UNIT 7-Performance Management in SC Flashcards
Performance measurement
Key task of management accounting. Performance is achievement of a certain task/goal.
Measure through adequate indicators for improvement such as:
- Inform about the economic situation of the company,
-facilitate decision-making,
-motivate employees,
-constitute basis for incentivation,
-act as guidance to external stakeholders (e.g. investors)
Facets of “performance”:
- Performance potential: Combination of inputs to enable performance + willingness to perform
- Performance process: External factor (order, event) + Transformation of resources into desired output
- Performance result: Created state/object + Performance impact: Utility (customer), compensation (company), effects on stakeholders.
Example of performance measurement considering facets: Red Cross
- Performance potential (trained staff, ambulances + emergency number
- Performance process (Emergency call + Emergency assistance
- Performance result (Treatment + transport + vitality, donation
Importance of performance measurement
It is the act of creating transparency about the economic success of an organization, unit or member.
It is the heart of management control because it ensures that defined goals are actually achieved.
1. Data gathering and tracking -> 2.Feedback -> 3.Performance measurement -> 4.Learning/ corrective actions -> 5.Performance improvement
Factors related to the importance of performance measurement:
- Financial performance measures
- Process related performance measures
- Market and customer related performance measures
- Innovation related performance measures
- Employee related performance measures
Performance management vs Performance measurement:
- P. measurement: determination of performance indicators in order to assess the current and/or future performance of an organisation or units.
- P. management: Application of performance measures (indicators) for management of p. potentials, p. processes and p. results aiming at reaching an organisation’s targets.
Performance indicators:
- > Qualitative indicators, e.g. Employee morale or motivation
- > Quantitative indicators -> Performance measures
- > Financial: Absolute numbers (NWC), Ratios (ROI, Profit margin)
- > Non-financial: Absolute (Employee headcount), Ratios (Employee fluctuation rate)
Performance in logistics and SCM:
Input (warehouse staff) ->Process (picking & packaging) ->Output (time gap between production and sales) ->Outcome (customer satisfaction)
Logistics performance: Efficiency (doing the things right) Input->Process-> Output
Logistics performance: Effectiveness (doing the right things) Input -> Outcome
Effective vs efficient performance in logistics and SCM:
- Effective logistics contribute to reaching corporate targets.
- > Vision and strategy -> Corporate targets -> Manufacturing; Logistics/SCM; Marketing/Sales
- Efficient logistics optimize the input/output ratio (resources/results):
- > Logistics output (up): Availability, productivity, service quality (up), Throughput time (down)
- > Logistics costs (down): carrying, process costs (down)
KPIs in logistics and SCM:
-Performance indicators focus on three key value dimensions: cost, time quality. The simultaneous optimization is no possible since there are in direct conflict. Therefore, Prioritization!
For example, Zara has as priority (fashion) speed, instead of saving logistic costs.
Major criticism of KPIs:
- No underlying theory
- No link to strategy
- Reducing info
- Conflicting goals
- Lack of available data
- Influences of extraordinary events
Performance measurement systems
-When several measures are related to one another and put into a structure. Two types of performance measurement systems: Based on mathematical relationships and on logical relationships.
DuPont System of financial control:
All three ratios from the DuPont system stand for a certain area of company performance:
- Increase profitability: The first ratio in the DuPont identify is net income margin. Hence, increased profitability is a driver of ROE.
- Increase asset usage efficiency: The second ratio is total asset turnover. Hence, a company that utilizes its asset base efficiently drives ROE values higher.
- Increase financial advantage/leverage: The third ratio is the equity multiplier. Hence, financial leverage also is a driver of ROE (as long as ROA>interest rate)
Balance Scorecard in SCM: Key characteristics
-Beyond performance measurement: integrated system of perf. Measures that are derived from, linked to and support a company’s strategy.
- Cause-and-effect relationships: How non-financial measures drive financial performance indicators through visualized cause-and-effect chains.
- Adaptability: It has to be adapted to an organization’s specific situation.
-Financial and non-financial performance indicators: the system includes non-monetary measures, even though financial ratios are still very important.
Balance Scorecard in SCM: perspectives/ viewpoints
- External view: Financial and Customer view (How our stakeholders and customers see us?)
- Internal view: Internal processes (At what business practices must we excel at?), Innovation and learning (How can we continue to improve and create value?)
