensure consistency of targets for KPIs and KPDs. Typically, every employee or department will have their own set of goals, depending on how they’re incented. In order to achieve alignment, organizations need to assign targets and link metrics across functional areas, roles and the overall value stream. This will address the challenge of managing to silos of KPIs and ultimately increase efficiencies and maximize profits.
When it comes to improving performance within a value stream context, it is critical to look at the intersection points of the different segments of the value stream and ensure that multiple people aren’t managing to conflicting KPIs.
The information presentation should be intuitive, interactive and provide context and embedded knowledge to ensure consistency of behavior and actions. Ideally accessible from wherever the decision maker is located, web-based applications lend themselves to providing relevant information where and when it is required.
The following screen shots provide some insight into how information can be presented logically; the ability to drill into the information to get more detail or identify the cause of issues; and the ability to access clarifying information as well as suggested diagnosis and actions.
View authorized information in a very intuitive, interactive dashboard:
Drill into the information for more detail or identify the cause of issues:
Obtain contextual information, definitions and guidance:
5. The Role of Performance Improvement Methodologies
There are a number of performance improvement methodologies such as lean process, six sigma, total quality management and theory of constraints which can be used to improve operational performance. In all of these cases, having appropriate KPI and KPD metrics are necessary to establish baselines, identify opportunity areas for improvement and track progress toward goals.
These methodologies can be combined with value stream mapping and management to ensure performance across the complete value stream (or segment) is improved. Focusing on one specific process step in the value stream and optimizing that step in isolation might cause issues in other areas of the value stream.
More importantly perhaps, is sustaining the improvements achieved using these methodologies. Using an operational intelligence system ensures decision makers continue to monitor the most important KPIs and KPDs; understand the implications of not achieving targets; quickly identify issues; and analyze the information to determine causes. Embedding knowledge within the system also helps improve the quality and consistency of decision making.
Operational performance can be improved using a combination of value stream management and operational intelligence. This ensures that maximum value is delivered to customers while optimizing the effectiveness and efficiency of the business processes hence improving profitability.
Below is an outline of the steps that can be used to implement such a performance improvement initiative:
- Identify and map the complete customer value stream.
- Simplify the metrics map by identifying the various segments of the overall value stream that are related to a specific customer process, product or internal business process.
- Determine the most appropriate KPIs for each major step within the value stream segments – these can be identified in support of performance improvement methodologies such as lean / six sigma etc.
- Look across the value stream to identify potential conflicts and synergies between KPIs, and group these KPIs so they can be reviewed in combination.
- Assign KPIs to individual roles using the KPI groupings above.
- Where possible, link the KPI objectives across individual roles to ensure alignment.
- Continuously monitor and analyze KPIs on a right-time basis to ensure effective operational decisions.
- Review the appropriateness of KPI objectives looking for cause and effect relationships.
- Modify KPIs, objectives and their assignment to roles based on this review and actual results achieved.
- During the regular corporate planning exercise start at number 1 with a review of the overall customer value stream.
myDIALS is pioneering a new industry standard in operational performance management with real-time KPI visualization that combines operations and business performance metrics. Offering unparalleled usability for decision makers, the hosted software solution extracts real-time metrics and calculates KPIs and associated KPDs across all business roles, processes and value streams.
In conjunction with its partner ecosystem, myDIALS delivers embedded vertical industry and value stream expertise, as well as improvement methodologies and guided diagnosis to help customers gain a deeper understanding of the factors that fuel their business. With myDIALS, companies can quickly resolve operational issues and capitalize on opportunities, while maximizing the value of their existing environment.
myDIALS is headquartered in Lafayette Colorado, with offices in Houston Texas, Oak Brook Illinois, Brisbane Australia and Perth Australia.
Visit www.mydials.com for more information.