Engineering Management

Lesson No. 12 - Controlling

 Specific Objectives of the Lesson
• At the end of the lesson, the student should be able to:
• Know and understand the importance of control as a management function
• Learn the control process
• Identify the types of control
• Know and learn the requirements for effective control
• Understand and know the major control system
CONTROLLING

• What explains McDonald’s enviable success?

• One major factor is the extent to which the company
maintains strong control over most aspects of its operations.
• These controls have helped McDonald’s develop a
competitive edge or advantage in the form of high product
and service consistency.
• A Big Mac is likely to taste pretty the same whether we are
eating it in Boston, in Bangkok in Santiago, Isabela
• How are successful companies such as McDonald’s, be able
to design and implement effective controls?
CONTROL AS A
MANAGEMENT FUNCTION
• Like their McDonald’s counterpart, managers in other
organizations also face important issues related to
controlling function.
• Controlling is the process of regulating organizational
activities so that actual performance conforms to expected
organizational standards and goals.
• Control simply means knowing what is actually happening in
comparison to preset standards or objectives and then
making any necessary corrections.
• It is also defined as any process that directs the activities of
individuals toward the achievement of organizational goals.
• Left on their own, people may knowingly or
unknowingly act in ways that they perceive to be
beneficial but may work to the detriment of the
organization as a whole.
• In this sense, control Is one of the fundamental
forces that keep the organization together.
• Without some means of regulating what people do,
the organization would literally fall apart.
Why Practice Management
Control?
• Management control alert the manager to potential
critical problems.
• All management controls are designed to give the
manager information regarding progress.
• The manager can use this information to:
• Prevent Crises. If a manager does not know what is going
on, it is easy for small, readily solved problems to turn
into crises.
• Standardized Output. Problems and services can be
standardized in terms of quantity and quality through the
use of good controls.
• Appraise Employee Performance. Proper controls
can provide the manager with objective information
about employee performance.
• Updates Plan. Even the best plans must be updated
as environmental and internal changes occur.
Controls allow the manager to compare what is
happening with what was planned.
• Protects an Organization’s Assets. Control can
protect assets from inefficiency, waste and pilferage.
Two Concerns of Control

• When practicing control, the manager must balance

two major concerns:
• Stability. To maintain stability, the manager must be sure
that the organization is operating within its established
boundaries of constraints. (Boundaries of constraints are
determined by policies, budgets, ethics, laws, and so on).
• Objective Realization. Requires constant monitoring to
ensure that enough progress is being made towards
established objectives.
THE CONTROL PROCESS

SET MEASURE DETERMINE

SET MEASURE DETERMINE
PERFORMANCE PERFORMANCE COMPARE DEVIATION
PERFORMANCE PERFORMANCE COMPARE DEVIATION
STANDARDS
STANDARDS

STANDARDS WITHIN LIMITS

STANDARDS WITHIN LIMITS

TAKE
TAKE NO YES
CORRECTIVE NO YES
CORRECTIVE
ACTION
ACTION

COMPUTE
COMPUTE
WORK
WORK
PROGRESS
PROGRESS
Setting Performance Standards
• A Standard is the level of expected performance for a given goal.
• Standards are performance targets that establish desired
performance levels, motivate performance, and serve as benchmarks
against which to assess actual performance.
• Performance standards can be set with respect to
• quantity
• quality
• time used, and
• cost
• For example, production activities include volume of output (quantity), defects (quality), on-
time availability of finished-goods (time used) and expenditures for raw materials and direct
labor (cost).
 Measuring Performance
• Example of measuring performance is manager can count
units produced, days absent, papers filed, samples
distributed, and money earned.
• Performance data commonly can be obtained by:
• Written Reports – which includes computer printouts
• Oral Reports – occurs when a salesperson contacts his or
her immediate manager at the close of each business day to
report the accomplishments, problems, or customer’s
reactions during the day.
• Personal Observations – involve going to the area of
activities and watching what is occurring It gives an ultimate
picture of what is going on.
Comparing Performance with the
Standards
• The manager evaluates the performances and compares it with
standards.
Take Corrective Action

• It is to take action to correct significant deviation.

• It ensures that operations are adjusted where necessary to achieve
the initially planned results.
TYPES OF CONTROL

Controls Controls Controls

INPUTS TRANSFORMATION OUTPUTS

PROCESS

FEEDFORWARD CONCURRENT FEEDBACK

CONTROL CONTROL CONTROL
Regulates input to ensure Regulates ongoing Regulates products or
that they meet standards activities to ensure that service after completion to
necessary for they conform to ensure final output meets
transformation process organizational standards organizational standards
REQUIREMENTS FOR
EFFECTIVE CONTROL
• Must be tailored to suit plans and positions.
• All control techniques and systems should reflect the
plans they are designed to follow, and in the same
way, control should be tailored to positions.
• Must be tailored to individual managers and
their personalities.
• Control system and information are course intended
to help individual managers carry out their function of
control.
REQUIREMENTS FOR
EFFECTIVE CONTROL
• Control should point up exceptions at critical points.
• One of the most important ways of tailoring controls to needs of
efficiency and effectiveness is to make sure that they are
designed to point up exceptions. In other words, by
concentrating on exceptions from planned performance,
controls based on the time-honored exception principle, allows
managers to detect those places where their attention is
required and should be given.
• Control should be objective.
• Best controls require objective, accurate, and suitable standards.
Objective standards can be quantitative, such as costs or labor-
hours per unit or date of job completion. It should be
determinable and verifiable.
REQUIREMENTS FOR
EFFECTIVE CONTROL
• Control should be flexible.
• Controls should remain workable in the face of
changed plans, unforeseen circumstances, or outright
failures.
• The Control system should Fit the Organizational
Climate
• To be most effective, any control system or technique
must fit the organizational climate.
• For example: a tight control system applied in the
organization where people have been given considerable
freedom and participation may go so “against the grain” that
would be doomed to failure.
REQUIREMENTS FOR
EFFECTIVE CONTROL
• Control should be economical.
• Controls must be worth their cost. Control and
economy are relative, since the benefits vary with the
importance of the activity, the size of operation, any
expense that might be incurred in the absence of
control, and the contribution the system can make.
• Control should lead to corrective action.
• A control system will be little more than an
interesting exercise if it does not lead to corrective
action. An adequate system will disclose where
failures are occurring and who is responsible for
them, and it will assure that some corrective action is
taken.
MAJOR CONTROL SYSTEMS

QUALITY CONTROL

FINANCIAL CONTROL

PLAN BUDGETARY RESULT

CONTROL
Organizational Organizational
Goals Goals
INVENTORY
and and
CONTROL
Standards Standards

OPERATIONS
MANAGEMENT

COMPUTER-BASED
INFORMATION
SYSTEMS
 Quality Control or Total Quality
Management
• Total Quality Management (TQM) is defined as a
management system that is an integral part of an
organization’s strategy and is aimed at continually
improving product and service quality so as to achieve
high levels of customer’s satisfaction and building
customer loyalty.
• It provides means of increasing the quality of products
and services, a competitive issue.
• Quality is the totality of features and characteristics of a
product or service that bear on its ability to satisfy stated
or implied needs.
 Financial Control
• Suppose that you are a top-level manager of an
organization, what types of financial controls could you
use?
• Some of the common financial control techniques:
• Financial Statement is a summary of major aspects of an
organization’s financial status.
• The information contained in such statements is essential in maintaining
financial control over organizations
• Two basic types of financial statements that are typically used by business
organizations are the balance sheet and the income statement.
• Balance sheet is a financial statement that depicts an organization’s assets and
claims (liabilities) against those assets at a given point in time.
• Income statement is a financial statement that summarizes the financial results
of company operations over a specified period of time, such as a quarter or a
year.
Financial Control

• Ratio Analysis is the process of determining and evaluating financial

ratios of an organization.
• In assessing the significance of various financial data, managers often engage
in ratio analysis.
• A ratio is an index that measures one variable relative to another, and it is
usually expressed in percentage or a rate.
Financial Control

• Four types of financial ratios are particularly important to

managerial control.
• Liquidity ratios are financial ratios that measure the degree to
which an organization’s current assets are adequate to pay
current liabilities (current debt obligations).
• Asset management ratios (sometimes called activity ratios)
measure how effectively an organization manages its assets. One
of the most used asset management ratios is inventory turnover.
• Inventory turnover helps measure, how will an organization
manage its inventory. Low inventory may point to either excess or
obsolete inventory. High inventory turnover generally signals
effective handling of inventory relative to selling patterns,
because less money is tied up in inventory that is waiting to be
sold.
Financial Control
• Debt management ratios (often called leverage ratios) assess the
extent to which an organization uses debt to finance investments, as
well as the degree to which it is able to meet its long term
obligations.
• Profitability ratios help measure management’s ability to control
expenses and earn profit through the use of organizational
resources.
• Comparative Financial Analysis is done when managers
compare the financial statements and ratios against some
standards. Manager may be able to determine the
significant variances (positive and negative) and its
implications to the organizations financial status.
Budgetary Control

• While financial controls are a major tool of top

management, budgetary controls are a mainstay for middle
managers. Lower-level managers also use budgets to help
track progress in their own units.
• Budget, the quantitative statement prepared through
budgeting process, may include such figures as projected
income, expenditures, and profits. They are useful because
they provide a means of translating diverse activities and
outcomes into a common measure.
• Preparation of the budget is primarily a planning function,
however its administration is a controlling function.
Budgetary Control

• Types of Budget:
• Operating Budget is a statement that presents the
financial plan for each sub-unit of the organization during
the budget period and reflects operating activities
involving revenues and expenses.
• Capital Expenditure Budget is a plan for the acquisition
or divestiture of major fixed assets, such as land,
buildings, or equipment. Acquisitions of such assets are
often referred to as capital investments.
Inventory Control

• Another major type of control system found in most

organizations is inventory control.
• Inventory is a stock of materials that are used to facilitate
production or to satisfy customer demand.
• Three major types of inventory:
• Raw stock inventory is the stock of parts, ingredients, and other
basic inputs to a production or service process.
• Work-in-process inventory is the stock of items currently being
transformed into final product or service.
• Finished-goods inventory is the stock of items that have been
produced and are waiting sale or transit to a customer.