Performance & Productivity Measurement -Theory of Constraint

• Traditional financial measures of performance have been criticised by Kaplan and Norton (1992) who voiced their concern:

... today's management accounting information, driven by the procedures and the cycle of the organisation's financial reporting system, is too late, too aggregated and too distorted to be relevant for managers' planning and control decisions. 

• There are a number of performance measurement systems. The most popularly used appears to be: the Kaplan and Norton balanced scorecard however there are other perspectives of performance measurement that are important, including theory of constraints (TOC) and benchmarking.
• TOC is a philosophy which suggests that there must be constraints somewhere in the system and that measurements should be focused on these constraints because constraints govern the behaviour of the system and constrain the attainment of goals. Whereas non constraints do not constrain the system.
• Attention is focusing on the service sector where measurements are difficult to establish. The manufacturing sector is amenable to numerical assessments its products either work or they do not work. Whereas in the service sector, quality as well as quantity must be measured. This includes customer evaluation of a product or service.
• With increased use of IT, stakeholder groups are demanding performance metrics related to their own interests.
• Benchmarking is a very important aspect of performance measurement and is in demand by consumer groups for cross supplier comparison.
• Productivity is a subset of performance measurement.
• Productivity is a particular type of measurement which can be expressed in diagrammatic form or as a calculation.
• The major contributors to GDP productivity are; direct labour, capital and management. The management contribution is thought to be greatest (52 per cent ).