Operations Management: Control Process and Scope

1. m a n a g e m e n t 2eH i t t / B l a c k / P o r t e r Chapter 14: Operations Management

2. Learning Objectives After studying this chapter, you should be able to: • Define control and explain its importance in organizations • Describe the four basic elements of the control process and the issues involved in each • Explain the concept of scope of control • Compare and contrast strategic, tactical and operational controls. Identify the salient issues involved in each

3. Learning Objectives • Analyze the factors that determine the effectiveness of organizational controls

4. Control Function in Management • Control • Regulation of activities and behaviors within organizations • Adjustment or conformity to specifications or objectives • Effective control depends heavily on planning , organizing, and leading

5. Ensures adjustment or conformity to objectives Ensures adjustment or conformity to specifications Control Regulates activities Regulates behavior Control Function in Management Adapted from Exhibit 13.1

6. Planning Control Organizing Control’s Feedback Loop Changes in Feedback Adapted from Exhibit 13.2

7. Basic Elements in Control Process • Control process includes four elements • Each element involves managerial attention and decisions Establish Standards Measure Performance Compare Performance against Standards Evaluate Results and Take Action

8. Basic Elements in Control Process • Standards = targets of performance • Start at the top of the organization and involves every level of employee • Involve employees in setting standards • Commits the employees to achieving the standards • Results in more appropriate standards Establish Standards

9. High Low Concrete Abstract Specificity of Standards and Performance Measurement Level of confusion in performance measurement Specificity of standards Adapted from Exhibit 13.4

10. Standards Establishing Standards How specific should they be? Who should set them? How difficult should they be to reach? Adapted from Exhibit 13.5

11. Basic Elements in Control Process • Obtain consensus about how to assess performance • If performance involves multiple activities, measurement must be comprehensive • Measurement is costly, so usefulness of the information must justify the costs Establish Standards Measure Performance

12. Performance Measurement Issues in the Measurement of Performance Is there consensus among those involved as to how performance will be measured? Can measurement criteria be quantified? Can expensive, but non-critical, controls be eliminated? Are all necessary aspects of actions contributing to performance being measured? Adapted from Exhibit 13.6

13. Basic Elements in Control Process • Comparisons are affected by the kinds of measurements available • Managers must interpret the patterns of comparisons (some negative/some positive) • Comparisons often involve subjective and objective measures Establish Standards Measure Performance Compare Performance against Standards

14. Basic Elements in Control Process • Not all results require action • Evaluate importance and magnitude of the deviation • Determine what action to take if necessary • Diagnosis skills of managers • Level of expertise • Evaluate the standards and the measures • Employees performing better than “standard” should be recognized and rewarded Establish Standards Measure Performance Compare Performance against Standards Evaluate Results and Take Action

15. Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Actual performance measured against standard for performance Gap Detected Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment) Outcomes of Performance Measurement Actual performance better than expected performance + - Actual performance worse than expected performance Adapted from Exhibit 13.7

16. Strategic Controls Tactical Controls Operational Controls (Narrow) (Broad) Types and Scope of Control Scope Adapted from Exhibit 13.8 Adapted from Exhibit 16.8: Types and Scope of Control

17. Strategic Controls • Assess and regulate how the organization fits its external environment and meets its long-range objectives and goals • Control becomes less efficient in uncertain or changing environments

18. Decentralized Centralized Stable Turbulent Centralization of Control and Environmental Stability Degree of centralization Environmental stability Adapted from Exhibit 13.9

19. Approaches to Strategic Control Strategic control system valuable but should not be tightly administered Strategic control system problematic High Strategic control system valuable Strategic controls more for tracking progress than motivation Environmental turbulence Low Easy Difficult Ability to specify and measure precise strategic objectives Adapted from Exhibit 13.10

20. Tactical Controls Assess and regulate day-to-day functions of strategy implementation • Financial controls • Budgetary controls • Supervisory structure controls • Human resource controls

21. Tactical Controls Strategic Controls Limited Long, unspecific Controls relate to specific, functional areas Controls relate to organization as a whole Comparisons made within organization Comparisons made to other organizations Implementation of strategy Determination of overall organizational strategy Strategic and Tactical Controls Time Frame Objective Types of Comparisons Focus Adapted from Exhibit 13.11

22. Tactical Controls: Financial Controls • Include quantitative ratios involving key financial statistics • Common financial ratios • Profitability ratios (e.g., ROI) • Liquidity • Leverage • Efficiency or activity • Other financial measurements • Break-even point

23. Examples of Financial Ratios Adapted from Exhibit 13.12

24. Budgetary Controls Compared to financial controls, budgetary controls: • Cover a more limited time frame • Focus on one financial objective • Cannot be used to compare an organization to its competitors

25. Issues in Budgetary Control Adapted from Exhibit 13.13

26. Issues in Budgetary Control (cont.) Adapted from Exhibit 13.13

27. Supervisory Structure Controls Measure and evaluate: • Reporting structure • Span of control • Other structural issues

28. Appraisal and evaluation Selection Human Resource Function Controls Training Compensation Control in the Human Resource Function Adapted from Exhibit 13.14

29. Control in Bureaucracy and Clan Structures Adapted from Exhibit 13.15

30. Operational Controls • Regulate activities or methods an organization uses to produce goods and services for customers • Used in evaluating: • Inputs • Transformation • Outputs

31. Operational Controls Pre-control Controls the quality, quantity, and other characteristics of the inputs to the process Concurrent Control Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation Post-control Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls Adapted from Exhibit 13.16

32. Control Effectiveness Control effectiveness depends on many factors: • Focus of control • Amount of control • Quality of information • Flexibility of controls • Favorable cost-benefit ratio • Source of control

33. Effectiveness of Controls Adapted from Exhibit 13.17

34. Effectiveness of Controls (cont.) Adapted from Exhibit 13.17