Management Control Function

• "Control" is the fourth management function, following planning, organizing, and leading
• Control entails monitoring performance, comparing it to goals, and taking corrective actions
• Controlling is the function most directly related to business efficiency and effectiveness
• Whether one is a "Controller" or a general manager, significant time should be devoted to control activities

Learning Objectives

• LO 16-1: Control as a management function
• LO 16-2: Steps in the control process and types of controls
• LO 16-3: Methods for managers to control an organization
• LO 16-4: The total quality management process
• LO 16-5: Contemporary control issues

Topics

• Control as a managerial function
• Steps in the control process and control types
• Total quality management process
• Balanced scorecard purpose and perspectives
• Efficiency, effectiveness, and productivity concepts

Key Terms

• Balance sheet
• Balanced scorecard
• Benchmarking
• Best practices
• Budget
• Concurrent control
• Continuous improvement
• Control chart
• Control process steps
• Control standard
• Controlling
• Customer retention
• Customer satisfaction
• Deming management
• Feedback control
• Feedforward control
• Financial ratios
• Financial statement
• Fixed budget
• Income statement
• Incremental budgeting
• ISO 9000 series
• ISO 14000 series
• Kaizen
• Lean Six Sigma
• Management by exception
• Outsourcing
• PDCA cycle
• Productivity
• Quality
• Quality assurance
• Quality control
• Reduced cycle time
• Six Sigma
• Statistical process control
• Supply chain
• Tactical control
• Total quality management (TQM)
• Two core principles of TQM
• Variable budget

The Control Function

• Control involves monitoring performance, comparing it to goals, and taking corrective action
• It's the fourth management function, ensuring performance meets objectives

Why Control is Needed

• Adapt to change and uncertainty
• Detect opportunities
• Discover irregularities and errors
• Provide performance feedback
• Reduce costs, increase productivity, or add value
• Decentralize decision-making and facilitate teamwork

Four Steps of the Control Process

• Establish standards
• Measure performance
• Compare performance to standards
• Take corrective action, if necessary
• Evaluating performance necessitates building in a range of acceptable variation into standards.

Step 1: Establish Standards

• A "control standard" is the desired performance level for a given goal
• Standards are best when quantified

Step 2: Measure Performance

• Measuring performance seeks to observe the actual outcome
• Sources of performance data can include employee behavior, peer input, customer feedback, managerial observations, and production output

Step 3: Compare Performance to Standards

• Evaluating performance means incorporating a range of acceptable variation into standards
• "Control charts" are visual tools for quality control
• "Management by exception" dictates managers should be notified only of significant deviations

Control Charts Example

• It assesses the number of T-shirts manufactured hourly
• Produces 110 T-shirts per hour, a standard
• Variation range is defined by an Upper Control Limit (120) and a Lower Control Limit (100)
• A chart provides a warning to investigate and correct production shortfalls and determine cause

Step 4: Take Corrective Action

• Courses of action include making no changes, reinforcing positive performance, or correcting negative performance

Types of Controls

• Concurrent control: Collects performance information in real-time to ensure standards and regulations are met; corrective action is immediate
• Feedback control: Collects performance data after task completion to improve future performance, as when customer feedback improves a product
• Feedforward control: Focuses on preventing future issues via historical performance data which helps in planning new tasks and processes.

The Balanced Scorecard (BSC)

• It is a control form providing top managers a quick, comprehensive organizational view via four indicators
• Financial metrics include revenue/profit growth and return on equity (ROE)
• Customer metrics assess customer perception
• Internal business process metrics
• Innovation and learning metrics
• Establishes goals and performance measures using these perspectives

Key Idea behind Balanced Scorecard (BSC)

• Relying on a single standard or control is insufficient
• Managing complexity requires simultaneous awareness of multiple areas
• Measuring financials alone isn't enough; operations and customer satisfaction matter

The Financial Perspective

• Creating balanced scorecard (BSC) standards by measuring performance via budgets, financial statements, and ratios
• A "Budget" is a formal financial projection and a standard for comparison
• A "Fixed budget" (static budget) allocates resources based on a single cost estimate with no adjustments
• A "Variable budget" (flexible budget) allocates resources relative to levels of activity, adjusting standards to changes

Financial Statements

• "Financial statement” summarizes financial status
• "Balance sheet” summarizes overall financial worth (assets and liabilities) at a point
• "Income statement” summarizes financial results (revenue/expenses) over time
• "Financial ratios” are indicators from financials used for comparisons

The Customer Perspective

• Balanced scorecard (BSC) measures include ensuring client satisfaction, or how products meet expectations and customer retention, where companies act to reduce customer defections.
• Customer satisfaction and retention
• Retention is more cost-effective since existing customer retention is cheaper than acquiring another, and thus can increase profitability.

Internal Business Perspective

• Balanced scorecard (BSC) measures include productivity, efficiency, and effectiveness.
• Part of managers job is ensuring productivity and results.
• Other standards consist of benchmarking and best practice, and productivity.

Internal Business Perspective - Benchmarking

• Benchmarking consist of comparing to others which creates benchmarks and control standards.

Internal Business Perspective - Best Practice

• Refers to guidelines, ethics, and ideas that yields optimal results

Productivity

• This is outputs divided by inputs
• Outputs are goods and services, while inputs are labor, capital, materials, and energy
• Increased productivity occurs when businesses increase production at a greater rate than inputs or reduce required inputs for current production.
• Productivity improves business competitiveness

Effectiveness Measures

• Effectiveness looks at business process outputs/outcomes and can assesses either quantity, or quality
• Measures can include the percentage of entrees meeting standards (restaurant example w/ 95% goal) or customer satisfaction on 10-point scale (car manufacturer w/ 8.5 goal)
• Effectiveness only relates to your goals, and consists of satisfying customers the most and intermediate goals the least

Efficiency

• "Efficiency" minimizes time, cost, and resources, also minimizing waste of time, effort, resources
• Consists of measuring business process inputs, like cost per unit, defect rates, and time per unit
• Can be exemplified by restaurants measuring entree cooking time (95% under 5 minutes) and car manufacturers calculating unit cost (goal of <$10,000)

Effectiveness vs. Efficiency

• Effectiveness focuses on outcomes, asking what customer experience to create, whereas efficiency concerns inputs
• Effectiveness outcomes: Serving 500 daily customers; customer satisfaction ratings exceeding 8.5
• Efficiency inputs: Production time under 5 minutes; entrée ingredients below $2.50

Innovation and Learning Perspective

• Innovation and learning is how a business improves their quality and workforce to anticipate and respond to changes
• Balanced scorecard (BSC) innovation includes new patents, product/service introductions, employee training programs, attitude/culture surveys, and employee turnover

Total Quality Management

• Total quality management (TQM) is a management-led, organization-wide approach to continuous improvement, training, and customer satisfaction.
• People-based: Focus on delivering value to customers
• Improvement-based: Continuously improve work processes

Quality Control and Quality Assurance

• "Quality" defines if a service or product meets customer needs
• "Quality control” minimizes errors, from each stage of production.
• "Quality assurance” focuses on employee performance to acheive zero defects.

Deming Management

• W. Edwards Deming suggested making orgs more responsive, democratic, and economical
• Key Deming Principles: Quality serves consumer needs
• Organizations improve the system over blaming workers
• Improved quality boosts market share and employment
• Hard data improves quality, using the Plan-Do-Check-Act (PDCA) Cycle

PDCA Cycle: Plan-Do-Check-Act

• A diagram explains the steps of the Plan-Do-Check-Act cycle. The note on the right indicates that Step 3, or "check", provides feedback on performance compared to standards. Feedback is essential to control.
• Plan: implement the steps, and make a pilot test.
• Do: Determine if production can be basis for new
• Check: or observe what happened after the procedure.
• Act: Acknowledge and take note of lessons that can be learned from this process, determine what predictions can be made from new methods.

People Orientation of Total Quality Management (TQM)

• Key People Orientation assumptions include that customer value is most important and that people focus with empowerment.
• Requires TQM training, teamwork, and cross-functional efforts

Improvement Orientation of Total Quality Management (TQM)

• Key assumptions for ongoing improvement, including doing it right the first time so one can improve at any time.
• Accurate standards eliminate variation, and strong management commitment is required

Kaizen

• Japanese philosophy of small continuous improvement that involves all levels in identifying opportunities and using innovative solutions.
• Tips include innovative ideas, doing instead of not doing, and removing excuses

Total Quality Management (TQM) Tools, Techniques, and Standards

• Outsourcing is the subcontracting of services and operations to an outside vendor.
• Reduced cycle time is a reduction in the number of steps in a work process where cycle time is measured by the time elapsing between the start and completion of a process
• Statistical Process Control: periodic random samples ascertain the standardization consistency for the burgers.

Six Sigma

• A vigorous statistical process reducing service/manufacturing errors, where "six sigma" only permits 3.4 defects/million products
• Lean Six Sigma: uses an efficiency of speed to make performance improvements like "Speed with excellence"

Quality Standards

• In 1987, the ISO (International Organization for Standardization) creates their set of quality standards known as the 9000 series
• Achieved ISO standards indicate they have quality products.

Two ISO Standards Sets

• ISO 9000:quality-control firms which install from purchase, manufacturing, inventory and shipping, but needs audits from registrar. Its objective reduces flaws and improves manufacturing by adopting 8 key principles
• ISO 14000 extends the concepts but identifies standards for environmental performance