PERFORMANCE MANAGEMENT CONCEPTS

Management and Industrial System Development Lab

Department of Industrial Engineering – ITS

MANAGEMENT TEAM

Business environment changes

drasticallyP.T CP INDONESIA PERFORMANCE STATUS

POULTRY PERFORMANCE STATUSCOLDSTORAGE PERFORMANCE STATUS

Management must make decisionsunder turbulent

business environment

DEFINITION ▪ Performance management is all about improvement

—synchronizing improvement to create value for and from customers with the result of economic value creation to stockholders and owners.

▪ Performance management is ‘‘the translation of plans into results—execution’’

▪ It is the process of managing an organization’s strategy

▪ Performance measure is a metric used to quantify the efficiency and effectiveness on an action

▪ Performance measurement is the process of quantifying the efficiency and effectiveness of an action

▪ Performance measurement system is a set of structured metrics and procedures to quantify both effectiveness and efficiency of activities

DEFINITIONS

1800 1880 1900

Fra Pacioli ( 15 th century )New England Textile Mills

Andrew Carnegie (Carnegie Steel Company)

Albert Fink (Louisville &Nashville)

Macy, Marshall Field, Sears (Distribution and retailing)

Frederick W. TaylorPercy Longmuir

Harrington EmersonG. Charter Harrison

Hamilton ChurchG.P. Norton

Functional organisation

Specialisation

Scientific Management: standard labour grade, standard labour

hour/unit, standard material quantity/unit

Development of transportation and

telecommunication systems

Hierarchical

organisation structure

The invention of steam

engine and steel making process

Profit gain is measured from market transaction

Cost/lb, Cost/hour, Cost/ton-mile and inventorystock-turn are used to measure the efficiency ofinternal processes, but are not used to measure the

profitability of the companyStandard product costs based on standard

labour and material costs are used to measure the internal processes and managers’

performance

Period

Era

Actors

Artisan Shops Single Activity organisation Scientific Management

Performance

measurement

system

The development

in that era

1925 1980 19871900 1920

The requirement of integratedand audited financial report for

external partiesProduct

diversification

Multi-divisional

organisation

The invention of

high speed process

technology

Cheap micro-computer

Robotics

CIM, FMS

Just-In-Time

Total Quality Management

Customers are more

critical

More producers

compete in the market

Free trade agreements

Global market is more

competitive

Requirement for more flexibleand reliable manufacturing system

Benchmarking

Business Process

Re-engineering

ROI is used to measure the performance of unit operationsand the whole organisation

ROI is used to measure

divisions and the whole

organisation Financial accounting based performance measures

Individual, non-financial performance measures are used in additionto financial performance measures

Multi-divisional

organisation Relevance lost

The use of individual, non-financial

performance measures in addition to

financial measures

Du Pont Powder Co.(F. Donaldson Brown, PierreDu Pont)

Du Pont General Motor(William C. Durrant, Pierre

Du Pont, Alfred P. Sloan)

~Quality: Costs of quality (Feigenbaum, Crossby), Malcolm Baldrige National Quality Award, European Quality Award, Six Sigma (Motorola), M. Zairi~Time: Stalk, Hout, Azzone~Flexibility: Gerwin, Slack

No significant development of performancemeasurement system, traditional performance

measurement system produces distorted,irrelevant and late information

Vertically Integration: Centralised-Departmentalised

enterprises

1987 1990 1996 Future

ABC and Throughput

Accounting

Cost accounting improvement New performance measurement systems Future performance

measurement systems

Activity-based Costing andThroughput Accounting

Integrated performance measurement system

Lean Manufacturing

Franchising

Extended Enterprises

Agile Manufacturing

?

~R. Cooper~ Galloway, Waldron

B. Maskell, S. Globerson, J. R. Dixon, A. J. Nanni, T. E. Vollmann,R. S. Kaplan, D. P. Norton, Wang System, Cambridge Research Group, Strathclyde Research Group, Loughborough Research Group, CranfieldResearch Group

Lack of relevance Lagging metrics Short-termism Inflexible Does not foster improvement Cost distortion

Traditional performance measurement systems produce information that are too late, too aggregate,

and too distorted to be relevant for managers planning and control decisions (Kaplan and Johnson)

TRADITIONAL PERFORMANCE MEASUREMENT SYSTEM:

STABLE ENVIRONMENT

NOW

PAST FUTURE

REAL MEASURES PROXY MEASURES

PERFORMANCEREPORTS

?

TURBULENT ENVIRONMENT

NOW

PAST FUTURE

?

REAL MEASURES PROXY MEASURES

PERFORMANCEREPORTS

PERFORMANCE MEASUREMENT SYSTEM – PITFALLS

1. Most organizations have too many performance measures

2. Organizations have wrong or inappropriate measures

3. The performance measures are not properly communicated throughout the organization

4. A lack of alignment

5. A performance measurement system that emphasizes short-term financial measures creates long-term problems

6. Executives want a predictive performance measurement system, rather than one that is just historical. They want a system that predicts whether they are on course, and if not, what they have to do to correct and thus achieve the desired targets

Performance Planning• Objective/target setting• Objective deployment• Resource bargaining

PERFORMANCE MANAGEMENT CYCLE( Closed loop system )

Performance Accomplishment

• Resource deployment• Training/coaching• Continuous

improvementPerformance Measurement

• KPIs• Structuring • Prioritising• Measurement• Review

Performance Improvement• Area of improvement• Causal factors• Action Plan

PERFORMANCE PLANNINGLast year performance

(Improvement Programmes)

Strategic plan

Business environmentchanges

Objectives Setting

Target Setting

Company Objectives

CompanyTarget

Objectives Deployment

Target Deployment

Department Objectives

DepartmentTarget

DefineActivity

Activity Plan- Routines

- Improvements

ResourcesBargaining

ResourcesRequirement

PERFORMANCE ACCOMPLISHMENTS

▪ Activity Plan

▪ - Routines

▪ - Improveme

nts

▪ Resources

▪ Requirement

▪ Activity Plan

▪ Execution

▪ Resources

▪ Deployment

▪ Progress

▪ Reports

Balanced ScorecardModel

Identification of Key Performance Indicator (KPI)

Corporate, Business Units

Key Performance Indicator

Corporate, Business Unit

Performance ReportsCorporate, B. Unit, B.Process, Activity

Activity Plan- Routines

- Improvements

CompanyTarget

DepartmentTarget

Performance Measuremet

Identification of Key Performance Indicator (KPI)

Business Process, Activity

Business ProcessMap

Key Performance Indicator

B. Process, Activity

Performance Review

Performance Problems

PERFORMANCE MEASUREMENT

PERFORMANCE IMPROVEMENTS

▪ Performance Problems ▪ Identification of

▪ Causal Factors

▪ Setting

▪ Improvement Programmes

▪ Improvement Programmes

▪ - Target

▪ - Schedule

▪ - Resources

▪ - Responsibility

Performancemanagement

Performancemanagement

Performancemanagement

Performancemanagement

Better performance

Implementation of performancemanagement leads to

continuous improvement

Managers should :

Understand exactly the nature of the competition - Order qualifier criteria

- Order winner criteria

Know precisely the critical business processes

Ensure that the critical business processes are executed properly

Business environmentchanges

Companyperformancemanagement

BUSINESS SITUATION

ORDER QUALIFIER AND ORDER WINNER CRITERIA

▪ Order Qualifier Criteria : the attributes of products/services which enable them to enter to a particular market.

▪ All products or services compete in market fulfill Order Qualifier Criteria, the winner is the one which also fulfill Order Winner Criteria.

▪ Order Winner Criteria : the attributes of product/service which make customers to buy that product/service, not the others.