Exam 18: Performance Measurement to Support Business Strategy

The Satin Manufacturing Company collected the following information (in days) for July and August: July August Transporting product 2.0 3.0 Processing product 5.0 7.0 Inspectirng product 0.5 0.8 Storing product 1.0 3.0 Required: a. Calculate the manufacturing cycle efficiency for July and August. b. Assume September's processing time will be the same as August. If Satin's target for manufacturing cycle efficiency is 65%, what will be September's target for manufacturing cycle time?

Steinwand Corporation keeps track of the time required to fill orders. Data concerning a particular order appear below: Hours Processing Time 1.5 Inspection Tirne 0.2 Moving Time 2.8 Storing Time 7.2 - The manufacturing cycle time was:

Shuster Metalworks Co. has provided the following information for last year: Pounds of metal input 21,000 Labor hours 8,000 Overhead costs \ 165,000 Pounds of output produced 12,000 Required: Calculate the partial productivity for: a. Metal. b. Labor.

At the middle levels in the organization, control and performance measurement focus on how people carry out the daily activities that create the organization's products.

The number of defective units is an example of a subjective performance measure.

Cavanaugh Co. has provided the following information for last year: Gallons input ??? @\ 20/ Labor costs 5,000 @\ 20/ Overhead costs \ 110,000 Gallons finished 8,000 @ selling price of \ 55/ Total factor productivity 1.0732 The total number of gallons input (rounded) is:

The Majors Company collected the following information (in days): Inspecting product 4 Transporting product 6 Storing product 15 Marufacturing product 40 - What is the manufacturing cycle efficiency?

The Ramos Company collected the following information (in days): Transporting product 4.0 Manufacturing product 28.0 Inspecting product 1.5 Storing product 6.0 - What is the manufacturing cycle efficiency?

The White Hot Mining Co. has the following information for last year: Labor hours 12,000 Tons of output produced 175,000 The partial productivity for labor is:

Sam Almasi, the CEO of Almasi Technologies Inc. (ATI), a biotechnology firm had recently returned from a conference on modern cost management and performance measurement methods where he was exposed to target costing, value-chain analysis, balanced scorecard, activity-based management, and other ideas. ATI is a five-year old company operating in a growing, but competitive market. It develops and produces a number of different enzymes for use by research scientists and pharmaceutical companies. Its main competitors are also small to medium-sized firms just like ATI. The key to growth in this industry is the ability to develop new products in a short time. Gail Stevenson, the vice-president (VP) for research & development (R&D), has noticed that some of ATI's new developments did not perform well because of the delays in their introduction into the market. Stevenson is very keen on hiring the best scientists and ensuring that they stay current in their fields because knowledge is the key competitive weapon in the biotechnology industry. Bob Phillips, the controller of ATI, had another concern. He has been noticing that the new products were not only delayed but their actual development costs were usually higher than budgeted. One of his goals was to see that the new products were profitable for the company. Linda Joseph, the production manager, had a different concern of her own. Based on her observation, the production of the new enzymes was taking longer. Her feeling was that the products spent too much time in the quality control (QC) department. Barry Laker, the manager of the QC department, argued that the new enzymes lacked the rigorous specifications that are demanded in the marketplace. Consequently, the QC department has to perform additional tests to get to the root cause of the problems. Almasi had heard complaints from all quarters, and decided to convene a meeting of all the department heads. Almasi: Good afternoon, everyone. I am troubled that despite hiring a number of talented scientists, we are unable to compete effectively in the marketplace. Many of the recent entrants in the game seem to be beating us easily. Stevenson: Sam, the key to our growth is rapid introduction of new products. Although my scientists are developing new enzymes in record times, they seem to be getting held up in manufacturing, and especially, the QC department. Laker: Sam, I think I can pinpoint the root cause of the problem. I agree that our scientists are developing new enzymes in record times, but they do not seem to be paying any attention to standards. It looks like my department will have to provide training to them regarding quality control matters. Stevenson: With due respect, I do not think there is more to know about QC standards. It looks like the QC department wants more attention and is therefore creating all this unnecessary fuss. Joseph: I think I will agree with Barry that there are problems at the R&D side. My production scientists are also complaining that adequate specifications have not been developed; they have to constantly phone their R&D counterparts for clarifications. Stevenson: I do not believe that the production problems can be attributed to R&D. I have personally screened each and every scientist during the hiring process. Phillips: I don't think we will make much progress as a company if we keep pointing fingers at one another. We all must realize that all problems, regardless of their origin, finally affect the bottom-line of our company. Unless we set aside our differences and work together as a team, we will be unable to compete with our rivals. Some of our competitors follow best practices, which we must try to emulate. Almasi: I agree with Bob. We must all look for solutions. I recently attended a conference where noted speakers talked about the value-chain of a company, interrelationships between functions, and the balanced scorecard. In fact, some speakers suggested that companies must stop discussing in terms of individual functions or departments; instead they must talk in terms of processes and understand linkages among all the processes that exist in an organization. I believe there are a number of ideas that we could adopt. I will leave the conference proceedings in the library, and suggest that we all read about these different topics. How about getting together after six weeks and discussing a plan of action? Thank you and see you all after six weeks. Required: Assume the role of a consultant preparing a report for ATI. Discuss the following aspects in your report: a. The internal value-chain of ATI. b. The balanced scorecard. Identify the goals of the company under each perspective of the scorecard and cause-effect relationships, and develop potential measures that could be used. c. How the inter-departmental differences can be eliminated.

Harringer Co. has provided the following information for last year: Gallons input 10,000 @\ 20/ Labor costs 5,000 @\ 20/ Overhead costs ??? Gallons finished 8,000 @ selling price of \ 55/ Total factor productivity 1.0732 The total overhead cost (rounded) is:

Granite Manufacturing produces high-end furniture products for the luxury hotel industry. Granite has succeeded through excellence in design, careful attention to quality in manufacturing and in customer service, and through continuous product innovation. The manufacturing process at Granite begins with a close consultation with each customer so that the finished product exactly meets the customer's specifications. This commonly means unique designs, special fabrics, and high levels of manufacturing quality. In addition, Granite believes that a key competitive edge it has over other competitors is that it has an outstanding design staff that is able to work with customers to come up with product designs that go beyond the customer's expectations. Required: Present a balanced scorecard for Granite Manufacturing with 3-4 perspectives and 3-4 quantitative critical success factors (CSFs) in each perspective.

The Gantry Company collected the following information (in days) for November and December: November December Transporting product 2.0 3.0 Processing product 15.0 18.0 Inspecting product 1.0 1.2 Storing product 8.0 7.0 Required: a. Calculate the manufacturing cycle efficiency for November and December. b. Assume January's processing time will be the same as December. If Gantry's target for manufacturing cycle efficiency is 65%, what will be January's target for non-processing times?

Explain how nonfinancial performance measures for customer satisfaction may differ from functional performance measures.

During the most recent month at Harrison Corporation, storing time was 3.0 days, inspection time was 0.8 days, processing time was 2.8 days, and moving time was 0.6 days. Required: a. Compute the manufacturing cycle time. b. Compute the manufacturing cycle efficiency. c. What percentage of the production time is spent in non-value-added activities?

Employee involvement is important in an effective performance measurement system because it:

Consider a local coffee shop, a Starbucks store, and a retail gas station that offers fresh coffee in its convenience stores. Required: Characterize these stores according to the Porter strategy framework.

A balanced scorecard is a set of:

Describe the difference between a company's mission statement and its business-level strategy.

Divisional managers of Crusing Incorporated have been expressing growing dissatisfaction with the current methods used to measure divisional performance. Divisional operations are evaluated every quarter by comparison with the static budget prepared during the prior year. Divisional managers claim that many factors are completely out of their control but are included in this comparison. This results in an unfair and misleading performance evaluation. The managers have been particularly critical of the process used to establish standards and budgets. The annual budget, stated by quarters, is prepared six months prior to the beginning of the operating year. Pressure by top management to reflect increased earnings has often caused divisional managers to overstate revenues and/or understate expenses. In addition, once the budget had been established, divisions were required to "live with the budget." Frequently, external factors such as the state of the economy, changes in consumer preferences, and actions of competitors have not been adequately recognized in the budget parameters that top management supplied to the divisions. The credibility of the performance review is curtailed when the budget cannot be adjusted to incorporate these changes. Top management, recognizing the current problems, has agreed to establish a committee to review the situation and to make recommendations for a new performance evaluation system. The committee consists of each division manager, the Corporate Controller, and the Executive Vice President who serves as the chairman. At the first meeting, one division manager outlined an Achievement of Objectives System (AOS). In this performance evaluation system, divisional managers would be evaluated according to three criteria: (1) Doing better than last year - Various measures would be compared to the same measures of the prior year. (2) Planning realistically - Actual performance for the current year would be compared to realistic plans and/or goals. (3) Managing current assets - Various measures would be used to evaluate the divisional management's achievements and reactions to changing business and economic conditions. A division manager believed this system would overcome many of the inconsistencies of the current system because divisions could be evaluated from three different viewpoints. In addition, managers would have the opportunity to show how they would react and account for changes in uncontrollable external factors. A second division manager was also in favor of the proposed AOS. However, he cautioned that the success of a new performance evaluation system would be limited unless it had the complete support of top management. Further, this support should be visible within all divisions. He believed that the committee should recommend some procedures which would enhance the motivational and competitive spirit of the divisions. Required: a. Explain whether or not the proposed AOS would be an improvement over the measure of divisional performance now used by Crusing Incorporated. b. Develop specific performance measures for each of the three criteria in the proposed AOS which could be used to evaluate divisional managers. c. Discuss the motivational and behavioral aspects of the proposed performance system. Also, recommend specific programs which could be instituted to promote morale and give incentives to divisional management.