Allulite Windows and Joinery's Performance Measurement System - Assignment Example

ALLULITE WINDOWS AND JOINERY PERFORMANCE MEASUREMENT SYSTEM EXECUTIVE SUMMARY Allulite Windows and Joinery is a manufacturer of aluminum doors, windows and other joinery products for residential and commercial applications. The company intends to incorporate more effective performance measurements systems for reviewing and compensating workers. This report provides comprehensive analysis of the techniques with a focus on Balance Score Card, alongside also highlighting merits and demerits associated with the technique. The report also concludes with recommendation if the firm shall adopt the mentioned technique or not. BACKGROUND Allulite Windows and Joinery is a manufacturer of aluminum doors, windows and other joinery products for residential and commercial applications. Company has various hierarchy levels and compensation to each has been linked with the financial performance only. Upon reviewing, company requires to incorporate some aspects of non-financial performances to create more strongly bonded connection of operations with strategy. I have been assigned with the task to suggest some comprehensive measurement technique to the firm. This report, herein, provides complete analysis of alternative available to the firm. Also this report has provided in-depth analysis of Balance Score Card being as among widely used techniques and its prospective suitability to the firm. PERFORMANCE MEASUREMENT TECHNQUES Performance measurements techniques are used to evaluate the position of any company on the road that leads to the destination it has defined in vision. These performance measurement techniques vary from industry to industry and include both financial and non-financial measures. Every performance measure is required to meet the following aspects to be eligible for the application (Price Waterhouse Coopers, 2006): Provide balance and comprehensive analysis. Provides fair review of the business Declares necessary information regarding position, performance and development of business. There is large number of performance measures available and making choice regarding as the key performance indicator (KPI) is the critical decision. PWC developed model for the comprehensive Communication of KPI which is as follows: Link to strategy: Measure must have developed link with strategy. Definition and calculation: clearly defined measures ensure understandability for investors instead of industry specific jargon oriented mechanism. Purpose: It must also clearly state the purpose of its usage in terms of benefit it will bring to firm. Source, assumptions and limitation: this information increases the reliability of the measure. Future targets: explanation regarding the targets that are expected to be achieved in future. Reconciliation to GAAP: Provides conciliation to GAAP if they are not in accordance with GAAP principles. Trend data: capable of providing trend analysis over a period of time for more relevant view. Segmental: Segmented review that is industry or strategy specific shall also be provided in case of measure is companywide representation. Changes in KPIs: Based on changes in conduct of businesses and strategy KPI’s shall also be upgraded. Benchmarking: Every measure must be reviewable against some benchmark and not an isolated measure. Measures that are in-accordance with the guideline model provided above can be adopted irrespective of being financial or non financial measure. Some KPI’s specific to industry are summarized below: (Price Waterhouse Coopers, 2006) ALTERNATIVES AVAILABLE TO ALLULITE WINDOWS AND JOINERY Measures that already are part of Allulite Windows and Joinery shall be aligned and hence, updated as required for meeting the standards set in model above. For instance, the production performance measurement can be upgraded to meet the quality, delivery, service and total cost. Furthermore, quality measurement shall be assigned some rating criteria with benchmark of acceptance, rejection or customer feedback etc. Moreover, analysis of various cost components, their percentage contribution in total cost overall positive and negative impact of variability in cost components etc. On the external front, comparison from industry benchmark; declaration of positive or negative position against mentioned benchmark; customer retention; company growth as well as industry growth etc. All these will provide considerable insight about the company position and will highlight areas of improvement. All these measurements, however, must be aligned more tightly with the strategic goal and meeting the specifications mentioned in the model. Mistakes in selecting the performance can result in havoc. For instance, top management of the manufacturing enterprise shall translate through various ways to each level of hierarchy the focus on energy efficient mechanisms. At the same time this energy efficiency mechanism shall not result in outcome product that has compromised quality etc. NON FINANCIAL MEASURES Alongside financial measure, importance and contribution of non-financial measure cannot be avoided. Non financial measures such as customer satisfaction, product quality, and employee turnover etc are all critical to firm (Hilton, 2010). Among other information combination of accounting and non- financial measure provides also guideline for the management compensation (Hofmann, 2001). These measures carry no intrinsic value for the director. Rather, they provide information as leading indicators. Non financial measures develop trend that contains information for the expected future performance. This information is not available in simultaneous accounting measures applied for evaluating performance (Hofmann, 2001). However, while employing non-financial measurement technique management sometimes has to encounter difficulty in relating their result with the financial/ accounting measures (Hofmann, 2001). BALANCE SCORE CARD Among performance measures that have non-financial measures as their central theme is Balance Score Card (Hofmann, 2001). Balance Score Card (BSC) is among the most used performance measurement techniques in the current business world. Basic motive behind the balance score card is to highlight the critical importance of the link by making incentive-compensation or balanced paychecks that ensure compensation hi balance with objectives achieved. BSC accounts the principle of “Everyone’s Everyday Job” as s sub-component of the Making Strategy with the focus with organization strategy. Balance Score Card covers the company strategy from four different perspectives, unlike the single perspective of the financial / accounting measures. These Four perspectives are: Financial perspective Customer perspective Innovation and learning perspective Internal processes perspective (Martin) Hence, BSC provides more comprehensive view of the internal as well as external position of the firm along with being connected to the overall strategy of the firm. BALANCE SCORE CARD FOR ALLULITE WINDOWS AND JOINERY Developing balance score card has the following procedure: The Strategic Foundation Critical components Deployment The Strategic Foundation: Allulite Windows and Joinery shall follow following five stages to develop milestone to strategic foundation (Evans, 2002): 1- Establishing a clear strategy for defining course to reach the destination of vision (objectives & targets) (6a). 2- Communicating strategy to all the stakeholders (image 6b) 3- Broadly defining areas that align the organizational activity around the strategy (6c) 4- Defining limited number of areas where each objective is put into action. Limited numbers ensures minimum chances of activity over-lapping or conflict etc. 5- Finally linking strategic objectives into grids form across four perspectives to remain aligned (6d). (6a) (6b) (6c) (6C) (6d) CRITICAL COMPONENTS Once the strategy and its fencing outline has been developed, the critical stage of is to arrives. This stage requires measuring objectives, establishing target for each measurement; and initiate programs that result in the achieving these objectives are to be performed (Evans, 2002). Measurement of various aspects can be done on the basis of factors as given in sample template (6e) and later aligning the same with the salary targets of various hierarchical levels (6f): (6e) (6f) Once these have been developed, measurement and targets shall be combined with the strategic objectives defined in previous stage. Alongside programs that will be conducted to achieve the mentioned targets and objectives. Given below are the samples of two Balance score cards that will be arrived based on detailing of grid (6g, 7). (6g) (Martin) Deployment: Organization wide employment of this Balance Score card must be conducted with well thought out plan. This include assigning tasks as defined in BSC , countering challenges that come in way and also making adjustable changes as needed (Evans, 2002). For instance, cross functional teams to achieve certain objectives ensure connectivity on the various hierarchical levels (6h) etc. (6h) BSC is an attempt to link the strategy with the overall operations. It tries to develop balance between two extremes of objectives (Martin): 1- Short term and Long term objectives, 2- External (i.e. for shareholders and customers) and Internal (processes, innovation etc), 3- Leading indicators (desired result and performance driver) and Lagging indicators (outcomes) 4- Objective (e.g., financial etc) and Subjective measures (e.g., non-financial etc). ADVANTAGES OF BALANCE SCORE CARD It provides complete breakdown of the entire firm strategy along with its links with entire business operations in a single presentation. Includes four aspects of firm performance together unlike other measures that needs separate analysis for each area. Balance score card not only evaluates the immediate future but also the long term perspectives that are not accounted in accounting technique By implementing balance Scorecard Company is able to achieve desired outcome by implementing strategic actions. Short term and long term objectives when compared with the current position also provides insights about the health of the company and its capacity to meet the stated goals. DISADVANTAGES OF BALANCE SCORE CARD BSC also has some disadvantages that are discussed below: Every action strongly becomes value oriented and hence, resulting ignoring some valuable factors.. Developing balance score card requires extensive exercise as each step can only be begun the completion of previous step. Moreover, first stage of strategy development and aligning is very extensive itself. The BSC does not provide any resolution to conflict if arises. Four aspects covered in balance scorecard refer to considerable information but do not account for The entire information. For instance, financial information made part of BSC only does not include the entire financial spectrum. In order to meet the BSC requirements companies often include metrics that are not applicable to their respective situation and hence, diverting the results (Evans, 2002). RECOMMENDATION TO ALLULITE WINDOWS AND JOINERY BSC is a tool designed with focus on the big businesses based as can be comprehended from its very nature and structure. Big firms have considerable financial and human capital strength as well as developed mechanism to build up strategy then devising plans and program to implement it etc. Small and medium size firms can also apply it; however, the cost of designing implementation exceeds the boundaries of firm’s capacity (Langfield-Smith, Thorne, & Hilton). Therefore, based on the scale, financial strength, availability of information that is required to developed BSC Allulite Windows and Joinery shall make decision to undertake the exercise of developing BSC. If firm doesn’t have the large scale capacity then it should focus on other options that separately develop entire information such accounting ratios etc; and hence, avoid BSC approach. References Evans, M. (2002). The Balanced Scorecard. Excellence in Financial Management, retrieved October 25, 2012 from http://www.exinfm.com/training/pdfiles/course11r.pdf Hilton, R.W. (2010). Managerial Accounting – Creating Value in a dynamic business environment. (9th ed.). McGraw – Hill, New York. Hoffman, C. (2001). Balancing Financial and Non-Financial Performance Measures. Retrieved October 25, 2012 from http://www.econbiz.de/archiv/h/uh/controlling/performance.pdf Langfield-Smith, K., Thorne, H., & Hilton, R., Management Accounting 6E, (6th ed). McGraw-Hill. Martin, J. The Balanced Scorecard Concepts. Management and Accounting Web, retrieved October 25, 2012 from http://www.maaw.info/BalScoreSum.htm Price Waterhouse Coopers. (2006). Guide to key performance indicators. Retrieved October 25, 2012 from http://www.pwc.com/gx/en/corporate-reporting/assets/pdfs/UK_KPI_guide.pdf Read More