Decentralization and Performance Measures
Decentralization and Performance Measures
(Decentralization and Performance Measures)
1.What is meant by the term decentralization? What benefits result from decentralization?
2.Distinguish between a cost center, a profit center, and an investment center.
3.In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem?
4.What is the difference between delivery cycle time and throughput time? What four elements make up throughput time? What elements of throughput time are value-added and what elements are non-value-added?
5.What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of 0.40?
6.Why do the measures used in a balanced scorecard differ from company to company?
Responce. (Decentralization and Performance Measures)
1. What is meant by the term decentralization? What benefits result from decentralization?
Decentralization refers to the delegation of decision-making authority from higher levels of management (centralized control) to lower levels, such as divisions, departments, or units within an organization.
Benefits of decentralization:
- Faster decision-making: Decisions can be made at the point of action without waiting for approval from top management.
- Empowers employees: Increases motivation and job satisfaction by giving more responsibility to lower-level managers.
- Better responsiveness: Units closer to the market or operations can respond more effectively to customer needs or local conditions.
- Focus for top management: Senior leaders can concentrate on strategic issues while operational decisions are handled at lower levels.
- Improved expertise: Managers at lower levels develop decision-making skills and expertise, fostering leadership development.
2. Distinguish between a cost center, a profit center, and an investment center.
- Cost Center: A segment or unit of an organization responsible for controlling costs. It does not directly generate revenues (e.g., HR, IT, or maintenance departments).
- Profit Center: A unit responsible for generating revenues and managing expenses to produce a profit (e.g., a product line or regional sales office).
- Investment Center: A segment responsible for generating profits and efficiently managing the assets it controls. Performance is evaluated based on profitability and the return on investment (e.g., a division or subsidiary).
3. In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem?
ROI (Return on Investment):
- ROI can lead to bad decisions because managers may reject investments that are profitable but have an ROI lower than the current ROI of the division. This focus on maximizing divisional ROI rather than overall company profitability can lead to missed opportunities.
Residual Income (RI):
- RI is the income remaining after deducting a charge for the cost of capital. Unlike ROI, RI encourages managers to accept any investment that generates returns above the cost of capital, aligning divisional decisions with company-wide profitability goals.
4. What is the difference between delivery cycle time and throughput time? What four elements make up throughput time? What elements of throughput time are value-added and what elements are non-value-added?
- Delivery Cycle Time: The total time from receiving a customer order to delivering the finished product.
- Throughput Time: The time taken to convert raw materials into finished goods. It is a subset of delivery cycle time.
Four elements of throughput time:
- Process Time (Value-Added): Time spent directly on manufacturing the product.
- Inspection Time (Non-Value-Added): Time spent checking for defects.
- Move Time (Non-Value-Added): Time spent moving materials between processes.
- Queue Time (Non-Value-Added): Time spent waiting for production to begin.
5. What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of 0.40?
MCE: Measures the proportion of time spent on value-added activities in the production process. It is calculated as:
MCE=Value-Added Time (Process Time)Total Throughput TimeMCE = \frac{\text{Value-Added Time (Process Time)}}{\text{Total Throughput Time}}
- An MCE of less than 1 indicates that there is non-value-added time in the production process.
- An MCE of 0.40 means only 40% of the production time is spent on value-added activities, and the remaining 60% is non-value-added, suggesting significant inefficiencies.
6. Why do the measures used in a balanced scorecard differ from company to company?
The balanced scorecard is tailored to a company’s unique strategy, objectives, and operational priorities. Measures differ due to:
- Industry: Different industries have unique success factors (e.g., customer retention in retail vs. R&D innovation in technology).
- Company strategy: Goals like cost leadership or differentiation require different metrics.
- Organizational goals: Measures align with the specific objectives of each company, such as increasing market share, improving quality, or fostering innovation.
- Stakeholder priorities: Companies may emphasize customer satisfaction, shareholder value, or employee engagement based on their mission and values.
