To: The board of Chiven Stores (Chiven)
From: An Accountant
Date: June 2018
Subject: Performance reporting and management issues
This report evaluates the current performance report used for the annual board review and suggests three additional important performance indicators. The performance measurement aspects of the use of the value chain to help to streamline the supply chain is considered. Finally, the impact, risks and challenges of Big Data for Chiven are discussed.
(i) Performance report for annual board review
The basic role of the performance report is to allow the board to see if the mission is being achieved along with the subsidiary aims and strategically important initiatives set by the senior management.
The mission of Chiven breaks down into two parts:
– becoming the largest clothing retailer in Beeland which is measured by Chiven’s market share, but without an indication of the market leader, it is not possible to see if this is achieved; and
– delivering exceptional value to its shareholders which is measured through a number of measures (dividends, EPS, economic value added and ROCE). However, it is often the growth of these indicators year-on-year which would be more useful to assess performance rather than the absolute amounts. Additionally, market average information would be important for investors so they can compare their investment in Chiven with others in their portfolios.
The subsidiary aims and initiatives based on the CEO’s comments are:
– maximising opportunities from new technology
– increasing web presence
– making use of ‘Big Data’ in relation to Chiven’s web sales
– simplifying the supply chain
There are no measures of web sales or the impact of technology on the activities of Chiven which would allow measurement of the first three aims. The basic data does not appear to be collected as sales are reported in total and not for stores and for the website separately.
The final aim does appear to be measured by looking at the number of suppliers and also the number of product lines sold (no. of suppliers x average no. of product lines per supplier). Reduction of these numbers would indicate a more streamlined supply chain. This would also indirectly improve the probability of stock obsolescence and so reduce inventory write-downs.
General comments about the current report
The current report is likely to confuse the board as it presents too many indicators and so overloads the board with information. This could be improved by reducing the number of indicators. For example, it should be considered if there is a need for both economic value added and ROCE in the report as they perform similar functions.
The report does not appear to group or appropriately prioritise the indicators presented. Suggested headings for an improved report might be:
– shareholder value performance
– market leadership
– impact of new technology
– efficiency in the supply chain
For example, the main company aim relating to shareholder value should appear at the top of the report and include dividends, EPS, economic value added and/or ROCE. As already noted, the growth of these indicators year-on-year would be more useful rather than the absolute amounts.
There is a lack of external information (especially competitor information) such as the market leading market share.
There is a lack of forward looking information which given the aim of innovation through new technology would be important. Expected growth of web sales in the market generally would allow measurement of Chiven’s performance in this area.
There is a lack of a summary of property costs which could be especially useful for comparison with web operations.
There are a number of indicators which are about the detailed operation of the stores (such as average time between customer entry and employee greeting or average queueing time for customers). These are of a more operational nature and may be distracting and unnecessary in the board report, as it ought to focus on the strategic indicators.
However, the board may take the view that such customer-experience centred indicators are strategically important as they are commonly used in retail. In this case, there ought to be equivalent indicators for the web-based sales, for example, relating to number clicks or pages needed in order to make a web sale.
(ii) Three new performance measures for Chiven
There are three performance measures, which currently do not appear on the report, which would improve presentation of Chiven’s results. As noted above, the current report contains many absolute figures and some ratios would simplify the work of interpreting these results.
Key issues in the current report and from the perspectives of running the physical stores are the number of employees and the floor space of the stores. Therefore, it is suggested that the revenue and operating profit per unit for each of these variables would be helpful and are also common indicators used in the retail trade.