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

USEFULNESS OF TRADITIONAL AND NEW PERFORMANCE MEASURES SOME EVIDENCE FROM NIGERIAN COMPANIES BY DR. (MRS. ) S. L. ADEYEMI segment OF BUSINESS ADMINISTRATION UNIVERSITY OF ILORIN ABSTRACT This paper distinguishs the incurings of a survey on the usefulness of selected handed-down and new death penalty measures used in some Nigeria companies that eat up latch oned a flexible manufacturing dodging. The results indicate that majority of these companies considered the new carrying out measures useful particularly among the larger companies and among those with 5 years or less of business line experience. tralatitious measures ar still useful, though to a much lesser extent. These results suggest that a combination of both traditionalistic and new measures would be needed oddly when Nigeria companies are going through the transition of implementing changes to their strategies from cost scarpering to flexible manufacturing. INTRODUCTION The combination of slower economic grow th and change magnitude competition has laboured firms in every industry to concentrate on efficient and effective deployment of elections. One result of these efforts has been the emergence of a new corporate position utilize to controllership.The controller is concerned with continuous quantity of a firms implementation. In order to carry out the measuring rod process, controllership focuses on the assessment of resources deployment and destruction attainment Numerous research initiatives puddle a bun in the oven identified the eminent correlation between superior exercises and the development and use of sophisticated assessment or touchstone capabilities. As early as 1985, A. T. Kuarney Consultants noniced that firm engaging in comprehensive performance realized goods in boilersuit productivity in the pluck of 14 to 22 percent.Effort has been expended by establishments to improve the character of information that their managers impart at their disposal to measur e, compare and guide performance. In most firms in Nigeria the traditional formats and travel reports are still in used. TRADITIONAL AND MODERN MEASURES OF PERFORMANCE AN OVERVIEW OF A REVIEW The traditional performance mensuration system has been knowing to report labour productivity, machine and capacity utilization, and standard cost variances.These are cost-efficiency-based measures derived from a strategy to minimize drudgery be, described as a cost leadership strategy, which is characterized by mass production of a new standard products musing s turn off engineering (hall, 1980 Kaplan. 1986). The modern manufacturing environment has undergone dramatic changes since the past decades mainly because of intensifier global competition, shifts in customers buying behaviour, and rapid innovation in manufacturing and information technology product.A cost-minimization and mass production strategy is no hourlong compatible with this new manufacturing scenario. Instead, issues such as responsiveness to customer needs, improving quality, reducing lead times, technological innovation and enhancing production flexibility have emerged as strategically more important to maintain competitiveness. Direct management to these issues is the essence of a flexible manufacturing strategy. (Nemetz and Fry, 1988). Despite this strategic re-orientation among the more progressive companies, performance bill systems have non kept pace with the change.The theory of organizational follow has been involved to explain this lag in making changes. The theory of organizational lag has been involved to explain this lag in making changes to focussing accounting 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 potential benefits of administrative innovations are less certain and are likely to tak e more 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 whitethorn 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 operating performance yardsticks promote inaccurate compendium, 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 sample of Nigerian Companies that have adopted flexible manufacturing strategy. The bulk of responding companies came from the electronic and other high technology product industries (60%) Business experience was categorized i nto 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 needs of manufacturing characterized by the production of standard products with high direct labour contest. Set ups are minimized to interpret uninterrupted production runs. In this way, labour and machine capacities merchant ship be fully utilized and the greatest possible output produced with a consequent decline in the overhead cost per unit of output. The competitive strategy is cost minimization, so variance reporting, overhead assimilation and capacity utilization measures appropriately take a hop 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 allo wing inventorying to build up so as to show a favourable volume variance, and delaying machine maintenance, padding the reckon or shifting expenses between accounts so as to show a favourable expenses variance.Purchasing managers, for example, may act dysfunctionally by purchasing materials based on low price considerations at the expense of quality so as to show a favourable materials price variance. The consequences of inferior quality materials purchased are manifested in increased reworks, scraps, inspections and storage of defective parts leading to higher production cost and loss of competitiveness. The volume variance as a manufacturing indicator has been criticized since traditional absorption costing 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 policy is short-sighted because any production in excess of market demand must be consigned to inventory and this runs counter to the just-in-time philosophy of maintaining a zero inventory with all its attendant benefits (Sadhwani, et al, 1985). Variance reports at the managers level are as well as too aggregated for meaningful 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 civilization of continuous improvement. Capacity utilization measures productivity improvement, automation and robotics have shrank direct labour cost to only a small fraction of the total manufacturing cost, whereas overheads have increased fundamentally. 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 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 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 increasing pool of overheads, the incurrence of which may not be totally 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 apparently showing profitable margins simply are actually incurring loses (Beckett & Dang, 1992). Thus an incorr ect signal about profitability is receivedEarned hours, as a measure of labour efficiency, is also deficient since it provides an erroneous signal to supervisors to maximize earned hours by keeping employees gainfully occupied regardless of market conditions. It would have been more beneficial in the long term to use the time for training or cross training of operators so as to move on 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, maximizing the utilization rate encourages continuous machine usage at the expense of regular maintenance. Moreover, the focus on utilization may lead to inadequate tension on quality. Short-term Financial Measures Although achieving profit and an acceptable return on investment are the raison detre for a company to stay in business, the t raditional 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 & 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 value if discretionary expenditures have to be reduced for short-term gains. Such expense is fact essential for new products development production process improvement, worker skills training and upgrading distribution networks and promoting 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 Nair a 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 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 improved quality and shorter delivery times (Northey, 1991). Customer responsiveness examines a firms relative ability to satisfy customers. Therefore, high customer responsiveness translates into greater customer retention, leading to longer-term.Profitability as the costs of acquiring and serving customers come down. Customers responsiveness measures therefore must be designed into the performan ce measure system. These include 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 desired company objectives.For example, a system that evaluates how well customer demands have been convenient can better support efforts in achieving sustainable competitive advantage than one that emphasizes labour or machinery efficiency in internal operations (Beckette & Dang, 19910, Goldhar & chaplet 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 individual activity. Quality refers to the degree to which a products specific features in terms of workmanship durability and so on satisfy the requirements of a particular cust omer.Poor quality can result 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 difficult 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 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 that meets the complete delivery of all items requested, delivery customers request figure with one-day tolerance, complete and accurate documentation supporting the order and perfect condition, that is, faultlessly installed, corre ct 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 identifying existing problems and assessing whether the quality objective is adequately meet. duration Reducing level times is also of the new manufacturing strategy through out, (manufacturing cycle) time measures the amount of time require to convert raw materials into finish products. Cycle 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 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 b ut no value to customers (Alexander et al, 1991). Using throughput and cycle times as performance measures help managers to eliminate these non-value adding activities, considered as waste time, and achieve substantial cost savings.Thus, fit in 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 high-speed 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 valued by customers. Only in this way are companies able to enlarge their market region and maintain a competitive edge.Introducing technological innovation and advanced design features into new products is costly initially and requires operational flexibility unlike cycle have unique characteristics (Ainikal & Teo, 1992) that will requi re 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, presumptively 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 theatre of operations has been conducted. In Nigeria, the trend toward high technology manufacturing is a recent event, partly motivated by rising costs and partly encouraged 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 t o 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. expedientness has been operationalized as the frequency of use of each measure. establish 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 conformable with previous(prenominal) 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 N20one thousand thousand and below (7. 5%), N20 million N100 million (17. 5%) N100 million (75%). It was not surpris ing 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 Table 1 shows that at least 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 unannounced that performance measures originally designed for a labour intensive environment will no longer be appropriate.What is noteworthy is that 37 percent of respondents inform 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 co ntinue to rely on the traditional measures. TABLE 1 OVERALL RESPONSE TO TRADITIONAL PERFORMANCE MEASURE FREQUENCY (EXPRESSED AS %) Satisfied 26 Did not see any significant change needed 11 Dissatisfied 63 perfect 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 mark 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 regarded as still useful, such as purchase price variance report by 86. 7 percent. TABLE 2 USEFULNESS OF TRADITIONAL PERFORMANCE MEASURES Useful not or Less Useful Materials price variance 86. 7% 13. 3% Standard cost overhead 61. 3% 38. 7% Scrap work out 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 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 Useful 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. % take stock Levels 88. 9% 11. 1% Vendor Quality 84. 8% 15. 2% Cost of Qualit y 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 Cost Improvement 70. 0% 30. 0% arsenal 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 fou nd 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, e supererogatoryly 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 taut 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 sizing On-time Deliveries Inventory Levels Throughput 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 geezerhood 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 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 strategy, in order that companies can remain 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 surve y 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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