Operational Management in history

Performance Maangement PRofile and evolution

The evolution of operational performance management is linked to the evolution of accounting and management in history. This is due to the fact that operational performance was evaluated in terms of efficiency and effectiveness. And the easiest way to do this is by using financial indicators, provided by the accounting function in organisations.

 

Over time, as internal and external operating environments became more complex, organisations started to look at nonfinancial indicators of performance (Brudan, 2009). The chronological evolution of operational performance management in illustrated by a selection of citations in the table below:

 

Timeline

Event – Comments

Source

13th century 

The performance of a Venetian sailing expedition defined as the difference between the amount of money invested by the ship owner(s) and the amount of money obtained from selling all the goods brought back by the ship's captain.

Lebas (1995)

1494

Luca Pacioli (1445 – 1517) published Summa de arithmetica, geometrica, proportioni et proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice 1494), a textbook for use in the abbaco schools of northern Italy, where the sons of merchants and craftsmen were educated. It was a compendium of the mathematical knowledge of his time and included the first printed description of the method of keeping accounts that Venetian merchants used at that time, known as the double-entry accounting system.

 

Although Pacioli codified rather than invented this system, he is widely regarded as the "Father of Accounting". The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equaled the credits! His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organisation's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. His treatise also touches on a wide range of related topics from accounting ethics to cost accounting.

Dainty & Anderson (2008)

1776

Adam Smith wrote the “Wealth of Nations” in which he emphasised the division of labour as a driver of productivity:

“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.”

Smith (1776)

early 19th century

Some of the first factory owners concentrated on improving methods of production and introduced concepts that proved fundamental to modern manufacturing method. For instance Eli Whitney and Simeon North developed the concept of interchangeability of parts in the manufacture of pistols and muskets. Before then, each gun was unique. If a part did not work, an abandoned pistol would not provide a replacement piece.

Dainty & Anderson (2008)

19th century

In the early 19th century the need for larger aggregations of capital to support factory operations resulted in the increased application of special legal forms of organising a business. The corporation as a separate legal entity could sell shares in stock to many individuals and thus raise large sums of capital. Stockholders then became so numerous that they all could not actively manage the business and a distinction between the function of owners and managers arose. This distinction set the stage for management processes as an identifiable and separate activity.

Dainty & Anderson (2008)

1911

Frederick Taylor believed that it was management’s responsibility to devise the best method of performing work. In the first decade of the twentieth century he developed the concept of scientific management. This was based on the analysis of existing work methods through observation and measurement. From this, an improved method could be developed and implemented, and its results monitored through ongoing performance measurement. The focus of scientific management was primarily on increasing the efficiency of individual workers. Thus, the emphasis of Performance Management in scientific management was at the micro-level within each operation, focusing on the work and the output of individual workers.

Radnor & Barnes (2007)

1915-1928

Taylor’s ideas were advanced by many others including Frank and Lillian Gilbreth, who developed the concept of time and motion studies, which required the measurement of every single movement undertaken by a worker in the course of their work. This newly developed discipline which came to be known as work study, incorporated the study of work methods and the measurement of work.

Radnor & Barnes (2007)

1920s

The principles of capital investment appraisal, budgeting, performance measurement, variance accounting and ROI were introduced in the 1920s.

de Waal (2002)

1920-1925

DuPont and General Motors experimented by introducing decentralized divisional structures with profit centers. As support for these reorganizations they also introduced the DuPont chart and with it the concept of return o investment (ROI). This meant that management was now also held responsible for the achievement of budgeted ROI and therefore not only focused on measures on margin and net income, but also on return on investment.

de Waal (2002)

1930s

Fully integrated cost and management accounting systems were developed, regulated, subjected to independent auditing and linked to external financial operating systems.

Most standard accounting methods, such as budgeting, standard costing, transfer pricing and DuPont chart had been developed and incorporated in the accounting textbooks. Only in sporadic instances were new developments, such as the concepts of residual income and net present value, included in the textbooks.

 

‘Tableau de bord”, a management tool introduced in France in the 1930s and described as a "dashboard" used by managers to monitor the operational performance of their organisations 

 

The “tableau de bord” has been quite popular in France ever since its introduction and the majority of the large companies are using it, however, due to the limited availability of translated literature it had a minimal overseas diffusion

de Waal (2002)

 

 

 

 

Bessire & Backer (2005).

 

Bontis et al. (1999).

1930s-1960s

 

 

 

 

1940s-1950s

 

1950s

Performance measurement was conceived primarily in terms of the volume and cost, and hence productivity. In an era of labour intensive mass manufacture this made a lot of sense. These ideas came to dominate Operations Management theory and practice well into the second half of the twentieth century. Their application made a significant contribution to the success of western and

especially US, industry in this period.

 

The quality management Japanese philosophy emerge to form the roots of today’s performance management theories and rules.

 

After the 1950s, management information systems focused on the growing used of accounting targets to control operating processes.

Radnor & Barnes (2007)

 

 

 

 

Busi & Bittitci (2006)

de Waal ( 2002)

1970s

Questions began to be asked about the wisdom of concentrating solely on performance measurement. The previously unassailable position of US style management practice was increasingly challenged as manufacturers across the world were forced to face up to fierce competition from Japanese companies. The Japanese manufactured goods in a greater variety, with lower defect rates, yet competitively priced. Western operations managers were therefore forced to reconsider their practices, including their approach to performance measurement and management.

 

The General Motors system of performance measures, the development of which culminated in the 1970s (see) included several non-financial indicators, and can been seen as the fore-runner of the balanced scorecard approach.

Radnor & Barnes (2007)

 

 

 

Johnson & Kaplan (1987)

1974

"Cost" and "efficiency" are widely used as the conventional yardsticks for planning, controlling, and evaluating in U.S. plants.

Skinner (1974)

late 1970s early 1980s

New measures were required to reflect the new found concern for effectiveness.

Initially, the focus was on eliminating defects and achieving conformance.

Statistical techniques were based on the work of a number of Americans – most notably Shewhart (1980) Deming (1982) and Juran (Juran and Gryna, 1980) – who had been largely ignored by their compatriots, but whose ideas had been enthusiastically taken up in post war Japan.

The advent of total quality management (TQM) increased Operations Management’s concern to improve effectiveness and responsiveness. This, therefore, saw the introduction of customer-based measures. This linked well to the requirements of the increasingly important service operations sector for measures of customer satisfaction. In services, a level of high quality was seen as synonymous with a high level of customer satisfaction.

Radnor & Barnes (2007)

1980s

The competitive environment changed dramatically through the appearance of new technologies, increased competition as consequence of deregulation and emergence of foreign producers. Quality improvements, reduced inventory, more efficient production processes and increased automation were needed. The traditional management accounting and information systems were not suited for modern organisations that were characterised by customer specific production, short life cycles, computer-aided design and manufacturing technologies and more overhead.

A constant stream of new developments in production and processing techniques – such as flexible manufacturing systems, just-in-time production, materials requirements planning, enterprise requirements planning, supply chain management and total quality assurance – has been matched by new management information and accounting techniques such as target costing, value engineering, strategic cost accounting, activity-based costing/management, kaizen costing and nonfinancial performance indicators.

de Waal (2002)

1990s

The late 1980s and early 1990s saw the rise of business process re-engineering (BPR) which had main principles based on a consideration of organisations in terms of processes – looking across organisations horizontally rather than functionally and on creating an environment which allowed “breakthrough” or “step-change” improvements. BPR focused on those processes that crossed departmental boundaries, which enabled operations to be seen as more clearly linked with other departments (e.g.Marketing). This promoted a more strategic consideration of operations and gave rise to operations being assessed against objectives beyond cost and quality, including speed, flexibility and dependability (Slack et al., 2005).

Radnor & Barnes (2007)

1992

. . . in the late 1980s and early 1990s, this dissatisfaction [with traditional backward looking accounting based performance measurement systems] led to the development of “balanced” or “multi-dimensional” performance measurement frameworks. These new frameworks placed emphasis on non-financial, external and forward looking performance measures. These frameworks have been dominated by one particular model “The balanced scorecard” (BSC).

The BSC was introduced by Kaplan and Norton in 1992 as an improved approach to performance management beyond standard financial metrics. Since then, it has grown from being a tool for organising measures to being a device for controlling the implementation of strategy.

Bourne et al. (2000)

late 1990s-early 2000s

The rise of Business Intelligence software products had a profound impact on how companies manage their operational performance. Enterprise Resource Planning software (SAP, Oracle, etc.), combined with Business Intelligence software (Business Objects, Hyperion, Cognos,etc.) enabled companies to reach new levels of data integration, by making the data gathering and reporting process more streamlined. Availability of performance reports widened to organisational level and not just a limited number of employees. Reporting becomes more complex, with data streams enabling live reporting via dashboards and scorecards of performance indicators. Users of such performance reports are able to customise them by slicing and dicing the reported data.

Integration with strategies performance management reports makes the separation between the two difficult.

Brudan (2009)

 

 

 

 

 

 

 

References:

  • Brudan, A. (2009), Integrated Performance Management: Linking Strategic, Operational and Individual Performance, available at http://www.pma.otago.ac.nz/pma-cd/papers/1090.pdf (accessed 12 August 2010)
  • Bessire D. & Baker R. (2005), The French Tableau de bord and the American Balanced Scorecard: a critical analysis, Critical Perspectives on Accounting, Vol. 16, No. 6, 645-664. 
  • Bontis N., Dragonetti N., Jacobsen K. & Roos G. (1999), The knowledge toolbox: A review of the tools available to measure and manage intangible resources, European Management Journal, Vol. 17, No. 4, 391-402.
  • Bourne, M., Mills, J., Wilcox, M., Neely, A. & Platts, K. (2000), Designing, implementing and updating performance measurement systems, International Journal of Operations & Production Management, Vol. 20, No. 7, 754-771.
  • Busi, M. & Bititci, U. (2006), Collaborative performance management: present gaps and future research, International Journal of Productivity and Performance Management, Vol. 55, No. 1, p.7-25.
  • Dainty, P. & Anderson, M. (2008), The MBA Companion, Palgrave Macmillan.
  • de Waal, A. (2002), Quest for balance: the human element in performance management, John Wiley and Sons, New York, NY.
  • Deming, W.E. (1982), Quality, Productivity and Competitive Position, MIT Centre for Advanced Engineering Study, Cambridge, MA.
  • Johnson Thomas H., Kaplan Robert S. (1987), Relevance lost : the rise and fall of management accounting, Harvard Business School Press, c1987
  • Juran, J. and Gryna, F.M. (1980), Quality Planning and Analysis, McGraw-Hill, New York, NY.
  • Lebas, M.J. (1995), Performance measurement and performance management, International Journal of Production Economics, Vol, 41, Nr. 1-3, 23-35.
  • Shewhart, W.A. (1980), Economic Control of Quality of Manufactured Product, American Society for Quality, Milwaukee, WI, (reissue edition – originally published in 1931).FT Prentice-Hall, London.
  • Skinner, W. (1974), The focused factory, Harvard Business Review, May-June, pp. 113-21
  • Slack, N., Chambers, S., Johnston, R. and Betts, A. (2005), Operations and Process Management, (5th ed). FT/Prentice Hall.
  • Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, Project Gutenberg, April, 2002.
  • Radnor Z.J. & Barnes D. (2007), Historical analysis of performance measurement and management in operations management, International Journal of Productivity and Performance Management, Vol. 56, No. 5/6, 384-396.

 

Operational : Profile and evolution

 

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