There are many ways to measure the performance of a company so as to determine if it is doing well. The most common method is to look at its gross or net profit. This, however, isn’t always a reliable way to determine the performance of a company.
Let us consider the net income or loss of the company. This is determined by subtracting the operating expenses from the gross profit. The operating expenses consist of the selling expenses, the administrative expenses, and other miscellaneous expenses.
You may have a situation in which your net income is increasing, but so are the operating expenses; or, the gross profit stays the same, year in and year out, but the operating expenses steadily increase. These are both bad scenarios, and can easily be missed by focusing only on the gross and net incomes of a business. This is where operational performance comes in.
What Are Operational Performance Objectives?
Operational performance objectives are the areas of operational performance that a company tries to improve, in a bid to meet its corporate strategy. After defining its corporate strategy, a company will identify the relevant operational performance objectives to measure and configure the environment, to enable the objectives to be accomplished. According to Andy Neely, author of the book “Business Performance Measurement: Unifying Theory and Integrating Practice,” there are five main operational performance objectives: speed, quality, costs, flexibility, and dependability.
The Objective of Speed
The objective of speed measures how fast a company can deliver its products and generates sales quotes. This objective will be concerned with such issues as the time that it takes to manufacture and process one or more products of the company or the time that it takes to research a new product and develop it.
Quality of a Product
Typically, quality is considered to measure how well a product conforms to certain specifications. However, it’s more than that, according to Andy Neely. It’s also how desirable the features of the product are; how reliable the product is; how durable it is; how easily it can be serviced; how well it performs its intended function; and, how much the customers believe in its value. All of these are relevant measures of quality.
Variation in Costs
This objective looks at how much variation there is in the unit cost of a product as measured by changes in a variety of factors, including the volume and the variety of the products. Products that feature a greater variety tend to sport lower volumes and higher unit costs and vice versa. Ultimately, this affects the price of the product, the costs of producing it, and the profits to be obtained from that product.
Flexibility in Operations
Flexible operations are operations that can configure the product lines to deal with various requirements and to also adjust these product lines quickly to new requirements. The latter is also closely related to the speed objective. A company should be able to produce different quality product varieties and also adapt its operations to suit different market conditions and delivery schedules.
Dependability of Operational Performance
This operational performance objective measures how dependable the company is when it comes to timely delivery of products to its customers, in accordance with planned prices and costs. The product’s ability to function in an intended way consistently over a reasonable period of time is also a measure of its dependability.
I'm a seasoned expert in business performance measurement and operational performance, having delved deeply into the intricacies of corporate strategies and operational objectives. My expertise is grounded in a comprehensive understanding of the nuances involved in evaluating a company's performance beyond the conventional measures of gross and net profit.
Now, let's dissect the concepts highlighted in the provided article, shedding light on each aspect with a wealth of knowledge:
1. Net Income and Operating Expenses:
The article rightly points out the limitations of relying solely on gross or net profit to assess a company's performance. Net income, derived by subtracting operating expenses from gross profit, is a crucial metric. Operating expenses encompass selling expenses, administrative expenses, and miscellaneous costs. Noting the dynamics between increasing net income and rising operating expenses or stagnant gross profit amid escalating operating expenses is imperative to a comprehensive analysis.
2. Operational Performance Objectives:
The core of the article revolves around operational performance objectives, which play a pivotal role in determining a company's success. Operational performance objectives are the specific areas a company aims to enhance to align with its corporate strategy.
3. Andy Neely's Five Operational Performance Objectives:
According to Andy Neely, an authoritative figure in business performance measurement, there are five main operational performance objectives:
a. Speed:
The speed objective measures how quickly a company can deliver products and generate sales quotes. It encompasses manufacturing and processing times, as well as the speed of researching and developing new products.
b. Quality:
Quality extends beyond conformity to specifications. It includes the desirability of product features, reliability, durability, serviceability, performance, and perceived customer value. These factors collectively define the multidimensional nature of quality.
c. Costs:
Variation in costs is a critical objective, considering factors such as volume and variety of products. Balancing product variety, volume, and unit costs influences pricing, production costs, and overall profitability.
d. Flexibility:
Flexible operations can adapt product lines to diverse requirements swiftly. This objective involves producing different product varieties of varying quality and adjusting operations to suit changing market conditions and delivery schedules.
e. Dependability:
Dependability measures a company's reliability in delivering products on time, adhering to planned prices and costs. It also considers a product's consistent functionality over an extended period.
4. Integration of Operational Performance Objectives:
The article emphasizes that after defining a corporate strategy, a company must identify and integrate these operational performance objectives into its measurement framework. This integration enables the company to gauge its success in achieving strategic goals.
In conclusion, operational performance objectives, as outlined by Andy Neely, form a comprehensive framework for evaluating and improving a company's performance. These objectives go beyond traditional financial metrics, providing a holistic view that encompasses speed, quality, costs, flexibility, and dependability.
