The profitability of an organisation is directly linked to the continual improvement of business performance. Many organisations have found a way to improve their performance through the establishment of performance measurement systems. The importance of such systems as well as individual performance measures is generally recognised in the literature and the industry. Traditionally, performance measures and indicators have been derived from cost accounting information, often based on outdated and arbitrary principles. These provide little motivation to support attempts to introduce process improvement and, in some cases, actually inhibit continuous improvement because they are unable to map process performance. Additionally, the adequacy of measures applicable to different aspects and processes of an organisation (such as the New Product Introduction process) does not appear to have been addressed.
Finally, vast amounts of work on performance measurement to date lead to monitoring performance and stimulate future action. Increasingly, however, managers are beginning to seek "predictive" measures. These measures should show what is going out of control, before too much damage has been done. The identification and/or development of "predictive performance measures" will prove of a great value to the research and practice of the performance measurement field.
Performance measurement is an essential element of effective planning and control. The level of performance a business attains is a function of the efficiency and effectiveness of the actions (processes) it undertakes. In a cycle of never ending improvement, measurement plays an important role in identifying opportunities and comparing performance against internal and external standards. Measures are used in process control, e.g. control charts, and in performance improvement, e.g. improvement teams, so they should give information about how well processes and people are doing and motivate them to perform better in the future (Page, 2008).
According to Slack, 1999:
However, the degree of effectiveness of any control strategy will depend on the adequacy of the measures deployed. There are some performance measurement systems that frustrate improvement efforts. Various problems include systems that:
Oakland et al. (1996), argues that one example of a 'measure' with these shortcomings is Return On Investment (ROI). ROI can be computed only after profits have been totalled for a given period. It was designed therefore as a single period, long term measure, but it is increasingly being used as a short term one. ROI tells us what happened, not what is happening or what will happen, and, for complex and detailed projects, ROI is inaccurate and irrelevant.
Many managers have a poor or incomplete understanding of their processes and products or services, and looking for an alternative stimulus, become interested in financial indicators. The use of ROI, for example, for evaluating strategic requirements and performance can lead to a discriminatory allocation of resources. In many ways the financial indicators used in many businesses have remained static while the environment in which they operate has changed dramatically. Traditionally, the measures used have not been linked to the processes where the value-adding activities take place. What's been missing is improvement measures that provide feedback to people in all areas of business operations.
Historically (Driva et al., 2001), accounting-based measures have been relied on for a wide range of managerial monitoring of organisational performance. However, they are generally less than satisfactory for some organisational activities like New Product Development (NPD). Mahajan and Wind (1992) carried out one of the few surveys of tools, methods and "models" used for measuring NPD. The main aim of this research was to determine the role of new product "models" in supporting and improving the NPD process.
Literature review indicates that performance measurement research to date has been confined primarily to financial measures, with some recent developments for manufacturing measures by Maskell (1991), some organisational (Neeley et al, 1995) and business measurement systems (Black et al., 1998). Some research has been carried out in product development but this has focused on complexity, success and failure aspects (Griffin and Page, 1996) and on strategy aspects. Currently, more and more attention is paid to assessing the nature of the relationship between business performance, organisational intellectual capital and knowledge management (Hansen et al., 1999). There appears to be a lack of cohesive methodology presently available for assessing performance during product introduction using concurrent engineering principles (applied on a consistent rather than on an ad hoc basis).
This performance measurement method is mainly involved with the New Product Introduction (NPI) process and its relevance to time-to-market. The overall target is to provide a method of measuring the performance of this process in relation to time using indicators that could also act as predictive measures. The process will identify possible problems as well as resolve those issues related to this process. By following this method it will be possible to reduce time-to-market and improve business profitability. The method proposed comprises of 5 steps.
In line with the continuous improvement culture this method can be then reapplied to create a new action plan for further progress.
Applying this methodology will assist practitioners in dividing the overall problem into manageable tasks. It will provide scope for the improvement project as well as quantifying not only the issue in hand but also the progress made. The measures used in the second step of this method calculate the cost implication of the length of the NPI process, which is represented as the time-to-market. An indicator is also used to quantify the amount of losses against profitability due to the extended time-to-market. Using these indicators the performance of the NPI process can be evaluated in relation to its length and customer delivery adherence.
The values used for the calculation of the above measures are based on Actual and Potential Cost Attributed to the Delays in the process (Koliza et al., 2003). Their results give a good measure of the impact of the delay in question in terms of actual and potential losses that occur throughout the NPI process. This measure can assist in prioritising these delays so that an adequate plan can be produced for their reduction, or where possible, elimination. The percentage of Losses is itself a very valuable indicator of the impact of the delay to the business. A high value of Losses could mean that a company might never recover, or that immediate action needs to be taken so that the particular delay(s) does not appear in the future.
The model briefly described above was applied as a case study in a subsidiary company of the Smiths Group in 2003. After the completion of this performance measurement method for the NPI process the company realised the financial magnitude of the delays in the process. The figures calculated through the model were used as a benchmark and improvement plans were put in place to reduce or if possible eliminate the identified delays.
According to Coelho et al, (2003) the critical elements of a good performance measurement are:
The method and measures described above have been developed specifically for the New Product Introduction process, taking into account its uniqueness and complexity. The feedback received from its company trial indicated that the method was clearly defined and its application did not yield any major issues. The results of this exercise were evaluated and the company managed to receive valuable feedback by the deployment of the value indicators. An improvement action plan was also generated to follow through with the later steps of the improvement method.
Finally, the indicators have the benefit that they can be used in both static and dynamic situations as predictive measures.
Apart from the fact that the performance evaluation method proposed here meets all of the above criteria, it also provides management with reliable and verifiable information. It can be applied in organisations of any size and irrespective of whether they already have a management system in place. In an organisation that is to survive a long term, performance must begin to be measured by the customer. Delivery adherence and prompt time-to-market are qualities that customers value. This is the reason of this study concentrating on evaluating the New Product Introduction process and instigating the reduction of its length (time-to-market). Although, generic financial summaries and measures provide valuable information, they cannot control the business processes across a company's spectrum. Effective decision-making requires direct physical measures of operational feedback and improvement.