LESSON 3: PERFORMANCE

MEASUREMENT
PERFORMANCE MEASUREMENT
It is the process of collecting, analyzing, and
reporting information regarding the performance of an  This will vary from sector to sector and from
individual, group, organization, system, or component. business to business. For example, a
manufacturer producing and selling low-
Performance measures and system cost goods in high volume might focus on
performance monitoring are crucial components of production line speed
planning for operations.  While another producing smaller quantity
using high-cost components might focus
Performance measures are indicators of how well
instead on reducing production line errors
the transportation system is performing and are used in
that result in defective units.
several ways in the objectives-driven, performance-
based approach to planning for operations: Finding your SPECIFIC MEASURE
 Track progress toward operations objectives  Once you have identified your key business
 Identify needs and system performance drivers, you need to find the best way of
deficiencies measuring them. Again, your priority here
 Assess potential impacts of management and should be to look for as close a link as
operations (M&O) strategies possible with those elements of your
 Evaluate the effects of implemented projects performance that determine your success.
 Communicate progress to stakeholders
 Performance measures are inextricably tied to Using STANDARDIZED MEASURES
operations objectives. An operation objective
 There are standardized performance
typically has a performance measure embedded
measures that have been created which
in it that can be used to assess whether or not
almost any business can use. Examples
the objective has subsequently been achieved.
include balanced scorecards, ISO standards,
THE IMPORTANCE OF MEASUREMENT AND TARGET and industry dashboards.
SETTING  Choosing and using key performance
indicators.
 Performance measurement and target-setting
are important to the growth process. Selecting KPIs
 While many small businesses can run There are a number of key criteria that your KPIs
themselves quite comfortably without much should meet:
formal measurement or target-setting, for
1. They should be as closely linked as possible to
growing businesses the control of these
the top-level goals for your business.
processes offer can be indispensable.
2. Your KPIs need to be quantifiable.
THE BENEFITS OF PERFORMANCE MEASUREMENT 3. Your KPIs should relate to aspects of the
1. You will be knowledgeable on how well is your business environment over which you have
business is performing in different areas. some control.
2. You will know what triggers the changes in your Getting the MOST from your KPIs
performance. The purpose of performance measurement is
3. Performance measurement will put you in a ultimately to drive future improvements in
better position to manage your performance performance.
proactively
There are TWO MAIN WAYS you can use KPIs to
DECIDING WHAT TO MEASURE achieve this kind of management power.
Getting your performance measurement right, 1. The first is to use your KPIs to spot potential
involves identifying the areas of your business it makes problems or opportunities. Remember, your
the most sense to focus on and then deciding how best KPIs tell you what's going on in the areas that
to measure your performance in those areas. determine your business performance. If the
Focusing on the KEY BUSINESS DRIVERS trends are moving in the wrong direction, you
know you have problems to solve. Similarly, if
 Your performance measurement will be a more the trends move consistently in your favor, you
powerful management tool if you focus on may have greater scope for growth than you
those areas that determine your overall had previously forecast.
business success. 2. The second is to use your KPIs to set targets for
departments and employees throughout your
business that will deliver your strategic goals.
  sales data
 complaints
 questionnaires and comment cards
MANAGING YOUR INFORMATION  mystery shopping

As with most areas of your business operations, MANAGE CUSTOMER INFORMATION AND
the more detailed and well-structured the information RELATIONSHIPS
you keep about your KPIs is, the easier it will be to use
as a management tool. Computer-based management Software for customer relationship management
information systems are available for this purpose. (CRM) can be a powerful tool for capturing and
analyzing information about your customers and the
Measurement of your FINANCIAL PERFORMANCE products and services they purchase. CRM also enables
Getting on top of the financial measures of your you to push up service levels by ensuring that all
performance is an important part of running a growing customer-facing staff has ready access to each
business. It will be much easier to invest and manage for customer's history.
growth if you understand how to drill into your Widen your FOCUS BEYOND CURRENT CUSTOMERS
management accounts to find out what's working for Selling more to existing customers might be the easiest
your business and to identify possible opportunities for way of increasing sales, but most businesses aiming for
future expansion. significant growth will need to find ways of reaching
Measuring your PROFITABILITY new groups of customers.
MEASUREMENT and YOUR EMPLOYEES
Most growing businesses ultimately target increased
profits, so it's important to know how to measure As your business grows the number of people you
profitability. The key standard measures are: employ is likely to increase. To keep on top of how your
staff is doing, you may need to find slightly more formal
Gross profit margin - This measures how much money is ways of measuring their performance.
made after direct costs of sales have been taken into
account or the contribution as it is also known. Measuring through MEETINGS AND APPRAISALS

Operating margin - the operating margin lies between  Informal meetings and more formal appraisals
the gross and net (see below) measures of profitability. provide a very practical and direct way of
Overheads are taken into account, but interest and tax monitoring and encouraging the progress of
payments are not. It is also known as the EBIT (earnings individual employees.
before interest and taxes) margin.  Regular staff meetings can also be a very useful
way of keeping tabs on wider developments
Net profit margin - this is a much narrower measure of across your business. These meetings often give
profits, as it takes all costs into account, not just direct an early indicator of important concerns or
ones. developments that might otherwise take some
Return on capital employed (ROCE) - this calculates net time to come to the attention of your
profit as a percentage of the total capital employed in a management team.
business. Quantitative measurement of EMPLOYEE
Other Key ACCOUNTING RATIOS PERFORMANCE

There are several other commonly used accounting  Looking at employee performance from a
ratios that provide useful measures of business financial perspective can be a very valuable
performance. These include: management tool.
 At the level of reporting for the overall business,
 LIQUIDITY RATIOS the most commonly-used measures are:
 EFFICIENCY RATIOS 1. sales per employee
 FINANCIAL LEVERAGE OR GEARING RATIOS 2. contribution per employee
3. profit per employee.
Cash flow - can be a particular concern for growing
4. units of manufacturing employees produce
businesses, as the process of expansion can burn up
per hour at work.
financial resources more quickly than profits can replace
5. using timesheets to assess how many hours
them.
an employee devotes each month to
Measurement, Customers Finding and Retaining
different projects
customers – is a crucial task for every business. So,
6. customers under their responsibility give
when looking for areas of your business to start
you a way of assessing what the most
measuring and analyzing, it's worth asking yourself if
profitable use of their time is.
you know as much as possible about your clientele. See
your business through your customers' eyes. BENCHMARKING
Feedback is key - the more you know about what your  is a valuable method for improving business
customers think and want, the easier it will be to cater performance and potential by making
for growing numbers of them. Look for as many ways of comparisons with other businesses.
capturing this information as possible, including:
  It can be done against businesses in the same Cost of Goods Sold - By calculating production
sector or internally within the business. costs for your product, you can determine the
 The key drivers of business success should be product markup and profit margin, which is
chosen, and benchmarking data should be used crucial for outselling your competition.
to improve the way the business operates. Day Sales Outstanding (DSO) - is the number of
days it takes an organization to collect its
SEVEN KEY MEASURES
accounts receivable from its customers. The
In the manufacturing sector, the quality-cost-delivery DSO number is calculated by dividing accounts
(QCD) system provides seven key measures that capture receivable by total credit sales and multiplying
key drivers of most manufacturing operations. These by days, and a lower number indicates better
measures include: collection. Regularly run to monitor
improvement.
1. Not right first time (NRFT) Sales by Region - Through analyzing which
2. Stock turns (ST) regions are meeting sales objectives, you can
3. Overall equipment effectiveness (OEE) provide better feedback for underperforming
4. People productivity (PP) regions.
5. Floor space utilization (FSU) LOB Expense vs Budget - Comparing actual
6. Delivery schedule achievement (DSA) overhead with forecasted budgets can help
7. Value-added per person (VAPP). identify deviations from the plan, enabling the
SMART TARGETS creation of a more effective departmental
budget for future use.
 Setting SMART targets is crucial for achieving
strategic growth. CUSTOMER METRICS
 Specific, measurable, achievable, realistic, and 1. Customer Lifetime Value (CLV): is a
time-bound targets are essential for motivating performance indicator that helps organizations
employees and ensuring progress towards optimize customer acquisition by assessing the
goals is timely. value they derive from long- term relationships.
 Assigning responsibility and resources to deliver 2. Customer Acquisition Cost (CAC): by dividing
these targets is essential, and it is important to total acquisition costs by new customer count, a
make the necessary resources available when crucial e-commerce metric for evaluating
needed. marketing campaign cost-effectiveness.
 Regular reviews and changes can help motivate 3. Customer Satisfaction and Rentation: Customer
employees and ensure progress is made as satisfaction is crucial for retention and
expected. shareholder value, as it influences repeat
KPIs purchases and customer satisfaction scores.
4. The Net Promoter Score (NPS): is a crucial
 KPIs are performance measurement tools that indicator of a company's long-term growth,
help organizations understand their which can be determined through quarterly
performance and align with strategic goals. customer surveys, establishing a baseline, and
 To be effective, KPIs must be well-defined, implementing measures for growth.
quantifiable, communicated throughout the 5. Number of customers: The performance
organization, crucial to achieving goals, and indicator, similar to profit, helps assess if a
applicable to the Line of Business (LOB) or company is meeting its customers' needs by
department. analyzing the number of customers gained and
 Researching and understanding some of the lost.
most important KPIs helps identify which ones
are specific to your industry and which ones will PROCESS METRICS
not benefit your business. Process metrics define quantitative and qualitative
FINANCIAL METRICS measures related to a process, its performance and its
evolution.
 Financial metrics are used to evaluate and
assess the financial performance, health, and 1. Customer Support Tickets: Analysis of the
stability of a company or an investment. number of new tickets, the number of resolved
Profit - analyze gross and net profit margin to tickets, and resolution time will help you create
assess your organization's success in generating the best customer service department in your
high returns. industry.
Cost - measure cost effectiveness and find the 2. The Percentage of Product Defects: in the tests
best ways to reduce and manage your costs. is the number of defective products compared
to unit tests, the lower you can get this number,
LOB Revenue vs Target - Comparing actual and the better. Take the number of defective units
projected revenue can help identify and divide it by the total number of units
departmental performance by analyzing produced in the time frame you're examining.
discrepancies between the two numbers. 3. LOB Efficiency Measure: Efficiency in the
manufacturing industry can be measured by
 analyzing unit production and plant uptime
percentage

PEOPLE METRICS

People metrics are a way to measure and analyze how

effective your talent strategies are.

1. Employee Turnover Rate: is a measure of

how many employees leave a company in a
given period, usually a year.
To determine your ETR, take the number of
employees who have departed the
company and divide it by the average
number of employees.
2. Percentage of Response to Open Positions:
A high percentage of qualified applicants
applying for open positions indicates good
job exposure, leading to increased
interviewees.
3. Employee Satisfaction: Happy employees
are going to work harder it's as simple as
that. Measuring your employee satisfaction
through surveys and other metrics is vital to
your departmental and organizational
health.

Prepared by Emy :)
 LESSON 4: FORECASTING AND DEMAND
PLANNING
downturn or recession, consumers may have less
Demand planning and forecasting is simply how disposable income, leading to reduced demand and a
you formulate a plan to strike a balance between negative impact on sales forecasts
how much stock you have, how much stock
customers want, and how to get it to them
efficiently.

Demand forecasting is the process of using Demography - Demographics refer to the

predictive analysis of historical data to estimate and socioeconomic characteristics of a population that
predict customers' future demand for a product or businesses use to identify the product preferences and
service. According to Henry Fayol, "the act of purchasing behaviors of customers. With their target
forecasting is of great benefit to all who take part in market's traits, companies can build a profile for their
the process and is the best means of ensuring customer base.
adaptability to changing circumstances. The Price - This forecasting process is based on a variety of
collaboration of all concerned lead to a unified factors such as past sales, industry trends, economic
front, an understanding of the reasons for decisions conditions, and customer feedback. Businesses can use
this technique to more effectively plan for their
and a broadened outlook."
production and inventory requirements.
Importance of Demand Forecasting Replacement Demand - The replacement demand tends
to grow with the growth in the total stock with the
1. Helpful in deciding the number of salesmen consumers. Once a person gets used to a thing, he is
required to achieve the sales objective. unlikely to give it up at some future date. This makes
2. Determination of sales territories. replacement demand regular and predictable.
3. To determine how much production capacity to Credit Conditions - The availability of credit and hire
be built up. purchase facility tends to push up the demand for
consumer durables.
4. Determining the pricing strategy
Conditions within the industry - The sales of a company
5. Helpful in deciding the channels of distribution is the part of the total sales of industry. If the conditions
and physical distribution decision. of the industry changes then the sales of each of the
6. To decide to enter a new market or not. firm in the industry is affected. All the times the new
7. To prepare standard against which to measure marketers enter the market and some eclipse.
performance. Socio-economic Conditions - Socioeconomic status is
the position of an individual or group on the
8. To assess the effect of a proposed marketing
socioeconomic scale, which is determined by a
programme.
combination of social and economic factors such as
9. To decide the promotional mix. income, total national income, per capita income,
10. Helpful in the product mix decisions relating to standard of living of the masses, education, inflation,
width and length of product line. deflation etc.

Demand forecasting is done for a definite period. The Methods of Estimating Future Demands
period can be one month, three months, one year, two These are variety of methods and techniques
years, five years, ten years etc. Generally, organisations for forecasting demand/sales. Which one or ones to use
are involved in forecasting the demand for one year and depends on factors such as the cost involved, the
taking that demand forecast as a base, the demand for 6 forecasts time period, the markets stability or volatility
months, 3 months and one month is derived. and the availability of personnel with forecasting skills.
Some techniques are qualitative while others are highly
2 Types of Demand Forecasting quantitative.
 Short Run Demand Forecast The Demand/Sales Forecasting Methods Include:
 Long Run Demand Forecast 1. Survey of Buyers Intentions/Opinion Survey
Short Run Demand Forecast - Short-term demand Method.
forecasting looks just at the next three to 12 months. 2. Sales Force Composite Method/Collective
This is useful for managing your just-in-time supply Opinion Method.
chain. Looking at short-term demand allows you to 3. Executive Judgment/Jury of Executive Opinion
adjust your projections based on real-time sales data. It Method.
helps you respond quickly to changes in customer 4. Delphi Method
demand. 5. Time Series Analysis
Long Run Demand Forecast - Long-term demand 6. Market Test Method
forecasting is done for greater than a year. This helps 7. Correlation Method
identify and plan for seasonality, annual patterns,
production capacity, and expansion over a longer period Demand Forecasting of New Products
of time. Demand forecasting of new products is little bit difficult
Factors Affecting Demand (Sales) Forecasting than forecasting demand for existing product. Its reason
Purchasing Power of Customers - This increase in is that the product is not available and no historical data
purchasing power can lead to higher demand for is available. In these conditions the forecasting is being
products or services, resulting in a positive impact on done keeping in view the inclination arid wishes of the
sales forecasts. Conversely, during an economic customers to purchase.
 Conventional Methods 3. Strive for a collaborative demand planning
Evolutionary Approach - This method is based on implementation process.
assumption that the new product is the form of 4. Hold a demand review meeting.
continuous improvement of the old one. The demand is 5. Invest in performance management
forecasted as the basis of the demand of the old
product. This method is only appropriate when the
marketer is sure that the customers would take the new
one as the improved version of the old one. Prepared by Emy :)
Substitute Approach - This method is based on
assumption that the new product is substitute to
previous product and fulfill the same objective of the
customers as by the previous product. On this basis it
can be calculated that how far the new product would
take the place of old one and on this basis the
forecasting is done.
Market Testing Approach - When product is quite new
in the country, or good estimates are not available or
buyers do not prepare their purchase plan, this method
is very often adopted. Under this method, seller
introduces his product in a part in the market segment
for quite sometimes and makes the assessment of sales
for the whole segment or the market on the basis of
results of test sales.
The Potential Customer Approach - If the new product
is absolutely unique that cannot be compared with the
existing products, then the forecaster must attempt to
determine who the users might be potential consumer
should be described and properly classified on the basis
of appropriate segment variables e.g., income, age,
statues, occupation, sex and so on.

Criteria of Good Forecasting Method

Following criteria are generally used to evaluate the
effectiveness and efficiency of a forecasting method:
 Simplicity and Ease of Comprehension
 Durability
 Accuracy
 Availability
 Economy

Demand/Sales Forecasting Procedure

1. Determining the objective and the purpose for
which the forecasts are to be used.
2. Determining the relative importance of the
factor which affect sales of each product.
3. Selecting the appropriate forecasting method.
4. Collecting and analysing the data.
5. Making assumption regarding effect of factor.
6. Making specific forecasts relating to the product
and territories involved.
7. Periodically reviewing and reviving the forecasts

A Five-Step Approach to Effective Demand Planning

Implementation
Good handling of market demand data is one
of the most vital concepts in any supply chain. The
correct management of demand information can greatly
influence the level of integration and responsiveness
and has a direct impact on customer service and
inventory levels. If customer demand is the activating
element in the supply chain, it’s quite clear that a multi-
step operational supply chain management process to
create reliable demand forecasts can play an active role
in improving supply chain effectiveness.

How to Create a Demand Planning Process

1. Start with a demand analysis.
2. Rely on a quantitative baseline forecast.