AAOM Handbook

is not very obvious. Hence, overall business targets need to be dissected in a way that; • provides meaningful targets for each process within the business, and • will ensure that the collective targets optimise the overall business performance rather than individual processes. In answer to the above question about what do dividend targets mean to an internal process, dividends are related to the free cash flow generated by the business, and cash flow is related to the revenue generated by the output of the process and the cost of producing that output. The manager of an internal process may not have direct control over sales and pricing but will have influence over the production level and operating expenditures. Hence, the appropriate performance targets for this process manager may be defined as; • Effectiveness - quality product per unit of time. • Efficiency - recovery or yield on feed stock, unit operating costs, stockpile working capital to throughput. • Sustainability - feed stocks, safety and environmental performance, condition of fixed assets. Where there are independent processes their output and cost results can be added to define the connections between their performance targets and the performance targets at the overall business level - it is straight arithmetic. An example of this type of situation is a large mining business where there are mining and processing operations independently producing a single final product in different countries. The output and costs of the operation in one country are not determined by the other. Even parameters such as margin, cash flow and return on capital can be derived through bringing output, price, costs and capital invested into the series of calculations - although now it involves multiplication, division and subtraction as well as addition. Whether we are looking at setting targets or measuring results the arithmetic of the relationships will, in the case of independent processes, work. Unfortunately, real businesses and their processes are often not as simple as this. Complexity enters the picture where the processes that contribute to the outcome are not completely independent, i.e. the results of one process have an impact on the connected processes. This is very frequently the case. Take our mining example again, and consider a single operation within a country. In this case one that has several mines, from which ore is crushed and blended to a stockpile, and then fed into a single process plant. In this case we cannot just use arithmetic to determine the targets. We must also consider the logic that governs the flow of material (based on the capacities of mines, crushing facilities, stockpiles and the plant), as well as the quality and cost of the material being produced from each location. Regardless of which of the above situations we are dealing with, we need to construct a set of diagrams that accurately reflect the relationships and will support the development of a series of models that help us to understand how changing performance targets for one or more processes will change the performance targets for the business and vice versa. In the Operating Model this is done through the creation of a layered series of flow sheets that identify

© McAlear Management Consultants 2006

Operational Planning: Set Performance Targets

Updated: August 2018

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