Performance Measures

Performance measurement is an integral part of management, at all levels of an organization. The difficulty is in selecting perfor­mance measures that satisfy most criteria, such as meaningful-ness, acceptance, reliability, ease of reporting, and consistency. Conventional performance measures are subject to several criti­cisms, including: they stress financial performance, not quality and customer service; they may not be consistent from top to bottom of an organization; they may be difficult to translate from global measures to local measures; and they may not be equally applicable to all parts of the organization, to name only a few. Key indicators solve most of the problems with conventional performance measures, and offer many advantages. This presen­tation defines what key indicators are and how they can be used at all levels of an organization in performance planning and measurement.

The issue of performance measurement is not new; managers have debated for some time the merits of evaluating and rewarding individual performance. What is new is the recognition that improved performance is necessary for the continued survival of many companies. Some advocate that "performance improvement is critical to the economic well-being of manufacturing compa­nies. "(1) If performance is to be improved, it must first be measured; however, developing measures that satisfy all of the concerned parties is a difficult task. Dixon, Nanni and Vollman state that "Existing measures must be replaced with new measures for the following reasons:

1. Dissatisfaction with traditional measurement systems is growing.

2. Measurement approaches must support ever-increasing excellence.

3. Managerial effectiveness is achieved by integrating strate­gies, actions, and measures.

4. A major failure of existing measurement systems is their inability to focus managerial attention on overhead cost and the deployment of overhead personnel." [1] Existing performance planning and measurement systems tradi­tionally have been part of the accounting system. This is changing as it becomes more apparent that separate performance planning and measurement systems will be more useful. The key indicator approach will help to begin this transition from limited financially-oriented systems to flexible operations-oriented systems.

Before we can act, we need to identify the problem we want to solve. The problems most often associated with our present performance measures include the following:

• They stress financial performance, not customer service and quality. Historically, financial measures were popular because they can be expressed in dollars, a universally used measure. The financial, or accounting, function is usually responsible for measuring performance; as a result, they use the measures most accessible to them and with which they are most familiar.

There may be inconsistencies between the measures used for setting objectives and planning, and the measures used for performance measurement. Some studies have found that companies may not use the same measures for performance evaluation as they do for setting objectives or planning. For example, they may establish goals for customer service and quality levels because of the competitive pressures; on the other hand, they continue to use already existing measures for deciding merit increases or bonuses.

The measures chosen may not be equally applicable for all levels of the organization. Ideally, performance measurement systems would provide aggregate measures for use at the top management level. Such measures usually involve financial measures that have meaning both internally and externally, such as return on investment. The system would then dis­aggregate these measures for use at each of the lower levels of the organization, with the lowest levels using physical units of measure that are specific. Integration of measures in this form is difficult and very few companies have been able to design such a comprehensive measurement system.

The measures may not be equally applicable across the organization. Sometimes, measures may be selected to be used across several similar entities, such as plants within a division, or departments within a plant. Suppose a measure of customer service, such as percent of orders shipped on time, is chosen. If several departments or plants use this measure, and the group includes make-to-stock as well as make-to-order environments, the level of what constitutes acceptable perfor­mance may vary. While it is possible to set different levels for each unit measured, companies should take care not to view them all as having the same service level requirement.

It may be difficult to obtain actual results that can be compared with the performance goals. A reason that com­panies continue to use some traditional measures, such as labor efficiency, machine utilization, and even percentage of defects, is because they are easy to measure. On the other hand, some newer performance objectives that involve cus­tomer satisfaction or worker involvement or empowerment, are more difficult to measure and we have not yet developed universally accepted measures that can be routinely generated by our measurement systems. As a result, we may attempt to use surrogate measures that often are not acceptable substi­tutes.

Performance measurement systems may lack flexibility, making it difficult to change the measures used. It takes a long time to design comprehensive information systems. If these systems are to provide the performance measures, they may be difficult to change. Certainly, companies will tend to use the results because of the investment in the system and will tend to discourage the growth of "unauthorized" reports. Many companies have not yet resolved the issue of information system flexibility.

To Be Continued

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