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Appropriateness Of The Stakeholder Approach To Measuring Manufacturing Performance [*].

Just when we thought we had understood the "performance" construct, we are inundated with "Internet" firms with unique business models and surprisingly high market capitalizations. Such changes have given us reason to pause and think about how we value these companies. Could the high market capitalizations have resulted from the use of inappropriate performance measures? What are appropriate measures of performance for the new generation of firms? Questions are being raised about the appropriateness of existing measures of performance at all levels within the organization. The current interest in the performance construct is healthy and it underscores the critical role of performance measurement systems in maintaining an organization's competitive position. As Skinner correctly notes, "The reason to invest in a factory is not to have an efficient production facility or even a 'world-class' plant. It is to create competitive advantage" (1996: 23).

On the Measurement of Manufacturing Performance

The role of performance measurement systems is well established in the literature (e.g., Kaplan and Norton, 1996; Baldwin and Clark, 1992). We also know that the manufacturing function significantly contributes to the establishment and maintenance of the organization's competitive position (Hayes and Upton, 1998). Researchers recognize that manufacturing performance measurement systems should reflect manufacturing's contribution to the overall competitive position of the organization, and that traditional measures such as machine-utilization, labor efficiency, and overhead rate may not be adequate or appropriate as primary measures of manufacturing's contribution (Maskell, 1989; Santori and Anderson, 1987; Fry and Cox, 1989). Goldratt (1990) notes that the "cost-based" approaches to the measurement of performance could lead managers to make erroneous decisions. However, the process of change is slow and has only just begun. In a recent article, Skinner laments that ". . . The tendency to persist in the old t radition, clinging to a century old premise of what defines good performance even after twenty-five years of painful results, suggests that the new rules of competition are not yet broadly understood." (1996: 22). Part of this is because today's extended enterprise (Greis and Kasarda, 1997) is significantly different from the hierarchically structured and internally focused manufacturing organization of the 1970s and the 1980s.

The transition to more appropriate measures clearly requires a major shift in the mind-set of managers and researchers alike. Some progress is being made in the direction suggested by Skinner. Researchers have proposed several approaches to identify appropriate manufacturing performance measures. These approaches typically reflect the perspectives of various disciplines (e.g., accounting, industrial engineering), or reflect the strategic perspective that manufacturing performance measures should be congruent with higher-level objectives (e.g., business level, corporate level objectives). Many of the new approaches have recommended a recognition of both financial and nonfinancial measures sometimes termed the "balanced scorecard" (Kaplan and Norton, 1996). Vokurka and Fliedner (1995) note that financial measures tend to reflect the result of past action while nonfinancial measures are the generators of future performance of the organization.

Despite recent research efforts, no definitive and comprehensive framework exists to help managers develop appropriate manufacturing performance measures. Perhaps it is time to follow the call by Amundson (1998) to look outside the manufacturing discipline for theory that could help us develop measures of manufacturing flexibility. The purpose of this article is to propose and justify an approach for the development of an integrative framework that allows for the identification, evaluation, and prioritization of manufacturing performance measures. We will first argue for the appropriateness of stakeholder theory as the baseline theory for the selection of appropriate manufacturing performance measures. We will then compare the stakeholder approach with traditional methods used to identify performance measures in manufacturing. In the final section of this article the implications for research and practice will be discussed.

A REVIEW OF MANUFACTURING PERFORMANCE MEASURES

A review of the literature shows that many approaches have been used to define and develop manufacturing performance measures. These approaches can be sorted into two broad categories. The first category, which we will call Top-Down Hierarchical Linkage, uses higher-level (corporate- or business-level) characteristics of the organization as the basis to justify the choice of manufacturing performance measures. It attempts to link each manufacturing performance measure to a corresponding objective or performance measure from a higher organizational level. Several researchers have suggested this approach (e.g., Whang, 1995; Kim and Lee, 1993; Roth and Miller, 1992; Kotha and Orne, 1989), and there is evidence that this general approach is used by practitioners (Marucheck et al., 1990). Using this approach, a manufacturing vice president might set specific performance levels for various plants under his/her jurisdiction. The performance measures might include output levels for each plant, yields, capacity utili zation, or others. While these measures might be orchestrated to synchronize the firm's output, they still suffer from the lack of cross-functional relationships. This process has no overt consideration for any stakeholder other than the organizational entity directly overseeing the manufacturing function. While it probably presumes that the other functions will participate by virtue of consideration by the higher-level organization, there is no explicit process by which the needs of other stakeholders are considered.

The second category, which we will call Bottom-Up Hierarchical Linkage, appears to be situation specific. It entails the development of performance measures on a case-by-case basis and does not necessarily follow a prescribed framework. For example, Beischel and Smith identify the first step in defining a manufacturing performance framework as establishing "critical success factors" (1991: 25). They note that critical success factors may include such items as quality, customer service, resource management, cost and flexibility. These factors are then linked upwards to higher-level objectives in a process that is somewhat the reverse of the first approach. In other instances, the second approach does not directly link the results of an individual analysis to higher-level strategies or performance measures, but rather uses it as a springboard to criticize traditional performance measures and cost accounting systems in general (Fry, 1992; Howell and Soucy, 1987; Son, 1990). Examples of these measures have been sited previously and include capacity utilization, production costs/unit, percentage defects, etc.

Unfortunately, many of the manufacturing performance measures that result from the two approaches referred to above have essentially been situation-specific prescriptions that are reflective of a fallback to traditional manufacturing performance measures. Such prescriptive recommendations for manufacturing performance measures may be found in academic and practitioner literature--the software industry (Trino, 1995), accounting theory (Kaplan, 1983), accounting practice (Vitale and Mavrinac, 1995; Polakoff, 1992; Beischel and Smith, 1991; Howell and Soucy, 1987), industrial engineering (Merkel, 1995; Cherukuri et al., 1995; Lenz, 1992), operations management (Wheelwright, 1979; Fry, 1992; Vokurka and Fliedner, 1995; Son, 1990; Roth and Miller, 1992), and manufacturing practice (Maskell, 1989; Srikanth, 1991; Kerkhoff et al., 1998). Recommendations from such sources on manufacturing performance measures either reflect the perspective and experience of the various writers or are specific to the organizational f unction for which they are being developed, rather than being a reflection of the competitive position of the organization.

The diversity of performance measures identified in the literature illustrates the wide differences in perspectives on measures of manufacturing performance. For example, accountants may focus on manufacturing data that allow for the attribution of costs to products and processes, industrial engineers would be interested in labor standards and efficiency factors, marketing would be interested in order status and delivery schedules, and human relations experts in turnover and absenteeism statistics. In a narrow sense, we acknowledge each function's need for specific manufacturing outcomes to satisfy its own functional processes and goals. However, in a broader sense, functional areas within an organization ultimately have a role in developing and nurturing the competitive position of the organization that ultimately should lead to improvement in the net revenue stream of the organization. Manufacturing managers are aware of these diverse "stakes" held by various functions within or outside the organization, a nd are impacted, directly or indirectly, by them. Therefore, it seems likely that the stakeholder approach, which attempts to capture these diverse and sometimes conflicting perspectives, may be a vehicle for the development of appropriate manufacturing performance measures.

DEFICIENCIES OF CURRENT MANUFACTURING PERFORMANCE MEASURES

There are several reasons why the current approaches used to measure manufacturing performance may be deficient. In general, these reasons center around the fact that they tend to be introspective. Even when manufacturing performance measures are derived from business-level objectives, they tend to focus only on those variables related specifically to the manufacturing function, often ignoring how the manufacturing function impacts, and is impacted by, the other business functions. The following are some of the specific deficiencies that the authors, through consultative and other professional relationships, have detected in various manufacturing environments. A relatively thorough discussion of manufacturing performance measures is presented by Goldratt (1990). Although these deficiencies are based on anecdotal evidence, it is believed that they have been mentioned often enough to represent a common opinion among academicians and practitioners.

Focus is on the Measure. The measure becomes the performance. For example, many manufacturing organizations use percentage of capacity utilization as a performance measure--the higher the percentage of utilization, the better the performance. Capacity utilization and efficiency, work in process, and percent of idle time, among others, are all indicators of the performance level of the manufacturing function. However, they should not be equated with performance. Too often, when such measures are used, the manufacturing function allocates its resources in such a way as to maximize (or minimize) the performance measure being used. Production schedules are developed, jobs are sequenced and human resources deployed specifically to reach or exceed a specific performance measure. Managing the facility in this way can have a deleterious effect on other functional areas. For example, a high utilization of capacity might minimize the department's idle time, but it might also increase inventory levels beyond what is ne eded to support the business' need based on anticipated customer demand.

Number Manipulation. The old saying, "what gets measured, is what gets done," pertains here. If a firm measures manufacturing performance by the number of late orders shipped, the manufacturing manager is going to do everything possible to reduce the number of late orders on the books. This can be accomplished by means of disrupting existing work schedules to get orders out on time, and it can be done through the reporting process in which production records might be less than accurate in terms of percentage of work completed. Most manufacturing managers are familiar with the "hockey stick" effect which describes the function's dramatic increase in output toward the end of a planning period in order to meet demand or output quotas, followed by a significant decrease in output beginning the next period. Managers have learned to shift work from one week or month to another and effectively meet specific short-term performance targets, often with little or no attention to how those targets were achieved. In such a scenario the end justifies the means, even if the means are costly or inefficient in their use of resources.

Suboptimization. Since most current manufacturing performance measures are introspective, there is a strong tendency to suboptimize the firm's performance. For example, Department "N" in manufacturing might increase its capacity utilization by pushing work through the process, maintaining a tight schedule and maximizing the use of available capacity. Consequently, the department would report little if any departmental idle time. However, this could have a negative effect on other departments downstream, as well as on inventory levels and costs. By flooding downstream departments or processes with its output, Department "N" could overwhelm the downstream departments with high levels of work-in-process which could disrupt their work schedules and planned use of their capacities. The departments upstream from Department "N" would also be effected. They would feel pressured to keep Department "N" supplied with the inputs. This pressure could lead to inefficiencies in the upstream departments. An example of this would be the pressure on the purchasing department to maintain an adequate flow of raw materials and parts into Department "N", even if by so doing, the purchasing department was forced to use uncertified suppliers or order in quantities that were not cost effective. Given these scenarios, Department "N" might be optimizing its performance; however, the upstream and downstream departments would be operating at a less than optimal levels.

Non-directed. Again, the introspective nature of current measures generally means that the measure is not directly related to the firm's performance measures. Business-level financial measures, such as sales revenue, return on assets, or return on sales, could be undercut by traditional manufacturing performance measures such as capacity utilization or average inventory level. For example, a firm might choose to use net profit as a measure of its business-level performance. If such is the case, the manufacturing function's performance measures should be directed toward the firm-level measures. Capacity utilization, average inventory, machine efficiencies, and other traditional measures can be optimized and at the same time add nothing to, or even detract from, the firm's profitability. A corollary to the point made above is that business-level measures of performance are not necessarily good indicators of the performance of the manufacturing function. A firm can achieve high levels of profit, market share, R OA, or ROI and still have a manufacturing function that is performing at an ineffective level. As long as the functional performance measures are not directed toward the firm's performance measures, this will be the case. If the two levels of performance measures can be successfully integrated, then increases in the manufacturing function's performance measure will be positively related to increases in the firm-level measures.

Clearly, the above deficiencies are interrelated. Traditional measures suffer because they don't keep an eye on the "big picture"; that is, they do not take into account the firm's business level goals. Pilkington (1998) notes that focusing on inwardly driven concepts like "best-practices" may not be in the best interest of the firm. Part of the reason for this is that the measures are not cross-functional in that they don't consider the performance relationships between the manufacturing function and the other business functions.

STAKEHOLDER THEORY

According to Freeman and Reed the term "stakeholder" originated in an internal memorandum in the Stanford Research Institute in 1963, where it was defined as ". . . those groups without whose support the organization would cease to exist" (1983: 89). Stakeholders were initially identified as shareholders, employees, customers, suppliers, lenders, and society. The notion of corporate stakeholders has become widely accepted. Donaldson and Preston (1995) report that about a dozen books and more than 100 articles have been published on this subject popularized by Freeman (1983). Researchers have explored Stakeholder theory from various perspectives. For example, Hill and Jones (1992) review the impact of stakeholders on the firm using agency theory as their backdrop. Wood (1991) and Anderson (1989) investigate stakeholders from the point of corporate social responsibility and corporate social performance. Rowley (1987) proposes the use of network theory to understand the influences that stakeholders have on an o rganization. Mitchell et al. (1997) propose a method of prioritizing stakeholders.

Others have investigated the appropriateness of stakeholder theory to explain or support approaches to improving corporate performance. In that research stream, the use of stakeholder theory to develop corporate-level strategy is a common theme. Within organizations, the role of stakeholder theory is seen to extend past the formulation of strategy, into the establishment of performance goals. Montanari et al. (1990) note that the performance goals set by a manager are influenced by the pressures exerted by the organization's stakeholders. This suggests that a process might exist within organizations whereby stakeholder interests are recognized and included as key components in the establishment and development of performance goals.

There has been considerable interest in recent years in stakeholder theory at the corporate level in organizations. The notion that stakeholder interests are key strategic assets of an organization (Useem, 1996) that could lead to the establishment and development of corporate performance goals is well accepted in the management literature. While the literature to date has examined these issues predominantly at the corporate level, the premise of this article is that the stakeholder approach can be effectively used at the manufacturing level to establish manufacturing performance measures. Using this approach at the manufacturing level would allow for both the inclusion of the interests of the internal stakeholders at a higher organizational level (vertical flow-down) and the interests of other functions such as those from marketing or accounting (horizontal cross-flow) and any other entities that have vested interests in manufacturing. The following section explores the validity of our premise that the stak eholder approach is appropriate for the identification of manufacturing performance measures.

IS THE USE OF STAKEHOLDER THEORY APPROPRIATE?

Donaldson and Preston (1995) present four central tenets that must exist if a stakeholder framework is to be applicable in an organizational setting. We propose to establish the appropriateness of stakeholder theory for the identification of manufacturing performance measures by applying the four tenets developed by Donaldson and Preston. We will next compare the stakeholder approach with two traditional methods of identifying performance measures. Applied at the manufacturing level within an organization, Donaldson and Preston's four tenets suggest that stakeholder theory is appropriate if it holds up against the following criteria:

* Descriptive Accuracy: Does it represent a viable business model? Can the stakeholder theory be used to describe the relationship between the manufacturing function and its stakeholders?

* Instrumental Power: Does it establish a framework for examining the relationship between the practice of the stakeholder management and the achievement of various manufacturing performance goals?

* Normative Validity: Do stakeholders have legitimate interests in the manufacturing function and do those interests merit consideration for their own sake, independent of other interests?

* Managerial Implications: Does it recommend attitudes, structures and practices that taken together constitute management of the stakeholder interests?

We take the stance that the stakeholder framework is appropriate for the development of manufacturing performance measures only if all four tenets identified by Donaldson and Preston (1995) can be shown to hold true at the manufacturing level. The following sections examine each tenet in turn, drawing from various sources to support the proposal that the development process for manufacturing performance measures, in particular, can be enhanced by using the stakeholder framework. Table 1 lists the various stakeholders identified in the literature that have expressed interest in the manufacturing operations of an organization.

We begin by using our analysis to develop a framework for the manufacturing function of an organization that includes some of its key stakeholders. The framework is presented in Figure I. This framework is not intended to be a comprehensive depiction of all stakeholder relationships. The manufacturing function of every firm will have its own unique set of stakeholders, all of whom may not have been included in Figure I. Using this framework as a backdrop, we now investigate whether the four tenets hold true.

Descriptive Accuracy

Can stakeholder theory be used to describe and explain the interaction between the manufacturing function and its stakeholders? Evidence supporting this view is available in a number of sources that address manufacturing concerns in both academic and practitioner literature. The second column of Table 1 provides examples of eight such relationships. These examples describe the interaction between manufacturing and various stakeholders. For example, accounting is often entrusted with the task of assessing product costing. However, it needs information from manufacturing to do this. Similarly, manufacturing must interact with the purchasing department and provide it with the necessary manufacturing planning information in a timely manner so the raw material and semi-finished goods are available when required. Manufacturing must also share information and activities with engineering if it is to systematically institute product and process developments.

We note that there are differences between stakeholders at a corporate level and those at the manufacturing level. The corporate level has many external and internal stakeholders. However, at the functional level of the organization, there are a limited number of "external" stakeholders with direct stakes in manufacturing. Several "external" stakeholder relationships with the manufacturing function are "indirect," being mediated by intermediate functions within the organization. For example, the manufacturing function's relationship with the federal government on issues relating to employment guidelines is mediated by the human resources function; its relationship with creditors is mediated by the accounting function; and its relationship with customers is mediated by the marketing function. However, the boundary-spanning activities performed by these functions themselves spawn a corresponding set of performance expectations from the manufacturing function.

Instrumental Power

At the manufacturing level, instrumental power of the stakeholder approach may exist if there is a correlation between how the manufacturing function manages its stakeholders and how the manufacturing function changes its objectives and performance measures. With our broad understanding of the stakeholder relationships at the manufacturing level of the firm, we explored the literature to find evidence of such occurrences. Our findings have been presented in Table 1. Column three of this table shows instrumental relationships between various stakeholders and the manufacturing function identified in the literature.

Skinner's (1969) seminal piece that critiques the relationship between manufacturing and corporate strategy suggests that the two may not be appropriately linked. This had resulted in manufacturing developing its own performance measurements, which may not be the optimal method for manufacturing to support corporate strategy in any sense. We believe that the situation may have changed in recent years, with a perceptible realization of the inadequacies of the traditional manufacturing measures (Kaplan, 1983; Eccles, 1991; Ferdows and DeMeyer, 1990; Adam and Swamidas, 1989; Jaikumar, 1986). While the instrumental relationships recommended by operations management researchers tend to emphasize the desirability of aligning manufacturing performance to directly support the objectives of a key stakeholder (i.e., the corporate level in the organization) (Whang, 1995; Wheelwright, 1979), there is also a recognition that the manufacturing function must maintain a good internal working relationship with other function s within the organization (Wheelwright, 1984). Therefore, there is sufficient evidence in the literature to support an increasingly strong instrumental relationship between manufacturing and the various internal stakeholders.

Normative Validity

Evidence that suggests normative validity for the use of the stakeholder framework comes from several sources. First, there are regulatory impacts, which may require both significant capital expenditures and significant collection of performance data to ensure compliance with environmental laws (Barrett, 1992). The stakeholder group that oversees organizational compliance with government regulations (normally an entity or group at the corporate level of the firm) will in fact require manufacturing to take necessary steps to maintain its compliance with the applicable regulations.

Second, there are indications of a direct impact of environmental consciousness on the manufacturing function, what Sarkis and Rasheed call "greening the manufacturing function" (1995: 17). Under this approach, environmentally conscious manufacturers introduce manufacturing objectives involving reduction (reducing waste), remanufacturing (repair, rework, or refurbish components for either internal use or for product sales), and reuse/recycle. Associated with these manufacturing objectives are specific environmental performance measures, such as degradability, energy usage, and contribution to several different pollution measures. The incentive to implement some or all of these actions could be initiated by any one of manufacturing's stakeholders. For example, employees may foster the need for "greener" machines, or managing recyclable waste. Similarly, manufacturing's compliance with OSHA regulations may be investigated by the Human Resource department of the organization.

Other examples of normative influences can be found in the customer's arena. Customers may demand environmentally cleaner products (Schmidheiny, 1992). This will influence both the design and manufacturing phase, and may generate new metrics for product performance. A marketing strategy to sell products internationally can also have a normative influence on the manufacturing function. The International Standards Organization Environmental Management Initiative (ISO 14000) contains requirements for environmental performance evaluations, environmental auditing (data gathering) and environmental product standards (Sarkis and Rasheed, 1995). While the customers may themselves not direct these changes, their recommendations are clearly conveyed to the manufacturing function by the Sales and Marketing functions of the organization.

In the examples presented above, we have illustrated the influence of stakeholders on manufacturing's choice of performance measures. Some of these result from regulation, some result indirectly from customers, and some result from a desire to comply with market requirements. Taken together, they suggest a high degree of normative influence by stakeholders on the development of manufacturing performance measures.

Managerial Implications

The thesis that the stakeholder framework has managerial implication suggests that it is not simply descriptive, but that it also recommends attitudes, structures, and practices that, taken together, constitute stakeholder management. "Stakeholder management requires, as its key attribute, simultaneous attention to the legitimate interests of all appropriate stakeholders . . ." (Donaldson and Preston, 1995: 67). The question to be addressed, then, is whether or not existing frameworks for the development of manufacturing performance measures reflect nonmanufacturing stakeholder perspectives.

Eccles (1991) reports one such case where manufacturing took direct responsibility for adding customer satisfaction, quality, market share, and human resources to their formal measurement system. A second case reflected a reordering of priorities in a small manufacturing organization, replacing classical financial performance (earnings) with customer satisfaction, cash flow, manufacturing effectiveness and innovation, in that order. The elevation of customer satisfaction to a measured and tracked performance variable represents a significant divergence from traditional manufacturing measures, reflecting the recognition of stakeholders from marketing and service. A similar case is reported by Srikanth (1991), where a manufacturer has switched from traditional productivity measures to focus on delivery as the prime manufacturing performance measure. Writing from the perspective of cost accounting, Santori and Anderson (1987) recommend that manufacturing must consider sales, marketing, administrative and suppor t environments in the development of performance measures. There is, then, some evidence that manufacturing may use an approach to develop performance measures that complement the way it manages its stakeholders.

An Overall Assessment

Stakeholder theory is described by Donaldson and Preston (1995) as having four tenets. The above analysis establishes that the relationship between the manufacturing function and its stakeholders meets the four tenets. We therefore conclude that a framework based on stakeholder theory is, prima facie, an appropriate alternate framework for the task of identifying manufacturing performance measures. However, there is no evidence in the literature of the systematic usage of a stakeholder framework to develop manufacturing performance measures. Therefore, there exists the possibility of potential additional value and insights that may be obtained from the development of an integrated framework based on stakeholder theory.

COMPARISON WITH TRADITIONAL METHODS USED TO IDENTIFY MANUFACTURING PERFORMANCE MEASURES

An approach to understanding the significance of using stakeholder theory as the paradigm for identification of the manufacturing performance variables is to compare it with the two competing methods found in the literature -- the top-down hierarchical linkage and the bottom-up hierarchical linkage methods. While the top-down approach focuses on output, its orientation is very narrow in scope. It is analogous to setting performance objectives in a silo. The bottom-up approach is even more constrained in its perspective in that it considers only resources used by the manufacturing function. By contrast, the stakeholder approach recognizes the existence of both these approaches, and in addition it necessitates the inclusion in the model of other functional areas and permits the inclusion of empowered groups that may not have formal representation in the organization.

In a preceding section of this paper, we identified four major deficiencies with traditional measures of manufacturing performance: focus on the measure, number manipulation, suboptimization, and nondirected. The stakeholder approach would minimize some of these deficiencies in the following ways.

Focus on the Measure. A stakeholder generated performance measure would address the relationship between the manufacturing function and its stakeholders. Consequently, the emphasis is on the relationship and not the measure. For example, one of the manufacturing function's stakeholders is the purchasing department. One performance measure which relates to the interaction between purchasing and manufacturing might be the quality of purchase requisitions (e.g., frequency, timing, completeness, errors) generated by the manufacturing function. Such a measure would emphasize the nature of the interaction between the two areas and not isolated activities of the manufacturing department.

Number Manipulation. It would be difficult for the manufacturing function to manipulate cross-functional performance measures with the purpose of putting the manufacturing area in a better light. The "hockey stick" effect allows the manufacturing department to achieve high levels of performance by overloading departmental processes toward the end of a planning period. By developing performance measures which relate the manufacturing department with upstream and downstream departments, the manufacturing department would be forced to take those departments' needs into account when planning and scheduling its own activities. The end result would likely be a smoother flow of work throughout the planning period.

Suboptimization. For the same reasons as explained in items 1 and 2 above, a stakeholder approach to the measurement of manufacturing performance would discourage suboptimization. The integration of manufacturing performance in light of its relationship with various stakeholders would necessitate more global measures of performance. Traditional introspective departmental measures would not be sufficient to measure performance in a cross-functional context.

Nondirected. One of the manufacturing department's stakeholders would be business- level administration. The argument was made earlier in this article that traditional measures of manufacturing performance typically decouple manufacturing performance and business-level performance. The stakeholder approach would develop manufacturing performance measures which were directed toward the goals, objectives, and performance measures used to measure business-level performance. If the business-level performance measures are revenue oriented (e.g., sales revenue or net profit), an appropriate performance measure for the manufacturing function might be a ratio of value added to manufacturing cost.

Implications for Managers

The literature on the identification of measures of manufacturing performance has repeatedly highlighted concerns about the inadequacy of traditional performance measures in the current manufacturing environment. Many of the oldest performance measures such as machine utilization or labor efficiency are no longer adequate, and may even be counterproductive, to competing effectively in the marketplace. Longstanding rules-of-thumb, such as making production runs as long as possible, keeping large safety stocks, or minimizing line changes, are no longer appropriate. We submit that a stakeholder approach is more structured and more comprehensive than the two traditional approaches to developing manufacturing performance measures. Such an integrated approach provides the necessary "balanced scorecard," and is expected to result in performance measures that are internally consistent and supportive of business-level strategies. Business-level strategies have the attribute of being cross functional, in that they are established with input from all relevant functional departments. Since the stakeholder approach to measuring manufacturing performance also is cross functional, the measures should motivate the manufacturing area to perform in those areas that support organizational goals. In addition, business-level strategies are oriented toward the firm's long-term and short-term strategic objectives. Measures based on the stakeholder approach also will be directed toward the firm's strategic objectives. Since manufacturing performance measures based on the stakeholder approach are derived from cross-functional relationships and business-level objectives, the amount of "game playing" that accompanies the more traditional performance measures should be reduced. The stakeholder approach both formalizes and legitimizes the interests of other organizational units. Perhaps what is more important is that it implores manufacturing managers to focus on the overall effectiveness of the organization rather than on localized efficie ncy, and mitigates the inherent danger of suboptimization.

The traditional approaches to measuring manufacturing performance rely on corporate and/or business-level managers to identify and define manufacturing performance measures which they think are linked to competitiveness in the market-place. This frequently results in the establishment of performance measures which focus on system efficiency, such as smaller inventories or shorter cycle times. If this is an accurate assessment of the traditional approach, the managerial implications are significant because in doing so manufacturing is attempting to react to a changing marketplace by seeking quick-fix alternatives which may not necessarily enhance the firm's competitiveness. Such quick-fix actions do not include efforts to understand the impact of other manufacturing stakeholders or to identify and analyze the drivers and tradeoffs associated with the marketplace. As noted by Srikanth (1991), manufacturing executives have historically had little input into the choice of measures that track their performance. P erhaps, the real implication is that manufacturing managers must step up to the task of working with their stakeholders and control their own performance measures to a much higher degree.

In addition to the direct benefits mentioned above, the stakeholder approach provides several additional spinoffs. First, the process of establishing the performance measures based on the stakeholder approach will require substantive behavioral changes. Manufacturing managers may no longer be able to view their department as a de facto internal monopoly, and may have to begin the task of developing improved relationships with other departments in the organization. For example, the Product Engineering function is one of manufacturing's stakeholders. Improved relations between these two departments would have a positive impact on the efficiency and effectiveness of the relational analysis necessary to arrive at appropriate performance measures.

A second spinoff may be found in the area of organizational communications. The establishment of performance measures based on the stakeholder approach would, of necessity, address the nature of information needed to enhance the interaction between manufacturing and its stakeholders. Such communication issues as the channels used to disseminate information, exactly what information is needed, and when it is needed would be by-products of the stakeholder approach.

One of W. Edwards Deming's (1982) fourteen points of effective management is "Constancy of Purpose." The use of the stakeholder approach to performance measurement generates a third benefit that supports constancy of purpose. Since performance measures are established in accordance with the nature of the relationships with stakeholders, the manufacturing function and its stakeholders will be working toward goals that lead to common objectives. The traditional approaches of measuring performance frequently put the functional areas of an organization at cross purposes, sometimes putting them in antagonistic positions.

A fourth spinoff results from a combination of the previous three. Since the stakeholder approach encourages the development of improved relationships with stakeholders, including other functional areas within the organization, a true team orientation is generated. The various organizational units will be involved in more collaborative efforts which decrease the number of conflicts or self-serving decisions.

We have highlighted several benefits of the stakeholder approach to developing measures of manufacturing performance. Table 2 provides a summary of these findings.

Recommendations for Further Research

The essential argument advanced in this article is that stakeholder theory should provide a basis for the identification of appropriate measures of manufacturing performance. Further research, however, is necessary to fully substantiate such a claim. Clearly, the theoretical framework needs to be developed. Efforts at developing the framework should focus on identifying key stakeholders of the manufacturing function, determining the nature of the stakeholder relationships, and identifying manufacturing performance variables that best reflect those relationships.

The identification of key stakeholders is a critical first step in the development of an appropriate framework. Firms operate in a resource-constrained environment, and the drive to optimize the wealth creation process necessitates judicious choices about resource allocation aimed at satisfying stakeholder demands. Several researchers have attempted to identify appropriate criteria for selecting key organizational stakeholders. For example Savage et al. (1991) and Mitchell et al. (1997) offer methods for assessing and managing organizational stakeholders. Future research on the identification and prioritization of manufacturing's stakeholders should review the am propriateness of the concepts and processes suggested in such organizational models.

Is the "corporate level" the most important stakeholder of the manufacturing function? Are corporate directives still the primary determinants of the manufacturing function? If not, what are the implications for the development of appropriate measures of manufacturing performance? Could stakeholder theory help us better understand the role of manufacturing in an integrated and often "networked" organization? Research in this area could provide valuable information for researchers and practitioners.

Once the framework has been validated and tested, research into the predictive capabilities of the model can be initiated. For example, research could be conducted to determine if manufacturing performance could be predicted based on the nature of its stakeholder relationships. Additional research could be conducted to measure the impact of manufacturing's stakeholder relationships on firm performance measures such as return on sales, market share, etc.

Firms operate in a continuously changing environment. What impact would this have on the relative level of prioritization of the manufacturing function's stakeholders? How likely is it that we will see significant systematic (or random) change in the level of prioritization of each of the stakeholders? What are the implications for the process of managing this continually shifting pool of key stakeholders? What processes need to be in place to detect such changes? What will such systems cost? Are they worth the expense? These are important operational questions to which both managers and researchers would like answers. The awareness of the importance of stakeholders raises another vexing issue for the manufacturing function. How should manufacturing handle troublesome stakeholders, particularly if they fall in the primary pool?

Freeman and Reed caution us that "the stakeholder notion is indeed a deceptively simple one" (1983: 89). However, a stream of inquiry and research similar to the one suggested above can potentially provide many contributions to both the researcher and the practitioner. If it is true that "what gets measured is what gets done," then it is important that researchers develop appropriate manufacturing performance measures that reflect the needs of not only the manufacturing function, but also that of its stakeholders.

(*.) The authors would like to thank Max Ashmeed for his assistance on earlier drafts of this article.

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Advantages of the Stakeholder Approach to Measuring Manufacturing Performance

Direct Impact:

1. Emphasizes the relationship and not the measure.

2. Limits the "hockey stick" effect and other forms of game-playing by manufacturing managers.

3. Limits the use of introspective departmental measures and hence discourages sub-optimization.

4. Improves linkage between manufacturing goals with higher-level goals of the organization. Motivates managers to perform in those areas that support organizational goals.

5. Limits the use of quick-fix, short-term solutions to problems.

6. Provides a more integrative approach to the development of measures of manufacturing performance.

7. Formalizes and legitimizes the interests of other organizational units in the manufacturing function of the firm. Permits the inclusion of empowered groups that may not have formal representation in the organization.

8. Persuades manufacturing managers to take an active role in the selection of manufacturing performance measures.

Spin-offs:

1. Fosters improved relations with other departments in the organization.

2. Fosters improved organizational communications.

3. Supports the need for constancy of purpose.

4. Builds cohesive team spirit in the organization.
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Author:D'Souza, Derrick E.; Williams, Fredrik P.
Publication:Journal of Managerial Issues
Geographic Code:1USA
Date:Jun 22, 2000
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