Learning Objectives 10.1 Describe controlling as a management

function and explain why it is essential to high quality performance management.

10.2 Understand where control should reside within an organization.

10.3 Identify different types of control and when each is used.

10.4 Describe how a manager can control costs, quality and inventory.

10.5 Discuss the key characteristics that are essential to effective control.

What is

Control?

Control is the process of ensuring that organizational activities are going according to plan; accomplished by comparing actual performance to predetermined standards, specifications or objectives and then taking action to correct any deviations.

Why is Control Necessary?

• The purpose of control is to alert management to an existing or a potential problem before it becomes critical.

• Controlling addresses the basic questions of:

• Where are we now?

• Where do we want to be?

• How can we get there from here?

• Controlling takes place after planning is completed and organizational activities have begun.

• Control decisions can be preventative and can affect future planning decisions.

The Control Process

The control process follows four sequential steps:

1. Setting performance standards.

2. Collecting data to measure performance.

3. Comparing results with standards.

4. Taking corrective action.

Standard – the measure for judging performance of a product, service, machine, organizational unit, or employee.

Control Information

All forms of control are designed to give the manager information regarding performance. The manager uses this information for several purposes:

•Prevent problem escalation – If a manager does not know what is going on, it is easy for small, readily solvable problems to turn into larger ones.

•Standardize outputs – Products and services can be standardized in terms of quantity and quality through the use of controls.

•Appraise employee performance – Proper controls provide the manager with objective information about employee performance.

•Update plans – Controls allow the manger to compare what is happening with what was planned.

•Protect the organization’s assets – Controls can protect assets from inefficiency, waste, and pilferage.

The Control Pyramid

The control pyramid provides a method for implementing controls an organization, and is broken into five levels:

•Foolproof Controls – controls that deal with repetitive acts. Most of these controls already exist in an organization.

•Automatic Controls – controls that are machine- or computer-based, requiring very little human interaction.

•Operator Controls – controls that require a human response

•Supervisory Controls – controls the person or person’s implementing the controls

•Informational Controls – controls that pulls together all information from other controls.

Types of Controls

•Preventive Controls – These controls attempt to prevent problems before they occur– before production begins, before a service is delivered, or before operations get out of hand.

•Concurrent Controls – These controls focus on problems that occur during a process or operation. Concurrent controls help to catch problems while there is still time to correct them.

•Corrective Controls – These controls detect problems after they occur, but before they reach crisis proportions.

•Output Controls – These controls relate to the demand of almost every organization for some standard of output or production.

•Quality Controls – These controls relates to the specifications or quality standards set by the organization.

Types of Controls - continued

•Time Controls – These controls relate to deadlines and time constraints that help that a job gets completed in time, without sacrificing quality standards.

•Material Controls – These controls are related to both quality and quantity standards, and relate to the materials used during production.

•Equipment Controls – These controls are those that the manufacturer builds into the machinery and also those that are imposed on the operator to protect the equipment on the process.

•Cost and Financial Controls – These controls are often incorporated into the budget, which sets limits for costs and quantities to be consumed in operations.

•Employee Performance Controls – These controls focus on individuals or groups of employees, and their performance as it directly relates to quantity or quality of work.

What is

Management by Exception?

Management by Exception is a form of delegation in which the manager lets things run as they are as long as they fall within prescribed (control) limits of performance.

•The exception principle has become important in today’s economy, where both product and service organizations are concerned about the quality of their offerings.

Tools used to Facilitate Control

•Business Dashboard – A visual portrait of key performance measures, provided online and in real time for the purpose of control.

•Balanced Scorecard – A system for reporting key information in multiple areas, all related to goal achievement.

•Root Cause Analysis – A systematic problem solving approach that attempts to identify and eliminate underlying causes of a problem.

What is

Operations Control?

Operations focus on the recurring or cyclic activities or processes of an organization, particularly as they relate to product production and service delivery.

Operations Control is attained by applying the basic control concepts of cost, quality, and inventory to the operations of the organization.

Controlling Costs

• One of the primary jobs of an operations manager is ensure that costs relating to labor, materials and overhead do not get out of hand.

• Costs can be split into two different types of expenses:

• Variable Overhead Expenses – Expenses that change in proportion to the level of production or service.

• Fixed Overhead Expenses – Expenses that do not change appreciably with fluctuations in the level of production or service.

• Typical methods used to monitor costs include direct observation, written reports, and break-even charts.

• Managers use budgets, balance sheets, income statements, and financial rations for cost control purposes.

• Cost control systems typically only indicate if a particular cost is out of control, it does not address the question of “why” it is out of control.

Controlling Quality

• Quality is the degree or grade of excellence specified; quality is determined in relation to the specifications or standards set in the design stage.

• Quality means different things to consumers and managers

• Consumers – concerned with service, reliability, performance, appearance and durability.

• Managers – concerned that a product or service meets specifications or standards set in the design stage.

• The quality of an organization’s goods and services can affect the organization in many ways, which includes: loss of business, liability, costs and productivity.

• Today’s quality management emphasizes the prevention of defects and mistakes, rather than finding and correcting them.

Dimensions of Design Quality

• Performance – Primary product or service characteristics.

• Features – Added touches; bells and whistles; secondary characteristics.

• Reliability/Durability – Consistency of performance over time; probability of failing; useful life.

• Serviceability – Ease of repair.

• Aesthetics – Sensory characteristics (sound, feel, look, and so on).

• Reputation – Past performance and other intangibles (perceived quality).

What is

Quality Assurance?

Quality Assurance – is the idea of “building in” quality to a product or service.

This approach view quality as the responsibility of all employees, rather than a single manager.

What is

Total Quality Management?

Total Quality Management – a popular management philosophy that places an organization-wide emphasis on quality, as defined by the customer.

Under total quality management, everyone from the CEO on down to the lowest level employee is involved in quality initiatives.

Total Quality Management Approaches

• Specific approaches relevant to total quality management include:

• Continuous Improvement – The ongoing effort to make improvements in every part of the organization relative to all its products and services.

• Kaizen – “Good change”; a process of continuous and relentless improvement thru teamwork and employee participation.

• Quality at the Source – The philosophy of making each employee responsible for the quality of his or her own work.

• Six Sigma – Examination and improvement of the entire production or service system, in statistical terms, six standard deviations from the mean.

• Lean Manufacturing – A systematic approach to identifying and eliminating waste and non-value-added activities.

Total Quality Management Approaches – continued

• Reengineering – Searching for an implementing radical change in business processes to achieve breakthrough in cost, speed, productivity, and service; also called business process engineering.

• Zero Defects – An approach that empowers employees with “quality” communications, recognition, quality goal setting, and quality problem identification.

• ISO 9000 – A set of quality standards for international business with the major objective of promoting the development of standardization and facilitating the international exchange of goods and services.

Controlling Inventory

• Inventory refers to both materials and finished goods that a business holds for use in production or for future sale.

• Inventory is classified as one of three types:

• Raw Material Inventories – serve as a buffer between purchasing and the first stage of production.

• In Process Inventories – serve as a buffer between production.

• Finished Goods Inventories – serve as a buffer between the final stage of production and shipping.

Advantages and Disadvantages of Inventory

• Advantages of inventory include:

• It allows organizations to purchase, produce and ship in economic lot sizes.

• It facilitates continuous production, even when demand fluctuates.

• It circumvents problems when demand forecasts are in error or when unforeseen stoppages in supply or production occur.

• Disadvantages of inventory include:

• There are cost associated with carrying inventory, i.e. insurance, property tax, obsolescence, and spoilage.

• Inventory must be tracked and stored.

• Inventory ties up funds which could be used to pursue other opportunities.

Inventory Controls

• Inventory controls include usage, tracking, and order quantity.

• Usage Controls

• Just-in-time Inventory Control (JIT) – An inventory control system that schedules materials to arrive and leave as they are needed; also known as zero inventory systems, stockless systems, or kanban systems.

• ABC Classification System – An inventory control system that groups inventories based on the total value of their usage per unit of time according to ABC classifications.

• Tracking Controls

• RFID Technology – A tracking control for inventory that uses radio frequency identification tags.

• RFID is useful for tracking international shipments and can even monitor the ripening of fruit in transit to detect spoilage.

Inventory Controls – continued

• Order Quantity Controls

• Economic Order Quantity (EOQ) – The optimal number of units to order at one time; determined by the point at which ordering costs equal carrying costs, or where total cost (ordering cost plus carrying costs) is at a minimum.

• A weakness of this approach is accurately estimating ordering and carrying costs.

Key Characteristics Essential to Effective Control

• It is a manager’s role to secure employee buy-in and commitment to controls through continuous communications, modeling behaviors and recognition.

• Characteristics that should be considered in designing controls include:

• Strategic Control Points – Controls should be implemented only at strategic points so as not to overburden a process or system, or to implement controls at points where they have less than maximum impact.

• Timeliness – Controls are designed to identify problems in time for them to be fixed and minimize their effect.

• Accuracy – Data reports must be valid and trustworthy to ensure unwarranted corrections are not made.

Key Characteristics Essential to Effective Control - continued

• Conciseness – Control data should be concise and understandable, with additional information accessible for situations where more thorough analysis is needed.

• Cost Effective – The amount of controls should strike a balance between cost and benefit.