Reading: Lesson 4 - Gathering and Using Performance Information

3.4.A - Gathering and Using Performance Information

1. TAKING CORRECTIVE ACTION

1. When managers discover that performance is not meeting standards, they can take three possible actions:
   1. Take steps to improve performance.
   2. Change policies and procedures.
   3.   Revise the standard.
2. If managers have planned carefully, they should be reluctant to change standards. In the blanket-manufacturing business discussed earlier, managers should know from past experience whether producing 25 blankets a day is reasonable. Only under unusual circumstances (major equipment breakdown, problems with suppliers, employee strikes, etc.) would the blanket managers reduce the standard. However, failure to meet the goal of 1,000 blankets by the specified date will not please the customers and may result in a loss of sales.
3. Most often, managers need to improve performance of activities when standards are not being met. This usually means making sure that the work is well organized, that supplies and materials are available when needed, that equipment is in good working order, and that employees are well trained and motivated.
4. Occasionally, standards are not met because activities cannot be accomplished as planned, or policies and procedures are not appropriate. This is likely to happen when a business begins a new procedure, starts to use new equipment, or has other major changes. In this situation, managers may need to change the policies or procedures that are not working in order to meet the standards. Process improvement discussed earlier usually results in policy or procedure changes.
5. Finally, when the managers have explored all possibilities to improve performance and it still does not meet the standards, they need to evaluate the standards themselves. Planning is usually not exact. Conditions can change between the time plans and standards are developed and the time activities are performed. Managers cannot expect that all standards will be appropriate. Managers like to raise standards when they believe workers can achieve higher performance. It is difficult to make the decision to reduce standards, but that may be necessary from time to time. If a group of new employees is doing the task, performance standards may need to be reduced until the employees have had the necessary training and opportunity to perfect their skills.
6. When new planning procedures are used or new activities are implemented, planning is less likely to be accurate. Standards developed in those situations should be studied more carefully than the standards for ongoing activities or standards that have been developed in the same way for a long period of time.
7. Standards should be revised when it is clear they will not accurately reflect performance and attempts to improve performance have been unsuccessful. When standards are changed, the new standards and the reasons for the changes should be clearly communicated to the employees affected. Also, the procedures for setting standards should be revised so that standards developed in the future are more accurate.

1. All managers need to watch constantly for ways to reduce costs. Excessive costs reduce the company’s profit. There are several areas in a business where managers can anticipate cost problems and develop ways to reduce costs. They are inventory, credit, theft, and employee health and safety.
   
2. All the materials and products a business has on hand for use in production and available for sale is called inventory. Manufacturers need to produce enough of each product to fill the orders they receive. They need enough raw materials to produce those products. Wholesalers and retailers must maintain inventories to meet their customers’ needs. In all types of businesses, if inventories are too low, sales will be lost. If inventories are too high, costs of storage and handling will increase. There may be products remaining in inventory that are never used or sold. In that situation, the company loses all of the money invested in those products.
   
3. Inventory control requires managers to walk a fine line. They must maintain sufficient inventory to meet their production and sales needs yet not so much that it is too costly to handle and store. They must select products to purchase that can be sold quickly at a profit. They must purchase products at the right time and in the correct quantities to minimize the company’s inventory cost.
   
4. Many companies use just-in-time (JIT) inventory control, which is a method of inventory control whereby the company maintains very small inventories and obtains materials just in time for use. To set up a JIT system, managers carefully study production time, sales activity, and purchasing requirements to determine the lowest possible inventory levels. They then place orders for materials so that they arrive just as they are needed for production or to fill sales orders. Production levels are set so the company has only enough products to fill orders as they are received. Effective inventory control methods can be very complicated. JIT inventory management requires the close support and cooperation of a company’s suppliers as well as the companies providing transportation services to resupply inventories. If an order is not delivered on time, production will be delayed and sales will be lost.
   
5. Most businesses must be able to extend credit to customers. Businesses also use credit when buying products from suppliers. Credit is the provision of goods or services to a customer with an agreement for future payment. If the company extends credit to customers who do not pay their bills, the company loses money. Also, businesses that use credit too often when making purchases may spend a great deal of money on interest payments. Those payments add to the total cost of the product and reduce profits.
   
6. Businesses must develop credit policies to reduce the amount of losses from credit sales. They must check each customer’s credit history carefully before offering that customer credit. They must develop billing and collection procedures that will collect most accounts on time. The age of an account is the number of days that payment is past due. Managers need to watch the age of each credit account. The longer an account goes unpaid, the greater the chance that the company will never collect the full payment.
   
7. Companies should buy on credit when they will lose money if they don’t make the purchase. If a production schedule cannot be maintained without the credit purchase and if the price that can be charged for the sale of the product is high enough to cover the added cost, the credit purchase should be made. Companies may also need credit to purchase expensive equipment or large orders of products and materials. But managers responsible for purchasing must control the amount of money the company owes to other businesses. It is easy to make too many purchases on credit. When this happens, the interest charges will often be high, and the company may not have enough money to pay all of its debts on time.
   
8. Managers must be sure bills are paid on time to protect the credit reputation of the business. If the supplier offers a discount for paying cash, managers should check to see if the company will benefit from taking advantage of the discount. Before using credit, managers should study the credit terms to see what the final cost will be. Credit can be a good business tool if used carefully but can harm the business if not controlled.
   
9. Businesses can lose a great deal of money if products are stolen. Thefts can occur in many parts of a business and can be committed by employees as well as by customers and others. Businesses can lose cash, merchandise, supplies, and other resources due to theft. By establishing theft controls, businesses usually are able to reduce losses.
   
10. The theft of merchandise from warehouses and stores is a major business concern. Retail stores are the hardest hit by such losses. Retailers lose billions of dollars annually due to crime, much of which is from theft of merchandise. Shoplifting by customers and employees equals 1.3 percent of total retail sales, or over $40 billion per year. Much of the loss occurs during the end-of-year holiday shopping season when stores are crowded and part-time workers are employed, but it is an ongoing and serious problem through- out the year.
    
11. Many stores, warehouses, and trucks are burglarized during the night or when merchandise is being transported. Security guards and a variety of security equipment are frequently used to reduce the chances of such thefts. Many companies carry insurance against losses, but with high loss rates the cost of insurance is very expensive.
    
12. A rapidly growing area of concern to businesses and consumers alike is computer and Internet fraud. Business data and personal information are held in large and small computer files. Financial records and personal identity information are moved back and forth via the Internet. Data are exchanged online as part of many business transactions. Businesses increasingly contract with specialized companies to handle activities such as order processing, customer billing, accounting, and human resources management. Businesses must carefully plan and review all procedures for gathering, storing, and exchanging data to ensure the highest level of security and to prevent data and identity theft.
    
13. Even when employees are absent from work because of sickness or injury, the company must continue to operate. Other employees must be available to fill in for the absent employee or the work will go undone. The salary of both the absent employee and the replacement employee must be paid.
    
14. A major cost to businesses is linked to employee health. Part of this cost includes the health care benefits offered to employees. Employee absenteeism as a result of both short and long-term disability is another major health-related cost. On average, disability costs to employers are 12 percent of payroll. The costs are incurred from overtime, temporary staffing, replacement training, lower productivity, and other issues.
    
15. Some employees go to work when they are sick. This is called presenteeism. Many times these employees are afraid they will lose their jobs unless they go to work, even when they are ill. This places other employees and customers at risk. Presenteeism results in an estimated loss to businesses of $150 billion per year due to productivity slowdowns caused by employees who are not fully functioning.
    
16. In 2010 the Affordable Care Act (ACA, often called “Obamacare”) was signed into law by president Barack Obama. The ACA is an attempt to control the rising costs of health care by mandating that individuals have health insurance either through their employer or by purchasing their own policy. Businesses with 50 or more full-time employees are required to offer health insurance. Insurance companies are required to cover all applicants and offer minimum essential benefits. They cannot charge higher rates because of pre-existing conditions.
    
17. Businesses can control or even reduce the costs associated with health and safety programs if managed carefully. These companies provide safety training for all employees. Work areas and equipment are inspected regularly to make sure they operate correctly and safely. Employees are provided information on ways to improve their health. Investments in fitness centers and wellness programs have resulted in lower costs for businesses due to fewer medical claims and reduced employee absences.