Introduction
An overview of
frequently used
performance measures
Stefan Tangen
The author
Stefan Tangen is a PhD Student, Department of
Production Engineering, The Royal Institute of
Technology, Stockholm, Sweden.
Keywords
Performance measurement (quality),
Performance measures, Productivity rate, Profit
Abstract
Performance measures are often used to increase the
competitiveness and profitability of manufacturing
companies through the support and encouragement of
productivity improvements. This paper reviews the most
frequently used performance measures to identify their
strengths and weaknesses and the situations in which
they are most appropriately deployed. The performance
measures under review are compared in terms of how
easily they are derived from strategic objectives, how easy
they are to understand and whether they help form a
long-term view of performance. Suggests that it is
important to select performance measures to match the
situation in which they are to be used; more importantly,
it is necessary to combine various types of performance
measure to provide a fair complete and balanced view of
a company or the operations under evaluation.
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Work Study
Volume 52 . Number 7 . 2003 . pp. 347-354
# MCB UP Limited . ISSN 0043-8022
DOI 10.1108/00438020310502651
347
It is often argued that the use of performance
measures is an effective way to increase the
competitiveness and profitability of a
manufacturing company through the support
and encouragement of productivity
improvements. Appropriate performance
measures can ensure that managers adopt a
long-term perspective and allocate the
company's resources to the most effective
improvement activities. Performance
measurement has, therefore, become a very
popular research topic in the last 15 years,
and during that period of time numerous
frameworks and performance measures have
been developed.
Despite the fact that performance
measurement has received considerable
attention, and that remarkable progress has
been made over recent years, many
manufacturing companies are still primarily
relying on traditional cost-related
performance measures, such as return on
investment, profit margin and cash flow. This
may seem as an irrational behaviour, since the
limitations of financial measures have been
clearly documented (Kaplan and Cooper,
1998; Maskell, 1991; Ghalayini et al., 1997).
However, a major reason that underlies the
lack of acceptance of newer performance
measurement techniques is simply that
neither industry nor academia have agreed on
what new performance measures should be
used or what criteria the selection of
performance measures should be based on.
The question of what particular performance
measures to use is a complex task, and is not
being made any easier as the number and type
of performance measures available continues
to grow.
Another area of potential confusion is that
proponents of any one particular form of
measurement are keen to stress the
advantages of that measure, but much more
reluctant to discuss its disadvantages or to
highlight situations under which it may not be
appropriate. This, of course, is particularly
true for proprietary measurement systems and
methodologies.
Even though numerous theoretical
frameworks for performance measurement
design can be found in the management
literature, the measurement practitioner in a
company is offered little practical guidance
when trying to decide what performance
 An overview of frequently used performance measures
Stefan Tangen
measures are suitable for the company's
specific manufacturing situation.
Performance measures should adhere to
some basic criteria if they are to be effective.
Tangen (2002) suggests that:
. The measures must be derived from
strategic objectives to ensure that
employee behaviour is consistent with
corporate goals.
. The measures must provide timely,
relevant and accurate feedback, from
both a long-term and short-term
perspective.
. Measurement should be undertaken in
ways that are easily understood by those
whose performance is being evaluated.
. Measurement should be accomplished by
a limited number of performance
measures that consist of both financial
and non-financial measures.
Since each performance measure has
strengths and weaknesses, we should, instead
of searching for a perfect performance
measure (or set of measures) that is applicable
to all situations, explore in what situations
frequently used performance measures are
appropriate. The aim of this paper is,
therefore, to study in what ways performance
can be measured and review various types of
performance measures in order to identify
their strengths and weaknesses as well as
recognize the circumstances in which they are
effective. This paper is focused on reviewing
individual performance measures, not
complete systems of measures or methods to
design them, such as Balanced Scorecard.
Performance measurement
As performance measurement is a subject that
is often discussed but rarely defined, it may be
helpful to first clarify the term. Neely et al.
(1995) describe performance measurement as
the process of quantifying action, where
measurement is the process of quantification
and action correlates with performance. They
further propose that performance should be
defined as the efficiency and effectiveness of
action, which leads to the following
definitions, which have been adopted in this
paper (Neely et al., 1995):
. Performance measurement is defined as
the process of quantifying the efficiency
and effectiveness of action.
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. A performance measure is defined as a
metric used to quantify the efficiency
and/or effectiveness of an action.
. Performance measurement system
(PMS) is defined as the set of metrics
used to quantify the efficiency and
effectiveness of action.
Obviously, a very broad definition of
performance is used, which, in turn, means
that the term can be separated into different
types of performance objectives that are
desirable from both an internal and external
point of view of a company. Several
classifications of performance objectives can
be found in literature. However, most of them
are similar to the one presented by Slack et al.
(2001), which distinguishes between five
types of performance objectives: cost,
flexibility, speed, dependability and quality.
An example of the effect these performance
objectives have on an operation is illustrated
in Figure 1 and explained in the following way
(Slack et al., 2001):
. High-quality operations do not waste
time or effort having to re-do things, nor
are there internal customers
inconvenienced by flawed service.
. Fast operations reduce the level of
in-process inventory between micro
operations, as well as reducing
administrative overhead. Products can
also be delivered earlier to the customer.
. Dependable operations can be relied on
to deliver exactly as planned. This
eliminates wasteful disruption and allows
the other micro operations to operate
efficiently.
. Flexible operations adapt to changing
circumstances quickly and without
disrupting the rest of the operation.
Flexible micro operations can also change
over between tasks quickly and without
wasting time and capacity.
. Low cost operations allow the company
to sell their products at a competitive
price, and increase profitability.
Individual performance measures
There are many different types of
performance measures. This section describes
a representative number.
 An overview of frequently used performance measures
Stefan Tangen
Figure 1 Desirable performance objectives
Financial measures
Traditionally, the success of a manufacturing
system or company has been evaluated by the
use of financial measures. Unfortunately,
there is no completely unambiguous way to
know when a company is profitable, since
many business opportunities involve
sacrificing current and future profits (Ross
et al., 1993). Although financial measures can
appear in several different forms, three of the
most common ones can be explained as:
. Profit margins (also known as return on
sales) measure how much a company
earns relative to its sales. These measures
determine the company's ability to
withstand competition and adverse rising
costs, falling prices or declining sales in
the future (Ross et al., 1993).
. Return on assets (ROA), a measure
developed by Dupont in 1919, is one of
the most widely used financial models for
performance measurements (Zairi,
1994). ROA determines the company's
ability to utilise its assets. However, it
should be noted that ROA does not tell
how well a company is performing for the
stockholders.
. Return on equity (ROE) measures how
well the company is doing for the investor
(i.e. stockholders), since it tells how much
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income the investors are getting for their
investments.
Many researchers argue that there are
significant limitations of financial measures,
since they are based on simple cost
accounting systems that were common in the
early 1900s. Such systems often focus on
controlling and reducing direct labour costs
and can therefore not adapt to today's
competitive environment. Cost accounting
systems were designed for an environment of
mass production of a few standardized items,
which make them more or less inadequate in a
manufacturing environment that includes
new philosophies, such as lean production,
agile manufacturing or mass customisation.
However, while the climate for manufacturing
companies has changed enormously, the
techniques of management accounting have
changed very little. This has led many to
realise that the traditional approach to
performance measurement using financial
measures has a number of limitations:
. Financial measures show a lack of
relevance to the control of production
and are not directly related to
manufacturing strategy (Maskell, 1991).
Excessive use of ROI also distorts strategy
building (Hill, 1995).
. Traditional criteria such as cost efficiency
and utilisation may pressure managers
 An overview of frequently used performance measures
Stefan Tangen
and supervisors into maximising
short-term result and, therefore,
discourage improvements (Crawford and
Cox, 1990).
. Financial measures are clearly concerned
with cost elements and try to quantify
performance solely in financial terms, but
many improvements are difficult to
quantify directly in monetary value, such
as lead-time reduction (Ghalayini et al.,
1997).
. Financial reports are usually produced
monthly and the results are the outcome
of decisions that were made one or two
months prior. They also have a
predetermined inflexible format that is
used across all departments ignoring the
fact that most departments have their
own unique characteristics and priorities
(Maskell, 1991).
. Financial measures are not applicable to
the new management techniques that give
shop-floor-operators responsibility and
autonomy (Ghalayini et al., 1997).
. Financial measures do not penalize
overproduction and do not adequately
identify the cost of quality (Bitichi, 1994).
Activity-based costing
To cope with the demands of today's business
environment, a new approach to cost
accounting, known as activity-based costing
(ABC), was developed by Kaplan and
Johnson in the late 1980s as an attempt to
resolve some of the fundamental inadequacies
of traditional cost accounting (Kaplan and
Cooper, 1998).
ABC is concerned with the cost of activities
within a company and their relationships to
the manufacture of specific products rather
than to a functional base (Hill, 1995). The
basic technique of ABC is to analyse the
indirect costs within a company and to
discover the activities that cause those costs.
Such activities are called cost-drivers and can
be used to apply overheads to specific
products. In this way, it is believed that ABC
results in a more accurate identification of
costs than traditional cost allocation.
According to Maskell, several practical
cases indicate that ABC can be of practical
value for product pricing, production decision
making, overhead cost reduction, and
continuous improvement (Maskell, 1991).
But, on the other hand, there are also
researchers who suggest that the claim that
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ABC provides more accurate product costs
has never been proven (Neely et al., 1997).
However, as it is argued that even an
improved cost accounting system will not
entirely solve the problem with financial
measures, other measures than cost are
needed to gauge adequately manufacturing
performance relative to a competitive strategy
(White, 1996). This is why many researchers
have focused on developing more complex
performance measurement systems during the
last decade. These systems include both cost
and non-cost performance objectives, and are
argued to be more suitable for the business
environment of today.
Traditional productivity measures
Generally speaking, the term productivity is
defined as the relation of output (i.e. produced
goods) to input (i.e. used resources) in the
manufacturing transformation process.
Numerous productivity measures can be
found in the literature, but usually two
traditional types of index productivity
measures are distinguished:
(1) Partial productivity measures ± ratios of
output to one source of input, such as
labour, capital, material or energy.
(2) Total productivity measures ± ratios of
total output to the sum of all input
factors.
Partial productivity measures
The advantage of partial productivity
measures is that they are simple to understand
and to measure in reality. The needed data
are usually easy to obtain and partial
productivity indices are not difficult to
calculate (Sumanth, 1994). It is also easy to
pinpoint a specific partial productivity
measure for an important smaller area,
function or department in a company. This
means that partial measures can detect
improvements and the reasons behind them
more easily than broader measures.
The most common partial productivity
measure is without any doubt labour
productivity, e.g. output per working hour or
output per employee. However, much
criticism has been aimed at this way of
calculating productivity. Suh (1990), for
example, argues that terms like labour
productivity are becoming useless measures in
modern manufacturing operations, since the
total direct labour cost is becoming a smaller
 An overview of frequently used performance measures
Stefan Tangen
fraction of the total manufacturing cost (Suh,
1990).
Much focus has traditionally been on
efficiency of factory workers. This has caused
negative associations with the term
productivity. Increased labour productivity
can, in many cases, only be achieved at the
expense of other resource areas, such as
materials. For example, improving labour
productivity can actually hurt the overall
profitability by increased costs in inventory.
Nevertheless, labour productivity can be an
appropriate measure if the workforce is a
dominating production factor. It can also be
very useful in feedback of performance to the
workers, since these data are easy to
understand and workers want to know how
they are doing (Bernolak, 1997).
Perhaps the major objection to partial
productivity is that it only considers one
production factor, which, in turn, is often
decided on in interplay with the use of the
other production factors, e.g. capital, energy
and primary products. One example of this
problem is called capital-labour substitution,
which means that the labour productivity can
be improved at the cost of capital, resulting in
decreases in the total productivity. In this way
partial productivity measures tend to
overstate the increase in productivity
(Grossman, 1993). Partial measures do not
have the ability to explain overall cost
increases, and can be very misleading if they
are used alone (Sumanth, 1994).
Total productivity measures
Total productivity measures provide a
comparably good picture of the overall
productivity of a process or a company. A
major advantage of total productivity
measures is that they take account of
capital-labour substitution. The
disadvantages are that they are more difficult
to understand and to measure (Grossman,
1993). Due to the difficulties in calculating
such measures in practice, they are not always
accurate. Total productivity measures are
based on a number of more or less carefully
supported assumptions, and can produce
different results because of the many different
ways of weighting the production factors.
It is also more difficult to track activities
that improve productivity with total
productivity measures. Another weakness lies
in that the data needed to calculate the
measure becomes more difficult to retrieve.
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Time-based productivity measures
One possible problem to overcome when
measuring productivity is the definition of
output and input. At company level, output
can, for example, be a single product, but it is
also possible (even probable) that output of a
factory is varying models of a single product,
or even varying models of a number of
individual products. This problem is usually
solved by the use of monetary values;
however, such a solution results in the
measures being influenced by the price
recovery factor. Another approach is
proposed by Arnold (1991), who suggests
that the unit time can be used in the case of
several products being produced:
Where a variety of products are made, it may be
that a common unit does not exist. In this case
the unit common to all products is time. The
work content of a product is expressed as the
time required to make the product using a given
method of manufacture. Using time study
techniques, the standard time for a job can be
determined.
The time approach can also be applied to
inputs; this has been done by, for example,
Jackson and Petersson (1999). They see time
as a resource and propose a completely
time-based productivity measure, defined as a
ratio between value-adding time and total
time. Furthermore, they recommend the use
of time-based measures because (Jackson and
Petersson, 1999):
. it is easy to measure;
. it is easy for everyone to understand;
. it facilitates comparisons between
workshops (independent of cost
structure);
. it facilitates comparisons between
countries (independent of currencies);
and
. in operative manufacturing, there is
approximately a linear relationship
between time and cost.
However, it is questionable if a completely
time-based measure can be classified as a real
productivity measure, since total time does
not provide information about the consumed
resources in the production process.
Overall equipment effectiveness
The overall equipment effectiveness (OEE) is
used within the concept of total productive
maintenance (TPM) (Nakajima, 1988). TPM
has been widely accepted as a methodology
for improving tool operating efficiency in
 An overview of frequently used performance measures
Stefan Tangen
many industries. The main goal is to increase
equipment efficiency so that each piece of
equipment can be operated to its full potential
and maintained at that level (Chand and
Shirvani, 2000). This goal is measured by
using the OEE-ratio. The measure is based on
three aspects of performance (Slack et al.,
2001):
(1) the time that it is available to operate;
(2) the speed, or throughput rate, of the
equipment; and
(3) the quality of the product.
Jonsson and Lesshammar (1999) state that
the greatest contribution of OEE is that it is
a simple, but still comprehensive, measure
of internal efficiency and that it can work as
an important indicator of the continuous
improvement process (Jonsson and
Lesshammar, 1999). OEE is also an
effective way of analysing the efficiency of a
single machine or an integrated machinery
system (Ljungberg, 1998). Many examples
where OEE has been successfully
implemented and resulted in major
improvements can be found in the
literature. However, the application area of
OEE is limited to the semi-automatic and
automatic manufacturing processes. OEE is
not suitable for manual manufacturing
processes, since it does not consider the
number of workers working in a process and
anticipates that there is a fixed ideal cycle
time of each machine that controls the
maximum processing rate (Nord and
Johansson, 1997).
It is important to point out that OEE
measurement, alone, does not provide a tool
to support improvement programs. The
power of OEE is in the linkage of the OEE
data to the identification of major
equipment losses (Pomorski, 1997). There
are also several aspects that OEE does not
consider, such as planned downtime and
disturbances from incoming material.
Moreover, Jonsson and Lesshammar (1999)
found in a case study of three companies
that their OEE systems did not measure
strategy, flow orientation or external
effectiveness to any great extent (Jonsson
and Lesshammar, 1999). Nevertheless, the
most important objective of OEE is not to
get an optimum measure, but to get a simple
measure that tells the production personnel
where to spend their improvement
resources.
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Non-cost performance measures
Due to the pressure of an increasingly global
economy, and a business environment
characterized by complexity, competition,
change and uncertainty, the use of non-cost
performance measures has increased. In order
to give an overview of such measures, this
section introduces a number of classifications.
Previously, the term performance was
divided into five types of performance
objectives. Performance measures are often
classified in the same way: cost measures,
quality measures, speed measures,
dependability measures and flexibility
measures. White (1996) has extended the
view of the five types of performance
measures further into the following taxonomy
(White, 1996):
. Source of data ± internal (data from
sources within organization) or external
(data from sources outside the
organization).
. Type of data ± subjective (based on
perception or opinion) or objective
(based on observable facts not involving
opinion).
. Reference ± benchmark (compares an
organization with others) or
self-referenced (does not involve any
comparison with another organization).
. Orientation to process ± input to some
process or outcome of some process.
Flapper et al. (1996) state that classifications
such as that described above may be very
useful as sources for potential performance
measures; however, most of them do not offer
much help in reaching insight into the
relationships between performance objectives.
That is because the classifications do not tell
much about the performance measures
themselves, i.e. about their ``intrinsic
dimensions'', which do not depend on where
and by whom the performance measures are
used. A new classification of performance
measures involving three intrinsic dimensions
is therefore introduced (Flapper et al., 1996):
(1) Decision type ± strategic/tactical/operational.
This dimension focuses on the kind of
decision the measure is meant to support.
(2) Aggregation level ± overall/partial. This
dimension tells if the measure is of overall
or partial nature.
(3) Measurement unit ± monetary/physical/
dimensionless. This dimension relates to
which unit the measure is expressed in.
 An overview of frequently used performance measures
Stefan Tangen
Discussion
Some of the performance measures referred
to in this paper have a simple design,
rendering them easy to understand and
simple to use. Others are more complex and
more sophisticated, but this can make such
measures more difficult to use, especially as
facilitators of improvement activity.
The traditional ways of measuring
performance with financial and productivity
measures has a number of shortcomings,
principally the absence of a link to company
strategy and the risk of sub-optimisation.
However, these measures should not be
automatically rejected since they also have a
number of advantages. They are precise and
objective and can form the basis of a low-cost
measurement regime. Nevertheless, their
limitations suggest that they should be used in
combination with non-cost measures.
Since all the measures used have both
advantages and disadvantages, and since all
are more or less appropriate to particular
circumstances, the obvious conclusion is that
any measurement regime should be designed
to meet specific needs, and should be built
from a variety of measurement types which,
together, offer the data that will be useful in
monitoring performance and taking
appropriate action.
The choice of a suitable measurement
technique or collection of techniques depends
on a number of factors including:
. the purpose of the measurement;
. the level of detail required;
. the time available for the measurement;
. the existence of available predetermined
data; and
. the cost of measurement.
The ways in which different types of
performance measures should be combined
into a complete PMS is a larger question
that is not considered in this paper.
Nevertheless, it is clear that to focus primarily
on one type of measure will often result in
sub-optimisation. A varied set of measures
will, in most cases, give a more ``correct'',
certainly more balanced, view of a company's
performance.
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