CA S.S.

RAJAGOPAL BULDING BLOCK MODEL SCMPE

BUILDING BLOCK MODEL

SEGMENT 1: INTRODUCTION

1. Fitzgerald and Moon proposed a Building Block Model which suggests the
solution for performance measurement problems in service industries. But
it can be applied to other manufacturing and retail businesses to evaluate
business performance.

2. Building Block Model suggests that the performance measurement system

should be based on the three building blocks namely
 Dimensions
 Standards and
 Rewards.

SEGMENT 2: DIMENSIONS [CRITICAL SUCCESS FACTORS:CSF]

1. Dimensions are the goals or CSF for the business and suitable measures
must be developed to measure each performance dimension.

2. There are six dimensions in performance measurement under Building

block model. These six dimension are classified into two categories namely a.
Determinants and b. Results.

3. Downstream dimensions called results (competitiveness and financial

performance) are influenced by upstream dimensions called determinants
(quality of service, flexibility resource utilisation and innovation).

4. Determinants are those performance areas which influence the results.

These can be understood to be similar to lead indicators discussed in
balanced score card. These are:

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

Sn Dimension Explanation
1 Quality It is the ability to deliver goods and service with
consistency. Quality should be judged from eyes of the
customers. Quality is the level of benefits customers
expects from the product. Quality should be enough for
a product price paid.
2 Flexibility It is the responsiveness to change in the factors
influencing the business performance. Example,
ability to cope with sudden increase in sales demand.
3 Innovation Ability of the business to devise new products and new
ways of doing things. Like packaging of products with
environment friendly (recyclable) material.
4 Resource It is the ability to use resources to achieve
utilization business objectives. Business assets should be used
for the proper purpose and in most efficient way. Ex,
using delivery vans to its maximum capacity only by
carrying authorized goods.

5. Results are the performance areas which get influenced by the

performance of determinants. They are lag indicators i.e results improve
when determinants are properly managed. These are:

Sn Dimension Explanation
1 Competitive How the company stand in comparison to its
performance competitors? How it is different from the
competitors? Ex, offering of products of higher quality
than competitors and products having distinct
features than rival products.
2 Financial Financial performance gives an indication of overall
performance business at a glance in monetary terms. These can be
used to identify areas of strengths and weaknesses.
It may also highlight other areas previous identified
which may be critical to business success.

6. Examples of Dimensions and its performance measures

Dimensions of Types of Measures

Performance
Competitiveness ▪ Relative Market Share and Position
▪ Sales Growth
▪ Measures of the Customer Base
Resul

▪ Profitability
ts

Financial
Performance ▪ Liquidity
▪ Capital Structure
▪ Market Ratios

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

Quality of ▪ Reliability
Service ▪ Responsiveness
▪ Aesthetics/appearance Communication
▪ Cleanliness/tidiness
▪ Comfort
▪ Friendliness
▪ Courtesy
▪ Competence
▪ Access
Determin

▪
ants

Availability
▪ Security
▪ Communication
Flexibility ▪ Volume Flexibility
▪ Delivery Speed Flexibility
▪ Specification Flexibility
Resource ▪ Productivity
utilization ▪ Efficiency
Innovation ▪ Performance of the Innovation Process
▪ Performance of Individual Innovations

7. Conclusion:

Dimensions of performance
The table above identifies the dimensions of performance.
The first two of these relate to downstream results, the
other four to upstream determinants. For example, a new
product innovation will not impact on profit, cash flow and
market share achieved in the past - but a high level of
innovation provides an indicator of how profit, cash flow
and market share will move in the future. If innovation is
the determinant of future performance, it is a key success
factor.

SEGMENT 3: STANDARDS [KPI]

1. The standards are the targets (KPIs) set for the metrics chosen from the
dimensions measured.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

2. The standards set should have the following characteristics:

1 Ownership Performance measure should be acceptable to

everyone. Managers who participate in the setting of
standards are more likely to accept and be motivated by
the standards than managers on whom standards are
imposed. Hence, employees should be got involved in the
identification of measures rather than being imposed on
them. Ownership means here is responsibility for the
results.
2 Achievability Performance measure should be realistic. Ex, using actual
results for the competitors to set as target. Employee
will not be motivated to achieve targets if consider them
impossible. An achievable, but challenging, standard is a
better motivator than an unachievable one.
3 Fairness When setting standards across an organisation, care
should be undertaken to ensure that all managers have
equally challenging standards. Relaxation given to one
part of the business leads to perception of unfair
treatment which hinders productivity.

3. The Standards or KPIs should be SMART. SMART targets refers to:

 S = Specific
 M = Measurable
 A = Achievable
 R = Relevant and
 T = Time bound.

SEGMENT 4: REWARDS

1. Rewards are the motivators for the employees to work towards the
standards or KPIs set. When KPIs are achieved then the CSFs called
dimensions will be automatically managed which leads to excellence in
business.

2. It should be remembered that:

 what gets measured gets done
 what gets measured and fed back gets done well
 what gets rewarded gets repeated.

3. To ensure that employees are motivated to meet standards, the

standards need to be clear (e.g. the target is to 'achieve four product
innovations per year’ rather than to simply 'innovate') and linked to
controllable factors. The actual means of motivation may involve
performance related pay, a bonus or a promotion.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

4. Reward schemes should possess following characteristics:

1 Motivation Rewards scheme should be set in manner which motivates
employees to achieve the business goals. If sales growth
is desired than bonus can be linked to performance
measures, like increase in number of units sold than
previous year.
2 Clear Rewards scheme should be clearly communicated to
employees in advance. What kind to performance will be
rewarded and how their performance will be measured ?
3 Controllability Employees should only be reward or penalized of the
result over which they some control or influence.

5. Thus the building block model thus makes an explicit link between
achievement of the corporate strategy and the management of human
resources.

SEGMENT 5: OVERALL VIEW

Building block model performance evaluation template for a washing machine

manufacturer:

Dimension= Flexibility - On Quality of Financial

CSF time delivery service performance
Standard = Delivery speed Reliability Profitability
KPI
Reward Points for each % commission Management
on time delivery for repair profit related
- leading to a engineers from bonuses
bonus fee or warranty
paid

SEGMENT 7: EVALUATION OF THE BUILDING BLOCK MODEL

The building block model has a number of advantages:

1. All key determinants of success (financial and non-financial) in

performance will be measured.

2. It covers internal and external matters.

3. It differentiates between downstream results and upstream determinants.

4. It is specifically tailored to the service industry.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

5. The reward system will operate in a way to optimally motivate the

individual staff members, i.e. rewards should be clear and linked to
controllable factors.

6. Targets are set in such a way to engage and motivate staff, i.e. through
ownership, achievability and fairness.

7. Managers are unlikely to be able to distort performance.

SEGMENT 7: PROBLEMS AND SOLUTIONS

Problem 1:

FL provides training on financial subjects to staff of small and medium-sized

businesses. Training is at one of two levels - for clerical staff, instructing
them on how to use simple financial accounting computer packages, and for
management, on management accounting and financial management issues.

Training consists of tutorial assistance, in the form of workshops or lectures,

and the provision of related material - software, texts and printed notes.

Tuition days may be of standard format and content, or designed to meet

the client's particular specifications. All courses are run on client premises
and, in the case of clerical training courses, are limited to 8 participants per
course.
FL has recently introduced a 'helpline' service, which allows course
participants to phone in with any problems or queries arising after course
attendance. This is offered free of charge.

FL employs administrative and management staff. Course lecturers are hired

as required, although a small core of technical staff is employed on a part-
time basis by FL to prepare customer-specific course material and to man the
helpline.

Material for standard courses is bought in from a group company, who also
print up the customer-specific course material.

Required:
Suggest a measure for each of the six dimensions of the building block
model.

Solution:

Financial performance
 Fee levels.
 Material sales.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

 Costs.
 Net profit.
 Outside lecturer costs.
Competitiveness
 Market share.
 Sales growth.
 Success rate on proposals.
Quality of service
 Number of customer complaints.
 Help-line use may be related to tuition quality.
Flexibility
 Availability and use of freelance staff.
 Breadth of skills and experience of lecturers.
Resource utilisation
 Use of freelance lecturers.
 Levels of non-chargeable staff time.
Innovation
 Number of new in-company courses.
 Time to develop new courses.
 New course formats..

Problem 2:

The Sentinel Company (TSC) offers a range of door-to-door express delivery

services. The company operates using a network of depots and distribution
centres throughout the country of Nickland. The following information is
available:
(1) Each depot is solely responsible for all customers within a specified
area. It collects goods from customers within its own area for delivery both
within the specific area covered by the depot and elsewhere in Nickland.

(2) Collections made by a depot for delivery outside its own area are
forwarded to the depots from which the deliveries will be made to the
customers.

(3) Each depot must therefore integrate its deliveries to customers to

include:
(i) goods that it has collected within its own area; and
(ii) goods that are transferred to it from depots within other areas for
delivery to customers in its area.

(4) Each depot earns revenue based on the invoiced value of all
consignments collected from customers in its area, regardless of the location
of the ultimate distribution depot.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

(5) Depot costs comprise all of its own operating costs plus an allocated
share of all company costs including centralised administration services and
distribution centre costs.

(6) Bonuses for the management team and all employees at each depot are
payable quarterly. The bonus is based on the achievement of a series of
target values by each depot.

(7) Internal benchmarking is used at TSC in order to provide sets of absolute

standards that all depots are expected to attain.

(8) The Appendix shows the target values and the actual values achieved for
each of a sample group of four depots situated in Donrntellotown (D),
Leonardotown (L), Michaelangelotown (M), and Raphaeltown (R). The target
values focus on three areas:
(i) depot revenue and profitability
(ii) customer care and service delivery; and
(iii) credit control and administrative efficiency.

(9) The bonus is based on a points system, which is also used as a guide to
the operational effectiveness at each depot. One point is allocated where the
target value for each item in the Appendix is either achieved or exceeded,
and a zero score where the target is not achieved.

(10) Appendix:

Target and actual value statistics for Donatellotown (D), Leonardotown (L),
Michaelangelotown (M), and Raphaeltown (R) for the Quarter ended 31
October 20X1.
Revenue and Profit Statistics:

Revenue (1) Profit (2)

Target Actual Target Actual
$m $m $m $m
Company overall 200 240 30 32
Selected depots:
D 16 15 2.4 2.3
L 14 18 2.1 2.4
M 12 14 1.8 2.2
R 18 22 2.7 2.8

Note: For the purpose of calculation of each depot's points it is essential that
actual profit as a percentage of actual revenue must exceed the target profit
(%).

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

Customer Care and Service Delivery Statistics:

Target Actual
Selected Depots: D L M R
% % % % %
Measure (% of total):
(3) Late collection of consignments 2.0 1.9 2.1 1.8 2.4
(4) Misdirected consignments 4.0 4.2 3.9 3.3 5.1
(5) Delayed response to complaints 1.0 0.7 0.9 0.8 1.2
(6) Delays due to vehicle 1.0 1.1 1.4 0.3 2.0
breakdown
Measure (% of revenue):
(7) Lost items 1.0 0.6 0.9 0.8 1.9
(8) Damaged items 2.0 1.5 2.4 1.5 1.8

Credit control and administration efficiency statistics.

(9) Average debtor weeks 5.5 5.8 4.9 5.1 6.2

(10) Debtors in excess of 60 days 5% ? ? ?
(% of total)
(11) Invoice queries (% of total) 5% 1.1% 1.4% 0.8% 2.7%
(12) Credit notes as a % of 0.5% ? ? ? ?
revenue
Other information:
D L M R
Aged Debtor analysis $000 $000 $000 $000
(extract):
Less than 30 days 1,300 1,500 1,180 2,00
0
31-60 days 321 133 153 552
Value of credit notes raised during 45 36 28 132
the period ($000)
Note: TSC operates all year round.

Required:

Prepare a report for the directors of TSC which;

(a) Contains a summary table which shows the points gained (or
forfeited) by each depot. The points table should facilitate the
ranking of each depot against the others for each of the
12 measures provided in the Appendix. (9 Marks)

(b) evaluates the relative performance of the four depots as indicated by

the analysis in the summary table prepared in (a) (5 marks)

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

(c) assesses TSC in terms of financial performance, competitiveness,

service quality, resource utilisation, flexibility and innovation and
discusses the interrelationships between these terms, incorporating
examples from within TSC; and (10 marks)

(d) critiques the performance measurement system at TSC. (5 marks)

Solution:

Report:

To: The Directors of TSC

From: Management Accountant

Subject: The performance of our depots

Date: 5 December 20X1

(a) Summary analysis of points gained (1) or

forfeited (0) for quarter ended 31 October 20X1

Revenue and Profit D L M R

Statistics:
Revenue 0 1 1 1
Profit (see note below) 1 0 1 0
Customer Care and
Service Delivery Statistics:
Late collection of consignments 1 0 1 0
Misdirected consignments 0 1 1 0
Delayed response to complaints 1 1 1 0
Delays due to vehicle breakdown 0 0 1 0
Lost items 1 1 1 0
Damaged items 1 0 1 1
Credit Control &
Administration
Efficiency
Statistics:
Average debtor weeks 0 1 1 0
Debtors in excess of 60 days 1 1 1 1
Invoice queries (% of total) 1 1 1 1
Credit notes as a % of revenue 1 1 1 0
Total points gained 8 8 12 4

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

Workings:

(i) Profit point calculation:

Actual results, e.g. Donatellotown = 2.3/15 = 15.3%

(1 point) and Leonardotown = 2.4/18 = 13,3% (0 point).
These are compared with Target 15%..

(ii) Debtors in excess of 60 days (% of total)

(iii) Value of credit notes raised as a % of revenue

e.g. Donatellotown = $45,000/$15,000,000 = 0.3%

(b) The summary analysis in (a)(i) shows that using overall

points gained, Michaelangelotown has achieved the best
performance with 12 points. Donatellotown and
Leonardotown have achieved a reasonable level of
performance with eight points each. Raphaeltown has
underperformed, however, gaining only four out of the
available 12 points.

Michaelangelotown is the only depot to have achieved both

an increase in revenue over budget and an increased profit
revenue percentage.

In the customer care and service delivery statistics,

Michaelangelotown has achieved all six of the target
standards, Donatellotown four; Leonardotown three. The
Raphaeltown statistic of achieving only one out of six
targets indicates the need for investigation.

With regard to the credit control and administrative

efficiency statistics, Leonardotown and Michaelangelotown
achieved all four standards and Donatellotown achieved
three of the four standards. Once again, Raphaeltown is the
'poor performer' achieving only two of the four standards.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

(c) The terms listed may be seen as representative of the

dimensions of performance. The dimensions may be
analysed into results and determinants.

The results may be measured by focusing on financial

performance and competitiveness.

Financial performance may be measured in terms of

revenue and profit as shown in the data in the appendix of
the question in respect of TSC. The points system in part (a)
of the answer shows which depots have achieved or
exceeded the target set. In addition, liquidity is another
aspect of the measurement of financial performance. The
points total in part (a) showed that Leonardotown and
Michaelangelotown depots appear to have the best current
record in aspects of credit control.

Competitiveness may be measured In terms of sales

growth but also in terms of market share, number of new
customers, etc. This shows that three of the four depots
listed have achieved increased revenue compared to target.

The determinants are the factors which may be seen to

contribute to the achievement of the results. Quality,
resource utilisation, flexibility and innovation are cited by
Fitzgerald and Moon as examples of factors that should
contribute to the achievement of the results in terms of
financial performance and competitiveness.

In TSC a main quality issue appears to be customer care

and service delivery. The statistics in the points table in part
(a) of the answer show that the Raphaeltown depot appears
to have a major problem in this area. It has only achieved
one point out of the six available in this particular segment
of the statistics.

Resource utilisation for TSC may be measured by the

level of effective use of drivers and vehicles. To some
extent, this is highlighted by the statistics relating to
customer care and service delivery. For example, late
collection of consignments from customers may be caused
by a shortage of vehicles and/or drivers. Such shortages
could be due to staff turnover, sickness, etc or problems
with vehicle maintenance.

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CA S.S.RAJAGOPAL BULDING BLOCK MODEL SCMPE

Flexibility may be an issue. There may, for example, be a

problem with vehicle availability. Possibly an increased focus
on sources for short-term sub-contracting of
vehicles/collections/deliveries might help overcome delay
problems.

The 'target v actual points system' may be seen as an

example of innovation by the company. This gives a
detailed set of measures that should provide an incentive for
improvement at all depots. The points system may illustrate
the extent of achievement/non-achievement of company
strategies for success. For example TSC may have a
customer care commitment policy which identifies factors
that should be achieved on a continuing basis. For example,
timely collection of consignments, misdirected consignments
redelivered at no extra charge, prompt responses to
customer claims and compensation for customers.

(d) The performance measurement system used by TSC

appears simplistic. However, it may be considered to be
measuring the right things since the specific measures used
cover a range of dimensions designed to focus the
organisation on factors thought to be central to corporate
success, and not confined to traditional financial measures.

Intenal benchmarking is used at TSC in order to provide

sets of absolute standards that all depots are expected to
attain. This should help to ensure that there is a continual
focus upon the adoption of 'best practice' at all depots.
Benchmarks on delivery performance place an emphasis
upon quality of service whereas benchmarks on profitability
are focused solely upon profitability.

Incentive schemes are used throughout the business, linking

the achievement of company targets with financial rewards.
It might well be the case that the profit incentive would act
as a powerful motivator to each depot management team.
However, what is required for the prosperity of TSC is a
focus of management on the determinants of success as
opposed to the results of success.

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