Performance Measurement & Management Flashcards

A company uses Economic Value Added (EVA) as a performance metric. EVA is calculated as:

Answer: Net operating profit after tax minus the cost of capital employed

EVA = NOPAT − (Capital Employed × WACC), measuring the value created above the minimum required return for investors, linking operational performance to shareholder value.

Which practice best ensures that performance metrics remain relevant as organizational strategy evolves?

Answer: Conducting periodic metric reviews aligned with strategic planning cycles

Periodic reviews—typically annual or aligned with strategy refresh cycles—ensure KPIs continue to reflect current strategic priorities rather than obsolete objectives.

In a manufacturing context, what does 'process capability index (Cpk)' measure?

Answer: How well a process produces output within specification limits, accounting for process centering

Cpk measures both the spread of process variation and how well the process is centered within specification limits, with higher values indicating greater capability.

An operations manager wants to identify which few problems are causing the majority of customer complaints. The most appropriate tool is:

Answer: Pareto chart

A Pareto chart ranks problems by frequency or impact, visually applying the 80/20 principle to identify the vital few issues driving the majority of defects or complaints.

A performance dashboard shows a metric as 'favorable' when actual cost is below budget. If this rule is applied to quality inspection costs, what misinterpretation could result?

Answer: Underspending on inspection could be mistakenly celebrated when it actually signals under-inspection

For prevention and appraisal costs, spending below budget may indicate inadequate quality investment rather than efficiency, requiring context-aware interpretation of 'favorable' variances.

Which characteristic distinguishes a 'result indicator' from a 'performance indicator' in KPI design?

Answer: Result indicators measure outcomes of multiple activities combined; performance indicators measure what is done

Result indicators summarize the output of many activities (e.g., monthly revenue), while performance indicators reflect specific activities or inputs that drive those results.

A supply chain team achieves 100% of its individual departmental KPIs, yet the end-to-end supply chain performance is poor. This scenario best illustrates:

Answer: Local optimization that fails to achieve systemic (end-to-end) performance

When each silo optimizes its own metrics without regard for system-wide flow, the overall process suffers—a classic manifestation of local optima conflicting with global performance.