The Need for Corporate Policies to Define Productivity Measurements
As business trends continued to develop, the concept of performance measurement has to have a clear definition of its basis and goals. It is no longer a matter of cost allocation and financial results that will please the investors. Advancements in technology have broadened the consumer markets, which also denotes increased competition and compliance with international standards.
The requirements have become complex and the basic criteria have become vague. Only a few are aware that it was a combination of philosophical teachings introduced in the early 1900s that were developed throughout the years by using cost as the basic point of comparison to determine productivity.
Advocates recommended defining performance measurement not by the governing theories but by considering a theory's applicability to the business. Adopting a definition that clearly defines the behaviors, activities and goals within the organization will provide a more realistic concept, since managers and employees can easily relate to the strategies being used to achieve productivity goals.
Corporate policies should define their objectives for measuring the results of their performance. There should be clear delineation that the assessments are not only for determining the causes of financial variables but also of the non-financial aspects.
1. Financial measurements may be in any of the following forms:
Profit Margin as it measures pricing initiatives and how it can withstand the (1) rising costs of goods sold, (2) the increase or decline in demand, and (3) the overhead costs incurred in order to sustain the business.
Return on Assets (ROA), which was actually developed in 1919 by the Dupont Corporation, which indicates how well the company uses its capital assets.
Return on Equity (ROE), which was also conceptualized by Dupont, to provide the investors with information on how well the company is using its resources for the benefit of the investors.
Partial and Total Productivity, which measures the proportion of outputs against the resources used, i.e. capital, labor, energy or material.
Time-Based Productivity – This relates to considerations regarding the time spent to create value over the total time spent for production as a measure of efficiency. This also relates to the time spent for receivables to materialize as actual cash collections or time that stock purchases remain unsold.
Efficiency of Asset or Equipment Use – The objectives of evaluating the performance of equipment or machinery employed is to determine their full potential in generating the maximum level. Hence, values will be related to (a) the time spent in their uses, (b) the rate or speed by which production is completed, and (c) most importantly, the quality of the outputs produced.
2. Non-Financial Measurement of performance refers to the data that are being used to determine goals. Historical costs can no longer withstand the demands of a highly competitive economy that uses real-time information provided by computerized technology and the Internet:
- Reliability of internal data
- Objectivity of data that is based on observable opinions and not on subjective perception
Benchmark references, as outcomes are compared against similar inputs and outputs of organizations within the same industry.
In considering all these, it is clear that the evaluation of performance has evolved beyond costs as the focal point in measuring productivity. Rather, it’s now aimed at ensuring that there is a balanced state of business conditions to ensure that all strategies being used are aligned with the business goals. However, the processes all seem too tedious and difficult to comprehend.