Performance Measures

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Organizational Performance Measures

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used to manage and monitor performance in many areas of the organization including financial, customer, internal processes, employees, suppliers.

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Strategy

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decribes how an org. uses its activites and resources to achieve its objectives. Ethically maximize financial value.

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Execution

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-ensure strategy is being executed
-monitor performance

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Performance Measures

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are specific ways an organization measures outcomes and activites related to achieving its strategy.

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Types of Performance Measures

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-Financial
-Nonfinancial

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Performance Measurement Frameworks

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-Balanced Scorecard
-Value Based Management

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NonFinancial Performance

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-customer satisfaction
-customer retention
-on-time delivery
-quality
-employee satisfaction

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Balanced Scorecard

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translates an organization's mission and strategy into a set of performance measures.

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4 Perspectives of Balanced Scorecard

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1) Financial Perspective
2)Customer Perspective
3)Internal Business Processes Perspective
4)Learning & Growth Perspective

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Financial Perspective

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focuses on return on investment, and profability.
Strategic objective would be to increase profitability, and measure would be ROI.

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Customer Perspective

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focuses on performance in areas that are most critical to the customer. Strategic Objective would be increase customer satisfaction, perf. measure would be cust. satisfaction ratings.

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Internal business processes perspective

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focuses on operating effectively and efficiently. Processes that are involved in producing the product. Strategic Objective is to impove on time delivery, and perf measure would be percentage of on time deliveries.

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Learning & Growth Perspective

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focuses on infrastructure and employees. Strategic objective would be train employees on quality tools, perf measure would be hours of training on quality tools.

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Baseline Performance

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the current level of performance for the performance measure.

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Strategic Iniatives

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Plans for improvement

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Value Chain

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the sequence of business processes in which usefulness is added to the products or services of a company.

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3 Processes of Value Chain

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1)Innovation Process
2)Operations Process
3)Post Sales Process

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Characteristics of Balanced Scorecard

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-Strategy focused
-Balanced
-Included financial and nonfinancial
-cause and effect linkages
-unique to the strategy

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Performance Drivers

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leading indicators

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Outcome Performance Measures

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lagging indicators

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Strategy Maps

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are diagrams of the cause and effect relationships between strategic objectives.

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Value Based Metrics

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Financial Performance Measures
-ROI
-Economic Profit
-Economic Value Added
-Cash Flow ROI
-Residual Income

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When to use EVA

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useful for incentive compensation. "Pay for Performance" is defined as creating financial value.

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Cash Flow ROI

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represents the average real cash return of all existing projects. IRR for all assets.

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Profability Ratios

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-Gross Margin
-Operating Profit Margin
-Return on Assets
-Return on Equity
-Dividend Payout Ratio

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Asset Utilization Ratios

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-Receivables Turnover
-Average Collection Period
-Inventory Turnover
-Fixed Asset Turnover
-Total Asset Turnover

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Liquidity Ratios

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-Current Ratio
-Quick Ratio

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Debt Utilization Ratio

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-Debt to total Assets
-Debt to Equity
-Times interest earned

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Market Ratios

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-Price/Earnings Ratio
-Market-Book Ratio

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Horizontal Analysis

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an evaluation of the firm's ratios and trends over time.

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Cross Sectional Analysis

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involves benchmarking the ratios against ratios of similar firms at a point in time. (Industry Averages)

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Common Size Income Statement

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all revenues and expenses are presented as a percentage of net sales.

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Vertical analysis

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development of common size financial statements.

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Limitations of Financial Ratios

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-other firms in the industry may not be comparable
-industry averages may not be reliable
-variations in way ratios are calculated
-financial statements contain estimates that might distort results
-ratios do not provide a balanced view of performance.

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Internal Benchmarking

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compares similar operations within different units of the same organization

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Competitive Benchmarking

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targets processes and methods used by an organization's direct competiitors.

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Functional Benchmarking

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compares similar functions within the same broad industry.

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Generic Benchmarking

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compares processes that are independent of industry.

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Total Quality Management

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focuses on managing the organization to excel in all dimensions of products an d services for customers.

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Six Sigma

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a satistical measure expressing how close a product comes to its quality goal. Six Sigma is 99.99999 percent perfect.

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ISO 9000

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standards agreed upon by the International Organization for Standardization. 9000-9004

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ISO 14000

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developed to control the impact of an organization's activities on the environment and focuses on reducing the cost of waste management.

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Total Quality Control

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application of quality principles to all company activities.

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Kaizen

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the japanese art of continous improvement. Underlies total quality management and just in time business techniques.

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Cause and effect diagrams

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identifies four categories of potential causes of failure.

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4 Categories of Cause and Effect Diagrams

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-human factors
-methods and design factors
-machine related factors
-materials and components factors.

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Poka Yoke

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involves making the workplace mistake proof.

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Theory of Constraints

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methods to maximize operating income when faced with bottleneck operations.

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Bottleneck Resources

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any operation where the capacity is less than the demand placed upon it.

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Nonbottleneck Resources

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have capacity greater than demand.

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Throughput Contribution

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revenues minus the direct materials cost of goods sold.

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Operating Costs

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salaries and wages, rental expense, utilities, and depreciation.

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Cost of Quality

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based on philosophy that failures have an underlying cause, prevention is cheaper than failures, and cost of quality can be measured.

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4 Components of Cost of Quality

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-Prevention Cost
-Appraisal Cost
-Internal Failure Cost
-External Failure Cost

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Prevention Cost

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cost of any quality activity designed to help do the job right the first time.
Example: Quality Training, Supervision of Prevention activities.

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Appraisal Cost

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cost of quality control including testing and inspection. Designed to test deffective products.
Example:test and inspection of incoming materials.

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Internal Failure Cost

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costs incurred when substandard products are produced but discovered before shipment to the customer.

Example:Scrap, Spoilage, Reinspection on reworked products.

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External Failure Cost

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cost incurred for products that do not meet requirements of the customer and have reached the customer.

Example: Product Recalls