Introduction to the

Economics of Commercial
and Service Companies
S. 9.
 MEASURING THE
PERFORMANCE IN
RETAIL
EFFECTIVENESS, EFFICIENCY

 Result = revenue – expenses

 Effectiveness = results / targets
 Productivity = output / input
 Efficiency or effectiveness
 = energy extracted (output) / energy input
 = the ratio of the energy used to achieve a given target to
the total energy invested
 Efficiency = best result achieved within given limits
WHY DO WE NEED TO MEASURE?

 Identifying and eliminating risks

 Help with planning
 Identify trends, seasonality
 Boosting sales
 Strengthening market position
 Examining the impact of promotions
 Basis for forecasting
CATEGORIES OF OPERATIONS
1. PLAN
DEMAND FORECASTING AND PLANNING

 All forecasts deal with four major variables that combine to

determine what market conditions will be like. Those variables are:
1. Supply
2. Demand
3. Product Characteristics
4. Competitive Environment
FORECASTING METHODS

1. Qualitative
2. Causal
3. Time Series
4. Simulation
1. PLAN
PRODUCT PRICING
 Depending how price is used, it will tend to maximize either
revenue or gross profit.
 Relationship of Cost Structure to Pricing
 Relationship of flexibility to vary the size of its workforce
and productive capacity and the cost of carrying inventory.
 Their aim is to maximize gross profit in peak demand periods
and generate revenue to cover costs during low demand
periods.
1. PLAN
INVENTORY MANAGEMENT
(PLAN)
 Cycle Inventory
 Economic Order Quantity
 Seasonal Inventory
 Safety Inventory
2. SOURCE
PROCUREMENT
1. Purchasing
2. Consumption Management
3. Vendor Selection
4. Contract Negotiation
5. Contract Management
2. SOURCE
CREDIT AND COLLECTIONS
1. Set Credit Policy
2. Implement Credit and Collections Practices
3. Manage Credit Risk
PROCESS OF ANALYSIS
1. Planning and carrying out data collection
 Enterprise information systems
 External data sources
2. Data validation, data systematisation, clustering, comparability testing
 Comprehensive
 Reliable, accurate
 Can be broken down into homogeneous groups
3. Hypothesis generation
4. Data analysis
 Charts, tables
 Visualisation
5. Validation or rejection of hypotheses, textual analysis
 METRICS FOR
MEASURING RETAIL
PERFORMANCE
MARKET QUADRANT
MEASURING PEFORMANCE

1. Customer Service
2. Internal Efficiency
3. Demand Flexibility
4. Product Development
1. CUSTOMER SERVICE METRICS
 Metrics for a build to stock situation are:
 Complete Order Fill Rate and Order Line Item Fill Rate
 On-Time Delivery Rate
 Value of Total Backorders and Number of Backorders
 Frequency and Duration of Backorders
 Line Item Return Rate

 A build-to-stock (BTS) situation is one where common commodity

 products are supplied to a large market or customer base.
1. CUSTOMER SERVICE METRICS
 Metrics for a build-to-order situation are:
 Quoted Customer Response Time and On-Time Completion Rate
 On-Time Delivery Rate
 Value of Late Orders and Number of Late Orders
 Frequency and Duration of Late Orders
 Number of Warranty Returns and Repairs
 A build-to-order (BTO) situation is one where a customized product
 is ordered by a customer.
2. INTERNAL EFFICIENCY
METRICS
 Internal efficiency refers to the ability of a company to use their
assets as profitably as possible.
 Inventory Value
 Inventory Turns
 Return on Sales
 Cash-to-Cash Cycle Time
3. DEMAND FLEXIBILITY
METRICS
 Demand flexibility describes a company’s ability to be responsive to
new demands in the quantity and range of products and to act
quickly
 Upside Flexibility
 Outside Flexibility
 Activity Cycle Time
4. PRODUCT DEVELOPMENT
METRICS
 Product development measures a company ability to(design, build,
and)deliver new products to serve their markets as those markets
evolve over time.
 Percentage of total products sold that were introduced in the last
year
 Percentage of total sales from products introduced in the last
year
 Cycle time to develop and deliver a new product
BUSINESS OPERATIONS SUPPORT
COMPANY PERFORMANCE
 MEASURING THE
ECONOMIC PERFORMANCE
MEASUREMENT

 To what extent is the business able to create new value

 Indicators:
 gross production value
 gross value added
 net production value
MEASUREMENT
net turnover from sales
- the acquisition value of goods sold
- mediated services
+ capitalised value of own produced assets
± change in stocks of own-account stocks
= gross production value
gross production value
- value of goods and services used in production
= gross value added
- depreciation and amortisation
= net production value
OTHER INDICATORS FOR MEASUREMENT

 Turnover of stocks
 Turnover of equity
 Wage cost ratio (%)
 Fixed asset efficiency (%)
 Inventory efficiency (%)
 Material efficiency (%)
 Wage efficiency (%)
 Efficiency of results (%)
 Capital efficiency (%)
 …
ECONOMIC EFFICIENCY
 value of expenses / value of profit achieved
 comparison of two options
 = value or surplus (result) / input
 = output / input
 = product (output) / resource used
 measured in output or money
 the objective is to maximise the difference between returns and inputs
that can be measured in monetary terms
 Relative
 the efficiency of management
PRODUCTIVITY
 the ratio of output to expenditure
 can be expressed in volume and value
 volume increases if the company achieves higher output for the
same input
 output * sales price
 depends on
 the factors of production
 market conditions - demand, supply
 interest rates, exchange rates, etc.
PRODUCTIVITY
INFLUENCING FACTORS FOR
INPUTS OUTPUTS
• Total area of the shop • Sales
• Number of business units • Loyal customers,
• Number of point of sale customer retention
machines
• Wages – cost
• Hours worked
FACTORS INFLUENCING
PRODUCTIVITY
 Management effectiveness
 Workforce skills
 Competitiveness of the market
 Government regulations
 IT development, IT systems
 Capital investment
 Real estate prices
 Availability and utilisation of retail space
 Price gap
 ....
PROFITABILITY
 Measuring business performance
 To compare different companies or departments
 Profitability = income
 A firm is profitable if the price of its products is greater than the
cost of production
 A large market share does not necessarily mean profitability
PROFITABILITY INDICATORS

 ROE (return on equities)

 ROA (return on assets)
 Profit margin
 Profitability on turnover
 Profit after tax / net sales