Performance Measurement in Decentralized Organizations

1
Chapter 11

• Performance Measurement in Decentralized
  Organizations

2
Decentralization

• Both Advantages and Disadvantages
• Advantages
• Efficiency
• Entrepreneurial Spirit
• Frees top management from day-to-day
• Disadvantages
• Lack of coordination
• Not understanding overall corporate goals
• Own agendas

3
Centers

• Cost Center
• Control of costs, but not revenues
• Profit Centers
• Control of costs and revenues
• Investment Centers
• Control of costs, revenues investments in
  operating assets

4
Return on Investment

• Net Operating Income
• ROI Average operating assets
• Both operating income and assets used
• Income often EBIT
• Limits on usefulness?

5
ROI Differently

• ROI Margin X Turnover
• Margin Net Operating Income
• Sales
• Turnover Sales
• Average Operating Assets

6
ROI Drawbacks

• ROI improvements hard for many managers to
  operationalize
• Much of what drives ROI is out of managers
  control
• Seeking highest ROI rate often not the
  income-maximizing approach

7
Residual Income

• Measures dollars by which income exceeds income
  at minimum required rate of return.
• Residual income Net Operating Inc.
• (Ave. Op. Assets x min req. rate of rtn)

8
Residual Income

• Focus is on dollars not percentages
• Assume
• Actual ROI is 25
• Min req. is 15
• Should you invest in a project yielding 22
  return?

9
Delivery Cycle Times

• A measure of production efficiency
• Wait time
• Manufacturing Cycle Time within
• Process, inspection, cue, move
• Process is value added, others not
• Want to maximize percent of time that is
  value-added

10
Manufacturing Cycle Efficiency

• MCE percent of manufacturing time that is value
  added
• What is Value Added Time?
• MCE can be expressed as percent or decimal

11
Balanced Scorecards

• Pictorial description of cause and effect for
  performance improvement
• Identifies actions that can be taken
• Can use to measure accomplishment of actions and
  effectiveness
• Can modify as learn from experience

12
Process Capacity

• Cycle time and time available for production can
  be used to measure productive capacity
• Theoretical Does not allow for downtime (ideal,
  unrealistic assumptions)
• Practical Takes into account both planned and
  unplanned downtime
• Excess compares with demand