MODULE 11

Performance Measurement

Defining performance measurement

Performance measurement is the process of evaluating how well organizations are managed and the value they deliver
for customers and other stakeholders. For the improvement within the business operations, it is important to have the
performance measured or quantified, and have the individual receive feedbacks. Feedback is having the outcomes of work
communicated to the employee, work group, or company. Through performance measurement, we can evaluate whether
our business operations and processes are effective to guarantee success and achievement of goals.

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).

In the business operations, performance can be measure using 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.

Designing the performance measurement system

Wisner and Fawcett provide a nine-step process for developing a performance measurement system:
1. Clearly define the firm's mission statement.
2. Identify the firm's strategic objectives using the mission statement as a guide (profitability, market share, quality,
cost, flexibility, dependability, and innovation).
3. Develop an understanding of each functional area's role in achieving the various strategic objectives.
4. For each functional area, develop global performance measures capable of defining the firm's overall competitive
position to top management.
5. Communicate strategic objectives and performance goals to lower levels in the organization. Establish more
specific performance criteria at each level.
6. Assure consistency with strategic objectives among the performance criteria used at each level.
7. Assure the compatibility of performance measures used in all functional areas.
8. Use the performance measurement system to identify competition, locate problem areas, assist the firm in
updating strategic objectives and making tactical decisions to achieve these objectives, and supply feedback after
the decisions are implemented.
9. Periodically reevaluate the appropriateness of the established performance measurement system in view of the
current competitive environment

Reference used:
• Performance Measurement. https://www.referenceforbusiness.com/management/Or-Pr/Performance-
Measurement.html
• Thompson M., Definition of Performance Measurement. https://smallbusiness.chron.com/definition-performance-
measurement-45759.html