Many organizations measure organizational performance on efficiency. The field of cost accounting is based on these concepts and principles. The problem is that efficiency is no longer an effective measure of what happens in the functioning of the organization. It is possible to achieve high levels of efficiency and still operate at a loss.
Today’s organization requires a different measure – Effectiveness In other words, how effective are the resources applied to the operation? Efficiency – The relation between the output and the input of any system. – Ability to avoid wasting time and effort; “she did the job with great efficiency” [ant: inefficiency]
– The ability to identify and do things that contribute to the organization.
– The emphasis of effectiveness is on ‘doing things right’ and not just ‘doing things right’ (which is what efficiency is all about)
There are a number of benefits to applying effectiveness measures to the Reliability Oriented Organization:
– Practicing personal effectiveness creates results that are continuous rather than once and done.
– A focus on personal effectiveness greatly favors the elimination of wasteful activities that do not produce a contribution to the organization’s bottom line.
– Personal effectiveness is a skill that transfers with the person: you can apply it even when roles or work situations change. It is not something that no longer applies. It is a lifelong skill.
– On a personal level, knowing that you are being effective reduces work stress and creates a sense of well-being.
In the recent past, efficiency in business operations was used as the sole focus of a company’s improvement efforts. The logic was that if we can control our costs we can improve our profits. Efficiency focuses on how something is done to avoid waste by converting a physical input to a physical output. It is a performance-based measure. This was a sensible approach when applied to repetitive operations that could be systemized with a high degree of predictive repeatability. Work Study and Organization and Methods improved efficiency. Factory automation and computers allowed the approach to be taken even further with outstanding success.
problem with efficiency
Efficiency focuses on how something is done to avoid waste by converting a physical input to a physical output. It is a performance-based measure. This was a sensible approach when applied to repetitive operations that could be systemized with a high degree of predictive repeatability. In the process of introducing efficiency, which was often accompanied by significant changes in work practices, the workforce began to shift from being made up of blue-collar workers to being made up more and more of people who were not bound by procedures and processes. rigid. These people tended to be required to exercise judgment in their work based on their knowledge and experience. This became increasingly true as organizations changed rapidly to keep pace with transformations in the global marketplace. It was no longer possible to do the old work in the old way.
A different way of looking at performance
In most companies. Managers think that if they have produced something, it should be called performance. Performance can be defined for the reliability-oriented manager as: “All the money that comes into the company minus what he paid to his suppliers.” The concept is best explained by Eliyahu Goldratt in his novel: The Goal[i]. Goldratt masterfully explained the concept through the eyes of a plant manager who is tasked with either saving the plant from him or shutting it down. The book, first published in 1984, is still worth reading.
What is performance?
Yield is the rate at which the system generates money through sales” (“Yield” is sometimes called “Yield Contribution” and has similarities to the concept of “Contribution” in Marginal Cost, which are the sales revenue minus “variable” costs – “variable” defined according to the Marginal Cost philosophy). [ii]
Goldratt’s alternative to cost accounting begins with the idea that every organization has a goal and that the best decisions increase its value. The goal of a profit-maximizing company is easily stated: to increase profits. This is called performance accounting. Performance accounting uses three measures of income and expenses:
3. Operating expenses
The investment is the money immobilized in the system. This is money associated with inventory, machinery, buildings, and other assets and liabilities. In “The Goal”, the term was used interchangeably between “Inventory” and “Investment”. The preferred term used in performance accounting now is just “investment.” One difference between Yield Accounting and Cost Accounting is that inventory is valued strictly on cost associated with creating the inventory, not additional cost allocations from overhead. Operating expense is the money that the system spends on generating units. For physical products, OE is all expenses except the cost of raw materials. OE includes maintenance, utilities, rent, taxes, payroll, etc.
Managers need to test proposed decisions against three questions. Does the proposed change:
– Increase performance? – How?
– Reduce Investment (Inventory) (money that cannot be used)? – How?
– Reduce operating expenses? – How?
Management needs to change its thinking from cost accounting to take into account measures of effectiveness and must start to move away from simply measuring efficiency. They also need to redefine performance to include a full range of in-system raw materials for out-of-system sales.
References: [i] The Goal – Second Revised Edition, Eliyahu Goldratt, North River Press, Great Barrington, MA 1992. [ii] Performance Accounting, Thomas Corbett, North River Press, Great Barrington, MA, 1998, p29