Zones: Company information
Zones is an overnight parcel delivery business. Since it was founded by the current CEO, it has grown rapidly due to a boom in online shopping. It now operates 1,000 delivery vehicles of various sizes. Recently, financial performance and market share have deteriorated. Zones has had no clear corporate vision, an excessive focus on financial objectives and inadequate systems to measure and manage performance of the underlying processes driving its financial performance.
Business model
Zones’ collection and delivery service uses delivery vehicles to transport parcels to and from local depots and individual addresses. Vehicles may also pick up parcels from the addresses to which they deliver. Each time the vehicle calls to pick up or deliver parcels is known as a stop, and the time of day for each stop is booked in advance. At the end of each day, vehicles, along with any parcels not delivered, return to the depot. Regardless of who pays for the service, Zones regards anyone to whom it delivers, or from whom it picks up parcels, as a customer. In the long term, the requirements of both of these groups for a competitively priced, reliable and flexible service will be similar.
Performance improvement proposals
The CEO believes that reductions in customer satisfaction and flexibility, caused by a decline in operational performance, may have led to the recent deterioration in financial performance and market share. It has been suggested that Zones use the Lynch and Cross performance pyramid (Appendix 1) to reverse this deterioration, and three new measures for operational performance have been suggested in Appendix 2. The CEO has stated that Zones’ corporate vision should be:
‘To increase shareholder wealth by becoming the leading overnight parcel delivery business, providing quality, reliability and value for customers.’
It is also proposed to use the DMAIC (define, measure, analyse, improve and control) method to implement the six sigma methodology to improve the quality of delivery. Two measures have been defined in Appendix 3 which may help improve Zones’ delivery performance.
Appendix 1
Lynch and Cross performance pyramid
Advise the CEO how the Lynch and Cross performance pyramid can help Zones achieve its corporate vision.
The performance pyramid covers not only financial performance but also performance relating to a wide range of underlying processes which drive financial performance. As such, it helps to set financial and non-financial performance measures, such as on-time stops. Non-financial measures are leading indicators which can help to achieve long-term future financial performance. This would be useful to Zones, which has had excessive focus on financial objectives and inadequate systems to measure and manage performance of the underlying processes driving financial performance. It is unclear exactly what the current financial objectives are.
The elements of the pyramid are interrelated, and each level in the pyramid supports the one above it. For example, on-time stops will increase customer satisfaction, which will eventually lead to greater market share, one element of the corporate vision.
Objectives cascade down the pyramid from the strategic to the operational level. The vision to increase shareholder wealth can be supported by financial objectives such as EVA™ at the level below. Measures flow up the pyramid, so that measurement of on-time stops can help determine whether Zones is achieving customer satisfaction.
The pyramid ensures that all aspects, both internal and external, of performance are measured. The right hand side of the pyramid covers internal efficiency, such as flexibility and productivity, while the left hand side covers external effectiveness, such as customer satisfaction. Using on-time stops again as an example, which relates to the quality (external effectiveness) element of the pyramid, will lead to improved performance up the left hand side of the pyramid.
Using the performance pyramid, evaluate the extent to which the suggested new measures in Appendix 2 can be used to measure and manage operational performance at Zones.
Operational performance is represented by the four elements at the bottom level of the performance pyramid, which are quality, delivery, cycle time and waste. It is unclear what quality means in the context of the corporate vision, though the measure of on-time stops could be interpreted as a measure of quality, which is valued by customers. There is no direct measure of cycle time, for example, the time taken between collecting a parcel and delivering it. Also, there is no direct measure for delivery, which in this context would be the amount of time needed to arrange a collection or delivery.
Vehicle utilisation
This is a good way to measure waste. The greater the utilisation of vehicle capacity, the lower the waste, for example, of vehicle running costs. In the long run, higher vehicle utilisation would mean the number of vehicles operated could be reduced for the same level of activity. This would lead to increased productivity and financial performance, so helping to achieve the corporate vision.
Vehicle utilisation will vary, according to location, time of year and type of vehicle used, and is also measured inconsistently, according to the type of vehicle. Vehicle utilisation may be too broad a measure, making it difficult to manage performance. Areas of poor performance may mask other areas of good performance. Similarly, measuring utilisation as an average between that at the beginning and end of each day may not actually represent the average utilisation during the day.
Fuel consumption
Reducing fuel consumption would lead to a significant increase in financial performance at Zones. Measuring average fuel consumption per kilometre travelled does not, however, relate directly to activity, for example, to the number of parcels delivered.
Average fuel consumption will vary between type of vehicle and between rural and urban areas. A large vehicle may have high fuel consumption per kilometre travelled, but will also carry a large number of parcels. Average fuel consumption per kilometre is not a good measure of waste, or any other aspect of operational performance. To be useful in managing operational performance, this measure should be changed to average fuel consumed per parcel delivered. In this case, this would be a suitable measure for waste.
On-time stops
Customers are likely to value on-time stops very highly, and along with value for money, this will be one of the main reasons they will choose to use Zones. This is reflected in the corporate vision. The proportion of on-time stops is a measure of operational performance which relates to the quality element of the performance pyramid and is a key driver of customer satisfaction.
Tutor note: Answers structured on the basis of the four operational elements of the pyramid would be acceptable.
Advise whether the two measures defined in Appendix 3 are suitable for use in the DMAIC method to implement the six sigma methodology in order to improve delivery performance.
The DMAIC acronym stands for define, measure, analyse, improve and control. These are the five phases by which the six sigma methodology is implemented. To be suitable for use in the DMAIC method, measures defined must have certain characteristics.
Percentage of stops made within 10 minutes of the booked time
According to the six sigma method, only those measures which are valued by the customer should be measured. On-time stops will be valued by customers, and contribute to customer satisfaction.
Currently, however, of all complaints which Zones receives from customers relating to stops not made on time, less than around 1 per million of these relate to those made within 30 minutes of the booked time. This level of complaints is so low that this would already achieve the very low number, 3·4 per million, of failures targeted by implementation of the six sigma methodology.
It seems that customers will not value stops made within 10 minutes of the booked time, any more than they would value those within 30 minutes. Another principle of six sigma methodology is not to measure what customers are already satisfied with. They are already satisfied with stops made within 30 minutes of the booked time.
The percentage of stops made within 10 minutes of the booked time is not a suitable measure. The time and costs of making the measurements will exceed the benefits of doing so.
Failed deliveries
Failed deliveries will represent a considerable cost to Zones in terms of wasted fuel and driver time. It may also reduce flexibility by using up vehicle capacity which could be used to carry more parcels. Even though deliveries may fail due to traffic congestion, they will still reduce customer satisfaction.
The percentage of failed deliveries is currently 5%, well above the target rate for failures under the six sigma methodology (which is better than 3·4 per million accuracy), and in this respect would be a suitable measure.
According to the six sigma method, only those measures which can be improved should be measured. Failed deliveries arising from customers being unavailable to take the delivery is completely out of Zones’ control. Deliveries failing due to incorrectly addressed parcels could be reduced to some extent, for example, by the use of information technology to check the correct address, but most failures due to this are outside Zones’ control. As failed deliveries cannot be significantly improved, this is not a suitable measure.