Case Study – Chapter 7 (Optimization)

KPIs and Earnings

This assignment will use the following working definitions:

Key Performance indicators (KPI)

A measure by which performance will be evaluated.

Optimization

Choosing a mix of disparate factors that will best achieve a stated goal.

Background

Mary Black is a long-time sales person at Factory Supplies Inc. Her compensation has traditionally consisted of a draw against sales. At this time, Mary’s annual draw against sales is $100,000. So long as Mary’s shipped sales during the calendar years equal or exceed $300,000, she is considered to have earned the entire draw. No provision has previously been made for a shortfall in Mary’s sales.

Paul Norris has recently taken over the management of Factory Supplies Inc. Paul is a believer in the use of KPI’s to achieve greater motivation and improved employee performance results.

He has presented Mary with the following KPI-based compensation package:

• Mary’s annual draw of $100,000 will continue.
• Mary’s performance will be measured using the following Key Performance Indicators:
  • KPI 1 Total shipped sales by Mary to “continuing customers” (so long as an individual customer purchased goods within the past 3 years, they will be considered as a “continuing customer”);
  • KPI 2 Total shipped sales by Mary to “new customers” (“new customers” are customers who have not purchased goods within the past 3 years);
  • KPI 3 Total shipped sales by Mary of designated “bonus products” which will be designated by management at the start of each calendar year;
  • KPI 4 Returns and allowances of any Mary’s shipped sales.

The impact of these KPI’s on Mary’s compensation will be as follows: KPI’s 1, 2 and 3 will each result in an increase over the $100,000 draw whereas KPI 4 will result in a decrease of the Mary’s entitlement to the “draw”.   Specifically,

• KPI 1 requires Mary to maintain the level of $300,000 in shipped sales to continuing customers. If there is a shortfall greater than $25,000 then Mary will be put on probation going forward.
• KPI 2 will result in an increase of her draw for the past year in the amount of 7% of shipped sales to new customers.
• KPI 3 will result in an increase of her draw for the past year in the amount of 10% of shipped sales of “bonus products”.
• KPI 4 will result in a decrease of her draw for the past year in the amount of 15% of returns and allowances on the shipped sales.

Mary’s situation

Mary has done personal budgeting and quality of life planning and has come to the following conclusions.

1. She needs to at least maintain the current level of annual earned income, but would like to increase it to $125,000.
2. She is not prepared to devote any more time or energy to her job than she currently does.
3. The amount of time and energy that Mary is prepared to devote to her job is her current level of involvement, which is units of time and energy.

Assumptions

1. Mary does not want to be put on probation.
2. Mary feels that she can maintain $300,000 in sales to her continuing customers in units of time and energy, or proportionally equivalent.
3. Mary expects that she could generate additional shipped sales in the amount of $80,000 to new customers in units of time and energy, proportionally equivalent.
4. Mary believes that she could sell $50,000 of bonus products in units of time and energy, or proportionally equivalent.
5. Mary wants to allocate units of time and energy to minimizing returns and allowances and she believes that this will allow her to hold shipped product returns or allowed down to 5% of her total shipped sales.

NOTE: The total units of time and energy in Mary’s projections sum to  units of time and energy.

CAUTION:

You are to do the following assignment tasks using the assumptions provided above. Do not digress into fine-tuning the KPI’s with a series of valid “what ifs”.

Assignment

1. In mathematical terms express the calculation(s) that will enable Mary to experiment with various allocations of her elements of units of time and energy.
2. Using your solution to A, determine the mix of elements of units of time and energy that will come closest to Mary’s goal of $125,000.
3. Identify the non-quantitative aspects of Mary’s situation. Can you suggest a strategy that might enable you to reflect any of these aspects in mathematical terms? Explain either a “Yes” or “No” response.

Attribution: Case study by Morden Shapiro (Ontario Tech University), published under Creative Commons Attribution-NonCommercial-ShareAlike licence (CC-BY-NC-SA)

Any modifications to this case study may affect its solvability and caution is advised.