Designing and Implementing a Performance Management System in a Textile Company for Competitive Advantage

Transcription

1 Desgnng and Implementng a Performance Management System n a Textle Company for Compettve Advantage Muhttn Oral Fehm Peker December 2009 CIRRELT Bureaux de Montréal : Bureaux de uébec : Unversté de Montréal Unversté Laval C.P. 6128, succ. Centre-vlle 2325, de la Terrasse, bureau 2642 Montréal (uébec) uébec (uébec) Canada H3C 3J7 Canada G1V 0A6 Téléphone : Téléphone : Télécope : Télécope :

2 Desgnng and Implementng a Performance Management System n a Textle Company for Compettve Advantage Muhttn Oral 1,, Fehm Peker 2 1 Interunversty Research Centre on Enterprse Networks, Logstcs and Transportaton (CIRRELT) and Faculty of Management, Sabanc Unversty, Orhanl 34956, Istanbul, Turkey 2 Tüp Merserze A.S., Peker Group Companes, Istanbul 34169, Turkey Abstract. Globalzaton forces companes to work effcently, effectvely, and ntellgently to create and sustan compettve advantage to mantan ther exstence favorably n the markets of nterest. Global competton seems to be very much shaped by shorter delvery perod, hgher qualty, better prce, and effectve marketng. Ths s more so n the case of textle ndustry worldwde. The present paper dscusses a framework for desgnng and mplementng a performance management system (PMS) n a textle company that ntegrates compettve marketng and rght-the-frst-tme producton strateges. The PMS model developed also serves as an nstrument for organzatonal learnng to help the company mprove ts global compettve advantage. Keywords. Compettve advantage, ntegratng marketng and producton, performance management, organzatonal and team learnng, kntted fabrcs, textle ndustry. Results and vews expressed n ths publcaton are the sole responsblty of the authors and do not necessarly reflect those of CIRRELT. Les résultats et opnons contenus dans cette publcaton ne reflètent pas nécessarement la poston du CIRRELT et n'engagent pas sa responsablté. Correspondng author: Muhttn.Oral@crrelt.ca Dépôt légal Bblothèque et Archves natonales du uébec, Bblothèque et Archves Canada, 2009 Copyrght Oral, Peker and CIRRELT, 2009

3 1. INTRODUCTION Innovatve management of organzatonal performance has been a major factor for success n nternatonal markets for sometme now. It s even more so as we are currently gong through an economc and fnancal crss. Innovatons n producton processes, products, marketng effectveness, and management nfrastructure are all needed for creatng compettve advantage more than ever. Customer satsfacton needs to be acheved at the hghest levels possble whle mantanng a hgh level of producton superorty n terms of qualty, delvery perod, quantty, and costs. The relatonshp between manufacturng strategy and compettve strategy and ther nfluence on frm performance has been the subject of many studes snce late 1960s. Sknner (1969) argued that manufacturng strategy plays an mportant role on a frm s compettve potentalty and actualty and hence on the frms eventual performance. As Amoako-Gyampah and Acquaah (2008) summarzed, some of the ntal studes sought to develop a lnkage between compettve advantage and manufacturng strategy. Among those studes one can cte the works of Dutta and Kng (1980), Abernathy, Clark, Kantron (1981), Hayes and Wheelwrght (1984), Prahalad and Hamel (1990), Ward and Duray (2000). Kaplan and Norton (1992, 1993) suggested a framework for evaluatng organzatonal performance from the perspectves of fnancal success, customer satsfacton, nternal process effectveness, and learnng and growth achevement. Porter (1980, 1985) also provded frameworks for compettor and ndustry analyss and for ganng compettve advantage. Compettveness level as an overall measure of organzatonal performance has been also treated, usng mostly model-based approach, by Oral (1986, 1993). In ths paper, the level of frm performance s conceptualze and modeled from a partcular compettve strategy perspectve that takes nto consderaton qualty, prce, delvery tme, and marketng effectveness. For ths purpose, t especally ntegrates two major functons of a frm: marketng and producton. Marketng functon s based on customer-focused strategy to provde hgh levels of customer satsfacton n terms of qualty, delvery, flexblty, and prce. Producton functon, on the other hand, s founded on the rght-the-frst tme strategy so that due delvery dates are met, producton costs are reduced, and superor qualty levels are constantly mantaned through nnovatons n the areas of process mprovement, product development, and management. CIRRELT

4 The organzaton of the present paper s as follows. Secton 2 sets the context n whch performance management s to be perceved; bascally relatng compettve advantage to marketng effectveness and producton superorty. Secton 3 s devoted to the presentaton of the methodology developed and mplemented for performance evaluaton. Secton 4 dscusses the organzatonal mplcatons of the new performance management system. And, Secton 5 concludes the paper. 2. THE CONTEXT OF PERFORMANCE MANAGEMENT The company for whch ths study has been done s actve n nternatonal markets and makes kntted fabrcs for major garment makers of sports and casual wear, mostly for European companes. A content analyss of the daly reportng meetngs have ndcated that keepng promsed delvery dates, mantanng the qualty levels requred by customers, offerng compettve prces and product desgn flexblty are the major governng factors for runnng the busness successfully. These fndngs were also supported by the analyses performed usng the current and past data on customer relatons. All these results have suggested a partcular understandng as to whch factors that needs to be consdered n conceptualzng and desgnng a performance management system (PMS). The percepton of the context wthn whch PMS s to be conceptualzed and desgned for creatng a compettve advantage s gven n Fgure 1. As can be seen form Fgure 1, the compettve advantage of the frm s perceved to be jontly created and mantaned by marketng and producton functons. However, there are areas where producton functon s manly a domnant actvty; such as provdng superor qualty, meetng the promsed delvery dates and quanttes, and reducng producton costs. Smlarly, marketng functon s consdered to be the foundaton of compettve marketng through formng and sustanng rght customer portfolo, sellng rght product mx, and offerng compettve yet proftable prces. Fgure 1, n a sense, suggests a framework for conceptualzng a PMS that ntegrates two major functons of a frm. Ths feature mples that one needs to desgn a system by whch the performances of marketng and producton functons can be evaluated n relaton to one another. How ths s acheved forms the content of the next secton. CIRRELT

5 MAR K E T ING PRODUCTION COMPETITIVE DELIVERY C OMPE T ITIVE MAR K E T ING C OMPE TITIVE ADVANTAGE COMPETITIVE UALITY PRODUCTION SUPERIORITY COMPETITIVE PRICE Fgure 1: Context for Desgnng Marketng and Producton Factors Shapng Compettve Advantage A broader economc context s also to be taken nto consderaton. Performance management strateges can be clustered accordng to compettveness and demand levels as shown n Fgure 2. When both demand and competton are hgh we call ths economy compettve normal economy where marketng mastery s the performance management strategy. When demand s hgh but competton s relatvely low, we call ths economy growth economy (see also, for nstance, Rathore et al, 2005) and producton mastery s the strategy to be followed for managng performance. The thrd type of economy s tght economy when both demand and competton are low. In ths case, techncal effcency and effectveness s more approprate a strategy to adopt for performance management. The last type of economy s called compettve and tght economy whch s characterzed by low demand and hgh competton. Economy durng a fnancal crss falls n ths category, as the one we are currently experencng snce the end of 2008, and t requres a serous revson of all strateges, ncludng performance management. In such economes, rght actvtes must be performed rght-thefrst-tme and nnovatvely. CIRRELT

6 HIGH COMPETITION RIGHT THE FIRST TIME (COMPETITIVE AND TIGHT ECONOMY) TECHNICAL EFFICIENCY AND EFFECTIVENESS MARKETING MASTERY (COMPETITIVE NORMAL ECONOMY) PRODUCTION MASTERY LOW LOW (TIGHT ECONOMY) DEMAND (GROWTH ECONOMY) HIGH Fgure 2: Clusterng Performance Management Strategy The textle company for whch ths study was done s consdered to fall n the compettve and tght economy stuaton due to the current fnancal and economc crss. Therefore, dentfyng the rght actvtes to be performed the rght-the-frst-tme s the strategy to be pursued and hence forms the foundaton of the PMS developed and mplemented n ths study. Pursung a rght actvty rght-the-frst-tme strategy has several advantages and justfcatons from the perspectve of creatng compettve advantage. Because t reduces producton costs less energy, less dyestuff, fewer amounts of chemcals, and less labor are requred because there s no need for repar or reprocessng whch requres addtonal nputs, and hence hgher producton costs. These savngs lead to lower unt producton costs and therefore creatng opportunty to offer more compettve prces to customers. See compettve prce n Fgure 1. facltates to meet the due delvery dates because the operatons are successfully completed on frst trals, thus shortenng producton tmes, there s no dffculty n CIRRELT

7 meetng the promsed delvery dates, whch helps creatng and mantanng good customer relatons. See compettve delvery n Fgure 1. contrbutes to makng good qualty products achevng the rght-the-frst-tme objectve n producton means that there s no need for any reparng or reprocessng. Reparng or reprocessng n textle ndustry s usually major causes of decrease n qualty levels, as well as ncreasng producton costs. See compettve qualty n Fgure 1. ncreases the effectveness level of compettve marketng producng superor qualty products n shorter delvery perods at lower costs sets the very ground for compettve marketng. See compettve marketng n Fgure 1. A recent study dealng wth customer-focused and product-lne-based manufacturng performance measurement s due to Chee-Ceng and Wen-Yng (2007). Ther study proposes an ntegrated dynamc performance measurement system where three man areas are ntegrated; namely, company management, process mprovement, and the factory floor shop. As wll be seen shortly, the methodology presented n ths paper s phlosophcally smlar to that of Chee- Cheng and Wen-Yng, but dffers consderably n terms of formulatons and performance strategy. Readers are also referred to Oral and Domnque (1989) and Chen et al (2006) for compettve strategy formulaton that ntegrates frm-based producton plan and market-based performance n mature ndustres. 3. METHODOLOGY The textle company, for whch ths study was done, has three producton facltes: fabrc makng, bleachng, and yarn dyng. Although the performance management system dscussed n ths paper s currently beng used n all producton lnes, we shall concentrate only on fabrc producton lne to explan the methodology developed for the purpose of performance evaluaton. We shall start wth the marketng functon and ts performance evaluaton. Marketng Functon The performance evaluaton of the marketng functon s based on four rght factors. These are: rght customer portfolo, rght product portfolo, rght prcng, and rght producton quantty. Rght customer portfolo means that the company has developed an optmal customer base n terms of rght combnaton of small and bg customers, new and old customers, domestc and nternatonal customers so that the sustanablty of busness s successfully mantaned. CIRRELT

8 Rght product portfolo refers to sellng those products that are strategcally mportant and proftable. Rght prcng ndcates the effectveness of marketng and sales people n persuadng the customers regardng the values of the products offered. Rght economc value ndcates how and at whch level of the producton capacty s beng utlzed n terms of explotng the technologcal and producton superortes of the company to generate economc value. As a functon of these four rghts, the performance level of the marketng functon s determned, whch s called compettve marketng? In a sense, the marketng functon s to dentfy the rghts that wll gude the producton actvtes of the company. See Fgure 3 for the detals. Now, we shall provde the mathematcal formulatons of these four rghts, and then how the earned premum rate s calculated. Rght Customer Portfolo Index (C): A rght combnaton of customers s mportant from dfferent perspectves. Frst, t s rsky to work wth only few bg customers, for there s always a possblty that one or two of them mght reduce and even cancel ther orders due to ther busness condtons, thus lowerng the negotatng power of the company wth ts customers (Porter 1980, 1985). Such stuatons mght cause serous nterruptons n producton actvtes. Second, t s always benefcal to add new customers to the exstng ones for hgher capacty utlzaton. To measure the level of rght customer portfolo the followng metrc s formulated: N ja C = γ j j (1) N jt where C = the rght customer portfolo ndex, γ = the mportance of customer type j, wth γ = and γ 0, j n j j j 1 j the context of customer portfolo whch s defned and justfed by the company management, N ja = the actual number of customer type j, j N jt = the targeted number of customer type j, j. To nterpret (1) wth a smple hypothetcal example, let us assume that the number of exstng customers s 20 and we were able to do busness wth 19 of them; and we have targeted to have 5 new customers, but we were able to get only 2 durng the performance evaluaton perod. Then the value of the rght customer portfolo ndex C becomes CIRRELT

9 N ja C = j γ j N jt 19 2 = ( 0.8) + (0.2) = when the strategc mportance of dong busness wth the exstng customers s (0.8) and ganng new customers s (0.2). It should be noted here that the rght customer portfolo ndex takes on values around 1 by the very defnton of C n (1). A value of C greater than 1 ndcates that we have done better than the targeted objectve, otherwse t s just the opposte. RIGHT CUSTOMER PORTFOLIO N ja C = γ j j N RIGHT PRODUCT PORTFOLIO A P = λ jt T θ = COMPETITIVE MARKETING 4 ( C)( P)( V )( E) COMPANY PREMIUM RATE F RIGHT PRICING V = P β P A T RIGHT ECONOMIC VALUE S E = S A T = P P A T A T EARNED PREMIUM RATE f = Fθ Fgure 3: Methodology for Computng Premum - Marketng Although we have consdered only two types of customers n ths example, the company s n fact currently workng wth more than 20 groups of customers. Rght Product Portfolo Index (P): Not only the rght customer portfolo but a rght product mx s also desrable. Some products mght carry hgher levels of strategc mportance than the CIRRELT

10 others, for one reason or another. To accommodate ths feature n the rght product portfolo ndex P, we have the followng formulaton: A P = λ (2) T where P = the rght product portfolo ndex, λ = the strategc mportance of product n the context of rght product portfolo, whch s agan defned and justfed by the company management, wth λ = 1 and λ 0, A = the actual sze of the order for product,, T = the targeted sze of the order for product,. The values of T s obtaned from a model that represents optmal capacty utlzaton, whch s dscussed when explanng the rght economc value ndex E. Agan as a small hypothetcal example, let us assume that the products are strategcally classfed by company management nto two groups: the mportance of group 1 s 0.4 and that of group 2 s 0.6. The targeted outputs of product group 1 and group 2 are, respectvely, 100 and 20 tons of kntted fabrcs; where the actual outputs are, agan respectvely, 105 and 15 tons. Note that the total actual output and total targeted output n ths case are the same; that s,120 tons. Puttng the values n (2), we obtan A P = λ = ( 0.4) + (0.6) = T Although the targeted output s equal to the actual output, we have a value that s less than 1, ndcatng that we have not attaned our objectve due to a lower level of achevement wth respect to product group 2, although we have actually done better than the targeted value of 100 tons. Rght Prcng Index (V): Ths s the ndex formulated to measure how successful the marketng people are wth respect to prcng. For each product there s a targeted prce and CIRRELT

11 actual prce. The rght prcng ndex ndcates to what extent the targeted prces are actually mantaned. Its formulaton s below: PA V = β (3) P T where V = the rght prcng ndex, β = the strategc mportance of product n the context of prcng, as defned and justfed by the company management, wth = 1 P A = the actual prce charged for product, P T = the targeted prce for product. β and β 0,, RIGHT CUSTOMER PORTFOLIO 19 2 C = ( 0.8) + (0.2) = RIGHT PRODUCT MIXING P = ( 0.4) + (0.6) = RIGHT PRICING 9 15 V = ( 0.35) + (0.65) = COMPETITIVE MARKETING COMPANY PREMIUM RATE F = 0.50 θ = 4 (0.84)(0.87)(0.96)(0.90) = 0.89 RIGHT ECONOMIC VALUE (9)(105 ) + (15 )(15 ) E = = 0.90 (10 )(100 ) + (15 )( 20 ) f EARNED PREMIUM RATE = Fθ = ( 0.50)(0.89) = 0.45 Fgure 4: Computng Earned Premum Rate for Marketng Numercal Example A small hypothetcal example to nterpret the equaton (3) could be the followng. Suppose the strategc mportance of product group 1 s 0.35 and that of product group 2 s 0.65 wthn the context of the rght prcng ndex. Let the actual average prces charged are $9 and $ 15 for CIRRELT

12 product group 1 and 2, respectvely. The targeted prces, on the other hand, are $10 and $15. Then substtutng the values n equaton (3) we get PA 9 15 V = β = + = (0.35) (0.65) P T mplyng that the company s very close to the target level of 1. Rght Economc Value Index (E): An optmal use of capacty that creates economc value (may be measured n terms of total sales, total profts, etc.) for the company s of crucal mportance for survval. The rght producton quantty s the quantty that generates the maxmum value W and s obtaned from the followng optmzaton model: W = Max w subject to b T a, k (4) k T k where w = the economc value contrbuted by one unt of product, T = the targeted (optmal) quantty to be produced of product,, a k = the amount of captal resource (tme on machnery, equpment, department, etc.) of type k needed to produce one unt of product, b k = the avalablty level of captal resource of type k. The optmal quanttes T s obtaned from the model n (4) are all measured n the same physcal unts, ether n meters or n klograms, n the case of the company for whch ths study was done. Gven the actual quanttes A s produced, we defne the rght economc value ndex E as S PA A A E = = (5) S P T A value of E smaller than 1 ndcates that we have done less than the optmal capacty utlzaton ndcates. It should be noted here that the rght economc value ndex lnks the marketng functon wth the producton functon. T T CIRRELT

13 If we contnue wth the same small hypothetcal example agan, we already know the values P A s, P T s, A s and T s. Substtutng ther values n (5) we obtan S P A A A (9)(105) + (15)(15) 1170 E = = = = = 0.90, S P (10)(100) + (15)(20) 1300 T T T a value ndcatng to what extent the capacty s actually beng optmally used to create economc value. In the case of our small example, we are close to the optmal capacty utlzaton, because E = 0.90, through the quanttes actually produced, but qute not there yet because E s not equal to 1. The concept of the rght economc value ndex E wll also be used for evaluatng the performance of producton functon. In partcular, the rght product mxed quantty T = T T wll be the bass of calculatng the premum per unt of RFT (rght the frst tme) producton. Compettve Marketng Effectveness Index θ : Now we are n a poston to combne these four performance ndces of marketng functon to defne an overall ndex called the compettve marketng effectveness ndex θ. Its formulaton s θ = 4 ( C)( P)( V )( E) (6) where θ s defned as a geometrc mean of the prevously developed four performance ndces. There are two reasons for optng for such a model: (1) the overall ndex θ needs to be nterpreted n the same way the other four rght ndvdual ndces are, and (2) a multplcatve model better represents the nterdependence among the four performance ndces. For a dscusson of how a model choce (multplcatve, addtve, mn, max) s made, the reader s referred to Karnan (1982, 1984, 1985). Once agan returnng to our small hypothetcal example, by substtutng the values of the four ndces correspondng to four rghts found before n equaton (6) we get θ = 4 ( C)( P)( V )( ) = 4 (0.84)(0.87)(0.96)(0.90) = 4 (0.54) = 0.89 as the compettve marketng effectveness level. Ths value mples that the level of marketng performance s not far from the target value 1.0, although there s a room for mprovement. CIRRELT

14 Earned Premum Percentage Marketng: Let us assume that the company premum percentage s F = 50% when the marketng functon hts target performance level θ =1.0. Then the earned premum rate f s found by f = Fθ = ( 0.50)(0.89) = Ths value ndcates that the marketng people, as a group, wll be rewarded wth an amount of $ 22,500, assumng that the totalty of ther salares s $ 50,000 for the perod for whch the performance evaluaton s beng done. Then the total payment to be made to the marketng people becomes $ 50,000 + $ 22,500 = $ 72,500. Fgure 4 summarzes all these calculatons for the marketng functon. Now we shall present the methodology for evaluatng the performance of producton functon. Producton Functon The performance management strategy for evaluaton of the producton functon has been smply reduced to the motto rght-the-frst-tme. We term ths strategy as RFT Performance Strategy. Moreover, ths strategy s operatonal and applcable n the cases of all the orders accepted by the marketng functon. Sad dfferently, what ever brought as orders by the marketng department, the producton people have the responsblty to make the requred quanttes wth RFT Performance Strategy. The assumptons and mplcatons of ths RFT performance strategy are: The orders are strategcally shaped by the marketng functon and the producton functon s oblged to confrm wth the requrements of the orders. Assumng that the orders are receved n the best nterest of the company by the marketng people that takes nto consderaton company s technologcal characterstcs, techncal know how, capacty and compettve forces, the producton functon s smply requred to fulfll these orders. In other words, the outputs of marketng functon as orders are the nputs for the producton functon. Implementng a RFT strategy results n (1) consderable reducton n producton tme, (2) ncrease n qualty performance, (3) handsome decreases n producton costs, and (4) tremendous mprovements n customer relatons. CIRRELT

15 To fully mplement the RFT strategy, the performance of producton functon s therefore completely based on the RFT quanttes produced. For ths purpose, a certan amount s determned as a premum to be gven per each unt of RFT producton. How ths certan amount of premum s determned s depcted n Fgure 5. Net Total RFT uantty: For the perod of performance evaluaton, let 1 be the quantty of RFT producton. However, there are also non-rft quanttes; q j s, wth defect type j. The nature of defectve quanttes mght have dfferent consequences. Let α j be the consequence of defect type j per unt of followng factors are taken nto consderaton: q j. To estmate the lkely consequence of the defectve quantty q j, the Addtonal chemcal and dyestuff used to repar or replace the defectve quantty q j, Energy lost because of the addtonal work done due to the defectve quantty q j, Addtonal labor needed because of the defectve quantty q j Busness lost due to the defectve quantty q j Agan let us consder the same small example. We produced 105 tons of product group 1 and 15 tons of product group 2. Out of 105 tons of product group 1, q 25 tons have defect type 1, and q 10 tons of defect type 2. Ths mples that 70 tons of product group 1 were produced 2 = wthout any defect; that s, RFT producton. Smlarly, out of 15 tons of product group 2, q 3 = 2 tons of defect type 3 and q 3 tons of defect type 4. Ths mples that the RFT producton s 4 = equal to 15 (2+3) = 10 tons. Let us assume now the multpler effects of the defect types are gven by α = , α = , α 5 3 = 0., and α = Gven these data, we have 1 = = 80 tons of drect RFT producton and 1 = [ 25 (0.2)(25) + 10 (0.3)(10) + 2 (0.5)(2) + 3 (3.0)(3)] 22 2 = j ( q j α jq j ) = = tons of adjusted equvalent RFT producton, totalng = + = tons of net RFT producton (see Fgure 6). 1 2 = CIRRELT

16 NON -RFT UANTITIES q q,..., 1, 2 q j IMPACTS OF NON -RFT UANTITIES α α,..., 1, 2 α j TOTAL WAGES B RFT CAPACITY = r ρψ ADJUSTED EUIVALENT RFT UANTITY = ( q j q ) 2 α j j j RFT UANTITY 1 NET TOTAL RFT UANTITY = PREMIUM PER UNIT OF RFT PRODUCTION Π= ( B)( f)/( ) TOTAL PREMIUM TP = ( Π)( ) PROFITABILITY π PRODUCTION DIFFICULTY σ PRODUCTION LINE FACTOR g ( π, σ) [ ] PRODUCTION INCENTIVE RATE f = ( F) g( π, σ) [ ] COMPANY INCENTIVE RATE F Fgure 5: Methodology for Computng Premum - Producton RFT Capacty: Based on the actual product-mx producton, ths s the total quantty that could have been produced wthout any defects. The RFT capacty s the bass of calculatng the amount of premum that wll be gven per ton of quantty produced wthout any defect and wll be used n determnng the total amount of premum to be awarded to the people workng on the producton lne. Let us assume that the RFT tme requred to make quantty A s t. The total RFT tme needed to make A = A s then t = t. On the other hand, let us assume that the total RFT tme requred to make relatve tme used to make = s ψ. Then the rato ρ = t, represents the actual T T t / A. Ths rato wll be mantaned n calculatng the RFT capacty that CIRRELT

17 s based on the actual product-mx. In ths case, the RFT capacty reflectng the actual productmx s gven by = where s the RFT quantty that could have produced wthn the tme perod of ρ ψ. If the targeted RFT producton rate of product s r, then = r ρ ψ. The RFT capacty s then = = r ρ ψ (7) Agan referrng to our small hypothetcal example, the targeted quantty of product group 1 was 100 tons and would have been produced n 10 tme unts, mplyng a targeted producton rate of 10 tons of output per unt tme ( r = 1 10 ). But the actual quantty of product group 1 s 105 tons and t took 15 unts of tme. Smlarly, the targeted quantty of product group 2 was 20 unts and would have been produced n 10 tme unts, mplyng a targeted RFT producton rate of 2 tons per unt tme ( r = 2 2 ). The actual fgures, on the other hand, are 15 tons of output n 10 unts of tme. Gven these peces of nformaton, we have, t = = 25, ρ = t t = 15 / and 1 1 = ρ 2 = t2 t = 10 / 25 = These fgures, whch are based on the actual product mx, ndcate that 60% of ψ = = 20 would have been used for the producton of product group 1 and 40% for product group 2. Thus the actual product mx RFT capacty becomes tons of output. = ρ ψ = (10)(0.60)(20) + (2)(0.40)(20) = = 136 r Premum per Unt of RFT producton: As can be observed from Fgure 5, the premum to be pad per unt of RFT producton s based on several factors: (1) RFT capacty, (2) total wages B for the perod of performance evaluaton, (3) proftablty π of the producton lne, (4) technologcal dffculty level σ of the producton lne, and (5) company ncentve rate F. The RFT capacty s already gven n (7). The total wages B s the sum of the wages to be pad to all those who are workng on the producton lne. The proftablty π ndcates the relatve proftablty of the producton lne when t s compared wth the other two producton lnes. Hgher CIRRELT

18 the proftablty levels of a producton lne, hgher the level of premum to be pad for the actvtes of that producton lne. Smlarly, the technologcal dffculty level σ ndcates the relatve dffculty level of the producton lne when t s compared wth the other two lnes. Ths feature s also to be taken nto consderaton whle determnng the level of premum to be pad for the actvtes of the three producton lnes. Gven the above features and factors, one can formulate the amount of premum π to be pad per unt of RFT producton as: where ( F) [ g( π, σ )] Π = ( B)( f ) /( ) (8) f = and g ( π, σ ) s the value ndcatng the relatve proftablty and technologcal dffculty level of the producton lne when compared wth the other two producton lnes. For the most proftable and dffcult producton lne we assume that g ( π, σ ) = 1, whch s the case for the producton lne of fabrcs makng. Ths assumpton mples that [ g( π, )] = (0.50)(1.0) f = ( F) σ =. For the other two producton lnes, the values of g ( π, σ ) are less than 1, mplyng that the values of f are less than The nature of the functon g ( π, σ ) wll be more evdent when we are dscussng the Stage 1: Transtonal Implementaton n the followng secton. Now we are n a poston to demonstrate how to calculate the premum to be pad for one ton of RFT producton. Substtutng the approprate values n (8) we obtan Π = ( B )( f ) /( ) = (200,000)(0.50) /(136) $ 735 as the premum to be pad per unt output of RFT producton. Gven ths premum amount per unt output of RFT quantty, we can fnd the total premum to be pad to the workers of the producton lne as TP = Π(102)(735) $ 75,000. The reader s referred to Fgure 6 for the steps of the calculatons. CIRRELT

19 NON -RFT UANTITIES q1 = 25, q2 = 10, q3 = 2, q4 = 3 IMPACTS OF NON -RFT UANTITIES α = 2, α =.3, α =.5, α = TOTAL WAGES B = 200,000 RFT CAPACITY = ρ ψ = 136 r ADJUSTED EUIVALENT RFT UANTITY = j ( q j α jq j ) 22 2 = RFT UANTITY = = NET TOTAL RFT UANTITY = = 102 PREMIUM PER UNIT OF RFT PRODUCTION Π = ( B)( f ) /( ) 735 TOTAL PREMIUM TP = Π 75,000 PROFITABILITY π PRODUCTION DIFFICULTY σ PRODUCTION LINE FACTOR g ( π, σ ) = 1. [ ] 0 f PRODUCTION INCENTIVE RATE = ( F) g( π, σ ) = 0. [ ] 50 COMPANY INCENTIVE RATE F = IMPLEMENTATION Fgure 6: Computng Premum for Producton Numercal Example The mplementaton of the PMS as presented n the prevous secton has been realzed n two consecutve stages: Stage 1: Transtonal Implementaton and Stage 2: Full Implementaton. The transtonal mplementaton s bascally needed for two reasons: (1) as a preparaton stage for the full mplementaton, and (2) as a learnng nstrument for all mpled n the process of performance management. The full mplementaton s the use of the methodology wth all detals at the product level. In what follows we shall dscuss how the transtonal mplementaton s beng realzed and the preparatons beng made for the full mplementaton. Stage 1: Transtonal Implementaton The transtonal mplementaton s based on four groups of fabrcs: (1) vscose/elastc (vscose fabrc wth lycra), (2) cotton/elastc (cotton fabrc wth lycra), (3) 100% cotton, and (4) mercerzed fabrcs. The performance of marketng functon s beng perodcally evaluated CIRRELT

20 accordng to the formulas developed n the prevous secton for the case of the four groups of fabrcs above. The four rght ndces ( C, P, V, E) are found and converted nto overall marketng effectveness ndex θ. Regardng the performance evaluaton of the producton functon, on the other hand, rather a pragmatc approach s beng employed because of the nature of the functon g ( π, σ ) as well as the relatve strategc mportance of the above four product groups. As can be observed from Table 1, the premum Π per unt of RFT producton s defned as the product of three multplers; namely, proft and technology multpler (Column A), strategc multpler (Column B) and base multpler (Column C). The proft and technologcal multpler ndcates the relatve mportance of the product group n queston wth respect to base product, whch s the bleached fabrc havng the smplest technologcal process and the lowest proftablty. For nstance, the vscose elastc fabrc group has the value of g ( π, σ ) = 8, ndcatng that t has 8 tmes more mportant than the base group bleached fabrc wth respect to proftablty and technologcal dffculty. In a sense, the proft and technology multpler s n fact the functon g ( π, σ ) as perceved by the managers usng ther mental models. The strategc multpler s the commercal mportance of the product group n queston relatve to the base product group bleached fabrc. The base multpler s the premum to be gven per unt of RFT producton for the base product group, bleached fabrc. Ths multpler value of $ 32 per ton of RFT producton s found by takng nto consderaton the company premum percentage F and total wages B. The last column n Table 1 ncludes the amounts of premum to be pad per ton of RFT producton. Suppose that the quanttes produced of each product group are as follows: vscose/elasthane fabrcs = 40 tons, cotton/elasthane fabrcs = 45 tons, cotton fabrcs = 20 tons, mercerzed fabrcs = 15 tons, a total of 120 tons of fabrcs. If all quanttes were of the RFT producton type, then the total amount of premum would have been TP = ( 40)(512) + (45)(448) + (20)(192) + (15)(960) = $58,880. However, there are non-rft quanttes. For the transtonal mplementaton, a pragmatc approach s beng used. The actual tme spent to make orders s analyzed and dvde nto two parts: the RFT tme t needed to make the actual orders and the tme wasted τ for repars and reprocessng. Then the addtonal cost (energy, dyestuff, chemcals, labor, etc.) ncurred durng the tme wasted τ s estmated. Now the queston s how much RFT quantty s to be produced n order to recover the addtonal cost due to repars and reprocessng. The correspondng RFT quantty s found by dvdng the addtonal cost by the unt proft. Ths correspondng RFT quantty s deducted from the total quantty produced. The result s the net total RFT quantty, the quantty that s to be used n estmatng the amount of total premum TP to be dstrbuted to the workers of the fabrc producton lne. CIRRELT

21 Table 1: The Functon g ( π, σ ) n Table Format Product Group Proft and Technology Multpler g ( π, σ ) A Strategc Multpler B Base Multpler h ( F, B) C Premum per Ton of RFT Producton Π = (A)(B)(C) Vscose Elastc Fabrc Cotton Elastc Fabrc $ $ 448 Cotton Fabrc $ 192 Mercerzed Fabrc Bleached Fabrc (Base Product for Comparson) $ $ 32 At the tme of wrtng ths paper, the transtonal mplementaton s over and the nfrastructure for the full mplementaton s beng put n place. Some detals of the full mplementaton are gven below. Stage 2: Full Implementaton The data and nformaton needed for the full mplementaton of the methodology presented n Secton 3 can be summarzed, n connecton wth Fgure 3 and Fgure 5, as n Table 2 below. CIRRELT

22 Table 2: Data and Informaton and Ther Sources Data and Informaton Marketng Functon Rght Customer Portfolo Rght Product Portfolo Rght Prcng Rght uantty Compettve Marketng Index Earned Premum The Source Marketng Functon Management and Marketng Department Management and Marketng Department Management and Marketng Department Management, Company ERP Performance Management System Performance Management System Producton Functon Non-RFT uanttes Impacts of Non-RFT uanttes Adjusted Equvalent RFT uantty Total Wages RFT Capacty Proftablty Producton Dffculty Company Incentve Rate Producton Incentve Rate Premum per RFT Producton Total Premum Producton Functon ualty Control Department Management, OrgaTEX, SKADA Management, OrgaTEX, SKADA Human Resources Management, OrgaTEX, SKADA Management and Marketng Department Management and Company ERP Management Performance Management System Performance Management System Performance Management System The OrgaTEX system, n summary, s software that enables collectng and processng data from dye machnes on real-tme bass for producton control and reportng purposes. The OrgaTEX system s used to schedule producton on dye machnes as well as reportng the actual performance of each machne n terms of batches, partes, and orders. More specfcally, CIRRELT

23 the OrgaTEX system s useful n analyzng the performance of each dye machne: actual tme used for a batch aganst theoretcal or programmed tme needed to do the same batch. It also reports when there are addtonal use of chemcals and dyestuff. Ths analyss s the bass of evaluatng the performance of the producton functon n the dye house. ORGATEX DYEING HOUSE COMPANY DATA BASE SKADA FINISHING HOUSE COMPANY ERP SYSTEM PERFORMANCE MANAGEMENT SYSTEM Fgure 7: IT Infrastructure for Performance Management System Dyed fabrcs go to fnshng house for chemcal and mechancal treatment to make the fnal fabrcs accordng to ther specfcatons. In the case of fnshng house, the system used for controllng producton and analyzng performance s a combnaton of hardware and software called SKADA. Lke OrgaTEX, SKADA also serves the same purpose; that s, t provdes means of comparng the theoretcal or programmed parameters nputted nto system for treatment wth the actual values of the parameters. Analyzng the dfferences between the programmed values and actual values of the treatment parameters, one s able to evaluate the performance of the producton functon n the fnshng house. CIRRELT

24 The feature of IT nfrastructure for the mplementaton of the methodology developed s rather mportant because of the nature and frequency of performance evaluaton. It s envsaged that the performance evaluaton wll be conducted on a monthly bass frst and then weekly once the system s fully operatonal. Fgure 7 summarzes the IT nfrastructure for PMS n connecton wth company ERP system and data bases. 5. CONCLUDING REMARKS Ths paper presented a methodology for desgnng and mplementng a PMS n textle company. It accentuates the mportance of the ntegraton of marketng and producton functons for creatng and sustanng compettve advantage. Especally the mportance of the performance management strategy rght actvty rght-the-frst-tme s emphaszed. Ths knd of approach has been forced on the company because of the very nature of global competton. It s also n lne wth the research agenda suggested n the area (Den Hartog, Bosele, Paauwe 2004.) Also dscussed was, albet brefly, the two phases of the mplementaton n terms of data and nformaton and IT archtecture. It s the ntenton of the authors to contnue to work on the current PMS from the perspectves of human resources management and organzatons behavor. It s of great nterest to study how such a PMS s nstrumental n motvatng people and creatng compettve advantage. It should also to be noted that no PMS can totally replace management and make t a routne. There wll always be a need for the judgment, nterventon, and gudance of management to develop and motvate company people to perform better. However, the PMS as presented n ths paper wll reduce the work load of management. Moreover, efforts n ths drecton are also nstruments for learnng and effectve communcaton among company people. The reader s referred to Arthur (1994) and Ukko et al (2007) for more detaled dscussons on these ssues. CIRRELT

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26 Porter, M.E., Compettve Advantage, 1985, Free Press, New York, N.Y. Prahalad, C.K. and G. Hamel The Core Competence of the Corporaton, Harvard Busness Revew, 1990 March-Aprl, Vol. 68, pp Sknner, W., Manufacturng Mssng Lnk n Corporate Strategy, Harvard Busness Revew, 1969, Vol.47, pp Rathore, A., R.P. Mohanty, A.C. Lyons, N. Barlow, Performance Management Through Strategc Total Productvty Optmzaton, Internatonal Journal of Advanced Manufacturng Technology, 2005, Vol.25, pp Ukko, J., J. Tenhunen, H. Ramtanen, Performance Measurement Impacts on Management and Leadershp: Perspectves of Management and Employees, Internatonal Journal of Producton Economcs, 2007, Vol.110, pp Ward, P.T. and R. Duray, Manufacturng Strategy n Context: Envronment, Compettve Strategy and Manufacturng Strategy, Journal of Operatonal Management, 2000, Vol.18, pp CIRRELT