Costs and Performance

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Armco Inc., is the sixth largest producer of stainless, electrical, and carbon steels and steel products in the United States, and the Armco Inc Midwestern Steel Division is its largest division. The largest subdivision of the Steel Division is the Kansas City Works which produces two products: grinding media and carbon wire rod. In January 1991, a new performance measurement system for Kansas City Works was implemented by Bob Nenni, the Director of Finance, with the aim of providing managers the best information that would better enable them to enhance company performance. According to Mr. Nenni, the new system was designed so that managers would prioritize certain key objectives and not the numerous details provided by the old Operating Statistics Report that they have used in the past. The new system also aims to provide an improved basis for evaluating operating managers and manufacturing supervisors. This includes a balanced set of performance measures, including quality, schedule achievement, and safety, in addition to costs. The cost reports were changed to include only those that are controllable by each individual operating manager. Lastly, one of the most significant changes from the old system is the elimination of the Cost Above measure, therefore decreasing the cost detail in the new performance reports considerably. Although the new system intends to help the managers and increase their focus on relevant data, some are still complaining and dissatisfied because of the lack of information and lack of details that they have been accustomed to. Some actually prefer having the old system back, wherein monthly and annual trends are shown that allows them to compare actual costs with objectives. According to one manager, the old report provided “the minimum amount of detail necessary”.

What is the optimal performance evaluation system for the Kansas City Works to adopt? If the chosen system is optimal, should it be implemented to other subdivisions of Armco, Inc. Midwestern Steel Division? Areas of Consideration (see exhibit 1)

Kansas City Works should consider the following factors in determining what the optimal performance evaluation system to adopt. •Goals and objectives of the division
Purpose and operations of each department
The Incentive Program
Understandability and relevance.
The Division as a Cost Center

Alternative Courses of Action
After taking into consideration the preceding factors, we now proceed to the courses of action that the division could take to determine the optimal performance evaluation system.

1.Return to the Old System (see exhibit 2)

Managers are familiar with the output of the system. This lessens discontent and frustration and enables managers to concentrate on their work rather than continually complain about the system. •The reports were given in a monthly or weekly basis which helps the managers take immediate action to solve specific emerging problems. Disadvantages

Because it is detail oriented, managers may misappropriate the cause of the problem as a problem with the accounting system rather than a real problem with operations. •Too much detail may lead managers to focus on problems whose effects are short term, rather than details that look at the bigger picture and whose effects are long term. •The reports done are not in line with the goals of the division of undertaking activities that are the most value-adding to the division.

2.Implement completely the New System (see exhibit 2)

This system not only caters to the top management but also to the middle to the lower branches of the company by providing a standard that serves the division as a whole, and not only to the standards for their specific department. •It provides a more objective way of measuring the performance of a department of the division. •By streamlining cost reports, it will include only the most relevant...
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