Development of an Integrated Performance Measurement (PM) Model for Pharmaceutical Industry

authors:

avatar Hosein Shabaninejad a , avatar Mohammad Hossein Mirsalehian b , avatar Gholamhossein Mehralian c , *

Health Management and Economics Research Center, Iran University of Medical Sciences, Tehran, Iran.
Faculty of Entreprenurship, Tehran University, Tehran, Iran.
Department of Pharma Management and Pharmacoeconomics, School of Pharmacy, Shahid Beheshti University of Medical Sciences, Tehran, Iran.
Iranian Journal of Pharmaceutical Research : IJPR: Vol.13, issue Suppl; 207-215
article type: Original Article
received: December , 2013
accepted: December , 2013
DOI: https://doi.org/10.22037/ijpr.2014.1476

how to cite: Shabaninejad H, Mirsalehian M H, Mehralian G. Development of an Integrated Performance Measurement (PM) Model for Pharmaceutical Industry. Iran J Pharm Res. 2014;13(Suppl):e125461. https://doi.org/10.22037/ijpr.2014.1476.

Abstract

With respect to special characteristics of pharmaceutical industry and lack of reported performance measure, this study tries to design an integrated PM model for pharmaceutical companies. For generating this model; we first identified the key performance indicators (KPIs) and the key result indicators (KRIs) of a typical pharmaceutical company. Then, based on experts᾽ opinions, the identified indicators were ranked with respect to their importance, and the most important of them were selected to be used in the proposed model; In this model, we identified 25 KPIs and 12 KRIs. Although, this model is mostly appropriate to measure the performances of pharmaceutical companies, it can be also used to measure the performances of other industries with some modifications. We strongly recommend pharmaceutical managers to link these indicators with their payment and reward system, which can dramatically affect the performance of employees, and consequently their organization`s success.

Introduction

Considering the ongoing changes in the nature of the world᾽s markets during the last two decades and more competitive pressure on companies bearing a great impact on their operations (1,2), the performance management has prompted many organizations to implement new performance measurement and management systems (3) to survive in this new competitive environment. It will become increasingly important for all major businesses to evaluate and modify their performance measures to adapt with rapid changing and high competitive business environment (4). Dealing with the new competitive environment, the scholars suggested some approaches containing dimensions such as comprehensive PM models (3). Designing a good PM model requires its adaptability with related performance indicators (5), which means the PM should be comprehensive to contain all organizational financial and non-financial indicators; internal and external indicators; leading and lagging indicators and short-term and long-term indicators (6). Moreover, the performance management system helps an organization to adopt itself with strategies and stakeholders` needs (7).

Regarding special characteristics of pharmaceutical industry specified as Research and Development (R&D) activities’ intensity (8, 9), the most most profitable industry (10), uncertainty of the product development process (11), the importance of intellectual property protection (12, 13) and lack of reported performance measurement, makes it a particularly interesting setting for this research, which focuses on designing an integrated PM model for the pharmaceutical industry.

Literature review

With respect to its origins in management disciplines, the performance management contains different kinds of activities, including planning and execution of actions needed to ensure that the performance objectives are achieved. In spite of its multidisciplinary, the field of performance management has developed from diverse origins and different measures, and the management techniques and approaches have developed independently (3). The most expressive area of the evolution of performance management, and the area perhaps with the most attention of research is performance measurement (PM), which defined as a process of quantifying the effectiveness and efficiency of actions related to the performance of an organization (5). It includes feedbacks from activities related to the customer᾽s expectations and strategic objectives, which indicate the needs for improvement and development (14, 15). Moreover, PM contains development of strategies or objectives, and the need to take actions in order to improve the performance based on the perspectives offered by the performance measures (16). The main reason for measuring performance is to use its result in organizational decision makings at different levels of organization; strategic, tactical and operational levels (7). In fact, the PM tries to monitor and evaluate how an organization may obtain its defined goals.

Many researchers have focused on how organizations can design more appropriate measurement and management systems (17). Based on the literature, numerous frameworks (7, 18-21) have been developed to be followed by the organizations in order to design and implement different PM systems (22). The objective of such frameworks is to help organizations determining the performance in such a way that can reflect their objectives and appropriately evaluate their performance. This is often done by defining performance indicators, which generally measure the efficiency and effectiveness of an organization (5). Defined indictors should be connected closely to the vision, strategies, goals and objectives (6) to appropriately evaluate the organizational improvement.

PM indicators

Defining specific goals and indicators for organizational performance, which directs activities of an organization, is considered as a main step in designing a PM model. Indicators should be specific, measurable, reachable, robust and documented and must support the organizational mission. Though, we may define many indicators for organization, they should be prioritized based upon their importance. They also should be selected regarding their criticality for the organizational goals. Indicators can be classified in three following categories (23):

• Key Result Indicators (KRIs): determine how an organization performs in a perspective.

• Performance Indicators (PIs): determine what performances should be done.

• Key Performance Indicators (KPIs): determine what an organization should do to increase its performance dramatically.

To describe the relationship between these three performance measures (23), we use an onion analogy (Figure1): “The outside skin describes the overall condition of the onion, the amount of sun, water, and nutrients that it has received; how it has been handled from harvest to supermarket shelf. However, as we peel the layers off the onion, we will find more information. The layers represent the various performance indicators, and the core, the key performance indicators”.

To propose an appropriate PM system, the important things to be considered include how to define indicators that can cover all financial and non-financial performances, the relevance of indicators with organizational strategies (24) and also the relevance of these indicators with intentional characteristics of considered industry or company. For this, the use of KPIs and KRIs would be helpful.

Key result indicators (KRIs)

The KRIs shows the results of specific activity and provides a clear picture to show whether you are in a right direction or not. However, they are not helpful in improving these results. The KRIs include customer satisfaction, net profit before tax, profitability of customers, employee satisfaction and return on investment (23). KRIs provides information that is ideal for the boared of director, but not those involved in day-to-day management. Furthermore, KRIs typically covers a longer period of time and review on monthly/quarterly cycles, not on a daily/weekly basis as KPIs do.

Key performance indicators (KPIs)

KPIs provide a set of indicators focusing on those aspects of organizational performance that are the most crucial for the current and future success of the organization (23). Table 1 briefly compares the differences between KPIs and KRIs.

Table 1

Characteristics of KPI and KRI

KPIsKRIs
Non- financial Financial and non-financial
Useful as a report for CEOUseful as an executive summary for board of director
Conceivable for employees and corrective action can be doneNot suitable for employees and managers for identifying strength and weaknesses
It can be define personal responsibilities for indicators Generally CEO is responsible for indicators
Have dramatic effects on performance and a KPI relate with more than one organizational goals Summarize how much organizational goals achieved and a KRI relates only with one goal
KPIs can improve organizational performances A KRI is the result of number of managed activities in organization

Conceptual framework of the study

The main reason for measuring performance is to use its output in the organization`s decision making. Conceivably, the main function of PM is to define whether an organization achieves its goals or not (24). There is a hierarchical link between different levels of program in an organization and different levels of goals existing in an organization in respect to time horizon and importance. The main and the most important goal of organization is its mission, which explains the reason of organization`s existence and other goals and objectives defined regarding mission. The indicators can be used to measure how much the short-term and long-term goals have been obtained (Figure 2).

Research method

This study was performed as an email survey of pharmaceutical companies in Iran. The samples were selected among 200 experts. Experts are those with manager position for at least 10 years in the pharmaceutical companies. To calculate the number of samples, Cochran formula (25) showed 50 samples and we selected the samples via a random sampling method. The survey respondents had titles such as Senior Manager, Finance Manager, Quality Manager, Manufacturing Manager, R&D Manager, Marketing Manager, Human Resource Manager and Quality Control (QC) Manager. As Table 2 shows, most of the participants have more than 10 years job experience in the pharmaceutical industry (80 percent) and a quarter of the participants were top managers. Accordingly, we chose the respondents from managers who had comprehensive knowledge about company’s process, products and the performance management of pharmaceutical companies. We sent out 50 questionnaires, 25 of them were returned (response rate 50 %).

Table 2

Sample characteristics

Construct Classification Number Percentage
Field of the workSenior Manager624
Finance Manager28
Manufacturing Manager520
R & D Manager416
Marketing Manager312
Human Resource Manager14
QC Manager416
Job experience6-9 years520
10-15 years1040
Up 10 years1040
EducationMSc.728
Pharm.D.1456
PhD416

A draft questionnaire was compiled based on literature and practical information from the pharmaceutical industry. The draft questionnaire was then pretested with academics and a pharmaceutical industry expert to check its content and face validity, and the questionnaire was modified based on their comments. The modified questionnaire was then piloted to check its suitability and appropriateness for the target population. The questionnaire was piloted by four experts from pharmaceutical industry.

The respondents were asked to quantify according to a 5-point Likert scale. Anonymity was required due to sensitivity issues relating to the pharmaceutical industry. Therefore, the anonymity of the respondents was preserved in this survey. To identify the KPIs and KRIs for pharmaceutical industry based on expert opinions, we tested our hypothesis with t-test and Kendall᾽s W-Test.

H1 = μ < 3            H0 = μ ≥ 3

Results

The result of study presented in Table 3 and Table 4.

As Table 3 shows, 25 indicators were identified as KPIs in pharmaceutical context, three of which were rejected because they were not qualified based on the study hypothesis (indicators 28, 29 and 30) and the score of 2 other failed indicators were not statistically significant (indicators 14 and 18).

Table 3

KPIs of Pharmaceutical Company

NoFormulaMeanSDReference
1Number of recalled products in 6 months / Total number of products in 6 months50(26)
2Number of actual internal audit during last month / Total planned internal audit during last month50(26)
3Number of on time predictive maintenance orders in 1 month / Total number of predictive in 1 month maintenance orders50(27)
4Number of available connection channels in 1 month / Number of planned connection channels for customers in 1 month50(23, 28)
5Number of customer complaints about the quality and delivery of products during last month / Total number of customer complaints during last year4.950.4(27, 29)
6Average time from production license issue date to delivery / Number of working days4.830.36(26)
7Average time between production date of permit and receipt for batch stock / Number of working days4.790.63(30)
8Differences between staff award system and PM system in 3 months / Total value of staff awards in 3 months4.450.34(31) (27, 32)
9Total hours for production lines failures during last month / Total planned time for production during last month4.330.6(27, 33)
10Number of lower 70% of supplier satisfaction during 3 months / Total number of suppliers during 3 months4.320.23(27)
11Total cost of material purchasing procurement for each materials during past six months / Total cost of material purchasing during last year 4.250.12(23)
12Overall equipment effectiveness: Planning rate *Availability rate* Performance rate * Quality rate4.230.36(33)
13Physical and systemic inventory non-compliance during last 3 months / Total inventory items during last 3 months4.20.14(29)
14Average time between issue of sale plan and production plan / Number of working days40.37(34)
15Resolved non-compliance GMP in 3 months / Non-compliance in recent GMP compliance inspections in 3 months40.46(26)
16Average time between invoice to stock sale`s money in last month / Average time between invoice to stock sale`s money in last year40.24(35)
17Number of new confirmed sources / Total confirmed sources3.970.12(36)
18Average raw materials order lead time during past 6 months / Average order lead time during last year3.820.06(37, 38)
19Average time from purchase order issue and date of confirmation during last month / Average time from purchase order issue and date of confirmation during last year3.830.41(38)
20Total delay time of material purchasing during last 6 months /T otal delay time of material purchasing during last year 3.800.87(27)
21Number of supplier rejected materials in last month / Number of supplier rejected materials in last year3.790.76(38)
22Total number of corrective maintenance request in 1 year / Total number of maintenance request in 1 year3.710.65(27, 33)
23Difference between critical planned and spare parts for 1 month / Total number of critical spare parts for 1 month3.640.69(27)
24Difference between the time of requested issue and date of confirmation during last month / Difference between the time of requested issue and date of confirmation during last year3.460.32(38)
25Number of rejected batches during last month / Total number of produced batches during last month3.20.47(27)
26Hours of training programs per employee for 1 month / Total number of employees 3.120.43(27)
27Total production stopped because of utilities shortage / Total planned time for production3.10.24(27)
28Actual production time for each product during last month / Total standard production time during last month2.830.89(27, 29)
29Average rate of projects deviation from schedule time2.261.01(39)
30Average time between customer query and sale contract / Number of working days2.120.94(38)

As Table 4 shows, 12 indicators were identified as KRIs in pharmaceutical industry, which 1 indicator was rejected because it was not qualified based on hypothesis of the study (indicator 14) and the score of other failed indicator was not statistically significant (indicator 1).

Table 4

KRIs of Pharmaceutical Company

NOFormulaMeanSDReference
1Value of company`s IT investment during last 6 months / Value of company`s IT investment during current 6 months3.781.2(40)
2Value of company sale to pharmacies during 3 months / Total value of sales to pharmacies during last 3 months50(23)
3Value of net profit during last 3 months / Value of investment during last 3 months50(41)
4Current Ratio: Current assets / Current liabilities50(42)
5Current credit during last month / Total purchasing during last month4.600.18(42)
6Total cost reduction of raw materials by changing products formulation / Total cost reduction of raw materials4.120.23(23)
7Value of accounting profit during last month / Total value of company sales during last month4.120.34(43, 44)
8Value of exported pharma products during last three months /T otal value of pharma products exported during 3 months40.53(30)
9Value of sales during last 3 month / Value of inventories at stock during last 3 month40.41(27, 37)
10Current debt / Sales (value)3.900.46(42)
11 Value of new products’ profit for 3 months / Value of total products profit3.670.35(44)
12Total value of wasted materials for 1 month / Total value of materials for 1 month3.50.32(27, 29)
13Value of company sale at internal pharma market during last 3 months / Total sale at internal pharma market during last 3 month s30.34(30)
14Value of canceled invoice to customer during last 3 months / Value of company total sale during 3 months2.50.97(38)

PM model of study

Finally, the proposed PM model of the study was presented in Figure 2 From structural framework perspective (3), this PM model, covers both the performance and the result measures of an organization, and also from procedural framework perspective, this model is based on Wisner and Fawcett nine steps model (45). As showed in Figure 2 based on the PM model proposed by this study for measuring the organizational performance, 25 KPIs and 12 KRIs should be considered and each indicator has an equal weight for measuring KPIs and KRIs and for measuring the organizational performance following formula extracted from the proposed model:

PM=∑KRIs12×(0.5)+∑KRIs25×(0.5)

Discussion

Designing PM models is all about deciding on what measures should be selected, and importantly, which measures to be ignored. Due to budgetary constraints, the organizations should select the indicators that are critical for organizational success. In this study, we tried to define a number of limited measures in order to give clarity to what the organization is trying to achieve as well as the indicators preferred to be measured. However, some PM models try to do so (6), in this study, we selected the KPIs and KRIs which are crucial to assure the organizations achieving their key objectives and strategies and tracking their improvements on a single sheet of a paper. Based on the experts᾽ opinion, we identified the key indicators that have the most effects on the organizational performance. This help us to pay more attention to indicators with the maximum contribution in adding strategic value and thereby, to simplify the PM model regarding the number of key measures contributing to measure the performances. Moreover, with introducing KPIs, we propose the non-financial indicators, which are always missed in measuring the organizational performance.

Limitation and implication

The study has some limitations. While this survey covered only the pharmaceutical companies in Iran, the results might be slightly different from global point of view. It would be interesting to compare the results with the results of pharmaceutical industry in other countries. Moreover, the model proposed in this study did not specify the existence of a causal relationship between different perspectives of measurement; e.g. between performance and result measurements, and also may not reflect the needs and demands of all the stakeholders of a company.

However, this study presents important information about the less published KPIs and KRIs in pharmaceutical industry. Companies can thus utilize this information to implement and develop their own indicators in the future. Moreover, this model helps the managers to consider not just the result, but also the performances of their organization, and in this way, they may help them to take decision about priorities and objectives for individual activities and processes to better manage their organization.

Conclusion

In this study, we proposed an integrated PM model for a typical pharmaceutical company. To propose such a model, we used both the relevant literature and the experts’ opinions. Distinct characteristic of this model includes measurement of preferred and concise crucial performance indicators, known as KPIs and KRIs for pharmaceutical industry. Though, this model is more appropriate for measuring the performances of pharmaceutical companies, it can also be useful for measuring the performances of other industries with some modification. We strongly recommend pharmaceutical managers to link these indicators with their payment and reward systems, which will dramatically affect the performance of employees, and consequently their organization`s success.

References

  • 1.

    Javalgi RRG, Gross AC, Joseph WB, Granot E. Assessing competitive advantage of emerging markets in knowledge intensive business services. J. Business and Indust. Market. 2011;26:171-180.

  • 2.

    Depperu D, Cerrato D. Analyzing international competitiveness at the firm level: concepts and measures. Piacenza: Quaderni del Dipartimento di Scienze Economiche e Sociali, Università Cattolica del Sacro Cuore; 2005. 32 p.

  • 3.

    Folan P, Browne J. A review of performance measurement: Towards performance management. Computers in Indust. 2005;56:663-680.

  • 4.

    Mehralian G, Rajabzadeh A, Sadeh MR, Rasekh HR. Intellectual capital and corporate performance in Iranian pharmaceutical industry. J. intellectual capital. 2012;13:138-158.

  • 5.

    Neely A, Gregory M, Platts K. Performance measurement system design: a literature review and research agenda. Int. J. Operations and Produc. Manage. 2005;25:1228-1263.

  • 6.

    Kaplan RS, Norton DP. The Balanced Scorecard - Measures that Drive Performance. Harvard Business Rev. 1992:71-79.

  • 7.

    Neely AD, Adams C, Kennerley M. The performance prism: The scorecard for measuring and managing business success. London: Prentice Hall Financial Times; 2002.

  • 8.

    Hsieh PH, Mishra CS, Gobeli DH. The return on R&D versus capital expenditures in pharmaceutical and chemical industries. IEEE Transactions on Engineer. Manag. 2003;50:141-150.

  • 9.

    Rasekh HR, Mehralian G, Vatankhah-Mohammadabadi AA. Situation Analysis of R&D Activities: An Empirical Study in Iranian Pharmaceutical Companies. Iran. J. Pharm. Res. 2012;11:1013-1025. [PubMed ID: 24250532].

  • 10.

    Kesič D. Strategic analysis of the world pharmaceutical industry. Management: J. Contemporary Management Issues. 2009;14:59-76.

  • 11.

    Engelhardt HT, Garrett JR. Innovation and the pharmaceutical industry: critical reflections on the virtues of profit. M & M Scrivener Press; 2008.

  • 12.

    Roemer-Mahler A. Business conflict and global politics: The pharmaceutical industry and the global protection of intellectual property rights. Review of International Political Economy. 2013;20:121-152.

  • 13.

    Mehralian G, Rasekh HR, Akhavan P, Ghatari AR. Prioritization of intellectual capital indicators in knowledge-based industries: Evidence from pharmaceutical industry. Int. j. inform. manage. 2013;33:209-216.

  • 14.

    Lee S, Ahn H. Assessment of process improvement from organizational change. Information & management. 2008;45:270-280.

  • 15.

    Chan FT. Performance measurement in a supply chain. Int. J. Adv. Manufact. Technol. 2003;21:534-548.

  • 16.

    Ittner CD, Larcker DF, Randall T. Performance implications of strategic performance measurement in financial services firms. Accounting, Organizations and Society. 2003;28:715-741.

  • 17.

    Kaplan RS. Measuring manufacturing performance: a new challenge for managerial accounting research. Account. Rev. 1983:686-705.

  • 18.

    Hudson M, Smart A, Bourne M. Theory and practice in SME performance measurement systems. Int. J. Operations & Product. Manage. 2001;21:1096-1115.

  • 19.

    Rouse P, Putterill M. An integral framework for performance measurement. Manage. Decision. 2003;41:791-805.

  • 20.

    Bradley P. A performance measurement approach to the reengineering of manufacturing enterprises. NUI Galway: CIMRU; 1996.

  • 21.

    Kaplan RS, Norton DP, Horvбth P. The balanced scorecard. Boston: Harvard Business School Press; 1996.

  • 22.

    Bourne M, Neely A, Platts K, Mills J. The success and failure of performance measurement initiatives: perceptions of participating managers. Int. J. Operations & Product. Manage. 2002;22:1288-1310.

  • 23.

    Parmenter D. . Key performance indicators (KPI): developing; 2010.

  • 24.

    Kaplan RS, Norton DP. Transforming the balanced scorecard from performance measurement to strategic management: Part II. Accounting Horizons. 2001;15:147-160.

  • 25.

    Cochran WG. Sampling techniques. 2007.

  • 26.

    Iranian Food and Drug Organization. annual reports and protocols. 2013.

  • 27.

    Friedli T, Goetzfried M, Basu P. Analysis of the implementation of total productive maintenance, total quality management, and just-in-time in pharmaceutical manufacturing. Journal of Pharmaceutical Innovation. 2010;5:181-192.

  • 28.

    De Azevedo A, Pomeranz R. Customer Obsession: How to Acquire, Retain, and Grow Customers in the New Age of Relationship Marketing. McGraw-Hill; 2008.

  • 29.

    Gargeya VB. Plant level performance measurement: an exploratory case study of a pharmaceutical encapsulation company. Technovation. 2005;25:1457-1467.

  • 30.

    Prašnikar J, Škerlj T. New product development process and time-to-market in the generic pharmaceutical industry. Industrial Marketing Management. 2006;35:690-702.

  • 31.

    Chenhall RH, Langfield-Smith K. Multiple perspectives of performance measures. European Management Journal. 2007;25:266-282.

  • 32.

    Jeston J, Nelis J. Management by process: a (33) roadmap to sustainable business process management. Routledge; 2008.

  • 33.

    Muchiri P, Pintelon L, Gelders L, Martin H. Development of maintenance function performance measurement framework and indicators. Int. J. Product. Economics. 2011;131:295-302.

  • 34.

    Berrah L, Clivillé V. Towards an aggregation performance measurement system model in a supply chain context. Computers in Industry. 2007;58:709-719.

  • 35.

    Gunasekaran A, Williams HJ, McGaughey RE. Performance measurement and costing system in new enterprise. Technovation. 2005;25:523-533.

  • 36.

    Moses A, Åhlström P. Problems in cross-functional sourcing decision processes. J. Purchasing and Supply Management. 2008;14:87-99.

  • 37.

    Gunasekaran A, Patel C, McGaughey RE. A framework for supply chain performance measurement. Int. J. Product. Economics. 2004;87:333-347.

  • 38.

    Bhagwat R, Sharma MK. Performance measurement of supply chain management: A balanced scorecard approach. Computers & Industrial Engineering. 2007;53:43-62.

  • 39.

    Kwak YH, Ibbs CW. Project management process maturity (PM) 2 model. J. Manag. Engineer. 2002;18:150-155.

  • 40.

    Martinsons M, Davison R, Tse D. The balanced scorecard: a foundation for the strategic management of information systems. Decision support systems. 1999;25:71-88.

  • 41.

    Lenskold J. Marketing ROI: the path to campaign, customer, and corporate profitability. McGraw-Hill; 2003.

  • 42.

    Neely AD. Business performance measurement: theory and practice. Cambridge University Press; 2002.

  • 43.

    Darroch J, Miles MP. A research note on market creation in the pharmaceutical industry. J. Business Res. 2011;64:723-727.

  • 44.

    White S, Liu X. Organizational processes to meet new performance criteria: Chinese pharmaceutical firms in transition. Res. Policy. 1998;27:369-383.

  • 45.

    Wisner JD, Fawcett SE. Linking firm strategy to operating decisions through performance measurement. Produc. Inventor. Manage. J. 1991;32:5-11.