Chapter 6: CMS Performance Measurement
Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
According to a footnote, most of this chapter was written by Lawrence J. Utzig of General Electric Company. Some additional material was provided by Tom Pryor who worked for Motorola before joining CAM-I as the Director of the CMS Project. Tom is currently President of Integrated Cost Management Systems (ICMS).
Performance measurements are a key factor in the successful implementation of a company's strategic plan. Performance measurements:
1. measure business and plant performance in relation to the
objectives of the business plan,
2. provide timely information for identifying and eliminating activities that add no value, and
3. provide timely information on causes of non-value activity that may lead to improvement.
Most non-value added activity is caused by factors such as functional layouts, long setups, unsynchronized flow, material shortages, quality checks, centralized stockrooms, scheduling-system problems, and measurement inefficiencies. Many traditional performance measurements do not encourage the elimination of non-value added activities. For example, measuring the efficiency of individual workers and foreman, and measuring machine utilization encourages unnecessary production. Inventory valuation methods encourage high inventory to absorb overhead costs and increase income. Material price variances may cause an emphasis on vendor pricing rather than quality. All this encourages sub-optimization for the plant.
The CAM-I Performance Measurement Hierarchy
The CAM-I CMS approach to performance measurement is based on a hierarchy that includes four levels of management as follows:
1. Market level,
2. Business level,
3. Plant level, and
4. Shop-floor level.
The performance measurement hierarchy along with some appropriate measurements for each management level are provided in the graphic illustration below.
Performance measurements should be adaptable to changes in business needs and should be prioritized according to the company's strategic success factors.
The steps required to eliminate non-value added activities include:
1. Understanding what drives these activities, and
2. Establishing performance measurements such as lead time, inventory, conversion cost, quality, schedule performance and machine hours per part.
Different performance measures are needed at different stages of a product's life cycle.
Traditional Performance Measures Inhibit Optimized Manufacturing
The following table is based on Table 6.3 (p. 170) and illustrates some of the problems caused by traditional performance measurements.
|Traditional Measurements and Their Effects*|
|Purchase Price||Purchasing increases order quantity to receive a lower price, ignoring quality and delivery||Excess inventory, increased carrying costs, vendor with best quality and delivery may be overlooked|
|Machine Utilization||Run machine in excess of unit requirements to maximize machine utilization||Excess inventory as well as the wrong inventory|
|Encourages high run quantity||Excess inventory|
|Scrap factor built
into standard costs
|Supervisor takes no action if there is no variance||Inflated standard, minimum scrap threshold build in|
|Supervisor overproduces WIP to obtain overhead absorption in excess of expenses||Excess inventory|
|Management, not total cost, controls the ratio||Indirect labor standards wrongly established; total cost not in control|
|Scrap dollars||Scrap dollars drive corrective action priority||Direct-level impact on flow hidden in dollars|
|Cost center reporting||Management focus is on cost centers, not activities||Opportunities to reduce costs are missed when common activities are overlooked|
|Labor reporting.||Focus is on direct labor, which is fixed and relatively small, instead of on overhead, which is variable and large||Missed cost reduction opportunities; major overhead activities are not exposed|
|Earned labor dollars||Supervisor maximizes earned labor, keeps workers busy||Excess inventory, schedule attainment receives lower priority; emphasis on output|
|Overhead rate||Management, not total cost, controls rate||Improperly established overhead levels; high cost activities are hidden|
|* Adapted from Table 6.3, p. 170. Original source: Tom Pryor.|
Key Performance Measures
Some measurements that are generally viewed as key performance indicators for advanced manufacturing include:
Total value-added versus non-value added time and cost,
Machine hours per part,
Plant, equipment and tooling reliability,
Broad management/worker involvement,
High value-added design, and
Steps to Implement a Performance Measurement System
1. Develop a hierarchical measurement system that links business, plant, and shop-floor performance.
2. Identify and quantify the company's cost and performance drivers.
3. Identify non-value-added activities.
4. Eliminate inhibiting measures.
5. Simplify the manufacturing process to minimize or eliminate non-value-added activities.
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