It has been said that before you can improve something, you have to be able to measure it, which implies that what you want to improve can somehow be quantified. Additionally, it has also been said that improvement in performance can result just from measuring it. Whether or not this is true, measurement is the first step in improvement. But while measuring is the process of quantification, its effect is to stimulate positive action. Managers should be aware that almost all measures have negative consequences if they are used incorrectly or in the wrong situation. Managers have to study the environmental conditions and analyze these potential negative consequences before adopting performance measures.
TYPES OF PERFORMANCE MEASURES
Performance measures can be grouped into two basic types: those that relate to results (outputs or outcomes such as competitiveness or financial performance) and those that focus on the determinants of the results (inputs such as quality, flexibility, resource utilization, and innovation). This suggests that performance measurement frameworks can be built around the concepts of results and determinants.
Measures of performance of a business usually embrace five fundamental, but interlinking areas:
- Money, usually measured as profit
- Output/input relationships or productivity
- Customer emphasis such as quality
- Innovation and adaptation to change
- Human resources
Within the operations area, standard individual performance measures could be productivity measures, quality measures, inventory measures, lead-time measures, preventive maintenance, performance to schedule, and utilization. Specific measures could include:
- Cost of quality: measured as budgeted versus actual.
- Variances: measured as standard absorbed cost versus actual expenses.
- Period expenses: measured as budgeted versus actual expenses.
- Safety: measured on some common scale such as number of hours without an accident.
- Profit contribution: measured in dollars or some common scale.
- Inventory turnover: measured as actual versus budgeted turnover.