1. Performance Measurement in Decentralized Organizations
Chapter 11
Performance Measurement in Decentralized Organizations

2. Decentralization Both Advantages and Disadvantages Advantages
Efficiency
Entrepreneurial Spirit
Frees top management from day-to-day
Disadvantages
Lack of coordination
Not understanding overall corporate goals
Own “agendas”

3. Centers Cost Center Profit Centers Investment Centers
Control of costs, but not revenues
Profit Centers
Control of costs and revenues
Investment Centers
Control of costs, revenues + investments in operating assets

4. Return on Investment Net Operating Income
ROI = Average operating assets
Both operating income and assets used
Income often “EBIT”
Limits on usefulness?

5. ROI Differently ROI = Margin X Turnover Margin = Net Operating Income
Sales
Turnover = Sales
Average Operating Assets

6. ROI Drawbacks
ROI improvements hard for many managers to operationalize
Much of what drives ROI is out of managers’ control
Seeking highest ROI rate often not the income-maximizing approach

7. Residual Income
Measures dollars by which income exceeds income at minimum required rate of return.
Residual income = Net Operating Inc. –
(Ave. Op. Assets x min req. rate of rtn)

8. Residual Income Focus is on dollars not percentages Assume:
Actual ROI is 25%
Min req. is 15%
Should you invest in a project yielding 22% return?

9. Delivery Cycle Times A measure of production efficiency Wait time +
Manufacturing Cycle Time; within:
Process, inspection, cue, move
Process is value added, others not
Want to maximize percent of time that is value-added

10. Manufacturing Cycle Efficiency
MCE = percent of manufacturing time that is value added
What is Value Added Time?
MCE can be expressed as percent or decimal

11. Balanced Scorecards
Pictorial description of cause and effect for performance improvement
Identifies actions that can be taken
Can use to measure accomplishment of actions and effectiveness
Can modify as learn from experience

12. Process Capacity
Cycle time and time available for production can be used to measure productive capacity
Theoretical: Does not allow for downtime (ideal, unrealistic assumptions)
Practical: Takes into account both planned and unplanned downtime
Excess: compares with demand