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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 meaningfulness, acceptability, reliabil­ity, reportability, and consistency. Conventional perfor­mance measures are subject to several criticisms, including that 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 because (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; and (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.


The problems most often associated with our present performance measures include the following:

1.      They stress financial performance, not customer ser­
vice and quality. Historically, financial measures were
popular because they could be expressed in dollars, a
universally used measure. The financial, or account­
ing, function is usually responsible for measuring per­
formance; as a result, they use the measures most
acceptable to them and with which they are most fa­

2.      There may be inconsistencies between the measures
used for setting objectives and planning, and the mea­
sures used
for performance measurement. Some stud­
ies 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 lev­
els because of the competitive pressures; on the other
hand, they continue to use already existing measures
for deciding merit increases or bonuses.

3.      The measures chosen may not be equally applicable
to all levels of the organization. Ideally, performance
measurement systems would provide aggregate mea­
sures for use at the top management level. Such mea­
sures usually involve financial measures that have
meaning both internally and externally, such as re­
turn on investment. The system would then disag­
gregate these measures for use at each of the lower
levels of the organization, with the lowest levels us­
ing physical units of measure that are specific. Inte­
gration of measures in this form is difficult and very
few companies have been able to design such a com­
prehensive measurement system.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 12


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