PERFORMANCE MEASURES

"We want to change the competitive landscape by being not just better than our competitors, but by taking quality to a whole new level. Jack Welch

Performance measures should aim at the longterm and should be forward-thinking initiative designed to fundamentally change the way corporations do business. It is not a postmortem of what happened but a step towards how we do better in the future.

 When you can measure what you are speaking about and express it in numbers, you know something about it. - Kelvin You cannot manage what you cannot measure. - Anon

Why required?
Performance measures (PM) are required by managers for managing an organization effectively and efficiently PM play a very important part in success or failure of an organization

Objectives of Performance Measures

1. 2. 3. 4. 5. To establish baseline measures and reveal trend To identify the processes to be improved To determine the process gains and losses To compare goals with actual performance To provide information for individual and team evaluation 6. To provide information for making proper decisions 7. To determine overall performance of the organization

Why do performance measures fail?

Root cause: complexity - details, details, details Staff who collect data get frustrated

Performance Measures Criteria

1. Simple
simple to understand simple to use Ex: If a sales person spends too much time on call reporting, they have less time for making calls.

2. Few in number
Important Easy to concentrate

3. Developed by user
Ownership but sometimes mandated by customer

Performance Measures Criteria

4. Relevance to customer
Internal and external customer needs

5. Promote improvement
Not to identify poor performance Focus on improvement, prevention, strategic long term planning and goal setting

6. Cost
Should be low

7. Visible
Displayed where every employee can see

Performance Measures Criteria

8. Timely
Should be lead indicators not lag indicators

9. Aligned
Tied to customer and organizational performance

10. Results
Key result measures guided and balanced by the interests of all stakeholders

Let us now examine how real world firms measure performance and we will, later, find out whether these measures conform to the concepts we just discussed

Most organization measure performance using accounting measures Net profits, gross margin, ROA, ROE, etc.

Why do organizations choose accounting data as measures of performance? Accounting profits and returns can be measured on a timely basis relatively precisely and objectively Because they are timely, precise, and objective, employees would react positively The short term measures keep employees on check

Why accounting measures of performance are not adequate? Accounting measures are lagged indicators Dependent on the choice of measurement method

Accounting can create management myopia Accounting is short term earnings or returns. Why focusing on the short term is inappropriate? Why would this short-term focus affect long-term relationships?

The Changing Business Environment

Are historical accounting measures adequate for todays business environment that transcend global boundaries?

Performance Measurements for the new era In the global, technology-driven, decentralized environment, measuring Financial performance, while important, is not adequate. Even if less than precise, other measures of performance are required These measures should be capable of measuring multiple attributes of an organization

We need a balanced set of Performance Measures We need both lead and lag indicators

Lead indicators as value drivers

Many non-financial indicators can serve as lead indicators in certain settings. Common examples are:
Market share, backlog (book-to-bill ratio), new product introductions, new product development lead times, product quality, customer satisfaction, employee morale, personnel development, inventory turnover, bad debt ratio, or safety

Lag Indicators
In contrast to lead indicators, lag indicators are measures that point to earlier plans and their execution. Financial performances are lag indicators. Many times, financial performances are too late to affect future products and services. Therefore, we need multiple measures that include both financial and non-financial measures.

Comprehensive Performance Measures must address 1. 2. 3. 4. 5. 6. 7. 8. Financial Performance Customer Satisfaction Human Resource Production Research & Development Suppliers Marketing/ Sales Administration

Financial Performance Measures

ROA ROE EPS Net Profit Gross Margin Sales

Customer-related measures
No of complaints No. of on-time deliveries Warranty data such as
Parts replacement Time to resolve complaints

Customer satisfaction index Telephone data such - Response time Mean time to repair Dealer satisfaction

Human Resources Measures

Absenteeism Turnover Employee satisfaction index No. of suggestions No. of training hours per employee Training cost per employee No. of active teams No. of grievances

Production Measures
Inventory SPC Charts Amount of scrap / rework Machine down time Nonconformities per million No. of products returned Process yield Cost per unit

Research & Development Measures

New products developed Design change orders R & D spending to sales Recall data Average time to process proposals Cost estimating errors

Supplier Measures
On-time delivery Service rating Quality performance Billing accuracy Average lead time Percent of supplies that are error free Just-in-time delivery

Marketing/ Sales Measures

Sales expense to revenue Order accuracy New product sales to total sales. New customers Gained or lost accounts Sales income to number of sales people No. of successful calls per week

Administration Measures
Revenue per employee Purchase order error Billing accuracy Percent of payroll distributed on time Cost of poor quality No. of days accounts receivables past due No. of days accounts payable past due Office equipment up-time

Performance Measure Representation

Time series graph Control charts Taguchis loss function Cost of quality