key performance indicators to increase production

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By

Priscilia Tancongsonery 13110112

A thesis submitted to the Faculty of

BUSINESS ADMINISTRATION AND HUMANITIES

in partial fulfillment of the requirements for the

BACHELOR’S DEGREE in

INTERNATIONAL BUSINESS ADMINISTRATION

SWISS GERMAN UNIVERSITY EduTown BSD City

Tangerang 15339 Indonesia

Revision after Thesis Defense on 17^th July 2014

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Priscilia Tancongsonery STATEMENT BY THE AUTHOR

I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgement is made in the thesis.

Priscilia Tancongsonery

_____________________________________________

Student Date

Approved by:

Nila K. Hidayat, S.E., MM

_____________________________________________

Thesis Advisor Date

Dr. rer. nat Linus Pasasa

_____________________________________________

Thesis Co-Advisor Date

Prof. Eric Jos Nasution MBA, MA, PhD

_____________________________________________

Dean Date

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Priscilia Tancongsonery ABSTRACT

KEY PERFORMANCE INDICATORS TO INCREASE PRODUCTION PERFORMANCE: A CASE STUDY OF PT. CANGGIH PRESISI INDUSTRI

By

Priscilia Tancongsonery Nila K. Hidayat, S.E., MM, Advisor Dr. rer. nat Linus Pasasa, Co-Advisor

SWISS GERMAN UNIVERISTY

This purpose of this study is to analyze the current performance measurement system (PMS) and key performance indicators (KPIs) implemented in the Production department of PT. Canggih Presisi Industri and its implications towards production performance. This research is a mixture of quantitative and qualitative research and using both primary and secondary data, which were collected from the company internal reports and in-depth interview with the Head of Production Planning and Control of the company.

The current measurement system and KPIs were analyzed using the SCOR model, while the implications of KPIs towards production performance were analyzed using Structural Equation Modelling (SEM) to identigy the influential factors to production performance. Overall, this study uses time series data from January 2014 – March 2014.

Based on the results of this research, it was analyzed that the current PMS has only integrated one out of four Operational KPIs implemented in the department to

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Priscilia Tancongsonery measure production performance. It has also been indicated that out of those four KPIs, three has been found to be influential in affecting production performance with Rework Rate as the most significant factor that affects performance.

Keywords: SEM, KPI, SCOR Model, Production Performance, Performance Measurement System.

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Priscilia Tancongsonery DEDICATION

I dedicate this thesis for my parents, whose love and support sustained me throughout this journey and also to my late Grandfather, whose wish for me to graduate from

University encouraged me to finish this final work.

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Priscilia Tancongsonery ACKNOWLEDGEMENTS

First and foremost I would like to thank God whose blessings have brought me to where I am now. Secondly, I would like to thank my family, especially both my parents for their constant support and encouragement through the peaks and pits of this journey.

I would like to thank my advisor Mrs. Nila K. Hidayat, whose valuable opinions, patience, motivation and guidance have helped me tremendously throughout this entire process. Also to my co-advisor, Mr. Linus Pasasa for his great advice and knowledge inputs in processing data and analysis of this thesis.

To my friends Natasha and Shandy, who never stopped to motivate me and helped me to push on through when times get rough and have always been there to listen to all my rants and stories. To my close friends, classmates and Batch 2010 students of Swiss German University, for all their support help and all the time we shared together in overcoming difficulties that we encountered during this writing process.

Lastly, I would like to extent my gratitute to the staffs of PT. Canggih Presisi Industry, especially Mrs. Yen Yen for opening up the doors for this research and Mr.

Pujiyono for his time in sharing all the data and information about the company despite of his busy schedule.

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Priscilia Tancongsonery TABLE OF CONTENTS

STATEMENT BY THE AUTHOR ... 2

ABSTRACT ... 3

DEDICATION ... 6

ACKNOWLEDGEMENTS ... 7

LIST OF FIGURES ... 11

LIST OF TABLES ... 12

CHAPTER 1 – INTRODUCTION ... 13

1.1 Background ... 13

1.2 Limitation of Research ... 16

1.3 Research Problem ... 16

1.4 Research Questions ... 16

1.5 Research Objectives ... 16

1.6 Significance of Study ... 17

1.7 Thesis Structure ... 17

CHAPTER 2 - LITERATURE REVIEW ... 18

2.1 Key Performance Indicator in General ... 19

Key Performance Indicators (KPIs) ... 19

2.1.1 Importance of KPI ... 19

2.1.2 Seven Characteristics of KPI ... 20

2.1.3 2.2 KPI for Measuring Manufacturing / Production Performance ... 22

Benefits of KPI Application in Industrial Companies ... 22

2.2.1 2.3 Performance Measurement System ... 23

2.4 Supply Chain Operation Reference (SCOR) ... 24

SCOR Five Distinct Management Processes ... 24

2.4.1 SCOR Three Levels of Process Detail ... 26

2.4.2 2.5 KPIs Based on SCOR Model ... 27

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2.7 Study Differences ... 33

2.8 Research Model ... 34

2.9 Hypotheses ... 36

CHAPTER 3 – RESEARCH METHODS ... 37

3.1 Research Process ... 37

3.2 Type of Study ... 38

3.3 Types and Source of Data ... 38

3.4 Data Analysis ... 39

3.4.1 Statistical Approach ... 39

Hypothesis Testing ... 39

3.4.1.1 Coefficient Correlation ... 39

3.4.1.2 Path Diagram ... 40

3.4.1.3 Goodness of Fit Index (GFI) ... 41

3.4.1.4 Root Mean Squared Error of Approximation (RMSEA) ... 41

3.4.1.5 Comparative Fit Index (CFI) ... 41

3.4.1.6 3.4.2 SCOR Model Approach ... 41

Data Collection ... 41

3.4.2.1 Data Processing ... 42

3.4.2.2 Analysis and Conclusion ... 42

3.4.2.3 CHAPTER 4 – RESULTS AND DISCUSSIONS ... 43

4.1 Company Profile ... 43

4.1.1. Products ... 43

4.1.2. Organization Structure ... 44

4.2. Measuring Production Performance ... 45

4.2.1. Based on Current Performance System ... 45

4.2.2. Based on SCOR Model ... 49

4.2.2.1. Identifying Process and Performance Target Process in Production . 49 4.2.2.2. Identifying Operational KPIs in Production Department ... 51

4.2.2.3. Measuring Operational KPIs in Production Department ... 53

4.2.3. Comparison Analysis on Two Models ... 61

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4.3. Factors Influencing Performance ... 62

4.3.1 Path Diagram Analysis ... 62

4.3.1.1 Validity Testing ... 63

4.3.2 Analysis Path Diagram ... 65

4.3.3 Hypothesis Analysis ... 67

CHAPTER 5 – CONCLUSIONS AND RECOMMENDATIONS ... 72

5.1 Conclusions ... 72

5.2 Recommendations ... 74

GLOSSARY ... 77

REFERENCES ... 79

APPENDICES ... 82

Appendix 1 – In Depth Interview ... 82

Appendix 2 – Production Data Recapitulation ... 84

Appendix 3 – Company Full Range of Products ... 85

CURRICULUM VITAE ... 87

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Priscilia Tancongsonery LIST OF FIGURES

Figure 1.1 Quantity of Products Reworked ... 15

Figure 2.1 Research Model ... 34

Figure 3.1 Research Method ... 37

Figure 4.1 Organization Structure ... 44

Figure 4.2 Current Performance Measurement System ... 45

Figure 4.3 Current Production Process Flow ... 49

Figure 4.4 Path Diagram of AMOS Model ... 63

Figure 4.5 Path Coefficient of Performance ... 65

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Priscilia Tancongsonery LIST OF TABLES

Table 2.1 List of Strategic KPIs ... 28

Table 2.2 List of Operational KPIs ... 29

Table 2.3 Previous Studies ... 30

Table 2.4 List of Operational KPIs ... 35

Table 3.1 Rules of Thumb about Correlation Coefficient Size ... 40

Table 4.1 Production Report January – May 2014 ... 46

Table 4.2 Measurement Indicator Based on Current System ... 47

Table 4.3 Operational KPIs Based on SCOR Model ... 51

Table 4.4 Scoring Measurement Table ... 54

Table 4.5 Result of KPI Performance Measurement ... 55

Table 4.6 Production Planning Accuracy ... 56

Table 4.7 Rework Rate ... 58

Table 4.8 Return of Defective Products ... 59

Table 4.9 Comparison Analysis on Two Models ... 61

Table 4.10 Observed Variables ... 62

Table 4.11 CMIN Table ... 64

Table 4.12 RMSEA and GFI Table ... 64

Table 4.13 Standardized Regression Weights towards Performance of PT. Canggih Presisi Industri ... 66

Table 4.14 Coefficient Correlation of Production Planning and Performance ... 67

Table 4.15 Coefficient Correlation of Material Planning and Performance ... 68

Table 4.16 Coefficient Correlation of Product Rework and Performance ... 69

Table 4.17 Coefficient Correlation of Product Return and Performance ... 71