Analyzing Non-Financial Performance Measures in Manufacturing

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Western Sydney University *

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200108

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Industrial Engineering

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Jun 12, 2024

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M7+8 self-study SELF-STUDY PROBLEM 1: Interpreting operational performance measures Electro Systems manufactures small kitchen appliances, such as toasters and electric kettles. The following non-financial data were collected over the past six weeks. 1 2 3 4 5 6 Cycle time (minutes) 1.5 1.3 1.3 1.2 1.2 1.1 Number of defective finished products 44 40 30 41 30 20 Customer complaints 12 14 12 10 14 16 Unresolved customer complaints 8 7 6 2 2 20 Number of products returned 6 6 4 4 1 1 Average number of units produced per day per employee 40 45 41 41 45 50 Percentage of on-time deliveries 90 80 80 80 75 75 Percentage of customer orders filled 100 100 100 95 90 87 Average setup time (minutes) 60 60 50 50 45 50 Required 1. For each non-financial performance measure, indicate which of the following areas of manufacturing performance is involved: (a) (b) (c) (d) production processing product quality customer satisfaction delivery performance. (Some measures may relate to more than one area.) 2. Write a report to management evaluating the performance of the plant, noting any trends or other important results revealed by the data. SOLUTION TO SELF-STUDY PROBLEM 1 1. (a) (b) (c) (@ (b) (© (@ Production processing: = cycle time (minutes) = average number of units produced per day per employee = average setup time (minutes). Product quality: = number of defective finished products = number of products returned. Customer satisfaction: = customer complaints = number of products returned = unresolved customer complaints. Delivery performance: = percentage of on-time deliveries = percentage of customer orders filled. Production processing: Cycle time has reduced from 1.5 to 1.1 minutes over the six weeks and the setup time has also reduced, which is a positive trend. The average number of units produced per day per employee is also positive, increasing from 40 to 50 over the period. Overall, the three measures indicate improved efficiency of production processes. Product quality: The number of defective finished products and number of products returned show improvement over the six weeks, which indicates an improving level of quality control. Customer satisfaction: Customer complaints have increased over the six weeks, which is a worrying trend, and the number of unresolved complaints is high at the end of the six weeks. More investigations are needed to uncover the cause of these complaints. It could be due to poor on-time delivery performance. Delivery performance: Both performance measures (percentages of on-time deliveries and orders filled) were very high at the start of the period, but decreased over the six weeks. Investigation is needed to understand why this has occurred. It may also be driving the increasing number of customer complaints.

SELF-STUDY PROBLEM 2: Balanced scorecard Super Chicken operates a chain of takeaway chicken shops. The company is operating in a very competitive market, and it is difficult to gain and maintain market share. M believes that it is important to monitor competitors’ actions closely, and to continually offer new products and special promotions to create high visibility among customers. The management team has recently reviewed its mission, which is: To be a caring and envir [ p providing fresh and nutritious meals at an affordable price. Required Consider the four perspectives of Kaplan and Norton’s balanced scorecard. For each perspective, develop objectives and a series of performance measures. Consider both lag and lead indicators. Make sure that your objectives and measures support the mission of Super Chicken. SOLUTION TO SELF-STUDY PROBLEM 2 Performance measures Objectives Lag indicators Lead indicators 1 Financial = Improve returns to shareholders Return on equity = Number of new outlets opened Product profitability 2 Customer = Increase customer satisfaction Customer satisfaction measure Number of new products released Market share each quarter Number of customer complaints Number of customers participating in special promotion Average time to serve a customer Increase in sales revenue Average price per meal 3 Internal business processes = Maintain the quality of products Number of products currently under Time to develop new products Material wastage in kitchen Cycle time Electricity used per 10 kg output Labour productivity = Create new, innovative products development Average cost per meal = Improve efficiency of production processes = Improve environmental performance Kilograms packaging recycled 4 Learning and growth = Improve employee satisfaction = Improve employees’ knowledge of Employee satisfaction survey Number of employees completing Improvements in working conditions Number of employee suggestions company systems company training program = Number of employees achieving ‘gold star’ status C14.43 Review of Chapters 13(# and 14 (@ ; performance measures and reward systems; behavioural issues; benchmarking; continuous improvement L0 14.4, 14113 Refer to Case C14.42(2. Janice Cookson examined the performance-related pay system used to reward the managing directors and has prepared a report that recommends three changes: = add a more long-run emphasis to the bonus system = base rewards on achieving company-wide as well as divisional performance measures = include targets that are designed to consider the specific competitive challenges facing the managers of each division. Required 1. Suggest how the three proposed changes could be included in the bonus plan for each divisional managing director. Consider each division and be specific in your suggestions. 2. Outline any difficulties that could arise in implementing the changes to the bonus system. 3. Cookson has also recommended that the performance measurement system should make greater use of benchmarking, and incorporate continuous improvement to improve overall company performance. Why would she recommend benchmarking? Suggest the specific steps that would need to be undertaken to introduce benchmarking at the newspaper division. 4. Suggest how continuous improvement processes could be incorporated into the performance measurement system at the cable television division. Provide some examples of performance measures to illustrate your answer.

Long-run emphasis: A long-run emphasis could be added to the performance measurement system in several ways. For example: e linking rewards to average divisional performance over three years e choosing performance measures that focus on long-term performance, such as those relating to new product development, and employee training e implementing a share option plan which may encourage managers to consider future performance. Company-wide and divisional-based performance measures: This can be achieved by tying rewards to both company performance and divisional performance. This can encourage managers to consider the effect of various decisions on both divisional and company-wide performance. A share option plan may also help managers identify with the company as a whole. Targets that specifically consider competitive challenges: (These will be different for each division.) e Brewing: market share, cost per litre, sales volume e Newspaper: market share, share of advertising dollar, delivery on time e Cable television: cash flow, market share, growth in subscribers. There are several difficulties that may arise in implementing these changes: e If managers’ performance is based on average three-year performance, a decision needs to be made as to when the bonus will be paid. Waiting three years for a bonus may be far too long. e There are always unforeseen outcomes associated with bonus schemes, so care must be taken to ensure that the new system does not encourage opportunistic behaviour, or result in inequities between managers. e It is necessary to ensure that the non-financial measures selected flow through to improved financial performance. e The introduction of any change to bonus systems 1s often resisted, as managers become accustomed to the existing system and may not welcome introducing any uncertainty into their salary packages. e It may take time for managers to learn to change their orientation away from that encouraged by the previous bonus system. For example, managers may now have to consider the longer-term performance as well as short-term performance, and the impact of decisions on the division and broader company performance. Benchmarking will allow the business to set performance targets that are in line with the best performers in the industry, and can help each division to set in place improvement strategies to help minimise performance gaps. For the Newspaper Division this may entail research into how satisfied readers are with other similar tabloid newspapers and why, how quickly best newspaper firms deliver to newsagents and directly to customers and how that delivery performance is achieved and the extent of litigation experienced by other tabloid newspapers and how litigation is avoided. In researching ways to improve processes the division may also leamn from the experiences of companies in other industries who have achieved outstanding performances.

SEUESUIRYY SELF-STUDY PROBLEM 1: Economic order quantity Alfred Wood operates a factory that manufactures bread and cakes. One of the major raw materials used is organic maize, which he buys for $5 per kilogram. The factory operates for 350 days each year. The following information has been provided: Annual usage of maize 80 000 kilograms Average time between placing and receiving order 4 days Estimated cost of ordering and receiving inventory (per order) $8 Estimated annual cost of carrying a kilogram of maize in stock $0.50 Required 1. Use the above data to calculate: (a) economic order quantity (EOQ) (b) number of orders per year. 2. Wood has recently heard of just-in-time (JIT) purchasing, and wonders whether he should use it in his business. However, he is very concerned that the cost of placing frequent orders Page 696 will be too high. Explain the advantages of JIT purchasing and address specifically his concerns about cost. — 3. After a brief analysis of the cost of storing maize, including the cost of wasted space and inefficiency, you have discovered that the annual carrying cost can be reduced to $0.20 per kilogram. Wood has asked you to help him negotiate a JIT purchasing arrangement with a major supplier. After some discussion you have discovered that the cost of placing an order for maize can now be reduced to just $2 per order. Calculate: (@) newEOQ () new number of orders per year. SOLUTION TO SELF-STUDY PROBLEM 1 L@ 280000 x $8 $0.50 = V2560000 = 1600 kg per order EOQ \ () annual requirement _ 80 000 order quantity 1600 = 500rders Number of orders per year = 2. The main advantage of the JIT system is that inventory is not held in stock, but is ordered from suppliers so that it arrives just when it is needed for production. This will reduce storage costs. While the number of orders placed with suppliers under JIT increases, the costs per order can be reduced through ordering inventory on-line, requiring suppliers to deliver at a specified level of quality so that fewer inspections of deliveries take place, and allowing electronic ordering of inventory and payments with suppliers. 3. (a) 2 80000 x 52 $0.20 = V1600000 = 1265 kg per order EOQ (b) annual requirement _ 80 000 order quantity 1265 = 63orders Number of orders per year =

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