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

USEFULNESS OF TRADITIONAL AND parvenu PERFORMANCE nibS several(prenominal) EVIDENCE FROM NIGERIAN COMPANIES BY DR. (MRS. ) S. L. ADEYEMI DEPARTMENT OF BUSINESS ADMINISTRATION UNIVERSITY OF ILORIN summary This paper cover ups the findings of a survey on the intentionfulness of selected tralatitious and rising-madefangled feat taxs use in al just about Nigeria companies that possess adopted a on the t suitable manuf strikeuring dodge. The results indicate that majority of these companies considered the new carrying start measures useful specially among the larger companies and among those with 5 years or slight of business insure.Traditional measures argon unchanging useful, though to a much lesser extent. These results suggest that a combination of both traditional and new measures would be inevitable specially when Nigeria companies ar sledding by the transition of implementing changes to their st treasuregies from price ensueership to conciliatory manuci rcumstanceuring. INTRODUCTION The combination of slower economic growth and ontogenesisd ambition has forced strongs in every industry to concentrate on streamlined and effective deployment of choices. One result of these efforts has been the emergence of a new corporate position devoted to controllership.The controller is concerned with continuous bill of a firms execution. In invest to carry come forward the step process, controllership focuses on the assessment of resources deployment and goal attainment Numerous research initiatives arrest identified the towering correlation betwixt superior operations and the development and use of sophisticated assessment or measurement capabilities. As early as 1985, A. T. Kuarney Consultants noniced that firm engaging in comprehensive act accomplished improvements in overall productivity in the range of 14 to 22 portionage.Effort has been expended by establishments to improve the eccentric of information that their musi c come up toors entertain at their government activity to measure, comp atomic number 18 and guide surgical process. In most firms in Nigeria the traditional formats and decease reports argon still in used. TRADITIONAL AND MODERN MEASURES OF PERFORMANCE AN OVERVIEW OF A REVIEW The traditional performance measurement system has been designed to report wear productivity, machine and capacity use of goods and services, and well-worn speak to variances.These are exist-efficiency-based measures derived from a strategy to minimize yield costs, described as a cost leadership strategy, which is characterized by mass production of a new hackneyed products musing stable technology (hall, 1980 Kaplan. 1986). The modern manufacturing environment has underg one(a) dramatic changes since the yesteryear decades mainly because of intensive global competition, shifts in nodes buying behaviour, and rapid designing in manufacturing and information technology product.A cost-minimization and mass production strategy is no long-term compatible with this new manufacturing scenario. Instead, issues such(prenominal)(prenominal) as reactivity to client studys, improving fictional character, reducing lead ages, expert innovation and enhancing production flexibility claim emerged as strategically more grave to maintain agonisticalness. Direct attending to these issues is the essence of a flexible manufacturing strategy. (Nemetz and Fry, 1988). in spite of this strategic re-orientation among the more progressive companies, performance measurement systems have not kept pace with the change.The theory of organizational send back has been mixed to relieve this lag in making changes. The theory of organizational lag has been involved to explain this lag in making changes to management be systems of which performance system forms a part. According to this theory, administrative innovations in management accounting (and performance) systems tend to lag behind the technical innovations of manufacturing. This is because the electric potential benefits of administrative innovations are less certain and are likely to take more prison term to have both 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 antiquated sets of direct performance yardsticks promote inaccurate analysis, poor operating decisions, and inappropriate 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 using a test of Nigerian Companies that have adopted flexible manufacturing strategy. The bulk of responding companies came from the electronic and another(prenominal) high technology product industries (60%) commerce experience was categorized into groups, as follows 5 years 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 exigencys of manufacturing characterized by the production of standard products with high direct labour contest. Set ups are minimized to chink uninterrupted production runs. In this way, labour and machine capacities can be fully utilized and the greatest possible output produced with a sequel reduction in the overhead cost per unit of output. The competitive strategy is cost minimization, so variance reporting, overhead submersion and capacity use measures appropriately 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 & Soucy, 1987). This is because traditional variance analysis encourages dysfunctional behaviours such as allowing gunstock to build up so as to show a fortunate volume variance, and delaying machine maintenance, padding the budget or shifting expenses between accounts so as to show a complimentary expenses variance.Purchasing managers, for example, may act dysfunctionally by purchasing materials based on lowest price considerations at the expense of prime(a) so as to show a approbatory materials price variance. The consequences of inferior quality materials grease ones palmsd are manifested in increased reworks, scraps, inspections and computer storage of defective parts leading to high production costs and handout of competitiveness. The volume variance as a manufacturing indicator has been criticized since traditional absorption cost encourages excessive production in order to absorb the rooted(p) overheads into inventory costs.Maxi mizing capacity utilization is undeniable to accomplish cost minimization. However, such a policy is short-sighted because any production in excess of market place demand mustiness be consigned to inventory and this runs counter to the just-in- epoch philosophy of maintaining a zero inventory with all its attendant benefits (Sadhwani, et al, 1985). Variance reports at the managers level are likewise too aggregated for pregnant interpretation. Moreover, the standard cost itself may be perceived the norm eliminating any incentive for product innovation.In this case an unintended signal has been put out which impede efforts to infuse a culture of continuous improvement. Capacity utilization measures productivity improvement, automation and robotics have shrank direct labour cost to still a small fraction of the full(a) manufacturing cost, whereas overheads have increased remarkablely. disrespect these developments and the consequent impact on cost structures, reports from sur veys in various countries indicated that companies have not responded in tandem with the 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 hinderance order that are volume-driven, based on a diminished direct labour element. Such a computed burden rate is artificially inflated callable to the small direct labour base. Hen applied to an increasing mob of overheads, the incurrence of which may not be jibely volume-driven, the labour generated burden rate can 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 different products or processes (Kaplan, 1986). The overhead absorption measure gives rise to a distorted product cost analysis, so good performance is associated with products on the face of it showing profitable margins but are actually incurring loses (Beckett & Dang, 1992). thence an incorrect signal about profitability is received realize hours, as a measure of labour efficiency, is withal deficient since it provides an erroneous signal to supervisors to maximize get hours by keeping employees gainfully occupied regardless of market conditions. It would have been more beneficial in the long term to use the term for preparedness or cross training of operators so as to parent 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 accretion of inventory.Worse still, maximizing the utilization rate encourages continuous machine usage at the expense of regular maintenance. Moreover, the focus on ut ilization may lead to inadequate emphasis on quality. Short-term monetary Measures Although achieving profit and an unobjectionable return on investment are the raison detre for a company to stay in business, the traditional focus on these performance measures even so encourages managers to take a myopic view that empha coats short-term results to the detriment of long-run profitability (Banks & 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. cartel on short-term financial measures can lead to dysfunctional decisions since these indications decease to signal the erosion of a firms value if discretionary expenditures have to be reduce for short-term gains. Such spending is fact essential for new products development production process improvement, worker skills training and upgrading distribution networks and promoti ng customer awareness (Kaplan, 1986).Furthermore, profit measures represent outcomes that may not fully reflect managements effort (Drucker, 1964). Stated differently, total performance cannot be completely captured by Naira profits. NEW PERFORMANCE metre 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 accusing of cost efficiency will be incongruent with this new strategy.It is necessary to redesign the system so as to reflect this change in strategic objectives. Customer Responsiveness increasingly, customers demand not only a better service but also a wider variety of products with amend quality and shorter delivery time ( nonethey, 1991). Customer responsiveness examines a firms relative ability to satisfy customers. thitherfore, high customer responsiveness translates into greater customer retention, leading to longer-term.Profitability as the costs of acquiring and component customers come down. Customers responsiveness measures therefore must be designed into the performance measure system. These include reporting on the number of customer complaints, guaranty 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 desired company objectives.For example, a system that evaluates how well customer demands have been satisfied can better support efforts in achieving sustainable competitive good than one that emphasizes labour or machinery efficiency in sexual operations (Beckette & Dang, 19910, Goldhar & miscellany 1991). Quality Quality measures, which are the most process-oriented evaluations are designed to determine the effectiveness of a series of activities rather than the undivided activity. Quality refers to the degree to which a products specific features in terms of workmanship durability and so on satisfy the use upments 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 normally difficult to measure because of the broad scope. A contemporary measurement thought that is increasing in interest is the stainless order.Delivery of the perfect order is the ultimate measure of quality operations. The perfect order represents ideal performance from an operational perspective, a multi-industry consortium defines the perfect order as one tha t meets the complete delivery of all items requested, delivery customers request date 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, trafficker quality, cost of quality and scrap cost. All these provide valuable feedback for identifying be problems and assessing whether the quality objective is adequately meet. clip Reducing level times is also of the new manufacturing strategy through out, (manufacturing cycle) time measures the amount of time required to convert raw materials into completed products. pedal time is the total value 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 related to the time r equired 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 attend to managers to eliminate these non-value adding activities, considered as waste time, and achieve substantial cost savings.Thus, jibe to Lippa (1990) Shorter cycle times can result in less entire goods inventory, less forecast reliance, strategic capability when a firm reacts to customer demands faster than the competition and the ability to exploit opportunities). Innovation in at onces competitive environment companies must continuously engage in product improvement be designing new and improved products with incomparable characteristics valued by customers. Only in this way are companies able to enlarge their market share and maintain a comp etitive edge.Introducing technological innovation and go on design features into new products is costly initially and requires operational flexibility unlike cycle have unique characteristics (Ainikal & Teo, 1992) that will require performance measures tailored for this purpose such as derangement by products and product cost improvement. Human Resources The benefit of adopting a long-term participation 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 experienced 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 recent event, partly motivated by acclivitous costs and partly encourag ed by the Government as a strategy to maintain 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 drawn 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. profit 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 repartee rate of 18 percent.Response rates of this level were consistent with previous other studies of Ghosen el al, 1992 Petzall el. Al, 1991. Responding companies were classified by size musing sales turnover as the proxy measure, as follows N20 one million million and below (7. 5%), N20 million N speed of light million (17. 5%) N100 million (75%). It was not impress to find a higher percentage 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 circuit board 1 shows that at least 63 percent of respondents indicated their dissatisfaction with the actual 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 noteworthy is that 37 percent of respondents reported that they were either satisfied with the existing system (26%) or not sure see any need for sig nificant 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. plug-in 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 earlier indicated, not all companies have fully automated, so some traditional measures have been r egarded as still useful, such as purchase price variance reported by 86. 7 percent. TABLE 2 USEFULNESS OF TRADITIONAL PERFORMANCE MEASURES reusable Not or slight efficacious Materials price variance 86. 7% 13. 3% Standard cost overhead 61. 3% 38. 7% Scrap 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% interlock Income 85. 7% 14. 3% Return on Investment (total assets) 50. 0% 50. % intermediate 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 overwhelming 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 Use ful 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. % armoury Levels 88. 9% 11. 1% seller Quality 84. 8% 15. 2% Cost of Quality 84. 4% 15. 6% Scrap Naira 85. 7% 14. 3% Throughput m 91. 2% 8. % Cycle Time 78. 1% 21. 9% Waste Time 72. 7% 27. 3% yield Cost Improvement 70. 0% 30. 0% Inventory Turnover 88. 2% 11. 8% Turnover of Products 78. 8% 21. % Employee Turnover 86. 1% 13. 9% bonny 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 te chnological innovations, and so find new performance measures more appropriate. pureer 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 established 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 technology 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 Throughp ut Time Inventory Turnover N20m & 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% CONCLUSION AND SUMMARYEffective performance measurement and controllership are necessary to locate and monitor resources. As qualification 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-minimizat ion mass-production strategy, in order that companies can roost competitive. To this end, a performance measurement system capable of meeting 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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