Performance Management Flashcards
What is benchmarking?
it is the process of measuring processes, products, and services against industry leaders; benchmarking falls into 3 primary categories as shown below:
process benchmarking - understanding and optimizing processes
strategic benchmarking - comparing business models and approaches to strengthen strategies
functional performance benchmarking - comparisons based solely on outcomes
benchmarks can be both external and internal
What is external benchmarking?
it involves analyzing how a specific business compares to others in its industry, with the goal of understanding where a business falls short and what it can do better
two types of productivity ratios are generally recognized:
total factor productivity ratio - it reflects the quantity of all output produced relative to the costs of all inputs used; this ratio can be used to compare actual cost per unit production levels to budgeted production levels
partial productivity ratio - it reflects the quantity of output produced relative to the quantity of individual inputs used; this ratio can be used to compare the actual levels of a production input needed to produce a given output, which may be used for a comparison with a budgeted input level; it is the most frequently used productivity measure
What is internal benchmarking?
it finds the best processes available to complete the work with the minimal amount of resources and effort; comparisons of metrics and/or practices are made across different units, product lines, departments, programs, geographic locations, etc. within an organization
some of the most common quality-monitoring and investigative techniques are the procedures described below:
control charts - it is a graphical tool used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range; they show if there is a trend
pareto diagrams - it determines the quality-control issues that are most frequent and often demand the greatest attention; it demonstrates the frequency of defects from highest to lowest frequency
cause-and-effect (fishbone) diagram - it provides a framework for managers to analyze the problems that contribute to the occurrence of defects; managers use the diagram to identify the sources of problems in the production process by resource and take corrective action (comes after the Pareto diagram)
Nonfinancial measures
companies use various nonfinancial measures to evaluate performance; examples include the following:
customer retention rate (CRR) - a company’s ability to retain current customers is critical because of the high cost associated with finding new customers
CRR = (e - n) / s
E = number of total customers at the end of the period
N = number of new customers added within the period
S = number of existing customers to start the time period
the inverse of this is the churn rate; so if the customer retention rate is 80%, the churn rate is 20%
employee turnover rate (ETR) - it is costly to lose employees, as replacing them means replacing their expertise and efficiencies; there are differences between voluntary and involuntary turnover, and there are differences to internal promotions and going to an outside organization
ETR = el / ae
EL = summation of the total number of employees who leave within a specific period
AE = average number of employees who work within the selected time frame
labor productivity rate (LPR) - it is equal to the total output of a company divided by the total number of hours worked; a higher ratio is better as it implies greater productivity relative to the amount of effort by the employees
LPR = o / hw
O = total output
HW = total hours worked
ticket response time - it represents the total time elapsed between a customer initiating a ticket for service and an agent first responding to it; the goal is to reduce the amount of time it takes for a response
Non-GAAP measures
these are derived by taking GAAP measures and adjusting them in ways that better measure performance; examples include:
EBITDA - it evaluates a company’s operating performance; the idea is that this measure removes factors that may differ between companies but do not impact operating performance
free cash flow - the cash a company generates after taking into consideration cash outflows that support its operations and maintain its capital assets; it is cash after paying for operating expenses and capital expenditures and is calculated by taking net cash from operating activities and subtracting capital expenditures
core earnings - these are profits derived from a company’s main or principal business; these earnings disregard one-time revenues or costs that are not a part of main business activities
adjusted net income for nonrecurring expenses - it takes net income and adjusts it by removing nonrecurring expenses which are not expected to impact the income statement in future years
Types of responsibility segments (aka strategic business units [SBUs])
they are generally classified by four financial measures (performance objectives) for which managers may be held accountable; SBUs are highly effective in organizing performance requirements and in establishing accountability for financial responsibility
cost SBU - managers are held responsible for controlling costs
revenue SBU - managers are held responsible for generating revenues
profit SBU - managers are held responsible for producing a target profit; accountability for both revenues and costs
investment SBU - managers are held responsible for return on the assets invested to produce the earnings generated by the SBU
the effectiveness of each SBU is often subdivided into additional areas of accountability: product lines, geographic areas, and customer (often the most significant segment classification)
What is a balanced scorecard?
it gathers information on multiple dimensions of an organization’s performance defined by critical success factors necessary to accomplish the firm’s strategy; critical success factors are classified as: financial, internal business processes, customer satisfaction, and advancement of innovation and HR development (learning and growth)
typically, the scorecard describes the classifications of critical success factors, the strategic goals, the tactics, and the related measures associated with strategic and tactical goals
What are conformance costs?
the costs of ensuring conformance with quality standards are classified as prevention and appraisal costs
prevention - these are incurred to prevent the production of defective units; this includes: employee training, inspection expenses (for raw materials coming in), preventive maintenance, redesign of product, redesign of processes, and search for higher-quality suppliers
appraisal - these are incurred to discover and remove defective parts before they are shipped to the customer or the next department; this includes: statistical quality checks, testing, inspection (for completed products to be shipped), and maintenance of the laboratory
What are nonconformance costs?
the costs of nonconformance with quality standards are classified as internal and external costs; nonconformance costs are often difficult to compute because most of these costs are in the form of opportunity costs (ex. lost sales or reputation damage)
internal failure - the costs to cure a defect discovered before the product is sent to the customer; this includes: rework, scrap, tooling changes, costs to dispose, cost of the lost unit, downtime
external failure - the costs to cure a defect discovered after the product is sent to the customer; this includes: warranty costs, cost of returning the good, liability claims, lost customers, and reengineering an external failure
