Chapter 13: Non-financial performance indicators Flashcards
Examples of NFPI for customer satisfaction
Number of customer complaints
Levels of repeat business
On-time deliveries made to customers
Customer waiting times
Market Share
Examples of NFPI for productivity / efficiency
Number of units produced per labour hour
Batch set up times
Number of suppliers used
Percentage of idle labour hours
Inventory holding days
Machine capacity utilisation
Daily output per employee
Days lost to staff absenteeism
Examples of NFPI for Quality
Number of sales returned due to defects
Reject rates of production units due to defects
Percentage of output that requires reworking
Training time per employee
Why do we need non-financial performance indicators?
Increasing competitors means that we need to perform better in order to win customers
Increasingly sophisticated customers who expect high levels of quality
Changing nature of costs meaning more costs tend to be overheads which are harder to trace directly to production output.
Benefits of NFPIs
More forward thinking will lead to more sustainable business
Long term targets will reduce focus on trying to achieve short-term profits by cutting costs which can back fire in the future (for example cutting training costs will affect staff skills)
Calculated quickly and corrective action can be taken promptly
Less scope of manipulation as they are not subject to accounting policies
Easily understood by non accountants
Managers can appraise many areas of business that aren’t directly involved in making sales to customers
Consider various important stakeholder groups such as customers, staff and suppliers. Conventional FPI’s such as ratio analysis tend to focus attention on the shareholder
Encouraging long-term views:
Set long term or strategic goals
Offer long-term incentives e.g long term share options
Long-term contractors with employment
Make more non-financial measures
Cost of quality def
Difference between actual costs of producing, selling and supporting, products or services and the equivalent costs if there were no failures during production or usage.
Cost of quality - Conformance
Conformance - cost of getting it right
Prevention - costs incurred to prevent sub standard production. Prior or during production. Example: investment in design, purchase new machinery, training staff
Appraisal - Costs incurred to ensure outputs are of the desired quality. Example: Testing of goods, process testing
Cost of quality - Non-Conformance
Internal failure - costs arising to rectify sub standard product before the product goes to the customer. Example - inspection costs, scrapped items, rework costs
External Failure - Costs of rectifying sub standard products which have already been shipped to customers. Example: Refunds, Complaints handling, product liability claims.
Balanced Scorecard - what is it and what does it consist off
Balanced scorecard is a management tool to combine both FPI and NFPI. This is a true all-round view of the performance of the business and involves looking at indicators in four areas.
Financial perspective
Customer perspective
Internal business perspective
Innovation and learning perspective
Balanced scorecard - financial perspective
Look at whether financial performance of the business will keep shareholders happy. We could look at profitability ratios such as ROCE or even look at share price changes and dividend payments
Balanced scorecard - Customer perspective
Whether we have kept the customer happy by offering high levels of quality product and customer service. We could look at levels of repeat business or the results of feedback surveys that we could ask customers to complete.
Balanced scorecard - Internal business perspective
Whether we are running out internal processes efficiently to ensure that our resources are being used effectively. We could measure average time taken to fulfill orders, the number of the customers dealt with by each member of staff or number of defects in the production process.
Balanced scorecard - Innovation and learning perspective
Whether we are investing in the future of the business. We could look at the number of new products introduced each year (good test of innovation) or number of days training that a staff member receives.
