PERFORMANCE MEASURE

"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 long-term and
should be forward-thinking initiative designed to
fundamentally change the way corporations do business.
It is not a post-mortem of what happened but a step
towards how we do better in the future.

Why measure performance?
Objectives for-profitable organizations:
– Measure changes to stakeholders wealth; put in
simple terms, the value of a firm.
– Reward an employee for contributing to increase in
firm value
Issue: How would a firm measure an individual’s
contribution to value creation and what purpose
does it serve?

The value concept
(Results control)
• The performance measurement concept
indicates that employees can increase the
value of the firm by
– Increasing the size of a firm’s future cash flows,
– By accelerating the receipt of those cash flows, or
– By making them more certain or less risky.
If you are a CEO or CFO, how would you
increase the cash flows?

Measure the right things
• An ideal performance management system is
one that energizes the people in an organization
to focus effort on
• Improving things that really matter –
• One that gives people the information and
freedom that they need to realize
• Their potential within their own roles and that
aligns their contribution with the success of the
enterprise.

Then, why do performance measures
fail?
• Root cause: complexity - details, details,
details
• Staff who collect data get frustrated.
• Follow: What has to be done" (WHTBD).

Measure What Matters
• Easy to say but difficult to do.
• Find out what is valued both by customers and
stakeholders
• Examples: process: new product
• development, measure: time to market.
• process: customer service, measure: customer
retention.
process: treasury management, measure: cost
of service vs. value created.

Keep it simple
• Performance Measures must be
• • simple to operate
• simple to understand
• • simple to action
• Ex: If a sales person spends too much
time on call reporting, they have less time
for making calls.

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
today’s 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. Financial performance
2. Customer satisfaction
3. Internal business process developments
and
4. Allow an organization to learn and
grow.

Financial Performance can be
measured by
•ROA ROE, EPS etc. These measure are
essential to summarize the economic
consequences of strategy.

Customer-related measures
• Managers must identify the customer and
market segments in which the business
desires to compete.
• Develop measures to track the business
unit’s ability to create satisfied and loyal
customers.

Customer-based measures
Customer
Satisfaction
Customer Retention
Customer Loyalty Product and Service
Attributes
Image and
Reputation

Internal Business Process Measures
Identify the critical internal processes for
which the organization must excel in
implementing its strategy.
• IBP dimension enable the business unit to
– deliver the value propositions that will attract and
retain customers in targeted market segments, and
– satisfy shareholder expectations regarding financial
returns.

Internal Business Process Measures
Innovation
processes
Operation Processes
Quality Measures Cycle Time
Measures
Cost Measures

Learning and Growth measures
• Learning and growth identifies the
infrastructure an organization must
build to create long-term growth and
improvement.
• Growth comes from: people, systems
and organizational procedures.

A performance concept that combines
everything that we discusses so far is
Six Sigma

The Six Sigma
• Is “a business process that enables companies
to increase profits dramatically by streamlining
operations, improving quality, and eliminating
defects or mistakes in everything a company
does. “
• The objective is change the process so that
defects are never produced in the first place.

The objectives of Six Sigma
• To ‘satisfy the customer’ by changing
internal performance and processes.
• To enable better performance by better
design
• To improve the ‘quality’ of supplies and
other operational processes.
• Manage the costs

Six Sigma points out
• You don't know what you don't know
You can't do what you don't know
• You don't know until you measure
• You don't measure what you don't value
• You don't value what you don't measure

Difference between TQM and Six Sigma
• TQM focuses on improvement in
individual operations with unrelated
processes; takes many years before all
operations within a given process are
improved.
• Six Sigma focuses on making
improvements in all operations within a
process, producing results more rapidly
and effectively.

Malcolm Baldrige National Quality Award
• Key Characteristics of the criteria:
 1.Customer satisfaction/retention.
 2. Market share, new market development.
 Product and service quality.
 Productivity, operational effectiveness, and
responsiveness.
 Human resource performance/development.
 Supplier performance/development.
 Public responsibility/corporate citizenship

LOGISTICS
AUDIT

Logistics Audit
• A Logistics audit is an unbiased assessment
by an independent party of all aspects of a
client's supply chain system, including
supplier and customer relations, planning
procedures, document flow, logistics
infrastructure, quality control and
correspondence of logistics costs to local
market conditions.

• In-depth experience and knowledge of best
practices help auditors to identify problem
areas, potential areas for improvement, and
opportunities for the application of advanced
technologies. A logistics audit analysis is
provided in a manner consistent with the way
CFOs and other corporate executives make
investment decisions.

Logistics audit unlocks hidden
logistics value
• Logistics audit uncovers hidden sources of
logistics value and develops a plan for an
optimal logistics function by improving
operational efficiency through better logistics
system management including integration and
close coordination of the supply chain
components.

• In reality the hidden costs in logistics of many
companies, approach millions of dollars,
which, when unlocked, can bring profit, the
rise of the stock capital and the growth of the
market share. Those companies, less in size,
may have similar or even greater possibilities
in relative (per cent) indicators.

• Regular logistics audit results in the
unlocking of the costs reduction possibility
and simultaneously logistic system efficiency.

Logistics Audit Procedure
• As logistics systems differ from company to
company, Logistics Field Audit develops
individual programs of the audit. LFA can be
concentrated on any type of distribution and
warehouse management, workforce
management, resources and transportation
management, control over supply chain,
logistics function management, logistics
scorecarding and analytics, or may study
whole operations system within supply chain

The typical logistics audit procedure:
1. Preliminary observation of company’s operations
2.Positioning supply chain strategies to corporate
objectives
3.Negotiation on the LFA Service Agreement and
involvement of logistics-auditors within the
supply chain management process
4. Logistics Field Audit process
5. LFA reporting
6. Implementation
7. Post-implementation audit

Preliminary observation of company’s
operations
• Logisticians – auditors spend few days in a
company studying operational functioning and
interviewing responsible personnel in the
frames of prior signed Confidentiality
Agreement. The preliminary research and
interviews, combined with the profound
knowledge of the auditors, help to make a
proposal for providing Logistics Field Audit,
and prepare a draft agreement.

Positioning supply chain strategies to
corporate objectives
2.1 The LFA Expert's goal is to tie logistics strategies
and initiatives to specific corporate objectives,
then define the operational metrics that need to
be improved to achieve both supply chain goals
and support these high-level objectives.
2.2. Relating of the Companies logistics
requirements to the preferences of the
company’s customers

3.Positioning of supply chain management within
the company’s structure, review of relationships
between interrelated departments
4.Quantification of key logistics sources across
operational areas (distribution centers,
transportation management, productivity
management, global supply chain visibility and
logistics integration)
5.Where necessary, developing proposals for
involving logistics-auditors within the company’s
supply chain management process

Logistics Field Audit process
1.Managing operations (any combination of
warehouse and distribution management,
labor and resource management,
transportation, supply chain visibility,
logistics command and control, or the entire
Supply Chain execution function.)
2.Key metrics on current operations and
performance are collected or derived during
data collection.
3. Development of relevant information
systems (KPI’s), its implementation
and methodology for data collection.

• 4.4. Structuring relationships between
interrelated departments.
5.An analysis of current operations and
potential process improvements.
6.Detailed analysis of the key sources of hidden
logistics value that can be unlocked through
process and technology change .
7.A comparison of current practices against
potential levels of performance and results across
a broad spectrum of key logistics system
attributes.

LFA reporting
1. LFA analysis and conclusions.
2.Maintain result-focused technology
deployment.
3.Planning of significant improvements of
supply chain management.

• Logistics Field Audit methodology is an
effective management tool, widely used by
the leading companies in the world. It
ensures significant cut of time period
between gaining objective assessment of
company’s logistic system functioning,
developing of recommendations, introducing
innovations. It is all achieved via involvement
of auditors into the supply chain
management process.

• Total logistics costs
• Total logistics costs consider the whole range of costs associated with logistics,
including transport and warehousing costs and inventory carrying, administration,
and order processing costs. Administration and order processing costs are
relative to the total volume being handled. However, for the same volume being
handled, transport and warehousing costs will vary according to the adopted
distribution strategies. The above graph portrays a simple relationship between
total logistics costs and two important cost components; transport and
warehousing.
• Based upon the growth in the shipment size (economies of scale) or the number
of warehouses (lower distances), a balancing act takes place between transport
costs and warehousing (inventory carrying) costs. There is a cutting point
representing the lowest total logistics costs, implying an optimal shipment size or
number of warehouses for a specific freight distribution system. Finding such a
balance is a common goal in logistical operations. It depends on numerous
factors, such as if the good is perishable, the required lead time, and the market
density.

LOGISTICS COST
•Logistics costs refers to all of the expenses you accumulate when moving products, which includes
sourcing raw materials, delivering orders to customers, and every step in between of the full process.
What Makes Up Logistics Costs? Logistics costs throughout the supply chain are paid to a lot of
different factors, these can include;

Cost – Identification
• All costs associated with the performance of logistics function should be in the
activity- based classification. The total cost associated with fore casting and
order management, transportation, inventory, warehousing, packaging must be
isolated. Typical logistics costs can be categorized under two headings – direct
and indirect costs, cost of capital and overheads.
• a) Direct Costs:
• These costs are those expenses specifically caused by the performance of
logistics work. Such costs are difficult to identify. For example, the
transportation costs for an individual truckload order can be directly attributed to
a specific order. Likewise only minor difficulty is experienced in isolating the
direct administration cost of logistical operations.
•

b) Indirect Costs:
These are more difficult to isolate. For example, the cost of capital invested in
real estate, transportation equipment, and inventory- just a few of the areas
within the capital structure of logistics- must be identified to arrive at a
comprehensive total cost. The manner by which total costs are attributed to
logistics activities are determined by managerial judgments. One approach is to
allocate the overhead cost on the basis of the average cost per unit.
c) Cost of Capital :
Capital investment Expenses for logistical activities are relevant to logistical
activity- based costs. Cost of such capital also needs to be included in your
logistical cost.
d) Overhead
An enterprise incurs considerable expenses on behalf of all organizational
units, such as for light and heat in various facilities. Judgement is required to
determine how and to what extent various types of overhead should be
allocated to specific activities. One method is to directly assign total corporate
overhead on a uniform basis to all operational units. At the other extreme, some
firms withhold all overhead allocations to avoid distorting the ability to measure
direct and indirect logistical activity- based costs.

Cost Time Frame
A basic concern in logistical activity-based costing is to identify the period of time over
which costs are accumulated for measurement. Accounting principles call for accrual
methods to relate revenues and expenditure to the actual time period during which
services are performed. Expenses associated to raw material procurement through finished
product distribution and almost all other logistical operating costs are incurred in
anticipation of future transactions, making accrual methods difficult to administer.
To overcome the time problem, accountants attempt to break costs into 2 groups- costs
assigned to a specific product and costs associated with the passage of time. Using this
classification an attempt is made to match the appropriate product and time period costs
to specific periods of revenue generation. From a logistical perspective, a great many of the
expenses associated with procurement and manufacturing support can be assigned and
absorbed into direct product cost.
In situations where a considerable period of time elapses between production and sales,
such as in highly seasonal businesses, significant costs of maintaining inventory and
performing logistical operations may not be associated with revenue generation.

• The typical way to format activity-based costs is to assign expenses to the
event being managed. For example, the object of analysis is a customer
order, than all costs that result from the associated performance cycle
contribute to the total activity cost. Typical units of analysis in logical
activity- based costing are customer orders, channels, products and value
added services. The cost analysis will vary depending on which analysis
unit is selected for observation Logistical expenses can be presented in a
number of ways for managerial use. Three common ways are
•Functional grouping,
•Allocated grouping, and
•Fixed variance grouping.