DR. (MRS.) S. L. ADEYEMI
                               UNIVERSITY OF ILORIN

This paper reports the findings of a survey on the usefulness of selected traditional and new
performance measures used in some Nigeria companies that have adopted a flexible
manufacturing strategy. The results indicate that majority of these companies considered the new
performance measures useful particularly among the larger companies and among those with 5
years or less of business experience. Traditional measures are still useful, though to a much
lesser extent. These results suggest that a combination of both traditional and new measures
would be needed especially when Nigeria companies are going through the transition of
implementing changes to their strategies from cost leadership to flexible manufacturing.

The combination of slower economic growth and increased competition has forced firms in
every industry to concentrate on efficient and effective deployment of resources. One result of
these efforts has been the emergence of a new corporate position devoted to controllership. The
controller is concerned with continuous measurement of a firm‟s performance. In order to carry
out the measurement process, controllership focuses on the assessment of resources deployment
and goal attainment

Numerous research initiatives have identified the high correlation between superior
performances and the development and use of sophisticated assessment or measurement
capabilities. As early as 1985, A. T. Kuarney Consultants noticed that firm engaging in
comprehensive performance realized improvements in overall productivity in the range of 14 to
22 percent.

Effort has been expended by establishments to improve the quality of information that their
managers have at their disposal to measure, compare and guide performance. In most firms in
Nigeria the traditional formats and travel reports are still in used.

The traditional performance measurement system has been designed to report labour
productivity, machine and capacity utilization, and standard cost variances. These are cost-
efficiency-based measures derived from a strategy to minimize production costs, described as a
cost leadership strategy, which is characterized by mass production of a new standard products
musing stable technology (hall, 1980; Kaplan. 1986).

The modern manufacturing environment has undergone dramatic changes since the past decades
mainly because of intensive global competition, shifts in customer‟s buying behaviour, and rapid
innovation in manufacturing and information technology product. A cost-minimization and mass
production strategy is no longer compatible with this new manufacturing scenario. Instead, issues
such as responsiveness to customer needs, improving quality, reducing lead times, technological
innovation and enhancing production flexibility have emerged as strategically more important to
maintain competitiveness. Direct attention to these issues is the essence of a flexible
manufacturing strategy. (Nemetz and Fry, 1988).

Despite this strategic re-orientation among the more progressive companies, performance
measurement systems have not kept pace with the change. The theory of organizational lag has
been involved to explain this lag in making changes. The theory of organizational lag has been
involved to explain this lag in making changes to management accounting systems of which

performance system forms a part. According to this theory, administrative innovations in
management accounting (and performance) systems tend to lag behind the technical innovations
of manufacturing. This is because the potential benefits of administrative innovations are less
certain and are likely to take more time to have any recognizable impact (Dunk, 1989). Failure to
make complementary changes in the performance measurement system to fit with the company‟s
new flexible manufacturing strategy may lead to dysfunctional consequences. As pointed out by
Howell and Soucy, (1987).

                      “The manufacturing transformation in many companies has
                      been slowed, if not set back, as antiquated sets of operating
                      performance yardsticks promote inaccurate analysis, poor
                      operating decisions, and inappropriate resource allocations”.

This paper reviews traditional financial measures of performance and discussed the potential
benefits of incorporating new performance measures into the performance measurement system.
The usefulness of these measures was empirically tested using a sample of Nigerian Companies
that have adopted flexible manufacturing strategy.

The bulk of responding companies came from the electronic and other high technology product
industries (60%) Business experience was categorized into groups, as follows: 5 years and below
(7.5%( > 5-10 years (22.5%) and > 10 years (50%).

Traditional performance measures have been developed to meet the needs of manufacturing
characterized by the production of standard products with high direct labour contest. Set ups are
minimized to assure uninterrupted production runs. In this way, labour and machine capacities
can be fully utilized and the greatest possible output produced with a consequent reduction in the
overhead cost per unit of output. The competitive strategy is cost minimization, so variance
reporting, overhead absorption and capacity utilization measures appropriately reflect this

Variance Reporting: The use of variance accounting for managerial performance evaluation has
been criticized as counter-effective in the modern global environment (Howell & Soucy, 1987).
This is because traditional variance analysis encourages dysfunctional behaviours such as
allowing inventory to build up so as to show a favourable volume variance, and delaying
machine maintenance, padding the budget or shifting expenses between accounts so as to show a
favourable expenses variance.

Purchasing managers, for example, may act dysfunctionally by purchasing materials based on
lowest price considerations at the expense of quality so as to show a favourable materials price
variance. The consequences of inferior quality materials purchased are manifested in increased
reworks, scraps, inspections and storage of defective parts leading to higher production costs and
loss of competitiveness.

The volume variance as a manufacturing indicator has been criticized since traditional absorption
costing encourages excessive production in order to absorb the fixed overheads into inventory
costs. Maximizing capacity utilization is necessary to achieve cost minimization. However, such
a policy is short-sighted because any production in excess of market demand must be consigned
to inventory and this runs counter to the just-in-time philosophy of maintaining a zero inventory
with all its attendant benefits (Sadhwani, et al, 1985).

Variance reports at the manager‟s level are also too aggregated for meaningful interpretation.
Moreover, the standard cost itself may be perceived the norm eliminating any incentive for
product innovation. In this case an unintended signal has been put out which impede efforts to
infuse a culture of continuous improvement.

Capacity utilization measures productivity improvement, automation and robotics have shrank
direct labour cost to only a small fraction of the total manufacturing cost, whereas overheads
have increased significantly. Despite these developments and the consequent impact on cost
structures, reports from surveys in various countries indicated that companies have not
responded in tandem with the technological changes (Schoch, et al., 1994; Teoh, 1991). This has
serious implications for production costing and performance evaluation as the continued focus on

direct labour means labour is still considered a major driver of costs when it is no longer
relevant. The result is the development of burden rates that are volume-driven, based on a
diminished direct labour element. Such a computed burden rate is artificially inflated due to the
small direct labour base. Hen applied to an increasing pool of overheads, the incurrence of which
may not be totally volume-driven, the labour generated burden rate can lead to serious distortions
of the overheads absorbed into production cost. This is because of the unrealistic burden rate
used which does not reflect the actual consumption of overheads by different products or
processes (Kaplan, 1986).

The overhead absorption measure gives rise to a distorted product cost analysis, so “good‟
performance is associated with products apparently showing profitable margins but are actually
incurring loses (Beckett & Dang, 1992). Thus an incorrect signal about profitability is received

Earned hours, as a measure of labour efficiency, is also deficient since it provides an erroneous
signal to supervisors to maximize earned hours by keeping employees “gainfully” occupied
regardless of market conditions. It would have been more beneficial in the long term to use the
time for training or cross training of operators so as to upgrade their skills.

The machine utilization rate, as a measure of supervisory performance, also suffers from a
number of deficiencies. It encourages the excessive use of machines for large-scale production,
resulting in an unwidely accumulation of inventory. Worse still, maximizing the utilization rate
encourages continuous machine usage at the expense of regular maintenance. Moreover, the
focus on utilization may lead to inadequate emphasis on quality.

Short-term Financial Measures: Although achieving profit and an acceptable return on
investment are the raison d‟etre for a company to stay in business, the traditional focus on these
performance measures however encourages managers to take a myopic view that emphasizes
short-term results to the detriment of long-term profitability (Banks & Wheelwright, 1979). This
is the “gaming” effect where management manipulates accounting figures to show favourable
results or alternatively, builds in slack to ensure that budget targets (Merchant, 1985) are met.
Reliance on short-term financial measures can lead to dysfunctional decisions since these

indications fail to signal the erosion of a firm‟s value if discretionary expenditures have to be
reduced for short-term gains. Such spending is fact essential for new products development
production process improvement, worker skills training and upgrading distribution networks and
promoting customer awareness (Kaplan, 1986). Furthermore, profit measures represent outcomes
that may not fully reflect management‟s effort (Drucker, 1964). Stated differently, total
performance cannot be completely captured by Naira profits.

In the new technological environment, a flexible manufacturing strategy must be implemented
that focuses on customer responsiveness, quality, time, innovation and human resources
practices. A performance measurement system designed to achieve the traditional objective of
cost efficiency will be incongruent with this new strategy. It is necessary to redesign the system
so as to reflect this change in strategic objectives.

Customer Responsiveness: increasingly, customers demand not only a better service but also a
wider variety of products with improved quality and shorter delivery times (Northey, 1991).
Customer responsiveness examines a firm‟s relative ability to satisfy customers. Therefore, high
customer responsiveness translates into greater customer retention, leading to longer-term.

Profitability as the costs of acquiring and serving customers come down. Customers‟
responsiveness measures therefore must be designed into the performance measure system.
These include reporting on the number of customer complaints, warranty claims, and on-time
deliveries, among others. As Eccles (1991) put it bluntly “what you measure is what you get and
what you measure gets attention”, indicating that performance measures must be relevant to send
the right signals for employees to achieve desired company objectives. For example, a system
that evaluates how well customer demands have been satisfied can better support efforts in
achieving sustainable competitive advantage than one that emphasizes labour or machinery
efficiency in internal operations (Beckette & Dang, 19910, Goldhar & Lei 1991).

Quality: Quality measures, which are the most process-oriented evaluations are designed to
determine the effectiveness of a series of activities rather than the individual activity. Quality

refers to the degree to which a product‟s specific features in terms of workmanship; durability
and so on satisfy the requirements of a particular customer. Poor quality can contribute to a
significant increase in the manufacturing costs in various ways. As Howell and Soucy (1997)

“The absence of good materials, highly-trained labour, and well-maintained equipment will
dramatically increase the costs of non quality such as scrap, rework, excess inventories, process
and equipment: breakdowns, field serves, and warranty claims.

However, quality is usually difficult to measure because of the broad scope. A contemporary
measurement concept that is increasing in interest is “the perfect order”. Delivery of the perfect
order is the ultimate measure of quality operations. The perfect order represents ideal
performance from an operational perspective, a multi-industry consortium defines the perfect
order as one that meets the complete delivery of all items requested, delivery customer‟s request
date with one-day tolerance, complete and accurate documentation supporting the order and
perfect condition, that is, faultlessly installed, correct configuration, customer-ready with no

Operational and financial measurers to monitor quality include the manufacturing quality index
(i.e. defect rates), inventory levels, warranty claims, vendor quality, cost of quality and scrap
cost. All these provide valuable feedback for identifying existing problems and assessing
whether the quality objective is adequately meet.

Time: Reducing level times is also of the new manufacturing strategy through out,
(manufacturing cycle) time measures the amount of time required to convert raw materials into
completed products. Cycle time is the total value from the issue of materials into production to
the delivery of the final products to customers. The theory is that the cost of a product is related
to the time required to produce it. Cycle time variance therefore provides useful information
about non-value-adding activities such as moving, inspecting, reworking, storing and waiting,
that added to production costs as overhead charges but no value to customers (Alexander et al,
1991). Using throughput and cycle times as performance measures help managers to eliminate

these non-value adding activities, considered as waste time, and achieve substantial cost savings.
Thus, according to Lippa (1990);
               Shorter cycle times can result in less finished goods inventory,
               less forecast reliance, strategic capability when a firm reacts
               to customer demands faster than the competition and the ability
               to exploit opportunities).

Innovation in today‟s competitive environment companies must continuously engage in product
improvement be designing new and improved products with unique characteristics valued by
customers. Only in this way are companies able to enlarge their market share and maintain a
competitive edge. Introducing technological innovation and advanced design features into new
products is costly initially and requires operational flexibility; unlike cycle have unique
characteristics (Ainikal & Teo, 1992) that will require performance measures tailored for this
purpose such as turnover by products and product cost improvement.

Human Resources: The benefit of adopting a long-term employment policy is a loyal and
committed workforce, resulting in productivity increases, reduced training costs, and improved
customer services since this is provided by long-serving, presumably more experienced and
better-informed employees. A performance measure such as employee turnover is needed to help
management assess an enterprise‟s human resource availability and capabilities.

It is against this background that the present study has been conducted. In Nigeria, the trend
toward high technology manufacturing is a recent event, partly motivated by rising costs and
partly encouraged by the Government as a strategy to maintain a sustainable competitive edge.
As companies automate or adopt advanced manufacturing technology, complementary changes
in performance measurement systems must be implemented to reflect the new manufacturing
environment. The following sections presented the results of a recent empirical study

A questionnaire survey design was employed as an exploratory case study. The sample was
drawn from a cross-section of companies in Nigeria that have implemented or are implementing

changes in their production processes. Respondents were asked to consider the usefulness of
selected performance measures. Usefulness has been operationalized as the frequency of use of
each measure. Based on a total of 200 questionnaires distributed, 36 useable replies were
received, given a response rate of 18 percent. Response rates of this level were consistent with
previous other studies of Ghosen el al, 1992 Petzall el. Al, 1991. Responding companies were
classified by size musing sales turnover as the proxy measure, as follows: N20million and below
(7.5%), > N20 million – N100 million (17.5%) > N100 million (75%). It was not surprising to
find a higher percentage of response from the larger companies, because previous studies have
found size as important determinant for a company to adopt a flexible manufacturing strategy
(Schoch,, 1994).

Table 1 shows that at least 63 percent of respondents indicated their dissatisfaction with the
existing performance measure system. As more and more companies turn to automation or other
advanced technology for their manufacturing processes, it is not unexpected that performance
measures originally designed for a labour intensive environment will no longer be appropriate.
What is noteworthy is that 37 percent of respondents reported that they were either satisfied with
the existing system (26%) or not sure see any need for significant changes to the system (11%).
Many of such companies are currently going through the different stages of implementing
changes to their manufacturing processes. So it may not be surprising that 37 percent continue to
rely on the traditional measures.

                                            TABLE 1
                                                    FREQUENCY (EXPRESSED AS %)
Satisfied                                                               26
Did not see any significant change needed                               11
Dissatisfied                                                            63
                     Total                                              100

Table 2 presents findings on the usefulness of selected traditional performance measures. These
results are consistent with the overall findings above. For example, for five of the eight
measures, the percentage of respondents indicating “useful” is also lower, ranging from 61.3
percent for standard cost overhead to 41.4 percent for earned hours, and these correspond to the
overall 63 percent who expressed dissatisfaction with traditional measures. As earlier indicated,
not all companies have fully automated, so some traditional measures have been regarded as still
useful, such as purchase price variance reported by 86.7 percent.

                                            TABLE 2
                                                         Useful          Not or Less Useful
Materials price variance                                 86.7%                  13.3%
Standard cost overhead                                   61.3%                  38.7%
Scrap factor built into standard overhead                51.6%                  48.4%
Labour Reporting                                         58.6%                  41.4%
Earned Hours                                             41.4%                  58.6%
Machine Utilization                                      78.8%                  21.2%
Net Income                                               85.7%                  14.3%
Return on Investment (total assets)                      50.0%                  50.0%
Average                                                  64.1%                  35.9%

The new performance measures presented in Table 3 relate to customer responsiveness, quality,
time, innovation and human resources factors, reflecting the strategic objectives of the new
manufacturing environment. There is overwhelming evidence that these measurers were found to
be “useful” by most respondents. The overall average of 83.7 percent compares favourably
against the 64.1 percent for the traditional measures.

                                           TABLE 3
                                                         Useful           Not or Less Useful
Customer Complaints                                      88.6%                   11.4%
Warranty Claims                                          75.8%                   24.2%
On-time Delivery                                         93.9%                   6.1%
Manufacturing Quality Index                              82.4%                   17.6%
Inventory Levels                                         88.9%                   11.1%
Vendor Quality                                           84.8%                   15.2%
Cost of Quality                                          84.4%                   15.6%
Scrap Naira                                              85.7%                   14.3%
Throughput Time                                          91.2%                   8.8%
Cycle Time                                               78.1%                   21.9%
Waste Time                                               72.7%                   27.3%
Product Cost Improvement                                 70.0%                   30.0%
Inventory Turnover                                       88.2%                   11.8%
Turnover of Products                                     78.8%                   21.2%
Employee Turnover                                        86.1%                   13.9%
Average                                                  83.7%                  16.3%

Cross-tabulation analyses were performed by company size and years of experience in business.
Only significant results have been reported in Table 4 and 5. Larger companies found four
specific new performance measures more useful than the smaller companies. On-time deliveries
(X2 = 7.92, df = 2, p < .05); inventory levels (X2 = 5.98, df = 2, p < .05); throughput time (X2 =
9.80, df = 2, p < .01) and inventory turnover to be the forerunners in implementing technological
innovations, and so find new performance measures more appropriate. Smaller companies tend
to lag behind in implementing changes, so adoption of these new measures is not as widespread.

In table 5 significant results were found for vendor quality (X2 = 6.32, df = 2, p < .05) and
throughput time (X2 = 5.00, df = 2, p < .10). Companies with 5 years or less in business reported

the new measures as useful compared to companies in the other categories, especially in regard
to vendor quality longer established companies have developed special relationship with selected
vendors and, consequently, vendor quality is no longer of major concern. In contrast, more
recently established companies need to identify vendors who can meet the more stringent
demands in high-tech manufacturing, such as just-in-time deliveries and supply of quality

                                          TABLE 4

 Company Size           On-time           Inventory          Throughput           Inventory
                       Deliveries           Levels              Time              Turnover
N20m & below
Useful                   66.7%              66.7%               66.7%               66.7%
Not Useful               33.3%              33.3%               33.3%               33.3%
Useful                   85.7%              71.4%               71.4%               71.4%
Not Useful               14.3%              28.6%               28.6%               28.6%
Useful                  100.0%              96.7%               75.0%               96.7%
Not Useful               0.0%                3.3%               25.0%               3.3%

                                           TABLE 5

      Years in Business            Vendor Quality                Throughput Time
  Useful                                100.0%                        100.0%
  Not Useful                             0.0%                           0.0%
  >5 YEARS – 10 YEARS
  Useful                                88.89%                         77.8%
  Not Useful                            11.11%                         22.2%
  >10 YEARS
  Useful                                60.0%                         100.0%
  Not Useful                            40.0%                           0.0%

Effective performance measurement and controllership are necessary to locate and monitor
resources. As competency becomes a more critical factor in creating and maintaining
competitive advantage greater attention must be given to strategic issues concerning customer
responsiveness, quality, time, innovation and human resources factors than a cost-minimization
mass-production strategy, in order that companies can remain competitive.

To this end, a performance measurement system capable of meeting these strategic objectives
also must be in place. This study reported the findings of a survey on the usefulness of selected
traditional and new performance measures used by Nigerian companies that have adopted
flexible manufacturing strategy. The results indicated that the majority of these companies
considered the new performance measures useful particularly among the larger companies and
among those with 5 years or less of business experience. Traditional measures are found to be
still useful, though to a smaller extent, as companies are going through a transition of
implementing changes to their manufacturing strategies.

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