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CHAPTER 14

Performance Evaluation Using the Balanced Scorecard

© 2009 Cengage Learning

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Introduction

When you choose a restaurant for a meal, are you concerned with:

•The price of the meal

•How long you have to wait to be seated

•The quality of the food that is served

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Introduction

In order to be successful, managers must focus on factors other than financial performance

•Is quality more important than cost?

•Is timeliness more important than meeting the budget?

•Is customer service more important than return on investment ?

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The Balanced ScorecardThe balanced scorecard

•Uses financial and nonfinancial measures that relate to the critical success factors of the organization•Helps management focus on ALL of a company’s critical success factors, not just its financial ones•Helps to keep short-term operating performance in line with long-term strategy

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The Balanced Scorecard

The balanced scorecard approach integrates financial and nonfinancial performance measures.

Key Concept

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The Balanced Scorecard Approach to Performance

Measurement

FINANCIAL PERSPECTIVEHow do we create value for our stakeholders?

FINANCIAL PERSPECTIVEHow do we create value for our stakeholders?

CUSTOMER PERSPECTIVEHow do customers view us?CUSTOMER PERSPECTIVEHow do customers view us?

INTERNAL BUSINESS

PERSPECTIVE

At what business processes must we

excel?

INTERNAL BUSINESS

PERSPECTIVE

At what business processes must we

excel?LEARNING and GROWTH PERSPECTIVE

How do we continue to improve, learn and grow?

LEARNING and GROWTH PERSPECTIVE

How do we continue to improve, learn and grow?

Strategy

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The Balanced Scorecard

Financial Perspective•Primary goal of every profit-making enterprise is to show a profit•Profit is necessary to provide a return to

investors, repay creditors, and compensate employees•Balanced scorecard looks at financial

performance in the context of the company’s overall goals and

objectives

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The Balanced Scorecard

Customer Perspective•A focus on meeting or exceeding customer needs; customers ultimately buy the company’s product or service and contribute to company profits•Critical success factors include increasing the quality of products and services, reducing delivery time, and increasing customer satisfaction

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The Balanced Scorecard

Internal Business Perspective•Deals with objectives across the company’s entire value chain—from research and development to post- sale customer service•Critical success factors include productivity, manufacturing cycle time and throughput, and manufacturing cycle efficiency (MCE)

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The Balanced Scorecard

Learning and Growth Perspective•Links the critical success factors in the other perspectives and ensures an environment that supports and allows the objectives of the other three perspectives to be achieved•Critical success factors include efficient and effective use of employees, increasing information systems capabilities, and product innovation

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The Balanced Scorecard

The balanced scorecard approach requires looking at performance

from four different but related perspectives: financial, customer,

internal business, and learning and growth.

Key Concept

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Measuring and Controlling Quality

CostsQUALITY

Meeting or exceeding customers' expectations

•Product performs as it is intended•Product must be reliable and durable•These features are provided at a competitive price

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Measuring and Controlling Quality Costs

ISO 9000

A set of guidelines for quality management focusing on design, production, inspection, testing, installing, and servicing of products, processes, and services. Originally developed by the International Standards Organization (ISO) to control the quality of products sold in Europe.

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The Costs of Quality

•Since providing quality can be costly, a framework is necessary to compare the benefits of providing quality with the costs that result from poor quality

•Four general categories of quality costs include:Prevention costs

Appraisal (detection) costs

Internal failure costs

External failure costs

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The Costs of QualityPrevention Costs

Costs incurred to prevent product failure from occurring.

Incurred early in the value chain and include design and engineering costs, as well as

training, supervision, and the costs of quality improvement projects.

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The Costs of Quality

Appraisal (detection) CostsIncurred in inspecting, identifying, and

isolating defective products and services before they reach the

customer.

Include costs of inspecting raw materials, testing goods throughout the

manufacturing process, and final product testing and inspection.

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The Costs of Quality

Internal Failure CostsIncurred once the product is produced and then determined to be defective, but before

it is sold to customers.

Include the material, labor, and other manufacturing costs incurred in reworking defective products and the costs of scrap

and spoilage.

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The Costs of Quality

External Failure CostsIncurred after a defective product is delivered

to a customer.

Include the cost of repairs made under warranty, replacement of defective parts,

product recalls, liability costs arising from legal actions against the seller, and

eventually lost sales.

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Measuring and Controlling Environmental

Costs

Environmental CostsThe costs of producing, marketing,

and delivering products and services—including post-purchase costs

caused by the use and disposal of products—that may have an adverse

effect on the environment.

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Environmental Costing

Environmental Prevention Costs

The costs of activities carried out to prevent the production of contaminants

and/or waste that could cause damage to the environment.

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Environmental Costing

Environmental Detection Costs

The costs of activities executed to determine whether products, processes, and other activities within the firm are in compliance with appropriate environmental standards.

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Environmental Costing

Environmental Internal Failure Costs

The costs of activities performed to eliminate and manage contaminants and waste that have been produced but not

discharged into the environment.

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Environmental Costing

Environmental External Failure Costs

The costs of activities performed after discharging contaminants and waste into the environment.

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Productivity Measures

Productivity is simply a measure of the relationship between outputs and inputs.

How many loaves of bread are baked per bag of flour?

How many cars are produced per labor hour?

How many calculators are produced per machine hour?

How many customers are serviced per shift?

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Efficiency and Timeliness

Customer Response Time: the time it takes to deliver a product or service after an order is placed.

Customer Places Order

Customer Receives

Product

Order Ready for Setup

Order is Set Up

Product Completed

Order Receipt Time

Order Waiting Time

Order Manufacturing Time

Order Delivery Time

Total Customer Response Time

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Efficiency and Timeliness Measures

Northern Lights Custom CabinetsManufacturer of approximately 30 custom cabinets each year

Wait time = 12 hoursInspection time = 2 hoursProcessing time = 48 hoursMove time = 2 hours

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Northern Lights Custom Cabinets

Manufacturing Cycle Time: the amount of time it takes to produce a good unit of product from the time raw material is received until the product is ready to deliver to customers.

Wait time + Processing time + Inspection time + Move time= 12 + 48 + 2 + 2= 64 hours= 64 / 8 hours per work day= 8 days

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Northern Lights Custom Cabinets

Throughput: the number of good units that can be made in a given period of time.(Assume 50 weeks X 5 days = 250 work days)

= 250 / 8 days manufacturing cycle time

= 31.25 units per year

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Northern Lights Custom Cabinets

Value-Added Time: time spent actually manufacturing a product

Processing time = 48 hours or 6 daysNon-value-added Time: includes

wait time, moving time, etc. Wait time + Inspection time + Move

time = 12 + 2 + 2 = 16 hours or 2 days

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Northern Lights Custom Cabinets

Manufacturing Cycle Efficiency (MCE): value-added time in the production process divided by the total manufacturing cycle time

6 days / 8 days = 75%

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Marketing Effectiveness

Marketing Measures are linked to the financial, customer, and learning and growth perspectives of the balanced scorecard.

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Marketing Effectiveness

The four perspectives of the balanced scorecard revolve around measures of quality, environmental management, productivity, efficiency and timeliness, and marketing

effectiveness.

Key Concept