A key factor in the success of any organisation is its ability to measure performance. Such feedback on a continuous basis provided management the data necessary to determine, if established goals or standards are being meet. As Peter Drucker, a well-known management guru, has said " if you can't measure it, you can't manage it". Without proper measurement of performance managers cannot assess how well their organisations are doing or compare their performance with that of their competitors.
However, with a growing number of performance measurement available for the managers today must be selective in choosing only these measures that are critical to their firms success. Depending on the specific industry and market niche with that industry, some measures of performance are more important to management than others. For example, in a fast food outlet, a key performance indicator is the speed with which food is delivered to the customers. In an upscale restaurant, on the other hand, key performance measures may be the verity of items offered on the menu and the quality of food served.
Types of Performance Measures:
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The efficiency with which inputs are transformed into output is a measure of the process's productivity. In other words, productivity measures how well we convert inputs in to outputs.
The output capability of a process is referred to as the capacity of the process. This performance measure is typically presented in barrels of output per unit of time.
The quality of a process usually is measured by the defect rate of the products produced. Defects include those products that are identified as nonconforming, both internally as well as externally.
Speed of Delivery:
Many companies are experiencing increased pressure with respect to speed of delivery. Speed of delivery has two dimensions to measure. The first is the amount of time from when the product ordered to when it is shipment to the customer, which is known as a product' s lead time. The other dimension is the variability in delivery time.
Flexibility is the measure of how readily the company transformation process can adjust to meet the ever-changing demands of its customers.
A relatively new measure of performance is process velocity referred to as manufacturing velocity, process velocity is the ratio of the actual throughput time that it takes for a product to go through the process divided by the value-added time required to complete the product and service.
We defined a business process as "a logical set of tasks or activates that crosses functional boundaries and recognizes its interdependence with other processes or business processes".
Business Process Analysis:
The first Once the boundaries of the business process being analyzed are established, the firm must then link its overall corporate strategies to the process, In other words, the firm must clearly step in analysing the business process is to define the process boundaries. It is extremely important to clearly establish (a) where the process start and end (b) the inputs and output process and (c) the other processes in the organisation that either impact on or are impacted by the process under evaluation.
Comparison of a company's measures of performance with those of firms that are considered to be world class. Benchmarking can cut across traditional industry lines, providing opportunities for new and innovative ways to increase performance.
What should we Benchmark?
Benchmarking can be applied to many areas within an organisation. Robert Camp indentifies three of these as under:
Goods and services:
Benchmarking identifies the feature and functions of the goods and services that are desired by the firm's customers. This information is incorporated into product planning, design and development in form of product goals and technology design practices.
Benchmarking in the area provides the basis for business process improvement and reengineering. These changes should be an integral part of the continuous quality improvement initiative.
The end result of benchmarking good. Services and processes is to establish and validate objectives for the key performance measures that have been identified as critical to the success of the organisation.
Key Steps in Benchmarking:
Always on Time
Marked to Standard
The specific organisation against which we should be benchmarking, the types of data we should collect and the way we should collect those data.
The analysis phase focuses on obtaining an in depth understanding of our firm's existing practices and processes as well as those of the organisation against which we will be benchmarking.
Here we use the finding from the first two phases to define those target area that we want to change. We need to ensure that benchmarking concepts are implemented in the corporate planning process and that benchmarking is accepted by all levels of management.
The benchmarking finding and goals must be translated into action. Those individuals who actually perform the tasks should determine how the findings can best be incorporated into the existing process.
An organisation reaches maturity when the best business practices that have been identified have been incorporated into all of the relevant business process, thereby ensuring superior for the organisation as a whole.
Types of Benchmarking:
This type of benchmarking provides for a comparison among similar operation or processes within a firm's own organisation. Internal benchmarking also provides the first step to documenting processes, which is necessary for identifying future areas for improvement.
This provides the comparison between an organisation's performance and that of its best direct competitors. The relative information obtained here will show how the company compares to other firms in its industry.
This type of benchmarking addresses performance comparisons with the functional areas, regardless of the industry in which they are located.
Here performance measures are concerned with specific work processes that are virtually the same for all industries that use these processes. Generic benchmarking can easily identify those firms that have adopted innovative processes, thereby providing targets that can be more readily acceptable by members of the organisation.
This assignments is based on the shell lubricants which was launched in Asian countries such as, Pakistan, India and Bangladesh . due to the rising consumption of cars and the development of the countries, this product can capture the market, and have the potential to earn profit out of this by using the right tactics and strategies , and by looking at the operations of launching this product could be very effective in many sense.
Cost of quality
According to (Davis and Boczko, 2005), cost of quality (COQ) is a technique that I used to measure the difference between the actual costs incurred within each of the processes of manufacturing and/or supply of goods, and services, and the equivalent costs if there were no failures within each of those processes.
The SHELL LUBRICANTS may have two different categories of quality costs that may be incurred in its overseas operation:
Prevention cost: Cost of activities to prevent failure from occurring
Appraisal costs: Costs incurred to ensure conformance to the original design specification
Qualitative measures of prevention costs
In order for BP's Shell product division to ensure its SHELL LUBRICANTS product provides the same values and benefits to the Asian consumers, the organization needs to undertake expenses related to activities such as checking and inspection, documentation of processes, costs o inventory evaluation, and performance testing. Checking, inspections and documentations are indirect cost and cannot be readily identified with the operations processes. Moreover such posts are qualitative cost components in that gross negligence, or, mismanagement of testing, monitoring and the documentation process represent a higher opportunity cost in the consumer marketplace than the actual cost of production in real term. For an instance, activities such as management overlooking information and other items on an operational report, concerns over redundant copies of documents, focus on detailed analytical efforts when simplistic estimates are available, and so on may incur higher opportunity costs for providing information and /or services that are unimportant.
Quantitative measures of prevention costs
However, the costs of inventory evaluation and product performance testing are quantitative costs. These costs are direct (and also variable) costs. For an instance in case of a temporary failure of a processing unit, Shell may use up buffer storage of lubricant barrels to supplement the market demand for the period. The cost estimates of such buffer inventory are specific, and vary proportionately with the inventory level. Similarly, the costs of testing the viscosity index of every unit of Shell SHELL LUBRICANTS is estimated in accordance with the pre-specified production budget since the determination of the index is imperative to processing efficiency and the cost can be identified directly with the estimated level of processing operation in place during the production budgeting for Asian consumer markets.
Qualitative measure of appraisal costs
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Shell may develop a sophisticated training program to boost individual creativity and build on professional skills to provide highly differentiated synthetic lubricant in the global marketplace. Although the cost requirement of the training program is identifiable on a predetermined scale, however, the outcome of the training program will not be realized as the direct return on the investments incurred for implementing the training program. The immediate outcome of the program is the advanced level of skills on the part of the majority of the individuals upon which the organization will capitalize to increasing its brand salience and, consequently boosting the brand equity in the global consumer market of synthetic lubricants. Thus Shell needs to view the training program as a quality measure rather than a profitable investment opportunity.
Quantitative measure of appraisal costs
The cost of supplier assurance is a quantitative cost of quality on the part of SHELL LUBRICANTS . As evident from the earlier discussion, streamlining the procurement of raw materials and products (such as crude oil. PAO oil and other chemical compounds) is necessary to driving down the costs of suppliers to enable sales of its lubricant at relatively lower price than that of the competitors in the consumer markets of Asia. Along with price advantages, streamlined procurement process also has the advantage of the provision of high quality of raw materials input to the processing unit that subsequently impact greater quality of the extracts (synthetic lubricants) from the processing operation.
SGR (Sustainable growth rate)
Eq is the equity capital at the beginning of the project
New Eq is the equity gain issuing securities and retained earnings
Div is the dividend payable to the stockholders of the company
S is the total sales of the current year
S0 is the sales of the previous year
NP is the net profit for the year
A is the assets value for the year
Performance measures and evaluation
Evaluation of optimum procurement process
In addition of the price of the raw materials (crude oil and PAO oil) provided by the suppliers of Shell SHELL LUBRICANTS synthetic lubricant, Shell product division would also need to base its selection of potential suppliers on the following quality grounds:
Temperature viscosity performance index of crude and PAO oils
Shear stability of the compounds
Evaporative loss index
Oxidation resistance index
Longevity of the product life-cycle
Since the quality of the inputs to the processing barrels will have considerable impact on the quality of the synthetic lubricant extracted during crude oil processing, therefore Shell would need to specify the maximum (upper limit) toleration limit on the attributes of the materials mentioned above against which the sample raw materials from the potential suppliers to the company would be measured to decide on whether to go forward with forming agreement with a particular supplier. The process can be illustrated by the following flow chart
Evaluating the centralized distribution system performance
Distribution requirements planning are a system that forecasts when the various demands will be made by the system on central supply. This gives central supply and the factory the opportunity to plan for the goods that will actually be needed and when. it is able both to respond to customer demand and coordinate planning and control.
The system translates the logic of material requirements planning to the distribution system. Planned order releases from the various distribution centers became the input to the material plan of central supply. The planned order releases from central supply become the forecast of demand for the factory master production schedule. The Figure below shows the system schematically. The records shown are all for the same part number.
(Bruce and Cooper, 2000)
For an instance, Shell has a central supply attached to their factory and two distribution centers. Distribution center A forecasts demand at 25, 30, 55, 50, and 30 barrels (barrels) of Shell SHELL LUBRICANTS over the next five weeks and has 100 barrels transit that are due in week 2. The transit time is two weeks, the order quantity is 100 barrels (barrels) of SHELL LUBRICANTS , and there are 50 barrels on hand. Distribution center B forecasts demand at 95, 85, 100, 70, and 50 barrels of SHELL LUBRICANTS synthetic oil over the next five weeks. Transit time is one week, the order quantity is 200 barrels, and there are 100 barrels on hand. The calculation of the gross requirements, projected available, and planned order releases for the two distribution centers, and the gross requirements, projected available, and planned order releases for the central warehouse
Target Level /Maximum-Level Inventory of finished oil in retail outlets and warehouses
The quantity of apparels and clothing items is equal to the demand during the lead time plus the demand during the review period plus safety stock is the target level or maximum-level inventory:
T = target (maximum) inventory level
D = demand per unit of time
L = lead-time duration
R = review period duration
SS = safety stock of apparels
Derived from J.C.Van Horne, 2002)
The order quantity is equal to the maximum-inventory level minus the quantity on hand at the review period:
Q = order quantity
I = inventory on hand
The periodic review system is useful for the following:
When there are many small issues from inventory, and posting transactions to inventory records are very expensive.
When ordering costs are small. This occurs when many different clothing items are ordered from one source. A regional distribution center may order most or all of its stock from a central warehouse.
When many items are ordered together to make up a production run or fill a truckload. A good example of this is a regional distribution center that orders a truckload once a week from a central warehouse.
For an instance, a retail outlet owned by Shell lubricants in the US market hardware company stocks nuts and bolts and orders variety of oil products from a local warehousing facility once every two weeks (ten working days). Lead time is two days. The company has deter mined that the average demand for a particular clothing item is 150 per week (five working days) and it wants to keep a safety stock of three days' supply on hand. An order is to be placed this week, and stock on hand is 130 barrels of that garment.
Therefore the Target level of inventory T = D(R + L) + SS
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 30(10 + 2) + 90
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 450 barrels
And the Order quantity Q = T - I
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 450 - 130 = 320 barrels
[D = demand per unit of time = 150 Â± 5 = 30 per working day
L = lead-time duration = 2 days
R = review period duration = 10 days
SS = safety stock = 3 days' supply = 90 barrels
I = inventory on hand = 130 barrels]
Order Point System
When the quantity of an item on hand in inventory falls to a predetermined level, called an Order Point, an order is placed. The quantity ordered is usually recalculated and based on economic-order-quantity concepts.
Using this system, an order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until the new stock arrives (called the lead time). Suppose that for a SHELL LUBRICANTS the average demand is 100 barrel barrels a week in Asia and the lead time is four weeks. If an order is placed when there are 400 barrels on hand, on the average there will be enough stock on hand to last until the new stock arrives. However, demand during any one lead-time period probably varies from the average-sometimes more and sometimes less than the 400. Statistically, half the time the demand is greater than average, and there is a stock-out; half the time the demand is less than average, and there is extra stock. If it is necessary to provide some protection against a stock-out, safety stock can be added. The item is ordered when the quantity on hand falls to a level equal to the demand during the lead time plus the safety stock:
OP=(DDLT+SS) where OP=Order point, DDLT=Demand during the lead time and SS = Stock
It is important to note that it is the demand during the lead time that is important. The only time a stockout is possible is during the lead time. If demand during the lead time is greater than expected, there will be a stockout unless sufficient safety stock is carried. For an instance, if the demand is 200 barrels of Shell SHELL LUBRICANTS a week, the lead time is three weeks, and safety stock is 300 barrels, the order point would be
OP = DDLT + SS
= 200 x 3 + 300 = 900 barrels of Shell SHELL LUBRICANTS
(Derived from J.C Van Horne, 2002)
The Figure shows the relationship between safety stock, lead time, order quantity, and order point. With the order point system:
Order quantities are usually fixed.
The order point is determined by the average demand during the lead time. If the average demand or the lead time changes and there is no corresponding change in the order point, effectively there has been a change in safety stock.
The intervals between replenishment are not constant but vary depending on the actual demand during the reorder cycle.
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â order quantityÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Q
Average inventory =Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â + safety stock = Â Â Â Â Â Â Â Â Â Â Â Â Â Â + SS
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2
For an instance, the order quantity is 1000 barrels of Shell SHELL LUBRICANTS and safety stock is 300 barrels. Therefore the average annual inventory is:
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â =800 barrels
Determining the order point depends on the demand during the lead time and the safety stock required.
Shell need to have a clear financial goal (such as maximizing profit through market growth) to be achieved from its Asian operation before expanding its product to oil and gas market in Asia
Three core operations such as the supply chain management, production management and distribution management are the crucial factors to successfully market its product in Asia
Shell should benchmark these critical success factors against the industry standards in Asian oil and gas industry.
The company should develop strategies to streamline its procurement, manufacturing and distribution processes to achieve its strategic financial goals
Necessary control and evaluation measures need to be adopted by Shell to monitor its procurement, inventory management, and distribution processes to ensure its optimum strategic operational performances so as to progress toward industrial performance standards and successfully deliver its strategic financial goals over the long term