MODULE OF INSTRUCTION______________________________ ENG-6301 Engineering Management

CONTROLLING

Introduction

The long-term existence of many companies, most often, is placed in

jeopardy when some aspects of their activities go out of control.

Apart from the destruction of lives and property, normal business

operations are hampered causing discontinuities in employment and the
provision of products and services. These could not have happened if only
adequate controls were instituted.

What is Controlling?
• Controlling refers to the process of ascertaining whether
organizational objectives have been achieved; if not, why not; and
determining what activities should then be taken to achieve
objectives better in the future.

Importance of Controlling
• When controlling is properly implemented, it will help the
organization achieve its goal in the most efficient and effective
manner possible.
• The importance of controlling may be illustrated as it is applied in a
typical factory. If the required standard daily output of individual
workers is 100 pieces, all workers who do not produce the
requirement are given sufficient time to improve; if no improvements
are forthcoming, they asked to resign. This action help the company
keep its overhead and other costs at expected levels.

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Steps in the Control Process

The control process consists of four steps, namely:
1. Establishing performance objectives and standards

2. Measuring actual performance

3. Comparing actual performance to objective and standards,
and
4. Taking necessary action based on the results of the
comparisons.

Establishing Performance Objectives and Standards

Examples of objectives and standards are as follows:

1. Sales targets – which are expressed in quantity or monetary

terms;

2. Production targets – which are expressed in quantity and

quality;

3. Worker attendance – which are expressed in terms of rate of

absences;
4. Safely record – which is expressed in number of accidents for
given periods;
5. Supplies used – which are expressed in quantity or monetary
terms for given periods.
Once objectives and standards are established, the measurement of
performance will be facilitated. Standards differ among various
organizations. In construction firms, project completion dates are useful
standards. In chemical manufacturing firms, certain pollution measures form
the basis for standard requirements.

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Measuring Actual Performance

There is a need to measure actual performance so that when
shortcomings occur, adjustments could be made. The adjustments will
depend on the actual finding.
The measuring tools will differ from organization to organization, as
each have their own unique objectives. Some firms, for instance, will use
annual growth rate as standard basis, while other firms will use some other
tools like the market share approach and position in the industry.

Comparing Actual Performance to Objectives and Standards

Once actual performance has been determined, this will be compared
with what the organization seeks to achieve. Actual production output, for
instance, will be compared with the target output. This may be illustrated as
follows:
a construction firm entered into a contract with the government to
construct a 100 kilometer road within ten months. It would be, then,
reasonable for management to expect at least 10 kilometers to be
constructed every month. As such, this must be verified every month, or if
possible, every week.

Taking Necessary Action

The purpose of comparing actual performance with the desired result
is to provide management with the opportunity to take corrective action
when necessary.
If in the illustration cited above, the management of the construction
firm found out that only 15 kilometers were finished after two months, then,
any of the following action may be undertaken:
1. Hire additional personnel;
2. Use more equipment; or
3. Require overtime.
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Type of Control
Control consists of three distinct types, namely:
1. Feedforward control

2. Concurrent control, and

3. Feedback control

Feedforward Control
This type of control provides assurance that the required human and
nonhuman resources are in place before operations begin. An example is
provide as follows:
The manager of a chemical manufacturing firm makes sure that the
best people are selected and hired to fill jobs. Materials required in the
production process are carefully checked to detect defects. The forgoing
control measures are designed to prevent wasting valuable resources. If
these measures are not undertaken, the likelihood that problems will occur
is always present.

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Concurrent Control
When the operations are already ongoing and activities to detect
variances are made, concurrent control is said to be undertaken. It is always
possible that deviations from standards will happen in the production
process when such deviations occur, adjustments are made to ensure
compliance with requirements. Information on the adjustments are also
necessary inputs in the pre-operation phase.
Example of activities using concurrent control as follow:
The manager of a construction firm constantly monitors the progress
of the company’s projects. When construction is behind schedule, corrective
measures like the hiring of additional manpower are made.

Feedback Control
When information is gathered about a completed activity, and in
order that evaluation and steps for improvement are derived, feedback
control is undertaken. Corrective actions aimed at improving future activities
are features of feedback control.
Feedback control validates objectives and standards.
An example of feedback control is the supervisor who discovers that
continuous overtime work for factory workers lowers the quality of output.
The feedback information obtained leads to some adjustment in the
overtime schedule.

Components of Organizational Control Systems

Organizational control systems consists of the following:

1. Strategic plan
2. The long-range financial plan
3. The operating budget
4. Performance appraisals
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5. Statistical reports
6. Policies and procedures

Strategic Plan
A strategic plan provides the basic control mechanism for the
organization. When there are indications that activities do not facilitate the
accomplishment of strategic goals, these activities are either set aside,
modified or expanded. These corrective measures are made possible with the
adoption of strategic plans.

The Long-Range Financial Plan

The planning horizon differs from company to company. Engineering
firms, however, require longer term financial plans. This is because of the
long lead times needed for capital projects.
The financial plan recommends a direction for financial activities. If
the goal does not appear to be where the firm is headed, the control
mechanism should be made to work.

The Operating Budget

An operating budget indicates the expenditures, revenues, or profits
planned for some future period regarding operations. The figures appearing
in the budget are used as standard measurements for performance.

Performance Appraisals
Performance appraisal measures employee performance. As such, it
provides employees with a guide on how to do their jobs better in the future.
Performance appraisals also function as effective checks on new policies and
programs. For example, if a new equipment has been acquired for the use of

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an employee, it would be useful to find out if it had a positive effect on his

performance.

Statistical Reports
Statistical reports pertain to those that contain data on various
developments within the firm. Among the information which may be found
in a statistical report pertains to the followings:
1. Labor efficiency rates

2. Quality control rejects

3. Accounts payable
4. Sales reports
5. Accident reports
6. Power consumption report

Policies and Procedures

Policies refer to the framework within which the objectives must be pursued.
A procedure is a plan that describes the exact series of actions to be taken in
a given situation.
An example of policy:
Whenever two or more activities compete for the company’s attention, the
client take priority.
An example of a procedure:
Procedure in the purchase of equipment:

1. The concerned manager forwards a request for

purchase to the purchasing officer;

2. The purchasing officer forwards the request to top

management for approval;

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3. When approved, the purchasing officer makes a

canvass of the requested item; if disapproved, the
purchasing officer returns the form to the requesting
manger;
4. The purchasing officer negotiates with the lowest
complying bidder.

Strategic Control Systems

To be able to assure the accomplishment of the strategic objectives of the
company, strategic control systems become necessary. These systems
consist of the following:
1. Financial analysis
2. Financial ratio analysis

Financial Analysis
The success of most organizations depends heavily on its financial
performance. It is just fitting that certain measurements of financial
performance be made so that whatever deviations from standards are found
out, corrective actions may be introduced.
A review of the financial statements will reveal important details about the
company’s performance.
The income statement contains information about the company’s gross
income, expenses, and profits.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach used in controlling
activities. Under this method, one account appearing in the financial
statement is paired with another to constitute a ratio. The result will be
compared with a required norm which is usually related to what other

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companies in the industry have achieved, or what the company has achieved
in the past. When deviations occur, explanations are sought in preparation
for whatever action is necessary.
Financial ratios may be categorized into the following types:
A. Liquidity ratios – these ratios assess the ability of a company to meet
its current obligations. The following ratios are important indicators
of liquidity:
1. Current ratio – this shows the extent to which current
assets of the company can cover its current liabilities.
Formula:
Current ratio = current assets/current liabilities

2. Acid-test ratio – this measure of the firm’s ability to

pay off short-term obligations with the use of current
assets and without relying on the sale of inventories.
Formula:

Acid-test ratio = current assets – inventories/current liabilities

B. Efficiency Ratios – these ratios show how effectively certain assets or
liabilities are being used in the production of goods and services.
Among the more common efficiency ratios are:
1. Inventory turnover ratio – this ratio measures the
number of times an inventory is turned over or sold
each year. This computed as follows:
Inventory turnover ratio = cost of goods sold/inventory
2. Fixed asset turnover – this ratio is used to measure
utilization of the company’s investment in its fixed
assets, such as its plant and equipment. The formula
used is as follows:
Fixed asset turnover = net sales/net fixed assets

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C. Financial Leverage Ratios – this is a group of ratios designed to assess

the balance of financing obtained through debt and equity sources.
1. Debt to total assets ratio – this ratio shows how
much of the firm’s assets are financed by debt.
Formula: debt to total assets ratio = total debt/total assets
1. Times interest earned ratio – this ration
measures the number of times that earnings
before interest and taxes cover or exceed by
using the following formula:
𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥+𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝑇𝑖𝑚𝑒𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

D. Profitability Ratios – these ratios measure how much operating

income or net income a company is able to generate in relation to its
assets, owner’s equity, and sales.
1. Profit margin ratio – compares the net profit to the
level of sales.
Formula: profit margin ratio = net profit/net sales
1. Return on assets ratio – this ratio shows how much
income the company produces for every peso invested
in assets.
Formula: return on assets ratio = net income/assets

1. Return on equity ratio – this ratio measures the

returns on the owner’s investment.

Formula: return on equity ratio = net income/equity

Identifying Control Problems
Recognizing the need for control is one thing, actually implementing it is
another. When operations become complex, the engineer manager must
consider useful steps in controlling. Kreitner mentions three approaches.

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1. Executive reality check

2. Comprehensive internal audit
3. General checklist of symptoms of inadequate

Executive Reality Check

The engineer manager of a construction firm could, once in a while, perform
the work of one of his laborers. In doing so, he will be able to see things that
he never sees inside the confines of his air-conditioned office. Because the
said action expose the engineer manager to certain realities, the term
executive reality check is very appropriate.

Comprehensive Internal Audit

An internal audit is one undertaken to determine the efficiency and
effectivity of the activities of an organization. Among the many aspects of
operations within the organization, a small activity that is not done right may
continue to be unnoticed until it snowballs into a full blown problem.
A comprehensive internal audit aims to detect dysfunctions in the
organization before they bring bigger troubles to management.

Symptoms of Inadequate Control

If a comprehensive internal audit cannot be availed of for some reason, the
use of a checklist for symptoms of inadequate control may be used.
Kreitner has listed some of the common symptoms as follows:

1. An unexplained decline in revenues and profits.

2. A degradation of service (customer complaints).
3. Employee dissatisfaction (complaints, grievances,
turnover).

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4. Cash shortages caused by bloated inventories or

delinquent accounts receivable.
5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks,
excessive paperwork).
7. Excessive costs.

8. Evidence of waste and inefficiency (scrap, rework).

Reference:
Roberto G. Medina(1999). Engineering Management, First Edition.
Distributed by REX Book Store, Inc.(RBSI)

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