Critical Point Control

What is Critical Point Control?

Critical Point Control refers to a specific step, stage, or procedure in a process where control can be applied to prevent, eliminate, or reduce a hazard to an acceptable level.

When company is small in size managers might control operations through careful personal observation. When the company grow in size and the operations become complex, managers have to do much more than personally observing the operations. He then chooses points for special attention and then watches them to be sure that whole operation is proceeding as planned. These points of limiting factor are called critical points of control. These are the critical areas of control which best reflects the organizational goals.

Poor performance in these areas indicates deviations from the standards and requires the control system. This is called the principle of critical point control which states “effective control requires attention to those factors critical to evaluating performance against plans”.

Selecting a critical point of control is an art. It depends upon one’s ability to do so. In this connection managers must ask themselves such questions as: What will best reflect the goals of my department? What will best show me when these goals are not being met? What will best measure critical deviations? What will tell me who is responsible for any failure? What standards will cost the least? For what standards is information economically available?

Features of Critical Points

Critical points of control carry the following features:

• Critical points are related to important and vital areas of operation. For example, critical point in production process is input because output depends on quality and quantity of input.
  
  
• Critical points aim at preventing the damage rather than curing it. In production process huge amount of capital is invested. If quality checks are done after production, defects in the product will make the entire batch useless and the money invested becomes expenditure. Many companies therefore run sample production to test for quality before going for actual production at mass scale.
  
  
• Critical points aim at indicating financial performance of the company before preparing financial accounts. Checking of accounts at regular intervals prevents company from incurring
  
  
• losses. Critical point relate not only to tangible features viz. production, sales, profits; but also to intangible features viz. competence of manager, behaviour of employee, attitude etc.

Types of Critical Point Standards

Every objective, goal, policy, procedure, budget of a planning program becomes standards against which performance can be measured. In practice, the critical point standards tend to be of following types:

• Physical standards: These are non-monetary standards and are commonly used at operating level where materials are used, labour is employed, services are rendered, and goods are produced. They are expressed in quantities such as, labour hours per unit of output, units of production per machine hour, quantity of fuel per horsepower produced etc. Physical standards may also reflect quality, such as hardness of bearing, durability of fabric, fastness of colour etc.
  
  
• Cost standards: These are monetary standards which are also used at operating levels. They are expressed in monetary value such as direct and indirect cost per unit produced, labour cost per unit, material cost per unit, selling cost per unit of sales etc.
  
  
• Capital standards: These are application of monetary measurements to physical items. They are related to capital invested in the firm rather than the operating cost and are therefore primarily related to the balance sheet rather than to income statement. Most widely used standard is return-on-investment. Other capital standards are ratios such as current asset to current liability, fixed investment to total investment, cash and receivables to payables, notes or bonds to stock, size and turnover of inventories etc.
  
  
• Revenue standards: They arise from attaching monetary values to sales. For example, revenue per passenger per mile, average sale per customer, sales per capita etc.
  
  
• Program standards: They are related to some activity with subjective judgements, for example, a manager has to develop a variable budget for sales training program or for development of new product, or for improving performance of sales force etc. Though such programs carry subjective judgements, timing, quantity of material required and other factors can be used as objective standards.
  
  
• Intangible standards: These are difficult to express as they do not involve physical or monetary values. For example, standard of competence for manager, standard for advertising campaign to meet objectives, standard to measure public relation program of company, loyalty of supervisors towards company etc.
  
  
• Goals as standards: With the approach of MBO and developing means-end chain in hierarchy of objectives, goals are used as performance standards at all levels of management. Quantitative goals take the form of standards outlined above. But qualitative goal is a challenge to fix as tangible standard. It depends upon situation or program. For example, sales training program is spelled out to train sales personnel with some specific characteristics, and these characteristics themselves furnish standards and tend to become objective and therefore tangible.