8.1: Control Process

8.1.1: Setting Objectives and Standards

A company’s standards define its practices, while its objectives define what actions the company needs to take.

Learning Objective

Illustrate how objectives and standards define business practices and determine what actions an organization will take

Key Points

When creating standards, it is important to consider a company’s values, vision, and mission. Standards must reflect these perspectives internally and externally.
When creating a set of objectives, it is important for the organization to complete a self-evaluation. A SWOT analysis is one example of this.
One model of organizing objectives uses hierarchies; Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. These emphasize critical success factors.
Managers must ensure goal congruency, or the compatibility of different goals with each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy?

Key Terms

standards: Any norm, convention, or requirement.
objectives: The goals of an organization.
SWOT Analysis: A SWOT analysis (strengths, weaknesses, opportunities, threats) is an exercise undertaken by organizations to understand their current status and assess how to improve.

Organizational standards and objectives are important elements in any business plan because they guide managerial decision-making. To create reachable objectives, an organization needs to understand where it is, where it wants to go, and who it is competing against. A company’s standards define how it should act, while its objectives determine what actions it will take. Combining standards and objectives allows management to create a business strategy.

Business Objectives

A company’s objectives help determine what inputs and outputs are needed to achieve company goals.

Standards

Organizations are like individuals: they have values, beliefs, and goals. They want to promote a particular image to stakeholders, otherwise known as a brand. Before a company can create standards, it is important for management to clarify the mission, values, and vision. If any of these are not complete or correlative, management must redefine and re-think what the company stands for.

Once mission, values, and vision are established, the organization must set down standards (both operational and value-driven). These standards need to be enforceable and teachable and must be communicated with clarity and simplicity. It is important that employees understand the standards they are required to meet and the consequences of failing to live up to these expectations. Without employee buy-in the standards will be devoid of meaning and applicability, so management should focus a great deal of time and effort instilling standards through communication and observation.

Once standards are outlined and met by management and their subordinates, the organization can begin to apply this operational paradigm to a series of short-term and long-term objectives.

Objectives

A goal (or objective) is the desired result that an organization envisions, plans, and makes a commitment to achieve. This can be a personal or organizational end-point of development. Organizationally, goal management consists of recognizing or inferring goals for individual team members, abandoning outdated goals, identifying and resolving conflicting goals, and prioritizing goals for optimal team-collaboration and effective operations.

Self-evaluation

When creating a set of objectives, it is important for the organization to complete a self-evaluation, usually through tools like SWOT analysis (strength, weaknesses, opportunities, threats). A SWOT analysis helps the company understand where it can achieve competitive advantage by pinpointing what it does well (strengths) and where the opportunities lie with those actions. Organizations must also be aware of what they have sacrificed to achieve their goals (i.e., weaknesses), and where threats in the marketplace may reduce their ability to create profitability (threats). Objectives must take competitive advantage into account; otherwise, the organization lacks a value-added proposition.

Timeline

Once the company has a good understanding of its strengths and weaknesses, management is able to create a timeline of reachable objectives. It is important to create milestones for these objectives and identify which departments within the organization will be responsible for each one. Accountability and time-sensitivity should be explicitly stated and rigorously followed. The next question is how to set these and how to identify and delineate the importance of one objective relative to another.

Objective Setting Approaches and Considerations

One model of organizing objectives uses hierarchies. The items listed may be organized in a hierarchy of means and ends and numbered as follows: Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in a lower rank answers the question “How? ” and the objective in a higher rank answers the question “Why?” The exception is the Top Rank Objective (TRO): there is no answer to the “Why?” question. That is how the TRO is defined.

People typically pursue several goals at once. Goal congruency refers to how well the goals complement each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy? Goal hierarchy consists of the nesting of one or more goals within other, compatible goals.

Another useful approach recommends having short-term goals, medium-term goals, and long-term goals. In this model, one can expect to attain short-term goals fairly easily: they stand just slightly out of reach. At the other extreme, long-term goals appear very difficult–almost impossible to attain. Using one goal as a stepping stone to another involves goal sequencing: achieve the easy short-term goals, then step up to the medium-term and then the long-term goals. Goal sequencing can create a goal stairway.

8.1.2: Measuring Organizational Performance

Managers must consistently update performance reports to monitor progress and measure operational success.

Learning Objective

Apply performance measurement tools and evaluation processes to optimize operations

Key Points

Measuring performance is a vital part of assessing the value of employee and management activities.
Performance should be measured based on an employee’s overall impact, cost efficiency, effectiveness, and ability to implement best practices.
Organizational performance based on internal objectives and external competition should be measured using the metrics of margins, growth, market share, and customer satisfaction.

Key Terms

benchmark: A standard by which something is evaluated or measured.
performance: The act of carrying into execution or action; achievement; accomplishment.
best practices: A method or technique that has consistently shown results superior to those achieved with other means and so therefore is used as a benchmark.

Managers must do more than simply set objectives. They must consistently monitor operations to ensure feasibility and provide guidance to get failing operations back on track. Tools for this kind of management include budgeting, determining effective management strategies, finding areas that need improvement, and determining potential areas for collaboration.

Measuring performance is a vital part of assessing the value of employee and management activities. Performance measurement provides useful insights for conducting annual reviews of managers and employees and is also important for understanding how a company is performing compared with its competitors. This requires two types of measurement: individual (employee) evaluations and organization evaluations.

Employee Evaluations

Employee performance evaluations should be done on a quarterly, semi-annual, or annual basis. This ensures that everyone in the organization understands when the next evaluation will take place, gives the company regular measures of performance, and provides opportunities to take corrective action in a timely manner (if necessary).

Measurement Tools

There are many different performance measurement tools available, such as organizational and employee performance evaluations. Some are included as part of enterprise systems and some are standalone programs. Developing performance metrics usually follows a process of:

Establishing critical processes/customer requirements
Identifying specific, quantifiable outputs of work
Establishing targets against which results can be scored

Some useful attributes to consider for assessing employee and management quality include:

Effectiveness: Determined by outcomes: did the organization produce the required results?
Cost-effective: When outcomes are divided by input, how efficient was the organization’s performance?
Impact: What value did the organization provide?
Best practices: In the context of evaluating internal operations (comparing core processes to effectiveness and efficiency standards), how does current performance compare to benchmarks of past performance, performance in the industry, and political expectations?

Organizational Evaluations

For organizational information, the focus is on the outcomes of the agency’s performance, but input, output, process, and benchmark factors are important as well in creating a comparative framework for analysis. Outcomes should be directly related to the public purpose of the organization.

Measurement Tools

While there are a wide variety of perspectives on controlling performance, each more or less appropriate depending on the objectives and industry of the organization, a few key metrics exist.

Margins – Organizations setting objectives must carefully consider expected margins and ensure that they stay in the black (i.e., do not incur losses). Measuring profitability margins indicates the cents-per-dollar the organization makes by investing in operations.
Growth – Raw revenue growth is also important, as it indicates expansion and potential economies of scale and scope.
Market share – Generally described as a percentage, this indicates success relative to the competition. Higher market share means a deeper brand awareness.
Customer satisfaction and/or retention – It is much cheaper to keep existing customers than to find new ones. Customer retention rates underline brand loyalty and product quality.

8.1.3: Analyzing Organizational Performance

When comparing results it is important for an organization to look inward against historical trends and outward against competitive trends.

Learning Objective

Employ benchmarks and extensive research initiatives to effectively derive standards and expected results in the control process

Key Points

Compare results against a history of similar trends to establish a basis for the analysis.
If the performance measurement is for a new initiative, management should conduct research to determine if there is an industry standard already in place for the process.
If the results far exceeded expectations, than the goals or standards may be set too low (and vice versa). Both process and strategy must be considered in charting a new course and future objectives.

Key Term

problem solving: Using generic or ad hoc methods, in an orderly manner, to resolve issues.

When comparing results, it is important for an organization to look inward against historical trends and outward against competitive trends. When comparing standards, it is important to make sure that the people charged with implementation understand them and consider them achievable. Measuring the long-term success or failure of objectives is in part the process of evaluating the set of standards governing the operation. Using this benchmark, management can reconsider objectives in the context of standards set, ensuring that they are both parallel and effective.

Historical Trends

Internal Data

Compare results against a history of similar trends to establish a basis for the analysis. Accountants are tasked with tracking organizational accounts for legal and/or shareholder purposes and tracking spending for operational assessment. Accountants’ records can provide a historical backdrop to outline what the organization has accomplished in the past. This applies the benefits of hindsight to current results and future projections.

External Data

It is also important to conduct competitive research to determine who else in the market is performing the same processes. If the performance measurement is for a new initiative, management should conduct research to determine if there is an industry standard already in place for the process. If this is a new technology or research area, however, then results should be compared with financial objectives or quality standards instituted by the organization.

There are many metrics and methods for identifying industry standards, particularly for companies operating in the public sector (i.e., publicly traded). Public companies must release annual and quarterly reports, which serve as useful benchmarks for incumbents in the same industry (or new entrants). Overall industry metrics and averages are also available, though for specific applications of research the organization may want to hire or contract analysts for external data collection.

Results

If results aren’t what the company expected or are fall below expected norms, it is important to determine the root cause. It may be that the objectives weren’t realistic, or that more resources are needed to meet goals. Outside factors might have contributed to poor performance. The internal and external information above will help pinpoint the root cause. Once it is determined, corrective action is necessary to help the measured process meet expectations.

If the results far exceeded expectations, the goals or standards may be set too low. The process should be reexamined and the objectives should be increased in order to make sure the company is competitive in its market. Competitive analysis is often helpful in setting realistic but challenging goals for management, employees, or production.

8.1.4: Taking Corrective Action

Taking corrective action requires identifying the problem and implementing a potential solution.

Learning Objective

Model the problem-solving process of identifying contributing factors, taking corrective action, and assessing the effectiveness of a solution

Key Points

Managers need to understand the contributing factors of a problem and how it impacts key processes; they must then figure out a workable solution.
Step one in the problem-solving process is identifying the problem, which can be hard to distinguish from symptoms of the problem.
Once the problem is identified, the manager must decide what corrective action to take. In many ways, identifying and solving a problem (the control process) is a process, not a silver bullet.
Organizations may decide to discuss a problem and potential solutions with stakeholders.

Key Terms

tacit: Not derived from formal principles of reasoning; based on induction rather than deduction.
dichotomies: Two elements, often mutually exclusive, that stand in juxtaposition to one another.

Taking corrective action is one of the three essential elements of the control process. If result of the control process don’t meet company standards, then it needs to be revamped to meet organizational goals.

Managers are Problem Solvers

One key aspect of taking corrective action is problem-solving. Managers need to understand the contributing factors of a problem and how it impacts key processes; they must then figure out a workable solution. Once the solution is plotted, it is important to determine how best to implement it. This problem-solving process is the central consideration for effective corrective action.

Identify the Problem

Step one in the problem-solving process is identifying the problem, which can be hard to distinguish from symptoms of the problem: it can be easy to mistake repercussions of a problem for the problem itself. Gathering information and measuring each process carefully is prerequisite to pinpointing the problem and taking the proper corrective action.

Common Mistakes

Attempts at corrective action are often unsuccessful because of failures in the problem-solving process, like not having enough information to isolate the real problem, or a decision maker who has a stake in the process and may not want to admit that their department made an error. Another reason why a decision-making process may result in an incorrect solution is that the decision-maker was never properly trained to analyze a problem.

Outline Corrective Action Method

Once the problem is identified, and a method of corrective action is determined, it needs to be implemented as quickly as possible. A map of checkpoints and deadlines, assigned to individuals in a clear and concise manner, facilitates prompt implementation. In many ways, the control process must also be a process. Its steps can vary greatly depending on the issue being addressed, but in all cases it should be clear how the corrective actions will lead to the desired results.

Next, schedule an analysis of the effectiveness of the solution. This way if the corrective action doesn’t create the expected results, further action can be taken before the organization falls even further behind in meeting its goals. Organizations may decide to discuss a problem and potential solutions with stakeholders. It is useful to have some contingency plans in place, as employees, customers, or vendors may have unique perspectives on the problem that management lacks that can lead to a more effective solution.

8.2: Types of Control

8.2.1: Strategic, Tactical, and Operational Control

Organizational control involves using strategy, tactics, and operational oversight to monitor and improve company processes.

Learning Objective

Illustrate the varying levels of control utilized by organizations, notably strategic, tactical and operational strategy

Key Points

Organizations are built with the goal of profitability through processes in mind. The organizational control approach incorporates goals and the strategy used to reach them.
Strategic management is a level of managerial activity below setting goals and above tactics. Strategic management provides overall direction to an enterprise.
A tactic is a method intended to fulfill a specific objective in the context of an overall plan.
Operational control regulates day-to-day output relative to schedules, specifications, and costs.
Good managers have a broad vision of the process, a series of embedded tactics for efficiency and/or differentiation, and a careful operational control for cost control.

Key Terms

vision: An ideal or goal toward which one aspires.
efficient: Making good, thorough, or careful use of resources; not under- or over-consuming. Making good use of time or energy.
operational planning: The process of linking strategic goals and objectives to tactical goals and objectives.

Control

Organizations are built with the goal of profitability through processes in mind. The organizational control approach incorporates goals and the strategy used to reach them. These strategies and tactics are developed with the foresight of specific operational objectives, such as market share, return on investments, earnings, and cash flow. As a result, organizational control consists primarily of reviewing and evaluating overall performance against the strategies, tactics, and operations used to define the organization itself. Tactics for organizational control are developed based on existing goals and strategies to establish specific objectives in the context of an overall strategic plan. Organizational control is essentially a benchmark, moving the company toward optimal levels of operation.

Example of management levels

The Government Business Reference Model shown here illustrates three levels of control: strategic (purpose), tactical (mechanisms), and operational (operations support). Strategic control includes policy-forming and -enforcing bodies such as the Department of Homeland Security and law enforcement; tactical control includes direct services such as financial assistance and credit and insurance companies; and operational control includes oversight bodies, revenue collection, and resource allocation.

Strategy

Strategic management provides overall direction to the enterprise. Strategy formulation requires examining where the company is now, deciding where it should go, and determining how to get it there. Strategic assessment involves situation analysis, self-evaluation, and competitor analysis, both internal and external, micro-environmental and macro-environmental.

Objectives are determined by the results of the strategic assessment. These objectives should run parallel on a timeline, some short-term and others long-term. This involves crafting vision statements (long-term projections for the future), mission statements (describing the organization’s role in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives. These objectives should suggest a strategic plan that provides details (tactics) for achieving these objectives.

Tactics

Strategy involves the future vision of the business; tactics involve the actual steps needed to achieve that vision. For example, a marketing strategy for a motel might be to develop a business package targeting travel agents that includes an e-commerce solution. Tactics are practical steps for implementing strategy. Other tactics for the travel-agent strategy might include:

building a list of local travel agents
preparing a business incentive scheme
outlining how they can use the motel website to make reservations and keep up-to-date
personally visiting the agents to follow up
monitoring the response to determine if the sales target is met

One can see from this that strategy always comes first, followed by tactics. For example, a value-based commitment to environmentally responsible hospitality could be reflected strategically by working toward Green Globe certification and tactically by incorporating energy efficient appliances in the motel retrofit.

Operational Control

Operational control regulates the day-to-day output relative to schedules, specifications, and costs. Are product and service output high-quality and delivered on time? Are inventories of raw materials, goods-in-process, and finished products being purchased and produced in the desired quantities? Are the costs associated with the transformation process in line with cost estimates? Is the information needed in the transformation process available in the right form and at the right time? Is the energy resource being used efficiently?

Operational control can be a very big job, requiring substantial overhead for management, data collection, and operational improvement. The idea behind operational control is streamlining the process to minimize costs and work as quickly and efficiently as possible.

8.2.2: Feedback, Concurrent Control, and Feedforward

Bureaucratic control uses formal systems to influence employee behavior and help an organization achieve its goals.

Learning Objective

Define bureaucratic control and its potential advantages within an organization

Key Points

Bureaucratic control empowers individuals relative to their position within the organizational hierarchy. For example, the chief executive officer of an organization has more power than a line manager.
It is applied via systems of standardized rules, methods, and verification procedures.
Control helps shape the behavior of divisions, functions, and individuals.
Advantages of bureaucratic control include efficient decision-making, standardized operating procedures, and usage of best practices.
Disadvantages include discouragement of creativity and innovation; dissatisfaction among employees; high employee turnover rate; and difficulty adopting to changing conditions in the marketplace, industry, or legal environment.

Key Terms

hierarchy: An arrangement of items in which the items are represented as being “above,” “below,” or “at the same level as” in relation to each other.
bureaucracy: Structure and regulations in place to control activity. Usually in large organizations and government operations.

Bureaucratic Control, An Overview

What Is Bureaucratic Control?

Bureaucratic control is the use of formal systems of rules, roles, records, and rewards to influence, monitor, and assess employee performance.

Rules set the requirements for behavior and define work methods.
Roles assign responsibilities and establish levels of authority.
Records document activities and verify outcomes.
Rewards provide incentives for achievement and recognize performance relative to goals or standards.

Organizations use these systems when their size and complexity make more informal practices based solely on interpersonal communication and relationships impractical, unreliable, and ineffective. Bureaucratic controls are intended to help an organization achieve its goals by shaping how employees perform, creating accountability for outcomes, tracking actual performance, and correcting behavior when necessary.

Advantage of Bureaucratic Control

The biggest advantage of bureaucratic control is that it creates a command and control cycle for the business leadership. Decision-making is streamlined when fewer individuals are involved. Since standards and best practices are usually highlighted during decision-making, bureaucratic control makes an entire organization more efficient.

Disadvantages of Bureaucratic Control

One disadvantage of bureaucratic control is that it may discourage creativity and innovation by making an organization more standardized and less flexible. Business leadership may be versatile in some organizations, but it is not possible for a few individuals to generate all possible ideas or plans. This means that bureaucratic control can narrow the scope of possible ideas and plans. Another disadvantage is that the front- line employees may feel unappreciated and dissatisfied because they are not allowed to present their ideas; this can lead to heavy employee turnover. Often organizations with strict bureaucratic control find themselves less able to adapt to changes in the marketplace, their industry, or the legal environment.

Bureaucratic control

An example of a bureaucratic feedback system is the military, with its strict hierarchy and clear chain of command.

Conclusion

Though bureaucratic organizational structures may seem less desirable than flatter structures, they are necessary at times. While software development may benefit from a more autonomous structure, for example, other industries benefit from the tight controls and tall hierarchies of bureaucratic control.

8.2.3: Internal and External Control

Control uses information from the past and present and projections for the future to create effective control processes.

Learning Objective

Diagram the control process of feedback, concurrent control, and feedforward within the organizational control context

Key Points

Feedback is a process in which information about the past or the present is used to influence the present or future.
Concurrent control is active engagement in a current process where observations are made in real time.
Feedforward refers to giving a control impact to a subordinate or an organization from which you are expecting an output. It is predictive because it is given before any deliberate change in output occurs.
Monitoring and controlling is a set of processes implemented to monitor project execution to discover and solve problems or potential problems in a timely manner.

Key Terms

feedforward: To respond in advance.
concurrent: Happening at the same time; simultaneous.
feedback: Critical assessment on information produced.

In management terms, control means setting standards, measuring actual performance, and taking corrective action. Control involves making observations about past and present control functions to make assessments of future outputs. These are called feedback, concurrent control, and feedforward, respectively.

Feedback

Feedback is a process in which information about the past or the present is used to influence the present or future. As part of a chain of cause-and-effect that forms a circuit or loop, actions are said to “feed back” into themselves.

Feedback

‘Feedback’ exists between two parts when each affects the other. (W.R. Ashby, “An introduction to cybernetics”, 1956)

Feedback helps an organization seeking to improve its performance make the necessary adjustments. Feedback serves as motivation for many people in the workplace. When employees receive negative or positive feedback, they decide how to apply it in their daily work. Feedback for the system as a whole also provides common points of discussion for management and allows for a holistic appraisal of how processes can be improved.

Example of the information feedback process

This image shows how data, information, and feedback flow throughout a management strategy.

Concurrent Control

Concurrent control is active engagement in a current process where observations are made in real time. A set of processes are implemented to monitor project execution to discover and solve problems or potential problems in a timely manner. Picture a floor manager actively measuring each component of the operation with a checklist to identify issues as they occur.

Feedforward

Feedforward is a management and communication term that refers to giving a control impact to an employee or an organization from which you are expecting an output. Feedforward is not just pre-feedback, because feedback is always based on measuring an output and sending feedback on that output. Pre-feedback given without measuring output may be understood as a confirmation or just an acknowledgment of control command. Feedforward is predictive in nature. Picture an analyst statistically measuring the quality and quantity of a given output based on information gathering.

8.2.4: Internal and External

The control process can be hindered by internal and external constraints that require contingency thinking.

Learning Objective

Examine the external and internal control constraints that may limit efficiency in the control process

Key Points

All processes are susceptible to constraints; the theory of constraints (TOC) postulates that “the chain is only as strong as its weakest link.”
TOC asserts that throughput would be infinite if there were no constraints within a process. Therefore, constraints are a constant consideration for management control.
Internal constraints include people, policy, and equipment issues, which can actively reduce the efficiency of specific process flows.
External constraints include resource scarcity, contracts (i.e., suppliers or employees), and legalities.

Key Terms

control: Influence or authority over someone or something.
throughput: The movement of inputs and outputs through a production process.

Theory of Constraints

All processes are susceptible to constraints; the theory of constraints (TOC) postulates that “the chain is only as strong as its weakest link.” Because systems are interdependent, it makes sense that an entire set of processes within an operational paradigm can be made vulnerable to failure by a single process that is struggling.

TOC assumes that throughput, operational expense, and inventory are the three central inputs in a given system. TOC relies on the assumption that there is always room for improvement in these inputs–after all, if there was nothing preventing the system from achieving higher throughput, throughput would be infinite.

This means that any time organizations encounter substantial internal or external constraints, it is the role of management to create a strategy to circumvent them. Since throughput is never infinite, this is an ongoing process.

Internal Constraints

At the organizational level, internal control objectives concern the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. With this in mind, we can summarize internal constraints as any one or any combination of the following:

Equipment: The way equipment is used limits the ability of the system to produce more salable goods/services.
People: Lack of skilled people limits the system; mental models also cause negative behaviors that become constraints.
Policy: A written or unwritten policy prevents the system from making more goods/services.

The list of potential internal constraints is long: employees may not have the proper skills to use specific types of equipment, policy may organize the processes in an imperfect manner, equipment may depreciate faster than expected, employees may be absent or inefficient, policy may limit resource allocation to inventory and warehousing, etc. Internal constraints are a constant concern for the managers who must try to minimize them by continually optimizing the system. For example, if employees lack specific skills, management may want to refine its hiring policies.

Internal control system

This flowchart illustrates how an internal control system can be integrated into the production process: mid-level managers of one department can monitor and QA other departments’ output.

External Constraints

In their attempts to maximize existing profits, business managers must consider both the short- and long-term implications of decisions made within the firm and the various external constraints that could limit the firm’s ability to achieve its organizational goals. These constraints can be organized into three categories:

Scarcity
Contracts
Legalities

The first external constraint, resource scarcity, refers to the limited availability of essential inputs (including skilled labor), key raw materials, energy, specialized machinery and equipment, warehouse space, and other resources. Moreover, managers often face constraints on plant capacity that are exacerbated by limited investment funds available for expansion or modernization.

Contractual obligations also constrain managerial decisions. Labor contracts, for example, may constrain managers’ flexibility in worker scheduling and work assignments. Labor contracts may also restrict the number of workers employed at any time, thereby establishing a floor for minimum labor costs.

Finally, laws and regulations have to be observed. Legal restrictions can constrain production and marketing decisions. Examples of laws and regulations that limit managerial flexibility include: minimum wage, health and safety standards, fuel efficiency requirements, anti-pollution regulations, and fair pricing and marketing practices.

8.3: Bureaucratic and Quality Control Tools and Techniques

8.3.1: Bureaucratic Control

The quality control cycle improves processes through a continuous cycle of planning, doing, checking, and acting.

Learning Objective

Use the four central components of the quality control cycle as a quality control (QC) tool

Key Points

The quality control cycle is a repeating cycle that evolves around the production process. In the PDCA model, this incorporates four elements: Plan, Do, Check, and Act.
This process is essential for products developed through continuous production.
The quality control cycle does not stop after a process has been improved. Once a product is updated, the cycle begins again for the updated product, which is subjected to the same rigorous quality control process.

Key Terms

quality control: An activity, such as inspection or testing, introduced into an industrial or business process to ensure sound processes and products.
continuous improvement: An ongoing effort to make products, services, or processes better.
PDCA: The cycle of Plan-Do-Check-Act, four-step problem solving process typically used in quality control.

The Quality Control Life Cycle

The quality control life cycle is an ongoing cycle of planning, monitoring, assessing, comparing, correcting, and improving products or processes. It is designed to improve the quality of a product or process through continuous reinvention. Quality control is used to develop systems that ensure that the goods and services customers receive meet or exceed their expectations.

Quality control both verifies the delivery of good quality and identifies gaps and failures that need to be addressed within the process. Ultimately, it is a process that continuously evolves within the production process.

PDCA (Plan, Do, Check, Act)

PDCA (plan–do–check–act or plan–do–check–adjust) is a four-step management method used in business to control and continuously improve processes and products. It is also known as the Deming circle/cycle/wheel, Shewhart cycle, control circle/cycle, or plan–do–study–act (PDSA). Another version of this PDCA cycle is OPDCA. The added “O” stands for observation or, as some versions say, “Grasp the current condition.”

PDCA cycle

Plan, Do, Check, Act

The Four Steps

Plan: In this step of the quality control cycle, a business establishes the objectives and processes necessary to deliver results in accordance with the expected output (the target or goals).
Do: In this step, a business implements the plan, executes the process, and makes the product. It also collects data for charting and analysis to be used in the following “check” and “act” steps.
Check: A business then compares the actual result against the expected result to find any differences.
Act/Adjust: After comparing results, a business takes corrective actions on any significant differences between actual and expected results. In this step, the business analyzes the differences to determine their root causes, then determines where to apply changes that will improve the process or product.

It is important to keep in mind that this quality control process is continuous and specifically designed to improve the quality of business processes on an ongoing basis. The theory underlying this is the scientific method, where observations are made and hypotheses generated, which are then tested in the next cycle.

8.3.2: The Quality Control Cycle

Quality control is used to evaluate and address the quality of the goods a business provides.

Learning Objective

Describe effective quality control processes as they are employed in the business environment

Key Points

Quality control is used to evaluate an organization’s products or services.
Standards of quality need to be established first, using a set of quality criteria created by the manufacturer or by the requirements of the client/customer.
Quality assurance is preventive and process-oriented while quality control is reactive and product-oriented.
Quality control emphasizes process, control, competence, and personal integrity.
Quality control is very important to increasing customer satisfaction and the success of the overall business.

Key Terms

locus of control: A theory in personality psychology referring to the extent to which individuals believe that they can effect or dictate how events affect them.
quality control: A procedure or set of procedures intended to ensure that goods adhere to a defined set of soundness criteria or meet the requirements of the client or customer.
quality: The degree to which a man-made object or system is free from bugs and flaws, as opposed to scope of functions or quantity of items.

Quality control is a business procedure used to assess the quality of a company’s products or services against benchmarks determined by the company, industry standards, or clients/customers. Quality control includes inspecting a product before it enters the marketplace to make sure it is defect-free.

Quality Checking

A U.S. Navy Aviation Electrician’s Mate performs a maintenance check during the course of his duties.

Quality Control (QC) and Quality Assurance (QA)

Quality control and quality assurance have different purposes. Quality control emphasizes product testing to discover defects and report them to management, which decides how to respond (by delaying the product release date, for example). Quality assurance attempts to improve and stabilize production to prevent defects. In this way, QA is preventive and process-oriented while QC is reactive and product-oriented.

Guidelines for Quality Control

To maintain an effective quality control program, a business must follow these important guidelines:

Decide on a specific standard for the product or service.
Determine the extent of quality service actions.
Collect real-world data to improve product quality and adjust the QC process.
Submit the result to management. If the percentage of defective products is too high, management should take corrective action to improve quality.
Most importantly, a quality control process should be an ongoing process.

Three Major Aspects of Quality Control

Elements, like controls, job management, defined and well-managed processes, performance and integrity criteria, and identification of records.
Competence, such as knowledge, skills, experience, and qualifications.
Soft elements, such as personnel integrity, confidence, organizational culture, motivation, team spirit, and quality relationships. Deficiency in any of these three aspects increases the risk of inferior products or services getting to market. Quality control is one of the most important procedures for any business because it lowers that risk of customer or client dissatisfaction and prevents losses for the business.

8.3.3: Total Quality Management (TQM)

Total quality management (TQM) is the continuous management of quality in all aspects of an organization.

Learning Objective

Employ the total quality management (TQM) perspective to identify how to improve quality and efficiency on a continuous basis

Key Points

TQM asserts that quality improvement never ends. Quality is a strategic advantage to an organization, and zero defects is the quality goal that minimizes total quality costs.
TQM is rooted in the belief that preventing defects is cheaper than fixing them. In other words, total quality costs are minimized when managers strive to reach zero defects in the organization.
The seven basic elements of TQM are: customer focus, continuous improvement, employee empowerment, quality tools, product design, process management, and supplier quality.
There are several awards for outstanding TQM, such as the Malcolm Baldrige Award and the ISO 9000 award.

Key Term

TQM: Total Quality Management; a process improvement method that promotes the importance of quality improvement on a continuous basis.

Quality management is the study of improving the quality of a company’s products and services. Total quality management (TQM) promotes the importance of improving quality on a continuous basis. TQM asserts that quality improvement is a consistent source of strategic advantage because it eliminates waste and creates higher consistency. TQM involves all levels of staff and management as well as facilities, equipment, labor, supplies, customers, policies, and procedures.

Cost-Benefit Analysis

An important basis for justifying TQM is its impact on total quality costs. TQM is rooted in the belief that preventing defects is cheaper than fixing them. In other words, total quality costs are minimized when managers strive to reach zero defects in the organization.

The four major types of quality costs include:

Prevention costs are costs created from the effort to reduce poor quality. For instance, a company may train its employees to do an effective job the first time or conduct preventive maintenance on its equipment.
Appraisal costs include costs associated with conducting quality audits and the inspection and testing of raw materials, work-in-process, and finished goods.
Internal failure costs include the lost productivity and waste associated with having to scrap or rework a product.
Finally, external failure costs occur when the defect occurs after the product has reached the customer. This is the most expensive category of quality cost as it results in returns, repairs, warranty claims, and potentially lost business.

The Seven Basic Elements of TQM

These seven elements of TQM are:

Customer focus: Identifying customer needs and measuring customer satisfaction are key first steps for any business. Managing quality begins with delivering precisely what the customer wants.
Continuous improvement: There is no perfect system. Process improvements must be continuous. Constantly identifying and improving on processes to increase quality and/or lower costs is a primary responsibility of operations teams.
Employee empowerment: Employees are observers: ensuring familiarity with the individual components and the broader process as a whole is integral in empowering effective operations professionals.
Quality tools: Quality tools are mostly model-based (i.e., flowcharts, cause and effect diagrams, scatter plots, etc.) and involve manipulating output data to identify weaknesses and/or areas for improvement.
Product design: Design and delivery of a product is also an evolving process where product design can substantially impact costs and customer satisfaction. Operations professionals are in an ideal position to suggest design changes that will improve quality.
Process management: This is often seen as a the heart of TQM because improving the process itself is a goal everyone in operations should be working towards all the time. Simple process improvements like enhancing the organization of inputs or the design of the plant can have enormous cost implications.
Supplier quality: Finally, most companies are also customers. This means that many of the inputs for a given good will be coming in as goods themselves. Who organizations buy from significantly impacts costs and quality. This makes supplier management is a complex and highly relevant component of TQM.

All of these elements emphasize the importance of improving quality by empowering employees, providing adequate training, and building a continuous organizational culture of improvement. The idea here is to improve while continuing to fulfill customer needs through effective use of internal resources and process management.

Quality Awards Associated with TQM

There are several quality awards and standards for organizations to strive towards. Most of the organizations involved in these programs see them as tools to help improve their quality processes and move toward implementing successful TQM. Two examples are:

The Malcolm Baldrige Award is a United States quality award that covers an extensive list of criteria evaluated by independent judges. In many cases, organizations use the Baldrige criteria as a guide for their internal quality efforts rather than competing directly for the award.
The International Organization for Standardization (ISO) sponsors a certification process for organizations that seek to learn and adopt superior methods for quality practice (ISO 9000) and environmentally responsible products and methods of production (ISO 14000). These certifications are increasingly used by organizations of all sizes to compete more effectively in a global marketplace due to the wide acceptance of ISO certification as a criterion for supplier selection.

8.3.4: The RATER Model

RATER is a service quality framework that highlights five important business areas customers use to analyze strength or weaknesses.

Learning Objective

Apply Gap Analysis to the RATER model to measure current and potential performance

Key Points

RATER assumes that customers evaluate a firm’s service quality by comparing their perceptions with their expectations.
RATER highlights the five areas of a business: Reliability, Assurance, Tangibles, Empathy, and Responsiveness. Gap analysis of RATER results measures the difference between perception and expectation.
RATER allows businesses to improve an individual service variable by analyzing customer data.

Key Terms

reliability: The quality of being dependable or trustworthy.
SERVQUAL: SERVQUAL or the RATER model is a service quality framework.
Gap Analysis: A tool that helps organizations compare actual performance with potential performance. The thought process is: “Where are we now and where do we want to be?”

The RATER model is a service quality framework. It was created by professors Valarie Zeithaml, A. Parasuraman, and Leonard Berry, who introduced the framework in their 1990 book Delivering Quality Service. The model highlights five areas that customers generally consider important when they use a service, and focuses on differentiating between customer experience and expectation.

Delivering Quality Service

A book by Valarie Zeithaml, A. Parasuraman, and Leonard Berry

Five Areas of RATER

Reliability: did the company provide the promised service consistently, accurately, and on a timely basis?
Assurance: do the knowledge, skills, and credibility of the employees inspire trust and confidence?
Tangibles: are the physical aspects of the service (offices, equipment, or employees) appealing?
Empathy: is there a good relationship between employees and customers?
Responsiveness: does the company provide fast, high-quality service to customers?

By measuring the quality ratings for these five areas, a business can improve areas that are lagging. RATER uses a multidimensional approach to pinpoint service shortcomings, which helps a business understand why they are happening and how to correct them.

Gap Analysis

Gap Analysis can be applied to each of the five RATER areas. Gap Analysis is a tool that helps companies compare actual performance with potential performance. The five gaps that organizations should measure, manage, and minimize are:

Gap 1: The management perception gap, or the difference between the service customers expect and management’s perception of customer expectations. If management thinks customers expect one level of service when they really expect another, this indicates that management does not fully understand the market.
Gap 2: The quality specification gap. This is the difference between management perception and the company’s actual specification of customer experience.
Gap 3: The service delivery gap. This is the difference between customer-driven service design and standards and service delivery.
Gap 4: The market communication gap. This is the gap between the experience that customers are promised and the experience they actually have.
Gap 5: The perceived service quality gap. This is the gap between a customer’s expectation of a service and their perception of the service they received.

Addressing gaps is the ultimate goal of this process because the deviation between customer expectations and actual quality is where quality control and process improvements take place.

8.3.5: Total Quality Management Techniques

Six sigma, JIT, Pareto analysis, and the Five Whys technique are all approaches that can be used to improve overall quality.

Learning Objective

Classify the different methods of TQM available to organizations and leaders

Key Points

Total Quality Management (TQM) is an integrative management philosophy for continuous improvement of the quality of an organization’s products and processes in order to meet or exceed customer expectations.
Six Sigma focuses on improving the quality of process outputs by identifying and removing the causes of defects while minimizing the variability in manufacturing and business processes.
Just-in-Time is a production strategy for improving return on investment by reducing in-process inventory and associated carrying costs.
Pareto Analysis is a statistical technique used to identify a limited number of tasks that combine to produce a significant overall effect.
Five Whys is a question-asking technique used to explore the cause-and-effect relationships underlying a particular problem.

Key Terms

Pareto Analysis: A statistical technique that is used to select a limited number of tasks that produce significant overall effect.
Six Sigma: A process improvement method that focuses on statistical methods to reduce the number of defects in a process.
JIT: Just-in-Time; to perform an operation (usually compiling).

Total Quality Management (TQM) is an integrative management philosophy for continuous improvement of the quality of an organization’s products and processes in order to meet or exceed customer expectations. There are several TMQ strategies used to improve business management systems. Considering the practices of TQM as discussed in six empirical studies, Cua, McKone, and Schroeder (2001) identified the nine most common TQM practices as:

Cross-functional product design
Process management
Supplier quality management
Customer involvement
Information and feedback
Committed leadership
Strategic planning
Cross-functional training
Employee involvement

The following sections describe some other important and widely used techniques that drew inspiration from TQM in their focus on quality and control.

Six Sigma

Six Sigma drew inspiration from the quality improvement methodologies of preceding decades, including quality control, TQM, and Zero Defects. It focuses on improving the quality of process outputs by identifying and removing the causes of defects while minimizing the variability in manufacturing and business processes Like TQM, the Six Sigma philosophy asserts that achieving sustained quality improvement requires commitment from the entire organization, particularly top-level management.

Six Sigma

The Six Sigma management philosophy drew inspiration from the quality improvement methodologies of preceding decades, including TQM.

Just-in-Time (JIT)

The Just-in-Time (JIT) method is a production strategy for improving business return on investment by reducing in-process inventory and associated carrying costs. JIT focuses on continuous improvement to maximize an organization’s return on investment, quality, and efficiency. The JIT inventory system focuses on having “the right material, at the right time, at the right place, and in the exact amount” and defines inventory as a cost factor.

JIT programs often include a focus on Total Quality Control. For example, when a process or parts quality problem surfaces on Toyota’s production line, the entire production line is slowed or even stopped while the problem is dealt with. JIT must be organization-wide and consistent.

Pareto Analysis

Pareto analysis is a statistical technique used to select a limited number of tasks that produce significant overall effect. It uses the Pareto principle: most problems have a few key causes. Pareto analysis also concludes that 80% of the result can be generated by focusing on 20% of the key work.

Five Whys

The Five Whys is a question-asking technique used to explore the cause-and-effect relationships underlying a particular problem. The primary goal of the technique is to determine the root cause of a defect or problem, which points toward a process that is not working well or does not exist. The technique was originally developed by Sakichi Toyoda and was used by Toyota Motor Corporation as it evolved its manufacturing methodologies. It is now used within Kaizen (continuous improvement), lean manufacturing, and Six Sigma.

8.4: Financial and Project Management Tools of Control

8.4.1: Gantt Charts

Gantt charts display the duration of steps in a project and are used by project managers to track the time and sequence of each step.

Learning Objective

Compare the advantages and disadvantages of utilizing a Gantt chart to illustrate a project schedule

Key Points

Gantt charts illustrate the start and finish dates of the terminal and summary elements of a project. Gantt charts also display the expected duration of each stage of a project as well as the expected order of each stage.
The axes of a Gantt chart include the duration (weeks, months, and so on) of each step of the project and descriptions of each step. Gantt charts can also show the completion rate of the project steps that are currently underway.
Gantt charts help communicate the goals and objectives of projects, their timeline, and the expectations project managers have for completion rates for the project.
Although a Gantt chart is useful and valuable for small projects that fit on a single sheet or screen, they can become too large and unruly for projects with very large numbers of activities.

Key Term

project management: The discipline of planning, organizing, securing, managing, leading, and controlling resources to achieve specific goals.

A Gantt chart is a type of bar chart developed by Henry Gantt to illustrate a project schedule. Gantt charts show the start and finish dates of the terminal and summary elements of a project. Gantt charts also display the expected duration of each stage of a project as well as the expected order of each stage.

The axes of a Gantt chart include the duration (weeks, months, and so on) of each step of the project and descriptions of each step. Gantt charts can also show the completion rate of project steps that are currently underway.

Gantt charts are used in many types of projects, including technical projects and simple projects. Today they are commonly used, but when they were first introduced Gantt charts were revolutionary.

Relevance to Management

Gantt charts are especially useful for management professionals because they display multiple steps and active components simultaneously. Management is tasked with understanding a wide variety of processes at any given instant and allocating resources or adjusting policy based upon this understanding. Gantt charts enable real-time tracking of each phase of a given project (or series of projects), and allow managers to quickly update and communicate broad arrays of information chronologically.

Advantages Of Gantt Charts

Gantt charts can be used to show the current schedule status using percent-complete shadings and a vertical “TODAY” line. Because they are so commonly used, Gantt charts can be used and understood by audiences around the world.

Gantt charts also help communicate the goals and objectives of projects, their timeline, and the expectations project managers have for completion rates for the project. They serve as a communication device among team members to discuss the goals of the project and make realistically appraisals of the current timeline. Thus they provide a useful visualization of strategy in action.

Disadvantages Of Gantt Charts

Although a Gantt chart is useful and valuable for small projects that fit on a single sheet or screen, they can become too large and unruly for projects with a large number of concurrent activities. Larger Gantt charts may not be suitable for most computer displays.

Because Gantt charts focus primarily on schedule management, they represent only one of the triple constraints for project management (cost, time, and scope–Gantt charts show only time). Moreover, since Gantt charts do not convey the size of a project or the relative size of work elements, the magnitude of steps behind schedule can be easily mis-communicated. If two projects are the same number of days behind schedule, the larger project has a larger effect on resource utilization, but this difference is not expressed on a Gantt chart.

Construction of Gantt Charts

In the following example there are seven tasks labeled A through G . Some tasks can be done concurrently (A and B) while others cannot be done until the predecessor task is complete (C cannot begin until A is complete).

Additionally, each task has three time estimates: the optimistic time estimate (O), the most likely or normal time estimate (M), and the pessimistic time estimate (P). The X axis displays the expected duration of the project and the bars show how much time each step of the project is expected to take as well as when the step will take place in relation to the rest of the project.

Gantt chart

Gantt charts are used in project management scheduling.

8.4.2: CPM and PERT Charts

CPM and PERT are charts used to determine the sequence and maximum and minimum timing of activities in a project.

Learning Objective

Outline business processes within project management utilizing the critical path method (CPM) as a control function and diagram projects within project management using the program evaluation review technique (PERT) chart

Key Points

CPM diagrams each step of a project(s). This includes a list of tasks and the time (duration) that each task should take to complete, and the sequence of and dependencies between tasks.
CPM uses task sequence and timing information to lay out the longest path of planned activities to the end of the project and give a time window during which the step should be completed to keep it from interfering with later steps.
A PERT chart is a diagram for CPM that represents tasks with an arrow diagram. PERT charts are more simplistic than CPM charts because they simply show the sequence and timing of each step in the project.
CPM/PERT charts are useful in determining where potential delays may occur in a project and deciding the sequence of tasks. This helps project managers organize tasks and ensure that time is managed appropriately at each stage of the project.
The cumulative process of transforming various independent efforts into an interdependent value-added proposition is often complex; CPM/PERT charts allow project managers to visualize tasks chronologically.

Key Term

Critical Path: In a CPM diagram, the longest time period that any series of tasks will take. This amount of time becomes the maximum amount of time needed to complete the project.

The critical path method (CPM) is a project modeling technique that was developed in the late 1950s by Morgan R. Walker and James E. Kelley, Jr. CPM is commonly used for projects in construction, aerospace and defense, software development, research projects, product development, engineering, and plant maintenance. It is particularly useful for projects that have interdependent steps and/or processes.

CPM Inputs

CPM diagrams each step of a project(s). This includes a list of tasks and the time (duration) that each task should take to complete, and the sequence of and dependencies between tasks (such as “Step A has to be finished before moving to step B”). CPM uses task sequence and timing information to lay out the longest path of planned activities to the end of the project and give a time window during which the step should be completed to keep it from interfering with later steps.

Project managers can glean a lot of information about the timing of the project by following the pathways created in the CPM diagram between the different steps. They can determine which tasks need to be completed first and how much time can be spent on those tasks before they delay other parts of the project.

The Critical Path

Managers can also use CPM to determine which set of tasks is likely to take the longest. For example, if Step A has to be completed before Step B, which has to be completed before moving to Step C, but Steps D, E, and F can all be completed independent of each other, Steps A, B and C form the longest series of tasks in the project.

The longest series of tasks in a project is referred to as the “critical path;” in this case, it would be A–>C. The critical path is the sequence of project network tasks that combine for the longest overall duration. The critical path also tells the project manager the shortest possible time period in which the project can be completed since the timing of the project will be dependent on the completion of critical path tasks.

PERT Chart

A PERT chart (program evaluation review technique) is diagram for CPM that represents tasks with an arrow diagram . PERT charts are more simplistic than CPM charts because they simply show the timing of each step of the project and the sequence of steps.

PERT chart

A PERT chart shows the timing of a project.

Standard CPM charts are more complex than PERT charts because they illustrate the sequence of steps and place a diagram around each step that shows the earliest and latest possible time that each task in the project can be completed.

CPM Chart

A CPM chart is similar to a PERT chart but includes more detail about the latest and earliest possible times at which each stage of the project must be completed. The earliest possible time (in green) are calculated by determining the earliest start times of all activities on the critical path before that activity. The latest possible times (in blue) are calculated by adding all of the latest possible times of the activities before the critical path. In this CPM chart, the critical path is A-B-C-D-E since that pathway takes the most time to complete of any of the other potential pathways available. The total float time (lime green), or TF, represents the amount of time flexibility a task has between start and end times.

Managerial Implications

CPM/PERT charts are useful in determining where potential delays may occur in a project and deciding the sequence of tasks. This helps project managers organize tasks and ensure that time is managed appropriately at each stage of the project.

Project managers are master multitaskers, capable of seeing the forest of the long-term agenda through the trees of short-term objectives. The cumulative process of transforming various independent efforts into an interdependent value-added proposition is often complex; CPM/PERT charts allow project managers to visualize tasks chronologically. This time component is critical because understanding the prerequisites for each stage of development minimizes delays and ensures ideal resource allocation.

Finally, the concept of a critical path is integral to the usefulness of the model. Identifying which task grouping will determine the overall length of the project allows proper prioritization and enables deadlines to be shortened through increased effort in specific areas. This makes it easier for the project manager to effectively add value by reducing lead times.

8.4.3: Financial and Budgetary Controls

Financial and budget controls help ensure project success by controlling (and giving visibility to) input resources and output returns.

Learning Objective

Use effective budgeting techniques and financial projections to maximize the potential success and control project objectives

Key Points

Determining the cost of a project is one of the most important initial steps for a project manager (PM). Financial and budgetary controls are critical tools in this process.
Some tools that project managers can use to control finances and budgeting include payback period and other financial forecasting calculations, as well as budgeting techniques like variance analysis.
One way to determine whether the budgeting plan is being adhered to is to compare the budget allotted for a certain period of time with the actual amount of money spent during that time. This is called a variance analysis.
Financial forecasting calculations include basic payback periods and net profit values (NPVs) which calculate the period of time required for the return on an investment to repay the sum of the original investment.
It is important for a project manager to conduct these financial forecasting calculations and budgeting controls to identify budgetary constraints well before costs are incurred.

Key Term

Variance analysis: The difference between a budgeted, planned, or standard amount and the actual amount incurred/sold. This difference can be computed for both costs and revenues.

Why Managers Use Budgetary Controls

Determining the cost of a project is one of the most important initial steps for a project manager. If a project manager cannot stay within a controlled budget, they may not have the funds to complete the project. The budget and financial plan is typically created during the initial stage of project development. Costs and resources should be set during the initiation stage to adequately plan and allocate costs.

Some tools that project managers can use to control finances and budget include payback period and other financial forecasting calculations, and budgeting techniques, including variance analysis. These tools are critically important for project managers who need to control resources to ensure project completion. If resources are mismanaged, the project will be characterized by sunk costs (i.e., investments that procure no returns).

Budgeting Techniques

Budgeting involves determining how much money will be needed to complete a project and the timeframe for spending it. The budget may be determined on an annual or monthly basis depending on how long the project is projected to run. An important part of budgeting is setting a plan that can be followed over the course of the project.

Example Budget Plan

Budget plans can be used to project incomes and expenses over the span of several months.

One way to determine whether the budgeting plan is being adhered to is to compare the budget allotted for a certain period of time with the actual amount of money spent during that time. This is called a variance analysis. A variance is the difference between a budgeted, planned, or standard amount and the actual amount incurred/sold. Variances can be computed for both costs and revenues to show a project manager whether they are adhering to the project budget.

Financial Forecasting Calculations

Financial forecasting calculations, such as payback periods, calculate the period of time required for the return on an investment to repay the sum of the original investment. For example, a $1,000 investment that returned $500 per year would have a two-year payback period. Payback period intuitively measures how long something takes to “pay for itself.” All things being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because it is a simple and clear measure.

Payback period is limited by the fact that it does not include the time value of money; that is, people prefer to receive money sooner rather than later. Net present value (NPV) is a financial forecasting calculation that does include the time value of money. It determines the “current value” of a sum of money on an annual (or monthly) basis, the value that cash paid out years from now would have if it was paid out today. This is a complex financial forecasting model that derives real rate of return using interest and inflation to localize currency chronologically.

Both payback period and NPV can be used in project management in order to determine how much profit a project will bring in and when. It is important for a project manager to conduct these financial forecasting calculations and budgeting controls to identify budgetary constraints well before costs are incurred and to secure funding from top management. Once a project receives funding, the project manager will need to use budgeting controls such as variance analysis in order to stay within the budget and ensure the success of the project.

8.4.4: Project Management Audits

Project management audits are used to determine and control the quality, completion, and timing of a project.

Learning Objective

Identify how project managers can use the common accounting concept of audits to achieve optimal levels of control and efficiency

Key Points

In project management and quality management, managers audit the steps and/or processes of a project systematically or randomly to ensure that it is meeting estimated completion and quality standards.
An internal audit in project management is usually more or less like a check-up: it assesses the current state of a project and prescribes actions that will increase its success.
A regulatory audit is an external verification that a project is compliant with regulations and standards.
It is important to monitor how an audit is conducted so that employees or project team members don’t perceive it as a sign that the project manager does not trust them to complete their work.
Project managers benefit from periodic auditing in two broad ways: collecting performance data and ensuring managerial presence in various phases of the project.

Key Term

Best practice: A method or technique that has consistently shown better results than others, and is used as a benchmark.

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product.

Project Management Audits

This usually refers to audits in accounting, but similar concepts also exist in project management and quality management, as the auditing of steps and processes in a project systematically or randomly to insure that the project is meeting estimated completion and quality standards.

Like a project management audit, a quality audit is an external verification that a project is compliant with regulations and standard. A system of quality audits verifies the effectiveness of a quality management system. To benefit the organization, quality auditing should highlight areas of good practice and provide evidence of conformance (positive feedback) as well as report non-conformance and corrective actions (negative feedback).

Types of Audits

An internal audit in project management is usually more or less like a check-up: it assesses the current state of a project and prescribes actions that will increase its success. Audits in project management also include regulatory audits to provide external verification that a project is compliant with regulations and standards. Best practices of auditing dictate that a regulatory audit must be accurate, objective, and independent while providing oversight and assurance to the organization.

Why Project Managers Audit

Audits generally provide a good understanding of how a project is running and how in/effectively the project team is. Project managers benefit from periodic auditing in two broad ways. First, managers gain tangible data about specific components of the process performance and a good handle on how the project is aligning with long-term objectives. Second, auditing ensures that employees and contractors are aware of managerial presence (which motivates better performance) and show support for various elements of the project.

It is important, however, to monitor how an audit is conducted so that employees or project team members don’t perceive it as a sign that the project manager does not trust them to complete their work. If team members are aware that an audit is coming, or if they have discussed the possibility with the project manager, they may be more open to the idea. If an audit comes as a surprise, it can create lack of trust and suspicion between the project manager and their team. It is important to consider interpersonal factors before conducting an audit of a project.

Auditing and Communicating to a Project Team

When auditing a project, the project manager needs to be clear that the project team does not become suspicious or feel threatened by it.

8.4.5: Project Management Inventory

A key component of project management is controlling inventory trajectories and quantities to reduce costs and maximize returns.

Learning Objective

Discuss the importance of inventory management in maximizing utilization and achieving strong performance metrics

Key Points

PMs are constantly using inputs to generate outputs in standard operational processes, which necessitates a number of potentially costly inventory components.
PMs strive to control the timing of inventory, the uncertainty of demand and supply availability, and overall economies of scale.
A PM should leverage various technologies to better gather real-time inventory data. This could include RFID tags, bar codes, QR codes, and inventory management software integration.

Key Terms

QR Code: Black modules (square dots) arranged in a square grid on a white background that can be read and processed by an imaging device (such as a camera).
RFID Tag: Wireless tags with electromagnetic fields to transfer data, for the purposes of automatically identifying and tracking tags attached to objects.

An important consideration when determining how to best manage a project is inventory. Project managers (PMs) must manage all resource inputs for a given project; how they approach this can increase or reduce costs dramatically. From a project management standpoint, it is essential to track current inventory and create a process for managing inventory flow.

Why Track Inventory?

PMs are constantly using inputs to generate outputs in standard operational processes, which necessitates a number of potentially costly inventory components. For example, if a given project involves perishables (such as food), there is a definite time limit on product value–once perishables spoil, their product value is zero. Careful chronological and quantity-based inventory questions must be answered to create a process flow that ensures the value of the goods being sold. In short, there are three general reasons to manage inventory:

Time – Time lags in the supply chain at every stage from supplier to user require PMs to maintain certain amounts of inventory to use in this lead time.
Uncertainty – Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.
Economies of scale – The ideal condition of “one unit at a time at a place where a user needs it, when he needs it” tends to incur a lot of logistical costs that result in bulk buying, transporting, and storing the goods.

Since inventory tends to get overstocked and is typically not well-managed, there may be a multitude of supplies that no one is using. PMs can use a number of inventory management techniques to cut costs and streamline operations and ensure that optimal quantities are bought, stored and distributed.

Inventory Management Tools

Technology has dramatically changed the inventory management process. PMs can use technology to track real-time inventory statistics. A number of recent technological developments in inventory management include:

RFID Tags – RFID (radio-frequency identification) tags are used to track the locations of various items, from components in an automobile assembly line to boxes of cereal shipped from a manufacturing plant to the grocery store. These little tags communicate vast arrays of location data to inform timing processes and ensure proper inventory levels.
QR Codes – QR codes originated in logistics but have become popular in marketing as well. In the 1990s, QR codes were used for rapid component scanning linked to computer data systems to paint clear pictures of inventory process flows.
Bar Codes – Like QR codes, bar codes are used to scan inventory information into a computer data system. When you purchase an item at a store, the bar code is scanned so that the manufacturer’s inventory system can remove that item from their list of inventoried goods (transferring it to the income statement as revenue).
Inventory Management Software – Each of the devices listed above requires a logistics software package capable of streamlining all of this data into a meaningful view of the supply chain. Inventory management control systems are the heart of inventory management for PMs because they provide information output to be manipulated, analyzed, and assessed to better understanding the inventory process.

RFID tree

This image illustrates the information flow of RFIDs, which is then streamlined into large data streams for PMs to track.

QR code example

Above is a description of a QR code, along with the data implications of various visual aspects of the image (which are processed and reported via software). Different components of the code reflect position, alignment, and timing.

8.4.6: Break-Even Analysis

Break-even analysis can determine the minimum amount a company needs to sell in order to cover its costs with no gains or losses.

Learning Objective

Employ a break-even analysis and derive a break-even point when analyzing a business initiative or project

Key Points

In economics and business, the break-even point (BEP) represents the point at which there is no net loss or gain because costs and revenue are equal.
BEP, in the control sense, is a feasibility model for continuing an existing operation or opening a new one.
Break-even analysis represents the minimum quantity a company needs to sell to cover costs like rent, building expenses, utilities, and other aspects of day-to-day operations.
As long as a business can cover the minimum costs, it is “breaking even” and can remain in business without turning a profit.
Break-even analysis lets companies compare their production or sales numbers with the minimum they need to achieve in order to stay in business.

Key Term

fixed costs: Business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month.

Break-Even Point

In economics and business, the break-even point (BEP) is when costs (or expenses) and revenues are equal: there is no net loss or gain and the business has “broken even” by earning back its costs.

Identifying BEP

Break-even analysis determines the minimum quantity a company needs to sell in order to cover its minimum costs, including rent, building expenses, utilities, and the operational costs of running day-to-day operations. As long as a business can cover its minimum costs, it is “breaking even” and can remain in business even if it is not turning a profit.

For example: a business selling tables has a BEP of 200 tables per month. If the company sells fewer than 200 tables each month, it loses money; if it sells more, it makes a profit. Business leaders use this information to determine whether or not they will produce and sell 200 tables per month and proceed based on that analysis. If they estimate they cannot sell that many, they can reduce their fixed costs (renegotiating rent, keeping phone bills or other expenses down), reduce variable costs (paying less for materials per item produced, usually by finding a new supplier), or raise the price of their tables. Any of these approaches would lower the break-even point; the company might only need to sell 150 tables per month and pay its fixed costs if it can cover or alter them through other means.

A break-even analysis is typically depicted by a graph showing the midpoint between profit and loss with the axes as units sold and price of goods sold. The graph shows when sales can cover fixed costs so the company will be able to stay in business in the short-term. Over a longer period of time, other factors can come into play, like changes in rent or quantity sold, or other competitors entering the market.

Break-even analysis

Break-even points can be determined based on sales and total costs. The point is found at the number of units where loss and sales are equal.

Project Managers and Break-Even Analysis

Break-even analysis lets companies compare their production or sales with the minimum point (the break-even point) they need to achieve in order to stay in business. Typically, companies want to produce above BEP in order to make a profit and will adjust their output level to surpass the break-even point.

Because they are in charge of specific process flows, understanding BEP and how to lower it through operational efficiency is central to the responsibilities of a project manager (PM). When making financial projections or pitching a new line of goods, the PM must estimate BEP and how they can exceed it in a given market. BEP, in this sense, is a feasibility model for either continuing an existing operation or opening a new one.

8.4.7: Ratio Analysis

Ratio analysis is a useful tool for benchmarking the financial and operational efficiency of a project compared with other projects.

Learning Objective

Recognize the importance of ratios and ratio analysis in financial assessment and project control

Key Points

In project management, ratio analysis may evaluate the efficiency of the project and how well the project managers are controlling resources.
Financial ratios in the corporate setting usually come from a company’s balance sheet and income statement. These can include profitability ratios, efficiency ratios, activity ratios, and debt ratios. They can be applied to individual projects as well.
Ratios used to determine a project’s health include operating margins, profitability margins, efficiency ratios, and debt.
Project managers should consider these ratios in relation to past, present, and future projects, making sure that they are investing in a project that will produce the best value for their dollar.
The goal of any organization is profits, and ratio analysis allows organizations to see where dollars are being invested and the results on that investment in terms of profitability percentage.

Key Term

benchmark: When a manager compares metrics such as quality, time, and cost across an industry and against competitors.

Ratio analysis is used in finance and accounting to determine how a company is performing financially compared with other companies; efficiency and other production metrics may also be assessed. In project management, a ratio analysis may be related to the efficiency of a project and how well the project managers are controlling resources.

Financial Ratios

Financial ratios in the corporate setting usually come from a company’s balance sheet and income statement. These can include profitability ratios, efficiency ratios, activity ratios, and debt ratios. These are typically used to determine a company’s financial health relative to industry benchmarks, but they can also be used to maintain financial control of specific projects by assessing their financial health.

Ratios used to determine a project’s health include operating margins, profitability margins, efficiency ratios, and debt. Operating margin and total margin calculate the revenue a project is producing over expenses (a profitable output ratio). Operating margin considers only operating revenues and expenses (such as salaries, utilities, supplies) while total margin considers all revenues and expenses. There are many smaller ratios built into these broader operating margins as well, including output per employee, inventory turnover, and specific cost components in comparison with one another.

Other efficiency ratios that the project management team may consider include staff productivity levels, the number of activities completed in a set period, and expenses in relation to productivity.

Operating margin formula

The operating margin is found by dividing net operating income by total revenue.

Application to Control

All of these ratios give the project manager a better sense of the health of the project. Project managers should consider these ratios in relation to past, present, and future projects, making sure that they are investing in a project that will produce the best value for their dollar.

The goal of process control is increased efficiency; ratio analysis uses a wide variety of point in similar projects as benchmarks to denote where efficiency can be enhanced, and underlines differences in profitability and efficiency that may sway resource allocation for the organization in the future.

The goal of any organization is profits, and ratio analysis allows organizations to see where dollars are being invested and the results on that investment in terms of profitability percentage. Project managers must justify their projects in this context to appease managerial concerns and considerations; thus ratio analysis is also useful in ensuring the viability and likelihood of renewal for a given project.

8.5: Scorecard Management

8.5.1: Balanced Scorecards

A balanced scorecard is a device that managers use to convey performance across a range of relevant strategic criteria.

Learning Objective

Review the four primary perspectives addressed by a balanced scorecard

Key Points

Criteria are generally a mix of financial and non-financial indicators: measures of success and failure differ according to the type of indicator.
The balanced scorecard represents performance pictographically; its original design was a table broken up into sections, or perspectives, that generally included financial, customer, internal business processes, and learning and growth.
A balanced scorecard aggregates performance within a single framework. It should convey performance to stakeholders simply and quickly.
This visual tool gets each of the moving parts in an organization on the same page to ensure continuity and synergy between functional aspects.

Key Terms

Key Performance Indicator: An industry term for a type of performance measurement; usually used by an organization to evaluate its success.
strategic management: The art and science of formulating, implementing, and evaluating cross-functional decisions that will enable an organization to achieve its objectives.

Balanced Scorecards Defined

A balanced scorecard is a semi-standardized strategic management tool used to track, monitor, update, and improve key performance indicators (KPI) within an organization. These variables are generally a mix of financial and non-financial indicators that allow managers to better control strategic operational and financial commercial outcomes. The balanced scorecard is currently one of the most popular management tools used for tracking organizational performance

The balanced scorecard

On a standard balanced scorecard each”perspective” reminds the user to articulate attributes necessary for an effective scorecard: the financial perspective, the customer’s perspective, innovation, and internal processes, all of which come together to form an organization’s vision and strategy.

Originally created in 1987 by Art Schneiderman, an executive at the semiconductor firm Analog Devices, the balanced scorecard is an adaptation of early performance measurement techniques that were developed in complex post-industrial corporations in the U.S. and Europe.

Balanced Scorecard Perspectives

The balanced scorecard represents performance pictographically; its original design was a table broken up into sections, or perspectives, that generally included financial, customer, internal business processes, and learning and growth. Each perspective then included a set of five or six measures that could be compiled to inform the raw score for the corresponding perspective.

The four perspectives are:

Financial: This section encourages the identification of a few relevant high-level financial measures that help companies to answer the question “How do we look to shareholders?”
Customer: This section encourages the identification of measures that answer the question “How do customers perceive us?”
Internal Business Processes: This section encourages the identification of measures that answer the question “What must we excel at?”
Learning and Growth: This section encourages the identification of measures that answer the question “How can we continue to improve and create value?”

Managerial Use of the Scorecard

As organizational acceptance of performance management tools grew throughout the 1990s, the original design of the balanced scorecard evolved to include a host of other variables and considerations, most significantly at the intersection of performance and strategy.

Corporate strategic objectives were added to justify focusing on certain perspectives, effectively absorbing the original framework into a more comprehensive strategic planning exercise. Today, this second-generation balanced scorecard is often referred to as a “strategy map”, but the vernacular “balanced scorecard” is still used to refer to anything consistent with a pictographic strategic management tool.

Managers generally use this tool to identify areas of the organization that need improved alignment and control with the broader organizational vision and strategy. The balanced scorecard gets each of the moving parts in an organization on the same page to ensure continuity and synergy between functional aspects.

8.5.2: Visual Scorecards

The visual scorecard is a graphic analogy of the balanced scorecard framework and a key visual link between performance and strategy.

Learning Objective

Produce a visual representation of a balanced scorecard for communication and meetings

Key Points

If the balanced scorecard is the whole process of developing perspective, measures, and targets, then the visual scorecard is the graphic depiction of those interactions.
Although classically depicted as major perspectives encircling the organization’s overall vision or strategy, there is no widely accepted format for the visual scorecard; any format that effectively communicates performance to stakeholders will work.
Managers rely on the visual scorecard to quickly diagnose positive or negative performance throughout an organization.

Key Term

Strategy Mapping: An articulation of organizational perspectives and key goals.

Balanced Scorecard Illustrated

A balanced scorecard is the sum of all relevant inputs; the visual scorecard is the graphic representation of findings or results. Think of the visual scorecard as a tool for presenting data to managers of board members at an organizational strategy meeting.

This image represents the classic visual scorecard, in which “perspectives” of strategic importance are organized around a higher-level vision or strategy. The visual scorecard does not always have to be in this format; it may appear as a matrix, or a series or matrices that cross-reference issues of strategic importance with objectives or measures within the major perspectives.

The cyclical visual scorecard with four components (financial, internal, innovation, and customer) is a very common design that successfully bridges performance and strategy. Recent design enhancements to visual scorecards include the use of red (danger), yellow (caution), and green (safe) color schemes to reflect various performance attributes. An abundance of red immediately sends a signal to managers that serious improvement is needed in order to satisfy organizational targets. Similarly, the presence of green indicates that the targets are being met or exceeded.

Why Use Visual Scorecards?

A good visual scorecard is easily deciphered by all stakeholders, immediately conveying areas of strength, weakness, success, or deficiency. Visual scorecards make the data in balanced scorecards instantly readable.

When communicating business processes to stakeholders, managers are often tempted to rely on jargon and detail-oriented descriptions of strategy and process. The visual scorecard gives stakeholders a clear understanding that jargon and business-speak may not. It is primarily a communication tool.

8.5.3: Scorecard Measurement

Balanced scorecard measurements require extensive data collection and are essential in validating scorecard outputs.

Learning Objective

Indicate the value of measuring progress on objectives in effectively employing a score card in the workplace

Key Points

The balanced scorecard ultimately helps managers choose measures and targets. If these aspects of the scorecard are not well-selected then the results will be neither useful nor reliable.
Scorecard design is also critical. If managers decide that a balanced scorecard should include performance measurements from the perspective of the “Customer”, then an objective of success must be defined for the actual performance data to be effective.
Gap analysis is a tool that helps companies compare actual performance with potential performance. At its core are two questions: “Where are we?” and “Where do we want to be?”.
Coupled with well-designed and well-thought out dimensions for the scorecard itself, gap analysis is very useful in assessing organizational health.

Key Terms

Gap Analysis: A tool that helps organizations compare actual performance with potential performance. It answers the question: “Where are we now and where do we want to be?”
ex-ante: Latin for “beforehand” or “in advance of.”
ex-post: Latin for “after the fact.”

Scorecard Design and Feedback

The balanced scorecard is ultimately about choosing measures and targets. Its various design methods are meant to help identify these measures and targets, usually by a process of abstraction that narrows the search space for a measure. For instance, a company can find a measure to inform about a particular objective within the Customer perspective rather than find a measure for customers in general. This gives the scorecard more practical value.

Useful measurement feedback from a balanced scorecard is also essential. This means that careful consideration is required when interpreting applicable measurements. For example, if managers decide that a balanced scorecard should include performance measurements from the perspective of the “Customer”, then they must define particular objectives of success, such as customer retention longevity, repeat sales, or customer willingness to recommend a product or service. These concrete objectives allow the actual performance data to resonate and generate meaningful results.

Units on a Tape Measure

A balanced scorecard should include specific details, like the units on a tape measure, so that the scorecard can yield useful results.

Gap Analysis

Gap analysis is a tool that helps companies compare actual performance with potential performance. At its core are two questions: “Where are we?” and “Where do we want to be?”. If a company or organization does not make the best use of existing resources, or foregoes investment in capital or technology, it may produce or perform below its potential. Gap analysis can be conducted from the following perspectives:

Organizational
Business direction
Business processes
Information technology

Gap analysis lends itself to the measurement aspect of the balanced scorecard, ensuring that maximum value may be derived from the exercise. It enables management to look carefully at each objective through the lens of the four perspectives listed above and identify efficacy or room for improvement. Coupled with well-designed and well-thought out dimensions for the scorecard itself, gap analysis is very useful in assessing organizational health.

It is important to note that there are no hard-and-fast rules about defining measures and targets within a balanced scorecard. For example, financial measures can be defined as discrete values in the context of accounting ratios and continuous values in the context of dollar figures. What is important is that the data collected should be appropriately analyzed within the context of the targets and performance goals of the organization.

8.6: Managing Control

8.6.1: Elements of Managing Control

The key elements of a control process include a characteristic to be tested, sensors, comparative standards, and implementation.

Learning Objective

Model an effective managing control procedure that incorporates the key components required for effective control processes

Key Points

A significant part of a manager’s job is to control the processes involved in the successful operation of a business. This control process consists of key elements that management must be aware of before designing control systems.
Because organizational systems are large and complex, it is virtually impossible to control every aspect of their operation. Controllers can, however, determine the key conditions or characteristics of output and monitor them.
After determining a condition(s), managers must integrate the various communications and data collecting sensors that procure and pass information from the system to management.
Information should be collected and interpreted in a timely and accurate way by management and then benchmarked against previously stated organizational or competitive standards.
Finally, after collecting data and comparing it with desired standards, an implementation strategy for alterations can be integrated into the existing process.
While each of the key elements is a standalone component of the process, value is derived from the integration of the moving parts.

Key Term

procure: To acquire or obtain.

A significant part of a manager’s job is to control the processes involved in the successful operation of a business. This control process consists of key elements that management must be aware of before designing control systems. While each control system is unique because it is based on the process being observed, the key elements should be factored in wherever applicable. These include the characteristic or condition being controlled, the sensor, the comparator, and the activator.

The Key Elements of Control

While each of the key elements is a standalone component of the process, value is derived from the integration of the moving parts. Controllers and project managers are tasked with recognizing and assessing each element and the relationships between them. The elements include:

Condition or Characteristic – Because organizational systems are large and complex, it is virtually impossible to control every aspect of their operations with rigid control mechanisms. Controllers can, however, determine the key conditions or characteristics of output and monitor them. For example, if an organizations focuses on quality and durability, then the control factors should be testing the consistency of quality and the overall durability in the outputs of the system.

Sensor – After determining a condition(s), managers must integrate the various communications and data collecting sensors that procure and pass information from the system to management. This can be done using various logistics tools (bar codes, data manipulation software, etc.) to provide the controller a source of accurate and timely information relevant to the overall performance of the process. It is important that the communication is carefully worded, as mis-communication and misinterpretation of date can lead to costly mistakes.

Comparison with Standards – Information should be collected and interpreted in a timely and accurate way by management and then benchmarked against previously stated organizational or competitive standards. At this point, deviations from the expected outcomes and/or desired results can be noted and implementation discussed. If the system is too far outside of controlled standards to have a viable solution, the project may be shut down.

Implementor – Finally, after collecting data and comparing it with desired standards, an implementation strategy for alterations can be integrated into the existing process. This is often referred to as a series of corrective actions that address and test issues with the process in the next control cycle.

As implied above, this process is iterative. As long as there are outputs being produced and inputs being consumed, the organization will conduct productivity assessments in a control function to improve the overall efficiency of the organization. The key components of any control sequence will underline these four elements.

8.6.2: Barriers to Managing Control

Barriers to managing control include lack of resources, inaccurate measurements, improper information flow, and incorrect analyses.

Learning Objective

Outline the most common barriers encountered by managers working to manage control within an organization

Key Points

Managing control is essential to making sure that a process or system is running effectively within an organization.
A lack of resources can inhibit a company’s ability to manage control. Resources that can improve managing control include trained staff, statistical software, and accurate measurement systems.
Inaccurate measurement while managing control can occur for a number of different reasons. It can be avoided by having accurate measurement systems and appropriately trained staff.
The time lag in information flow can misdirect management to problems at the wrong time in the sequence.
Analyzing data from a measurement to determine how to improve and better manage control of the system can also be a barrier.

Key Term

Scarcity: An inadequate amount of something; shortage.

Managing control is essential to making sure that a process or system is running effectively within an organization. There are sometimes barriers to testing, measuring, communicating, or observing how effectively a system or process is running. These barriers can reduce the efficacy of the organization, not only in the process being controlled but also in the controlling process. Barriers to organizational control can include scarcity of resources, inaccurate measurements of the process, improper information flow, and incorrect analyses.

Resource Scarcity

Managing control typically requires a number of resources. These resources include supervisory staff, skilled specialists, tools to measure the control of the system, and often complex statistical software and other tracking technologies. A lack of any (or all) of these crucial inputs can drastically reduce the ability of the control team to collect and communicate their findings. This under-funding of the control system creates resource scarcity for the process.

Inaccurate Measurement

Inaccurate measurement while managing control can happen for a number of different reasons, including:

Inaccurate measuring devices
Misunderstanding of the measurement process by staff
Inaccurate or misleading measurement processes
Lack of staff training to determine how to measure the control process

These issues can result in inaccurate measurements, which can make the control process more of a danger to the evolution of the process than an asset. All measurement tests need to be tested themselves; an understanding of best practices in taking measurements is critical in project managment.

Information Flow Issues

A particularly complex barrier to offset is information flow. Information is collected at one point in the process and analyzed contextually at another. This time lag in information flow can misdirect management to problems at the wrong time in the sequence. Ensuring timely discovery and reporting of measurements mitigates this risk.

Oscillation and feedback

Output changes over time, creating room for error in the measurement process. Because there is necessarily a delay between measuring data, analyzing the data and identifying a problem, and ultimately implementing a solution, solutions may be implemented after the problem is no longer relevant (as shown in the graph—output is already improving before the solution for the prior dip in output is implemented). Timely discovery and reporting of measurements helps minimize this problem of delay in information flow.

Even with adequate resources to manage control and accurate measurement and information flow, barriers to analyzing data can still appear. These can be introduced by human error or software error. It is useful to think statistically: a good manager will consider a 99% confidence interval that a given process is underperforming as sufficient evidence to take action to improve it, despite the fact that one time out of a hundred the issue will not be significant. Even one failure out of one hundred adds up in an organization with thousands of processes to monitor.

A lack of resources, inaccurate measurements, information flow errors, and incorrect analyses can all result in significant barriers to managing control of a process or system. Managers should be aware of these barriers and do their best to avoid them through training and accuracy.

8.7: Managing Productivity

8.7.1: Defining Productivity

In control management productivity is defined as the overall efficiency and output of a given operational system.

Learning Objective

Define productivity in the context of management and control

Key Points

Productivity is defined as a total output per one unit of a total input. In control management, productivity is a measure of how efficiently a process runs and how effectively it uses resources.
At the plant level, common input statistics are monetary units, weights or volumes of raw or semi-finished materials, kilowatt hours of power, and worker hours.
Output is simply the rate of which goods are being produced and readied for sale. Managing production levels is part of the control process.
Productivity growth is important to a business because it controls the real income means needed to meet obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation).

Key Terms

input: Something fed into a process with the intention of it shaping or affecting the outputs of that process.
productivity: The rate at which goods or services are produced by a standard population of workers.

Productivity

Productivity–a ratio of production output to the input required to produce it–is one measure of production efficiency. Productivity is defined as a total output per one unit of a total input. Control management must implement control processes to maintain or improve productivity.

Inputs

At the plant level, common input statistics are monetary units, weights or volumes of raw or semi-finished materials, kilowatt hours of power, and worker hours. These are tracked as sets of partial productivity, such as kilowatt-hours per ton or yield (weight of output divided by weight of input), both of which are used in the chemical, refining, wood pulp, and other process industries. Quality statistics like defect rates are tracked in the same way. Summary reports are routinely issued to various departments and department managers are held accountable for managing inputs in their respective areas.

Outputs

Output is simply the rate of which goods are being produced and readied for sale. Managing production levels is part of the control process–management teams must predict demand to avoid market saturation.

From the control manager’s point of view, more outputs from the inputs describe above is a step in the right direction. Finding ways to streamline internal operations to minimize cost, limit resource use, and optimize performance (quality) is the control manager’s central responsibility. Productivity in producing outputs, in short, can determine a control manager’s success or failure.

Productivity and the Firm

Productivity growth is important to a firm because more real income means the firm can meet its obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the marketplace.

Productivity is one of the main concerns of business management and engineering. Practically all companies have established procedures for collecting, analyzing, and reporting productivity data. The accounting department typically has the overall responsibility of collecting, organizing, and storing data generated by various departments.

Improving Productivity

Many companies have formal programs for improving productivity via existing control systems. Companies are constantly looking for ways to improve quality, reduce downtime, and increase inputs of labor, materials, energy, and purchased services. Simple changes to operating methods or processes can increase productivity (think Henry Ford’s assembly line). The biggest gains often come from adopting new technologies or concepts, which requires capital expenditures for new equipment, computers, or software.

Textile manufacturing

During the Industrial Revolution, productivity increased with the implementation of the assembly line.

8.7.2: The Importance of Productivity

Productivity is the ratio of total output to one unit of total input; high productivity means larger capital gains.

Learning Objective

Illustrate the critical importance of assessing and managing productivity in the control process

Key Points

Productivity is a measure of the efficiency of production. High productivity can lead to greater profits for businesses and greater income for individuals.
The control managers in a given organization are tasked with maximizing productivity through process-oriented observations and improvements.
Five main processes affect productivity: real process, income distribution, production process, monetary process, and market value.
For businesses, productivity growth is important because providing more goods and services to consumers translates to higher profits.

Key Terms

ratio: A number representing a comparison between two things.
macroeconomic: Relating to the entire economy, including growth rate, money and credit, the total amount of goods and services produced, total income earned, the general behavior of prices, and more.
microeconomic: Relating to the decision-making behavior of individual households and firms that must allocate limited resources. Typically, it applies to markets where goods or services are bought and sold.

Definition of Productivity

Productivity is a measure of the efficiency of production. It is a ratio of actual output (production) to what is required to produce it (inputs). Productivity is measured as a total output per one unit of a total input. Control managers in a given organization are concerned with maximizing productivity through process-oriented observations and improvements.

For businesses, productivity growth is important because providing more goods and services to consumers translates to higher profits. As productivity increases, an organization can turn resources into revenues, paying stakeholders and retaining cash flows for future growth and expansion. Productivity leads to competitiveness and potentially competitive advantages.

Productivity Gains

Wheat production has increased as the productivity gains improve, particularly since the 1980s.

Processes that Affect Productivity

A producer can be broken down five main processes, each with a logic, objectives, theory, and key figures of its own. The main processes of a company are:

Real process
Income distribution process
Production process
Monetary process
Market value process

Controllers in an organization are responsible for understanding each of these elements. Real process and production process are often seen as focal points in efficiency, but monetary concerns and market value are also very important. For example, Starbucks must regularly buy a huge volume of coffee beans. Those coffee beans are vulnerable to plant diseases and other factors that could make them scarce. The price of coffee beans in dollars is therefore an enormous monetary risk for the company because resource scarcity could raise its expenses exponentially. Its controllers must hedge against these risks.

Real process – Real process generates the production output from input. It can be described by the production function. This refers to a series of events in production in which inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services, or combinations of both.
Income distribution – Income distribution process refers to a series of events in which the unit prices of constant-quality products and inputs change, causing an alteration in the income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in the price of the outputs and inputs and to their quantities. For example, productivity gains are distribute to customers as lower prices, which may lead to higher sales revenues. Productivity gains can also be distributed to employees in the form of higher wages.
Production process – Production process is the real process and the income distribution process. Profitability is both a result and a criterion of business success. Profitability of production is the share of the real process result that the owner has been able to retain in the income distribution process (profits earned). Factors describing the production process are the components of profitability, which are revenues and expenses.
Monetary and market value processes – Monetary process refers to financing a business and the inputs of production. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.