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Measuring Long-Run and Nonfinancial Organizational Performance
1. Chapter 20
Measuring Long-Run and
Nonfinancial Organizational
Performance
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney
2. Learning Objectives (1 of 3)
• Explain why management should focus on
long-run performance
• Clarify the importance of a vision statement
• Contrast long-run and short-run objectives
• Explain the value of nonfinancial
performance measures
• Describe factors to consider when selecting
nonfinancial performance measures
3. Learning Objectives (2 of 3)
• Explain the importance of developing bases
for comparison for performance measures
• Explain how activity-based costing is used
in long-run performance evaluation
• Describe the difficulties in measuring
multinational performance
• Explain how a balanced scorecard is used to
measure performance
4. Learning Objectives (3 of 3)
• (Appendix 1) List the steps needed to
implement a performance measurement
system
• (Appendix 2) Identify performance
measures for manufacturing companies
5. Vision and Mission Statements
• Vision Statement
– A conceptual view of the organization’s future
that is better than its present
• Mission Statement
– Expresses the organization’s purposes
– Identifies how the organization will meets its
customers’ needs through products or services
6. Values Statement
Objective
• profitability
• market share
Subjective
• ethical behavior
• respect for others
• Reflects the organization’s culture
• Identifies fundamental beliefs about what
is important to the organization
7. Vision, Mission, Values Statements
Underlies organizational goals and objectives
Without short-run success,
there will be no long-run success
Without long-run planning,
short-run success will probably fade rapidly
8. Objectives
Short-run
• Predominantly
financial
• Effective and efficient
management of
operating, financing,
and investing activities
• Customer satisfaction
issues - quality,
delivery, service
Long-term
• Financial and
nonfinancial
• Resource investments
• Competitive position -
quality, speed of
delivery, reputation of
products/services
9. Nonfinancial Measures
Use nonfinancial measures IF:
• They can be articulated and defined
• They are relevant
• Responsibility can be assigned
• Data about measures can be gathered
• Targets about measures can be set
• Benchmarks can be established
10. Nonfinancial Measures
• Operational measures
– Administrators, customer service, human
resources
• Customer measures
– Product development, order processing,
inventory
• Soft measures
– frequency of shortages, late shipments, delivery
errors
• Employee measures
– staff turnover, staff morale
11. Nonfinancial Performance Measures
• Measure directly performance that creates
shareholder wealth
• Predict future cash flows
• Relevant to nonmanagement employees
• More timely
• Highlight problems
• Less likely to result in suboptimization
12. Nonfinancial Performance Measures
• Focus on
– long term
– processes
– outputs
– teamwork
• Cross-functional
• Benchmarked externally
• Tied to reward system
13. Selecting Nonfinancial
Performance Measures
• Identify critical success factors
– direct causes of achievement of organizational
goals and objectives
• Choose some short-run and long-run
attribute measures of critical success factors
• Use qualitative and quantitative measures
• Limit the number of measures
14. Comparison Bases
• Establish benchmark
• Assign specific responsibility
• Monitor and report at appropriate intervals
16. Throughput
Nonfinancial Performance Measure
• Number of good units or quantity of
services that are produced and sold within a
specified time
• Increase throughput in time and in quality
– decrease non-value-added activities
– use flexible manufacturing systems
– use computer technology (bar code, CIM, EDI)
19. Activity-Based Management
• Increase throughput by reducing non-value-
added activities
• Minimize nonquality work
• Performance Measures
– Activities that create customer value
– Quality and Service
20. Activity-Based Management
Quality
• Measure cost of quality
• Adjust
– products design
– training
– asset acquisition and
utilization
– interaction with
suppliers and customers
Service
• Measure lead time
• Adjust
– parts (fewer,
interchangeable,
few/no engineering
changes)
– building layout
21. Multinational Performance Measures
• Adjust measures to reflect different
environments
– economic
– legal
– political
– tax
• Manager cannot control impact of
accounting standards, economic conditions,
and risks
22. Measuring Performance
• Design an effective, integrated Performance
Management System
• For example, the Balanced Scorecard
24. Balanced Scorecard Measures
• Financial
– Shareholder-relevant issues
– Profitability
– Organizational growth
• Customer
– Lead time
– Quality
– Service
– Price
Financial
Customer
Internal
Business
Innovation
and Learning
25. Balanced Scorecard Measures
• Internal Business
– Quality
– Cycle efficiency
– Time-to-market
– On-time delivery
• Innovation and Learning
– Number of patents or copyrights
– Percentage of R&D projects that are patentable
– Time of R&D from conception to
commercialization
Financial
Customer
Internal
Business
Innovation
and Learning
26. Performance Indicator System Steps
• Recognize need for enhanced performance
indicators
• Include top management in steering committee
• Create a cross-functional implementation team
• Develop a business performance model that views
the business as a stage in the value chain
• Divide firm’s goals into environment, markets and
customers, products and lines, technology,
operations, finance, and organization/management
27. Performance Indicator System Steps
• Define critical success factors
• Assess current performance measurement
system
• Determine which current measures should be
eliminated
• Develop the performance indicator structure
• Establish the necessary underlying technology
• Reevaluate current reward system
• Ensure continual improvement
28. Sample Performance Indicators
• Design for Manufacturability
– Number and severity of engineering changes
– First pass reject rate
– Number of parts
– Percent common parts per product
– Time from design to finished project
– Number of operations per finished product
– Number of tools per finished product
29. Sample Performance Indicators
• Zero Defects
– Units scrapped by cell
– Downtime due to quality problems
– Units reworked
– Yield of finished product per raw material batch
– Time required for quality test procedures
– Time lost due to quality control
– Number of checkpoints
30. Sample Performance Indicators
• Minimize Raw and In Process Inventory
– Number and location of vendors
– Number and frequency of deliveries
– Lead time from order to delivery
– Flexibility in order quantity, delivery, variety
– Complexity of components
– Demand variation
– Forecast accuracy
– Availability/accuracy of information
31. Sample Performance Indicators
• Zero Lead Time
– Actual production time
– Queue time
– Move, setup, inspection times
– Scrap, rework, yield percentages
– Late and on-time deliveries
– Back orders
– Product mix
32. Sample Performance Indicators
• Minimize Process Time
– Number and quality of components
– Availability/ease of use of components
– Skills necessary
– Number of procedures
– Process capabilities and limitations
– Plant layout
33. Sample Performance Indicators
• Optimize Production
– Bottlenecks
– Setup time
– Lot size constraints
– Labor availability, qualifications, flexibility
– Material resources availability, lead time
– Number of distribution centers
– Volume variations
– Schedule changes
34. Questions
• Why should management focus on long-run
performance?
• What factors should be considered when
selecting nonfinancial performance
measures?
• Why is it difficult to measure multinational
performance?