Concept of Performance Measurement
Performance measurement is one of the most essential factors in the total quality initiatives of an organization. It is concerned with managing the result and minimizing the overall variation in products or processes.
The primary goal of performance measurement is to make efficient decisions based on actions affecting products, processes, and output. Performance measurement is principally an overall management system that aims at detecting and preventing errors so as to reach conformance of the quality of products, services, or processes to consumer needs.
Table of Contents
- 1 Concept of Performance Measurement
- 2 Objectives of Performance Measurement
- 3 Typical Measurement
- 4 Criteria for Measurement
- 5 Strategic Performance Measurement
Additionally, it intends to process optimization by reaching enhanced effectiveness and efficiency of products, services, and processes. Performance measurement comprises significant metrics, data collection and analysis, and enhanced actions.
Performance measurement plays a major role in:
- Determining and tracking organizational performance
- Administering and controlling business processes
- Identifying opportunities for regular enhancement
- Comparing performance against the desired standards
Quality-related performance measures include the assessment of processes, supply chain performance, inventory limitations, and so on. The performance measurement process of an organization must respond to the following queries:
It is basically the purpose of performance measurement. An organization may measure its performance to:
- Ensure that consumer needs are met
- Set and fulfill process aims
- Give standards for assessment
- Emphasise quality issues
- Determine the cost of quality
- Substantiate the utilization of resources
- Offer views for motivating constant enhancement effort
What to Measure
An organization needs to gauge its efficiency, effectiveness, quality, productivity, and suitability so as to find its overall performance.
When to Measure
Performance can either be estimated when the processes are performed or after the result is produced. Organizations generally choose the in-process measurement of performance as it corrects flaws there and then without affecting the by and large process cycle.
How to Measure
It involves the selection of a method to be used for a specific measurement, the measurement tool required, calibration and precision requirements, etc.
Objectives of Performance Measurement
In the recent aggressive business milieu, organizations require to continually ensure how they are performing to endure in the market. Performance measurement is a vital technique that supports organizations to assess their performance on a timely basis and ensure enhanced efficiency.
Without an efficient measurement system, precise decisions cannot be completed. As a result, efficient performance measurement is critical for an organization.
These objectives of performance measurement are explained as follows:
Performance measurement must facilitate an organization to perceive variations in the performance and the required performance and undertake preventive measures. This supports in lessening variations and meeting organizational aims in the required time.
Performance measurement is a self-assessment technique to examine process competence and efficiency. This supports an organization to determine the bottlenecks in processes and make corrections before they obstruct the standard functioning of the organization.
Performance measurement must permit an organization to recognize the field of enhancement by spotting flaws and defective processes. In such a manner, it offers opportunities for constant enhancement.
Performance management must enable an organization to avoid flaws in services, products, and processes; ensure that organizational objectives and consumer needs are reached as decided; conform to quality standards; and recognize flaws and fix them.
Typical performance measurement helps an organization in periodically set business goals and then provide feedback to managers on progress towards those goals. These goals can be short-term or long-term. Performance measurement is a primary building block of TQM.
Traditionally, organizations focused on measuring performance in financial terms. Thus, conventional performance measures were based on cost accounting information. However, these measures provided little support to organizations in their quality drive. In today’s business environment, for the success of an organization, performance should be measured against the result delivered to customers.
Criteria for Measurement
In total quality management, measuring performance requires a conceptual framework. This framework lists the criteria for what should be measured.
The following are the criteria for measuring and evaluating performance:
It involves assessing the results achieved at any point in operations. Such criteria also include reviewing inputs, process activities, and outputs and outcomes.
It involves measuring performance against the number of resources utilized to produce an output or outcome. These resources can include personnel, materials, facilities, and money.
It involves checking whether the set quality standards are met and whether products and services meet customer requirements. Examples are poor quality may include defective products, rework needed, level of customer dissatisfaction, and so on.
It involves assessing the time taken to complete a particular activity, such as producing a lot of products, order shipping, problem-solving, etc. This criterion also involves checking the time experienced by a customer waiting for a product or service.
It involves checking the profitability of an organization, management of funds, budget limits, and so on.
It involves checking the condition of physical amenities and organizational culture.
Strategic Performance Measurement
Strategic Performance Measurement (SPM) is a process of defining and working toward attaining strategic objectives and aligning behaviors and attitudes with an aim to improve organizational performance.
It is a powerful tool for measuring an organization’s performance against its strategic goals. SPM helps organizations in the following ways:
- Developing, implementing, and assessing organizational strategy.
- Communicating the results attained to stakeholders, thereby building t brand and reputation.
- Facilitating performance improvement culture and fostering organizational learning; thereby motivating employees at all levels.
The strategic performance of an organization is measured on the basis of four perspectives, which are explained as follows:
- Financial Perspective: An organizational strategy is said to be effective if it meets its financial goals. These financial goals are the targets set for revenue growth with the existing product or service lines, profit margins, total cost. Financial perspective goals can also be related to improved asset utilization, speedy collection of receivables, etc.
- Customer Perspective: Every organization focuses on meeting customers’ requirements while formulating its strategy. The customer-related goals of an organization (included in a strategy) can be improved customer acquisition and retention, increased market share, quick response to customer needs, optimum product mix, maximum customer satisfaction, strong brand image, etc.
- Internal Process Perspective: A strategy also has internal process goals related to improved employee productivity, short process cycle times, low cost, reduced inventory levels, increased service response times, etc.
- Learning and Growth Perspective: These are the intangible goals incorporated into an organizational strategy. These goals can be related to better training to improve the skills and competencies of employees; rewards for performers; innovative contributions; employee retention and motivation; and so on.
The SPM process begins at the top level of management and involves the following steps:
- Creating the vision and formulating the strategy
- Building the top-level scorecard
- Educating and communicating strategic goals to stakeholders
- Creating an effective reward system
- Reviewing progress on a continuous basis
- Modifying the strategy if needed as per the review