Almost all companies use a combination of financial and nonfinancial performance measures for planning and control rather than relying exclusively on one or the other. To control a production process, supervisors cannot wait for an accounting report with variances reported in dollars. Instead, they use timely nonfinancial performance measures to exercise control. For example, Nissan and other manufacturers display real-time defect rates and production levels on large screens throughout their plants to monitor performance.
In Webb’s cutting room, cloth is laid out and cut into pieces, which are then matched and assembled. Managers exercise control in the cutting room by observing workers and by focusing on nonfinancial measures, such as number of square yards of cloth used to produce 1,000 jackets or the percentage of jackets started and completed without requiring any rework. Webb’s production workers find these nonfinancial measures easy to understand. Webb’s managers also use financial measures to evaluate the overall cost efficiency with which operations are being run and to help guide decisions about, say, changing the mix of inputs used in manufacturing jackets. Financial measures are critical in a company because they indicate the economic impact of diverse physical activities. This knowledge allows managers to make trade-offs, such as increasing the costs of one physical activity (say, cutting) to reduce the costs of another physical measure (say, defects).