USEFULNESS OF TRADITIONAL AND NEW PERFORMANCE MEASURES: SOME EVIDENCE FROM NIGERIAN COMPANIES

BY DR. (MRS.) S. L. ADEYEMI DEPARTMENT OF BUSINESS ADMINISTRATION UNIVERSITY OF ILORIN

ABSTRACT This paper reports the findings of a survey on the usefulness of selected traditional and new performance measures used in some Nigeria companies that have adopted a flexible manufacturing strategy. The results indicate that 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. Traditional measures are still useful, though to a much lesser extent. These results suggest that a combination of both traditional and new measures would be needed especially when Nigeria companies are going through the transition of implementing changes to their strategies from cost leadership to flexible manufacturing. INTRODUCTION The combination of slower economic growth and increased competition has forced firms in every industry to concentrate on efficient and effective deployment of resources. One result of these efforts has been the emergence of a new corporate position devoted to controllership. The controller is concerned with continuous measurement of a firms performance. n order to carry out the measurement process, controllership focuses on the assessment of resources deployment and goal attainment

Numerous research initiatives have identified the high correlation between superior performances and the development and use of sophisticated assessment or measurement capabilities. "s early as !#$5, ". T. %uarney &onsultants noticed that firm engaging in comprehensive performance reali'ed improvements in overall productivity in the range of !( to )) percent. *ffort has been expended by establishments to improve the +uality of information that their managers have at their disposal to measure, compare and guide performance. n most firms in Nigeria the traditional formats and travel reports are still in used. TRADITIONAL AND MODERN MEASURES OF PERFORMANCE: AN OVERVIEW OF A REVIEW The traditional performance measurement system has been designed to report labour productivity, machine and capacity utili'ation, and standard cost variances. These are cost, efficiency,based measures derived from a strategy to minimi'e production costs, described as a cost leadership strategy, which is characteri'ed by mass production of a new standard products musing stable technology -hall, !#$./ %aplan. !#$01. The modern manufacturing environment has undergone dramatic changes since the past decades mainly because of intensive global competition, shifts in customers buying behaviour, and rapid innovation in manufacturing and information technology product. " cost,minimi'ation and mass production strategy is no longer compatible with this new manufacturing scenario. nstead, issues such as responsiveness to customer needs, improving +uality, reducing lead times, technological innovation and enhancing production flexibility have emerged as strategically more important to maintain competitiveness. 2irect attention to these issues is the essence of a flexible manufacturing strategy. -Nemet' and 3ry, !#$$1. 2espite this strategic re,orientation among the more progressive companies, performance measurement systems have not 4ept pace with the change. The theory of organi'ational lag has been involved to explain this lag in ma4ing changes. The theory of organi'ational lag has been involved to explain this lag in ma4ing changes to management accounting systems of which

performance system forms a part. "ccording to this theory, administrative innovations in management accounting -and performance1 systems tend to lag behind the technical innovations of manufacturing. This is because the potential benefits of administrative innovations are less certain and are li4ely to ta4e more time to have any recogni'able impact -2un4, !#$#1. 3ailure to ma4e complementary changes in the performance measurement system to fit with the companys new flexible manufacturing strategy may lead to dysfunctional conse+uences. "s pointed out by 5owell and 6oucy, -!#$71. 8The manufacturing transformation in many companies has been slowed, if not set bac4, as anti+uated sets of operating performance yardstic4s promote inaccurate analysis, poor operating decisions, and inappropriate resource allocations9. 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 &ompanies that have adopted flexible manufacturing strategy. The bul4 of responding companies came from the electronic and other high technology product industries -0.:1 ;usiness experience was categori'ed into groups, as follows< 5 years and below -7.5:- = 5,!. years -)).5:1 and = !. years -5.:1. TRADITIONAL PERFORMANCE MEASURES Traditional performance measures have been developed to meet the needs of manufacturing characteri'ed by the production of standard products with high direct labour contest. 6et ups are minimi'ed to assure uninterrupted production runs. n this way, labour and machine capacities can be fully utili'ed and the greatest possible output produced with a conse+uent reduction in the overhead cost per unit of output. The competitive strategy is cost minimi'ation, so variance reporting, overhead absorption and capacity utili'ation measures appropriately reflect this strategy.

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Variance Re !r"in#: The use of variance accounting for managerial performance evaluation has been critici'ed as counter,effective in the modern global environment -5owell ? 6oucy, !#$71. This is because traditional variance analysis encourages dysfunctional behaviours such as allowing inventory to build up so as to show a favourable volume variance, and delaying machine maintenance, padding the budget or shifting expenses between accounts so as to show a favourable expenses variance. @urchasing managers, for example, may act dysfunctionally by purchasing materials based on lowest price considerations at the expense of +uality so as to show a favourable materials price variance. The conse+uences of inferior +uality materials purchased are manifested in increased rewor4s, scraps, inspections and storage of defective parts leading to higher production costs and loss of competitiveness. The volume variance as a manufacturing indicator has been critici'ed since traditional absorption costing encourages excessive production in order to absorb the fixed overheads into inventory costs. Aaximi'ing capacity utili'ation is necessary to achieve cost minimi'ation. 5owever, such a policy is short,sighted because any production in excess of mar4et demand must be consigned to inventory and this runs counter to the just,in,time philosophy of maintaining a 'ero inventory with all its attendant benefits -6adhwani, et al, !#$51. Bariance reports at the managers level are also too aggregated for meaningful interpretation. Aoreover, the standard cost itself may be perceived the norm eliminating any incentive for product innovation. n this case an unintended signal has been put out which impede efforts to infuse a culture of continuous improvement. &apacity utili'ation measures productivity improvement, automation and robotics have shran4 direct labour cost to only a small fraction of the total manufacturing cost, whereas overheads have increased significantly. 2espite these developments and the conse+uent impact on cost structures, reports from surveys in various countries indicated that companies have not responded in tandem with the technological changes -6choch, et al., !##(/ Teoh, !##!1. 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. 6uch a computed burden rate is artificially inflated due to the small direct labour base. 5en 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 -%aplan, !#$01. The overhead absorption measure gives rise to a distorted product cost analysis, so 8good performance is associated with products apparently showing profitable margins but are actually incurring loses -;ec4ett ? 2ang, !##)1. Thus an incorrect signal about profitability is received *arned hours, as a measure of labour efficiency, is also deficient since it provides an erroneous signal to supervisors to maximi'e earned hours by 4eeping employees 8gainfully9 occupied regardless of mar4et conditions. t would have been more beneficial in the long term to use the time for training or cross training of operators so as to upgrade their s4ills. The machine utili'ation rate, as a measure of supervisory performance, also suffers from a number of deficiencies. t encourages the excessive use of machines for large,scale production, resulting in an unwidely accumulation of inventory. Corse still, maximi'ing the utili'ation rate encourages continuous machine usage at the expense of regular maintenance. Aoreover, the focus on utili'ation may lead to inade+uate emphasis on +uality. S$!r"%"er& Financia' Mea()re(: "lthough achieving profit and an acceptable return on investment are the raison detre for a company to stay in business, the traditional focus on these performance measures however encourages managers to ta4e a myopic view that emphasi'es short,term results to the detriment of long,term profitability -;an4s ? Cheelwright, !#7#1. This is the 8gaming9 effect where management manipulates accounting figures to show favourable results or alternatively, builds in slac4 to ensure that budget targets -Aerchant, !#$51 are met. Deliance 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. 6uch spending is fact essential for new products development production process improvement, wor4er s4ills training and upgrading distribution networ4s and promoting customer awareness -%aplan, !#$01. 3urthermore, profit measures represent outcomes that may not fully reflect managements effort -2ruc4er, !#0(1. 6tated differently, total performance cannot be completely captured by Naira profits. NEW PERFORMANCE MEASUREMENT OB*ECTIVES n the new technological environment, a flexible manufacturing strategy must be implemented that focuses on customer responsiveness, +uality, time, innovation and human resources practices. " performance measurement system designed to achieve the traditional objective of cost efficiency will be incongruent with this new strategy. t is necessary to redesign the system so as to reflect this change in strategic objectives. C)("!&er Re( !n(i+ene((: increasingly, customers demand not only a better service but also a wider variety of products with improved +uality and shorter delivery times -Northey, !##!1. &ustomer responsiveness examines a firms relative ability to satisfy customers. Therefore, high customer responsiveness translates into greater customer retention, leading to longer,term. @rofitability as the costs of ac+uiring and serving customers come down. &ustomers responsiveness measures therefore must be designed into the performance measure system. These include reporting on the number of customer complaints, warranty claims, and on,time deliveries, among others. "s *ccles -!##!1 put it bluntly 8what you measure is what you get and what you measure gets attention9, indicating that performance measures must be relevant to send the right signals for employees to achieve desired company objectives. 3or example, a system that evaluates how well customer demands have been satisfied can better support efforts in achieving sustainable competitive advantage than one that emphasi'es labour or machinery efficiency in internal operations -;ec4ette ? 2ang, !##!., Eoldhar ? Fei !##!1. ,)a'i"-: Guality measures, which are the most process,oriented evaluations are designed to determine the effectiveness of a series of activities rather than the individual activity. Guality

refers to the degree to which a products specific features in terms of wor4manship/ durability and so on satisfy the re+uirements of a particular customer. @oor +uality can contribute to a significant increase in the manufacturing costs in various ways. "s 5owell and 6oucy -!##71 stated< 8The absence of good materials, highly,trained labour, and well,maintained e+uipment will dramatically increase the costs of non +uality such as scrap, rewor4, excess inventories, process and e+uipment< brea4downs, field serves, and warranty claims. 5owever, +uality is usually difficult to measure because of the broad scope. " contemporary measurement concept that is increasing in interest is 8the perfect order9. 2elivery of the perfect order is the ultimate measure of +uality 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 re+uested, delivery customers re+uest 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 +uality include the manufacturing +uality index -i.e. defect rates1, inventory levels, warranty claims, vendor +uality, cost of +uality and scrap cost. "ll these provide valuable feedbac4 for identifying existing problems and assessing whether the +uality objective is ade+uately meet. Ti&e: Deducing level times is also of the new manufacturing strategy through out, -manufacturing cycle1 time measures the amount of time re+uired to convert raw materials into completed products. &ycle 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 re+uired to produce it. &ycle time variance therefore provides useful information about non,value,adding activities such as moving, inspecting, rewor4ing, storing and waiting, that added to production costs as overhead charges but no value to customers -"lexander et al, !##!1. Hsing 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, according to Fippa -!##.1/ 6horter cycle times can result in less finished goods inventory, less forecast reliance, strategic capability when a firm reacts to customer demands faster than the competition and the ability to exploit opportunities1. nnovation in todays competitive environment companies must continuously engage in product improvement be designing new and improved products with uni+ue characteristics valued by customers. Only in this way are companies able to enlarge their mar4et share and maintain a competitive edge. ntroducing technological innovation and advanced design features into new products is costly initially and re+uires operational flexibility/ unli4e cycle have uni+ue characteristics -"ini4al ? Teo, !##)1 that will re+uire performance measures tailored for this purpose such as turnover by products and product cost improvement. .)&an Re(!)rce(: The benefit of adopting a long,term employment policy is a loyal and committed wor4force, 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. " performance measure such as employee turnover is needed to help management assess an enterprises human resource availability and capabilities. t is against this bac4ground that the present study has been conducted. n Nigeria, the trend toward high technology manufacturing is a recent event, partly motivated by rising costs and partly encouraged by the Eovernment as a strategy to maintain a sustainable competitive edge. "s 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 MET.OD " +uestionnaire 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. Despondents were as4ed to consider the usefulness of selected performance measures. Hsefulness has been operationali'ed as the fre+uency of use of each measure. ;ased on a total of ).. +uestionnaires distributed, >0 useable replies were received, given a response rate of !$ percent. Desponse rates of this level were consistent with previous other studies of Ehosen el al, !##) @et'all el. "l, !##!. Desponding companies were classified by si'e musing sales turnover as the proxy measure, as follows< N).million and below -7.5:1, = N). million I N!.. million -!7.5:1 = N!.. million -75:1. t was not surprising to find a higher percentage of response from the larger companies, because previous studies have found si'e as important determinant for a company to adopt a flexible manufacturing strategy -6choch, el.al, !##(1. EMPIRICAL FINDINGS AND DISCUSSION Table ! shows that at least 0> percent of respondents indicated their dissatisfaction with the existing performance measure system. "s 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. Chat is noteworthy is that >7 percent of respondents reported that they were either satisfied with the existing system -)0:1 or not sure see any need for significant changes to the system -!!:1. Aany of such companies are currently going through the different stages of implementing changes to their manufacturing processes. 6o it may not be surprising that >7 percent continue to rely on the traditional measures. TABLE / OVERALL RESPONSE TO TRADITIONAL PERFORMANCE MEASURE 6atisfied 2id not see any significant change needed 2issatisfied T!"a' FRE,UENCY (E0PRESSED AS 1) )0 !! 0> /22

Table ) presents findings on the usefulness of selected traditional performance measures. These results are consistent with the overall findings above. 3or example, for five of the eight #

measures, the percentage of respondents indicating 8useful9 is also lower, ranging from 0!.> percent for standard cost overhead to (!.( percent for earned hours, and these correspond to the overall 0> percent who expressed dissatisfaction with traditional measures. "s earlier indicated, not all companies have fully automated, so some traditional measures have been regarded as still useful, such as purchase price variance reported by $0.7 percent. TABLE 3 USEFULNESS OF TRADITIONAL PERFORMANCE MEASURES Aaterials price variance 6tandard cost overhead 6crap factor built into standard overhead Fabour Deporting *arned 5ours Aachine Htili'ation Net ncome Deturn on nvestment -total assets1 "verage U(e4)' $0.7: 0!.>: 5!.0: 5$.0: (!.(: 7$.$: $5.7: 5...: 56./: N!" !r Le(( U(e4)' !>.>: >$.7: ($.(: (!.(: 5$.0: )!.): !(.>: 5...: 78.9:

The new performance measures presented in Table > relate to customer responsiveness, +uality, 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 8useful9 by most respondents. The overall average of $>.7 percent compares favourably against the 0(.! percent for the traditional measures.

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TABLE 7 USEFULNESS OF NEW PERFORMANCE MEASURE &ustomer &omplaints Carranty &laims On,time 2elivery Aanufacturing Guality ndex nventory Fevels Bendor Guality &ost of Guality 6crap Naira Throughput Time &ycle Time Caste Time @roduct &ost mprovement nventory Turnover Turnover of @roducts *mployee Turnover A+era#e U(e4)' $$.0: 75.$: #>.#: $).(: $$.#: $(.$: $(.(: $5.7: #!.): 7$.!: 7).7: 7...: $$.): 7$.$: $0.!: :7.;1 N!" !r Le(( U(e4)' !!.(: )(.): 0.!: !7.0: !!.!: !5.): !5.0: !(.>: $.$: )!.#: )7.>: >...: !!.$: )!.): !>.#: /5.71

&ross,tabulation analyses were performed by company si'e and years of experience in business. Only significant results have been reported in Table ( and 5. Farger companies found four specific new performance measures more useful than the smaller companies. On,time deliveries -J) K 7.#), df K ), p L ..51/ inventory levels -J ) K 5.#$, df K ), p L ..51/ throughput time -J ) K #.$., df K ), p L ..!1 and inventory turnover to be the forerunners in implementing technological innovations, and so find new performance measures more appropriate. 6maller companies tend to lag behind in implementing changes, so adoption of these new measures is not as widespread. n table 5 significant results were found for vendor +uality -J ) K 0.>), df K ), p L ..51 and throughput time -J) K 5..., df K ), p L .!.1. &ompanies 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 +uality longer established companies have developed special relationship with selected vendors and, conse+uently, vendor +uality is no longer of major concern. n contrast, more recently established companies need to identify vendors who can meet the more stringent

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demands in high,tech manufacturing, such as just,in,time deliveries and supply of +uality materials. TABLE 6 C.I%S,UARE TESTS FOR NEW PERFORMANCE MEASURES BY COMPANY SI<E C!& an- Si=e N32& > ?e'!@ Hseful Not Hseful AN32&%N/22& Hseful Not Hseful AN/22& Hseful Not Hseful 00.7: >>.>: $5.7: !(.>: !....: ...: 00.7: >>.>: 7!.(: )$.0: #0.7: >.>: 00.7: >>.>: 7!.(: )$.0: 75..: )5..: 00.7: >>.>: 7!.(: )$.0: #0.7: >.>: On%"i&e De'i+erie( In+en"!rLe+e'( T$r!)#$ )" Ti&e In+en"!rT)rn!+er

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TABLE 8 C.I%S,UARE TESTS FOR NEW PERFORMANCE MEASURES BY YEARS IN BUSINESS Year( in B)(ine(( 8 YEARS Hseful Not Hseful A8 YEARS C /2 YEARS Hseful Not Hseful A/2 YEARS Hseful Not Hseful VenB!r ,)a'i"!....: ...: $$.$#: !!.!!: 0...: (...: T$r!)#$ )" Ti&e !....: ...: 77.$: )).): !....: ...:

CONCLUSION AND SUMMARY *ffective performance measurement and controllership are necessary to locate and monitor resources. "s competency becomes a more critical factor in creating and maintaining competitive advantage greater attention must be given to strategic issues concerning customer responsiveness, +uality, time, innovation and human resources factors than a cost,minimi'ation 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 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. Traditional measures are found to be still useful, though to a smaller extent, as companies are going through a transition of implementing changes to their manufacturing strategies. REFERENCES

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Teoh, 5. O. -!##!1, 82iscretionary or Non,2iscretionary &osts< Aanaging Q;allooning ndirect &osts in a @rofitable Aanner9, ;"$ Na"i!na' Acc!)n"in# C!n4erenceD %uala Fumpur, 6eptember, pp. !$,!#.

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