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UNIT II.pptx

  2. "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.
  3. 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?
  4. 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?
  5. 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.
  6. 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).
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Why accounting measures of performance are not adequate? • Accounting measures are lagged indicators. • Dependent on the choice of measurement method.
  12. 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?
  13. The Changing Business Environment Are historical accounting measures adequate for today’s business environment that transcend global boundaries?
  14. 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.
  15. We need a balanced set of Performance Measures – We need both lead and lag indicators
  16. 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
  17. 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.
  18. 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.
  19. Financial Performance can be measured by •ROA ROE, EPS etc. These measure are essential to summarize the economic consequences of strategy.
  20. 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.
  21. Customer-based measures Customer Satisfaction Customer Retention Customer Loyalty Product and Service Attributes Image and Reputation
  22. 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.
  23. Internal Business Process Measures Innovation processes Operation Processes Quality Measures Cycle Time Measures Cost Measures
  24. 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.
  25. A performance concept that combines everything that we discusses so far is Six Sigma
  26. 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.
  27. 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
  28. 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
  29. 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.
  30. 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
  32. 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.
  33. • 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.
  34. 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.
  35. • 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.
  36. • Regular logistics audit results in the unlocking of the costs reduction possibility and simultaneously logistic system efficiency.
  37. 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
  38. 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
  39. 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.
  40. 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
  41. 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
  42. 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.
  43. • 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.
  44. LFA reporting 1. LFA analysis and conclusions. 2.Maintain result-focused technology deployment. 3.Planning of significant improvements of supply chain management.
  45. • 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.
  46. • 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.
  47. 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;
  48. 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. •
  49. 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.
  50. 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.
  51. • 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.