Operational performance objectives are the areas of operational performance that a company tries to improve, in a bid to meet its corporate strategy. After defining its corporate strategy, a company will identify the relevant operational performance objectives to measure and configure the environment, to enable the objectives to be accomplished. According to Andy Neely, author of the book “Business Performance Measurement: Unifying Theory and Integrating Practice,” there are five main operational performance objectives: speed, quality, costs, flexibility, and dependability
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There are many ways to measure the performance of a company so as to determine if it is doing well. The most common method is to look at its gross or net profit. This, however, isn’t always a reliable way to determine the performance of a company.
Let us consider the net income or loss of the company. This is determined by subtracting the operating expenses from the gross profit. The operating expenses consist of the selling expenses, the administrative expenses, and other miscellaneous expenses.
You may have a situation in which your net income is increasing, but so are the operating expenses; or, the gross profit stays the same, year in and year out, but the operating expenses steadily increase. These are both bad scenarios, and can easily be missed by focusing only on the gross and net incomes of a business. This is where operational performance comes in.
Performance Objectives
The five basic performance objectives are:
– Quality
– Speed
– Dependability
– Flexibility
– Cost
Internal & External Influences of Performance Objectives
Performance objectives have both internal and external influences. Internally, the cost is influenced by other performance objectives.
Running an organization’s operations requires a well-defined set of performance objectives.
There are five basic performance objectives that apply to all types of operations. They are: cost, dependability, flexibility, quality, and speed.
These five objectives have internal and external implications, which are usually matched. Each of the various performance objectives has several internal effects, but all of them affect cost.
1) Quality
Quality refers to consistent conformance to the customers’ expectations and has a major influence on their satisfaction or dissatisfaction.
Typically, quality is considered to measure how well a product conforms to certain specifications. It’s also how desirable the features of the product are; how reliable the product is; how durable it is; how easily it can be serviced; how well it performs its intended function; and, how much the customers believe in its value. All of these are relevant measures of quality.
The meaning of quality varies across businesses, as we can see from the four examples below (a hospital, a bus company, an automobile plant, and a supermarket).
- Quality exerts a major influence on customer satisfaction and, in some ways, it is the most visible part of what an organization does.
- When quality means consistency in product and service production, it makes life inside the company easier, reducing the need for re-work.
- Thus, quality can work for cost-reduction and increased dependability.
2) Speed
Speed means the elapsed time between customers requesting products or services and their receipt of them. The objective of speed measures how fast a company can deliver its products and generates sales quotes. This objective will be concerned with such issues as the time that it takes to manufacture and process one or more products of the company or the time that it takes to research a new product and develop it.
- The main benefit to the operation’s (external) customers of speedy delivery of goods / services is that the faster they can get the product or service, the more likely they are to buy it, the more they will pay for it, or the greater the benefit they receive.
- Within the operation, speed is also important. Fast response to external customers is greatly helped by speedy decision-making and speedy movement of materials and information inside the operation.
3) Dependability
Dependability means doing things on time for customers – exactly when they are needed or at least when they were promised. Customers might only judge the dependability of an operation after the product or service has been delivered.
This operational performance objective measures how dependable the company is when it comes to timely delivery of products to its customers, in accordance with planned prices and costs. The product’s ability to function in an intended way consistently over a reasonable period of time is also a measure of its dependability.
- Over time, dependability can override all other criteria. No matter how cheap or fast a bus service is, if it is constantly late (or unpredictably early) or the buses are always full, then potential passengers will be better off calling a taxi.
- Operations, where internal dependability is high, are more effective than those which are not, because dependability saves time, money, and gives stability to the operations.
4) Flexibility
Flexibility means being able to change what operations does, how it is doing it, or when it is doing it. Flexible operations are operations that can configure the product lines to deal with various requirements and to also adjust these product lines quickly to new requirements. The latter is also closely related to the speed objective.
A company should be able to produce different quality product varieties and also adapt its operations to suit different market conditions and delivery schedules.
Customers usually demand four types of operations flexibility:
- Product/service flexibility: introduce new or customized products and services
- Mix flexibility: a wide range or mix of products and services
- Volume flexibility: the ability to change the output level to produce different quantities of products and services over time
- Delivery flexibility: the ability to change the timing of delivery
5) Cost
The lower the cost of producing their goods and services, the lower can be the price to their customers. This objective looks at how much variation there is in the unit cost of a product as measured by changes in a variety of factors, including the volume and the variety of the products. Products that feature a greater variety tend to sport lower volumes and higher unit costs and vice versa. Ultimately, this affects the price of the product, the costs of producing it, and the profits to be obtained from that product.
- Even those companies which do not compete on price will be interested in keeping costs low. Every euro or dollar removed from an operation’s cost base is a further euro or dollar added to its profits.
- The ways in which operations management can influence cost will depend largely on where the operation costs are incurred.