The Usefulness of Traditional and New Performance Measures Used in Nigerian Companies

profit OF TRADITIONAL AND NEW mental process MEASURES SOME demonstration FROM NIGERIAN COMPANIES BY DR. (MRS. ) S. L. ADEYEMI DEPARTMENT OF crease ADMINISTRATION UNIVERSITY OF ILORIN ABSTRACT This root reports the imageings of a conform to on the usefulness of selected conventional and unused mental process banners used in some Nigeria companies that chip in adopted a waxy manufacturing outline. The results indicate that bulk of these companies considered the new proceeding measures useful concomitantly among the big companies and among those with 5 old age or little of business screw.Traditional measures be just-tempered useful, though to a much less(prenominal)er extent. These results suggest that a crew of both handed-down and new measures would be needed especially when Nigeria companies ar qualifying through the transition of implementing swaps to their st trampgies from live leading to on the table manufacturing. entering The combination of slo wer economic growth and increased competition has agonistic impregnables in every industry to concent send on efficient and good deployment of resources. One result of these efforts has been the emergence of a new corporate gravel devoted to controllership.The controller is concerned with continuous measurement of a firms transaction. In order to carry out the measurement process, controllership focuses on the assessment of resources deployment and goal attainment Numerous research initiatives turn over place the senior high correlation between superior mental processs and the development and use of ripe assessment or measurement capabilities. As early as 1985, A. T. Kuarney Consultants notice that firm engaging in comprehensive surgical operation realized improvements in boilersuit harvest-timeiveness in the range of 14 to 22 percent.Effort has been expended by establishments to improve the feeling of information that their managers aim at their disposal to measure, equalise and guide writ of execution. In most firms in Nigeria the conventional formats and travel reports be still in used. TRADITIONAL AND MODERN MEASURES OF PERFORMANCE AN OVERVIEW OF A inspection The traditional executing measurement dodging has been intentional to report grasp ingatheringivity, mould and capacity utilization, and tired live variances.These are cost-efficiency-based measures derived from a scheme to minimize exertion be, described as a cost leadership schema, which is characterized by mass production of a new standard products cerebrate stable applied science (hall, 1980 Kaplan. 1986). The modern manufacturing environment has undergone dramatic changes since the past decades generally because of intensive global competition, shifts in customers buying behaviour, and quick fundament in manufacturing and information technology product.A cost-minimization and mass production strategy is no longer compatible with this new manufacturing scenar io. Instead, issues such(prenominal) as reactivity to customer needs, improving select, reducing lead sentences, technological innovation and enhancing production flexibility have emerged as strategicalally to a greater extent important to avow war-riddenness. Direct attention to these issues is the essence of a conciliatory manufacturing strategy. (Nemetz and baby, 1988). Despite this strategic re-orientation among the much progressive companies, carrying into action measurement brasss have not kept pace with the change.The theory of organizational fling has been involved to justify this lag in making changes. The theory of organizational lag has been involved to explain this lag in making changes to management accounting systems of which exercise system forms a part. According to this theory, administrative innovations in management accounting (and performance) systems tilt to lag female genitalia the technical innovations of manufacturing. This is because the po tential benefits of administrative innovations are less certain and are likely to contribute more(prenominal) time to have any recognizable impact (Dunk, 1989).Failure to make complementary changes in the performance measurement system to fit with the companys new flexible manufacturing strategy may lead to dysfunctional consequences. As pointed out by Howell and Soucy, (1987). The manufacturing transformation in many companies has been slowed, if not set back, as primitive sets of operating performance yardsticks promote inaccurate analysis, poor operating decisions, and unbefitting resource allocations.This paper reviews traditional financial measures of performance and discussed the potential benefits of incorporating new performance measures into the performance measurement system. The usefulness of these measures was empirically tested apply a sample of Nigerian Companies that have adopted flexible manufacturing strategy. The pouch of responding companies came from the e lectronic and other high technology product industries (60%) Business experience was categorized into groups, as follows 5 eld and below (7. 5%( > 5-10 years (22. 5%) and > 10 years (50%).TRADITIONAL PERFORMANCE MEASURES Traditional performance measures have been developed to meet the needs of manufacturing characterized by the production of standard products with high direct weary contest. Set ups are minimized to assure constant production runs. In this way, toil and machine capacities fucking be in full utilized and the greatest possible output produced with a successive decrease in the bang cost per unit of output. The competitive strategy is cost minimization, so variance reporting, overhead absorption and capacity utilization measures fittingly reflect this strategy.Variance Reporting The use of variance accounting for managerial performance evaluation has been criticized as counter-effective in the modern global environment (Howell &038 Soucy, 1987). This is b ecause traditional variance analysis encourages dysfunctional behaviours such as allowing line to condition up so as to show a favourable intensiveness variance, and delaying machine maintenance, padding the budget or shifting outlays between accounts so as to show a favourable set downs variance.Purchasing managers, for example, may act dysfunctionally by purchasing materials based on lowest expenditure considerations at the expense of quality so as to show a favourable materials bell variance. The consequences of inferior quality materials purchased are manifested in increased reworks, scraps, inspections and storage of uncollectible parts leading to higher production cost and loss of competitiveness. The bulk variance as a manufacturing indicator has been criticized since traditional absorption cost encourages excessive production in order to absorb the fixed overheads into inventory costs.Maximizing capacity utilization is necessary to achieve cost minimization. However , such a polity is short-sighted because any production in excess of market drive mustiness be consigned to inventory and this runs counter to the just-in-time philosophy of maintaining a vigor inventory with all its attendant benefits (Sadhwani, et al, 1985). Variance reports at the managers level are to a fault too aggregated for meaningful interpretation. Moreover, the standard cost itself may be perceived the norm eliminating any inducement for product innovation.In this case an unintended place has been put out which keep mum efforts to infuse a culture of continuous improvement. Capacity utilization measures productivity improvement, automation and robotics have shrank direct cranch cost to only a downhearted fraction of the be manufacturing cost, whereas overheads have increased probatively. Despite these developments and the consequent impact on cost structures, reports from surveys in various countries indicated that companies have not responded in tandem with th e technological changes (Schoch, et al. , 1994 Teoh, 1991).This has serious implications for production costing and performance evaluation as the continued focus on direct labour means labour is still considered a major driver of costs when it is no longer relevant. The result is the development of burden rates that are volume-driven, based on a diminished direct labour element. much(prenominal) a computed burden rate is artificially inflated due to the small direct labour base. Hen applied to an change magnitude pool of overheads, the incurrence of which may not be totally volume-driven, the labour generated burden rate washstand lead to serious distortions of the overheads absorbed into production cost.This is because of the unrealistic burden rate used which does not reflect the actual consumption of overheads by variant products or processes (Kaplan, 1986). The overhead absorption measure gives rise to a distort product cost analysis, so good performance is associated with products apparently cover profitable margins but are actually incurring loses (Beckett &038 Dang, 1992). Thus an improper signal about gainfulness is receivedEarned hours, as a measure of labour efficiency, is also deficient since it provides an erroneous signal to supervisors to maximize realise hours by keeping employees gain fully occupied regardless of market conditions. It would have been more beneficial in the long term to use the time for genteelness or cross preparation of operators so as to upgrade their skills. The machine utilization rate, as a measure of supervisory performance, also suffers from a number of deficiencies. It encourages the excessive use of machines for large-scale production, resulting in an unwidely accumulation of inventory.Worse still, maximize the utilization rate encourages continuous machine usage at the expense of regular maintenance. Moreover, the focus on utilization may lead to incapable emphasis on quality. Short-term Financial Measure s Although achieving profit and an acceptable expire on investment are the raison detre for a company to perplex in business, the traditional focus on these performance measures however encourages managers to take a myopic view that emphasizes short-term results to the detriment of long-term profitability (Banks &038 Wheelwright, 1979).This is the gaming effect where management manipulates accounting figures to show favourable results or alternatively, builds in slack to ensure that budget targets (Merchant, 1985) are met. Reliance on short-term financial measures can lead to dysfunctional decisions since these indications fail to signal the erosion of a firms respect if discretionary expenditures have to be reduced for short-term gains. Such spending is fact of the essence(p) for new products development production process improvement, worker skills training and upgrading dispersal networks and promoting customer awareness (Kaplan, 1986).Furthermore, profit measures represent out totals that may not fully reflect managements effort (Drucker, 1964). Stated differently, total performance cannot be realizedly captured by Naira profits. NEW PERFORMANCE MEASUREMENT OBJECTIVES In the new technological environment, a flexible manufacturing strategy must be implemented that focuses on customer responsiveness, quality, time, innovation and human resources practices. A performance measurement system designed to achieve the traditional objective of cost efficiency will be incongruent with this new strategy.It is necessary to plan the system so as to reflect this change in strategic objectives. Customer Responsiveness increasingly, customers demand not only a die service but also a wider variety of products with improved quality and shorter delivery times ( nonethey, 1991). Customer responsiveness examines a firms relative ability to satisfy customers. Therefore, high customer responsiveness translates into greater customer retention, leading to longer-term.Profi tability as the costs of acquiring and serving customers come down. Customers responsiveness measures therefore must be designed into the performance measure system. These accept reporting on the number of customer complaints, warranty claims, and on-time deliveries, among others. As Eccles (1991) put it bluntly what you measure is what you get and what you measure gets attention, indicating that performance measures must be relevant to send the right signals for employees to achieve coveted company objectives.For example, a system that evaluates how well customer demands have been convenient can better support efforts in achieving sustainable competitive wages than one that emphasizes labour or machinery efficiency in internal trading operations (Beckette &038 Dang, 19910, Goldhar &038 Lei 1991). fictional character feel measures, which are the most process-oriented evaluations are designed to determine the effectiveness of a series of activities rather than the individual a ctivity. select refers to the degree to which a products specific features in scathe of workmanship durability and so on satisfy the requirements of a particular customer.Poor quality can contribute to a significant increase in the manufacturing costs in various ways. As Howell and Soucy (1997) stated The absence of good materials, highly-trained labour, and well-maintained equipment will dramatically increase the costs of non quality such as scrap, rework, excess inventories, process and equipment breakdowns, field serves, and warranty claims. However, quality is usually gruelling to measure because of the broad scope. A contemporary measurement concept that is increasing in interest is the perfect order.Delivery of the perfect order is the supreme measure of quality operations. The perfect order represents ideal performance from an useable perspective, a multi-industry consortium defines the perfect order as one that meets the complete delivery of all items requested, deliver y customers request visualise with one-day tolerance, complete and accurate documentation supporting the order and perfect condition, that is, faultlessly installed, correct configuration, customer-ready with no damage. Operational and financial measurers to monitor quality include the manufacturing quality index (i. . defect rates), inventory levels, warranty claims, vendor quality, cost of quality and scrap cost. All these provide valuable feedback for listing existing problems and assessing whether the quality objective is adequately meet. metre Reducing level times is also of the new manufacturing strategy through out, (manufacturing rhythm method of birth control) time measures the amount of time demand to convert raw materials into completed products. Cycle time is the total care for from the issue of materials into production to the delivery of the final products to customers.The theory is that the cost of a product is upholdd to the time required to produce it. Cycle time variance therefore provides useful information about non-value-adding activities such as moving, inspecting, reworking, storing and waiting, that added to production costs as overhead charges but no value to customers (Alexander et al, 1991). Using throughput and cycle times as performance measures assist managers to croak these non-value adding activities, considered as waste time, and achieve substantial cost savings.Thus, according to Lippa (1990) Shorter cycle times can result in less finished goods inventory, less forecast reliance, strategic capability when a firm reacts to customer demands winged than the competition and the ability to exploit opportunities). Innovation in todays competitive environment companies must continuously engage in product improvement be designing new and improved products with unique characteristics treasured by customers. Only in this way are companies able to puff out their market share and maintain a competitive edge.Introducing technol ogical innovation and advanced design features into new products is costly initially and requires operational flexibility unlike cycle have unique characteristics (Ainikal &038 Teo, 1992) that will require performance measures tailored for this purpose such as turnover by products and product cost improvement. Human Resources The benefit of adopting a long-term employment policy is a loyal and committed workforce, resulting in productivity increases, reduced training costs, and improved customer services since this is provided by long-serving, presumably more go through and better-informed employees.A performance measure such as employee turnover is needed to help management assess an enterprises human resource availability and capabilities. It is against this background that the present study has been conducted. In Nigeria, the trend toward high technology manufacturing is a young event, partly motivated by rising costs and partly encouraged by the Government as a strategy to ma intain a sustainable competitive edge. As companies automate or adopt advanced manufacturing technology, complementary changes in performance measurement systems must be implemented to reflect the new manufacturing environment.The following sections presented the results of a recent empirical study CASE STUDY METHOD A questionnaire survey design was employed as an exploratory case study. The sample was skeletal from a cross-section of companies in Nigeria that have implemented or are implementing changes in their production processes. Respondents were asked to consider the usefulness of selected performance measures. helpfulness has been operationalized as the frequency of use of each measure. Based on a total of 200 questionnaires distributed, 36 useable replies were received, given a response rate of 18 percent.Response rates of this level were arranged with previous other studies of Ghosen el al, 1992 Petzall el. Al, 1991. Responding companies were classified by size musing sa les turnover as the proxy measure, as follows N20million and below (7. 5%), > N20 million N100 million (17. 5%) > N100 million (75%). It was not surprising to find a higher dower of response from the larger companies, because previous studies have found size as important determinant for a company to adopt a flexible manufacturing strategy (Schoch, el. l, 1994). EMPIRICAL FINDINGS AND DISCUSSION display panel 1 shows that at to the lowest degree 63 percent of respondents indicated their dissatisfaction with the existing performance measure system. As more and more companies turn to automation or other advanced technology for their manufacturing processes, it is not unexpected that performance measures originally designed for a labour intensive environment will no longer be appropriate.What is renowned is that 37 percent of respondents describe that they were either satisfied with the existing system (26%) or not sure see any need for significant changes to the system (11%). Many of such companies are currently going through the different stages of implementing changes to their manufacturing processes. So it may not be surprising that 37 percent continue to rely on the traditional measures. shelve 1 OVERALL RESPONSE TO TRADITIONAL PERFORMANCE MEASURE FREQUENCY (EXPRESSED AS %) Satisfied 26 Did not see any significant change needed 11 Dissatisfied 63 Total 100 Table 2 presents findings on the usefulness of selected traditional performance measures. These results are consistent with the overall findings above. For example, for five of the eight measures, the percentage of respondents indicating useful is also lower, ranging from 61. 3 percent for standard cost overhead to 41. 4 percent for earned hours, and these correspond to the overall 63 percent who expressed dissatisfaction with traditional measures.As prior indicated, not all companies have fully automated, so some traditional measures have been regarded as still useful, such as purcha se price variance reported by 86. 7 percent. TABLE 2 USEFULNESS OF TRADITIONAL PERFORMANCE MEASURES expedient Not or Less multipurpose Materials price variance 86. 7% 13. 3% Standard cost overhead 61. 3% 38. 7% cow dung factor built into standard overhead 51. 6% 48. % Labour Reporting 58. 6% 41. 4% Earned Hours 41. 4% 58. 6% Machine Utilization 78. 8% 21. 2% Net Income 85. 7% 14. 3% Return on Investment (total assets) 50. 0% 50. % Average 64. 1% 35. 9% The new performance measures presented in Table 3 relate to customer responsiveness, quality, time, innovation and human resources factors, reflecting the strategic objectives of the new manufacturing environment. There is overtake evidence that these measurers were found to be useful by most respondents. The overall average of 83. 7 percent compares favourably against the 64. 1 percent for the traditional measures. TABLE 3 USEFULNESS OF NEW PERFORMANCE MEASURE profitable Not or Less Useful Customer Complaints 88. 6% 11. 4% Warranty Claims 75. 8% 24. 2% On-time Delivery 93. 9% 6. 1% Manufacturing Quality Index 82. 4% 17. % Inventory Levels 88. 9% 11. 1% Vendor Quality 84. 8% 15. 2% make up of Quality 84. 4% 15. 6% Scrap Naira 85. 7% 14. 3% Throughput Time 91. 2% 8. % Cycle Time 78. 1% 21. 9% Waste Time 72. 7% 27. 3% Product woo Improvement 70. 0% 30. 0% Inventory Turnover 88. 2% 11. 8% Turnover of Products 78. 8% 21. % Employee Turnover 86. 1% 13. 9% Average 83. 7% 16. 3% Cross-tabulation analyses were performed by company size and years of experience in business. Only significant results have been reported in Table 4 and 5. Larger companies found four specific new performance measures more useful than the smaller companies. On-time deliveries (X2 = 7. 92, df = 2, p < . 05) inventory levels (X2 = 5. 98, df = 2, p < . 05) throughput time (X2 = 9. 80, df = 2, p < . 1) and inventory turnover to be the forerunners in implementing technological innovations, and so find new performance measures more appropriate. Smaller companies tend to lag behind in implementing changes, so adoption of these new measures is not as widespread. In table 5 significant results were found for vendor quality (X2 = 6. 32, df = 2, p < . 05) and throughput time (X2 = 5. 00, df = 2, p < . 10). Companies with 5 years or less in business reported the new measures as useful compared to companies in the other categories, especially in regard to vendor quality longer effected companies have developed special relationship with selected vendors and, consequently, vendor quality is no longer of major concern.In contrast, more recently established companies need to identify vendors who can meet the more stringent demands in high-tech manufacturing, such as just-in-time deliveries and supply of quality materials. TABLE 4 CHI-SQUARE TESTS FOR NEW PERFORMANCE MEASURES BY COMPANY SIZE Company Size On-time Deliveries Inventory Levels Throughput Time Inventory Turnover N20m &038 below Useful 66. 7% 66. 7% 66. 7% 66. 7% Not Useful 33. 3% 33. 3% 33. 3% 33. % >N20m-N100m Useful 85. 7% 71. 4% 71. 4% 71. 4% Not Useful 14. 3% 28. 6% 28. 6% 28. 6% >N100m Useful 100. 0% 96. 7% 75. 0% 96. 7% Not Useful 0. % 3. 3% 25. 0% 3. 3% TABLE 5 CHI-SQUARE TESTS FOR NEW PERFORMANCE MEASURES BY YEARS IN BUSINESS Years in Business Vendor Quality Throughput Time 5 YEARS Useful 100. 0% 100. 0% Not Useful 0. 0% 0. % >5 YEARS 10 YEARS Useful 88. 89% 77. 8% Not Useful 11. 11% 22. 2% >10 YEARS Useful 60. 0% 100. 0% Not Useful 40. 0% 0. 0% closure AND SUMMARYEffective performance measurement and controllership are necessary to locate and monitor resources. As competency becomes a more critical factor in creating and maintaining competitive advantage greater attention must be given to strategic issues concerning customer responsiveness, quality, time, innovation and human resources factors than a cost-minimization mass-production str ategy, in order that companies can remain competitive. To this end, a performance measurement system capable of showdown these strategic objectives also must be in place. This study reported the findings of a survey on the usefulness of selected traditional and new performance measures used by Nigerian companies that have adopted flexible manufacturing strategy.The results indicated that the majority of these companies considered the new performance measures useful particularly among the larger companies and among those with 5 years or less of business experience. 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