Balanced Scorecard.stagE3 CMAPA
5
ICMAP STAGE 3, Q 3 CMAPA WINTER 2010 KHALID AZIZ 0322-3385752 Balanced Scorecard: Definition and Explanation: A balanced scorecard consists of an integrated set of performance measures that are derived from the company's strategy and that support the company's strategy throughout the organization. A strategy is essentially a theory about how to achieve the organization's goals. Under the balanced score card approach, top management translates its strategy into performance measures that employees can understand and can do something about. For example, the amount of time passengers have to wait in line to have their baggage checked might be a performance measure for the supervisor in charge of the Southwest Airlines check-in counter at an airport. This performance measure is easily understood by the supervisor, and can be improved by the supervisor's actions. Balance Score Card: From strategy to performance measures Performance Measures Financial "Has our financial performance improved?" ←What are our financial goals? ↑ Customers "Do customers recognize that we are delivering more value? ←What customers do we want to serve and how are we going to win and retain them? ↑ Internal Business Processes "Have we improved key business processes so that we can deliver more value to customers?" ←What internal business processes are critical to providing value to customers? ←Vision and strategy ↑ Learning and Growth "Are we maintaining our ability to change and improve?" Performance measures used in the balance scorecard approach tend to fall into the four groups illustrated above, financial, customers, internal business process, and learning and growth. Internal business processes are what the company does in an attempt to satisfy customers. For example, in a manufacturing company, assembling a product is an internal business process. The basic idea is that learning is necessary to improve internal business processes; improving business process is necessary to improve customer satisfaction; and improving customer satisfaction is necessary to improve financial results. In the balanced scorecard approach a particular object, such as of profit of $10 million, is not emphasized but a continual improvement is encouraged. In many industries, this is a matter of survival. If an organization does not continually improve, it will eventually lose out to competitors that do. A wide rang of performance measures are used by companies in their balanced scorecard. Most of the performance measure used by companies are self explanatory. However we need to understand three important performance measures. These three measures are: 1. Delivery cycle time 2. Throughput time (Manufacturing cycle time) 3. Manufacturing cycle efficiency (MCE)
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Transcript of Balanced Scorecard.stagE3 CMAPA
ICMAP STAGE 3, Q 3 CMAPA WINTER 2010
KHALID AZIZ 0322-3385752
Balanced Scorecard:
Definition and Explanation: A balanced scorecard consists of an integrated set of performance measures that are derived from the company's strategy and that support the company's strategy throughout the organization. A strategy is essentially a theory about how to achieve the organization's goals. Under the balanced score card approach, top management translates its strategy into performance measures that employees can understand and can do something about. For example, the amount of time passengers have to wait in line to have their baggage checked might be a performance measure for the supervisor in charge of the Southwest Airlines check-in counter at an airport. This performance measure is easily understood by the supervisor, and can be improved by the supervisor's actions.
Balance Score Card: From strategy to performance measures
Performance Measures
Financial "Has our financial performance
improved?"
←What are our financial goals?
↑
Customers "Do customers recognize that we are
delivering more value?
←What customers do we want to serve and how are we going to win and retain them?
↑ Internal Business Processes
"Have we improved key business processes so that we can deliver
more value to customers?"
←What internal business processes are critical to providing value to customers?
←Vision and strategy
↑
Learning and Growth "Are we maintaining our ability to
change and improve?"
Performance measures used in the balance scorecard approach tend to fall into the four groups illustrated above, financial, customers, internal business process, and learning and growth. Internal business processes are what the company does in an attempt to satisfy customers. For example, in a manufacturing company, assembling a product is an internal business process. The basic idea is that learning is necessary to improve internal business processes; improving business process is necessary to improve customer satisfaction; and improving customer satisfaction is necessary to improve financial results. In the balanced scorecard approach a particular object, such as of profit of $10 million, is not emphasized but a continual improvement is encouraged. In many industries, this is a matter of survival. If an organization does not continually improve, it will eventually lose out to competitors that do. A wide rang of performance measures are used by companies in their balanced scorecard. Most of the performance measure used by companies are self explanatory. However we need to understand three important performance measures. These three measures are:
1. Delivery cycle time 2. Throughput time (Manufacturing cycle time) 3. Manufacturing cycle efficiency (MCE)
ICMAP STAGE 3, Q 3 CMAPA WINTER 2010
KHALID AZIZ 0322-3385752
Delivery Cycle Time:
Definition:
Delivery cycle time may be defined as the amount of time from when an order is received from a customer to when the completed order is shipped is called delivery cycle time. This time is clearly a key concern to many customers, who would like the delivery cycle time to be as short as possible. Cutting the delivery cycle time may give a company a key competitive advantage and may be necessary for survival. Consequently, many companies would include this performance measure on their balanced scorecard.
Throughput (Manufacturing Cycle) Time:
Definition:
The amount of time required to turn raw materials in to finished goods is called throughput time, or manufacturing cycle time. The relation between the delivery cycle time and throughput (manufacturing cycle time) is illustrated below.
Process time + Inspection time + Move time + Queue time Wait time ← Throughput (manufacturing cycle) time → ← Delivery cycle time →
Value added Activities: Process time Non-Value-Added Activities: Wait time, Inspection time, Move time, Queue time
As shown in above example, the throughput time or manufacturing cycle time is made up of, inspection time, move time, and queue time. Process time is the amount of time work is actually done on the product. Inspection time is the amount of time spent ensuring that the product is not defective. Move time is the time required to move materials or partially completed products from workstation. Queue time is the amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped.
Only one of these four activities adds value to the product and that is process time. The other three activities (inspecting, moving and queuing) add no value and should be eliminated as much as possible.
Manufacturing Cycle Efficiency: Through concerted effort to eliminate the non-value-added activities of inspecting, moving, and queuing, some companies have reduced their throughput time to only a fraction of previous levels. In turn, this has helped to reduce the delivery cycle time from months to only weeks or hours. Throughput time, which is considered to be a key measure in delivery performance, can be put into better perspective by computing the manufacturing cycle efficiency (MCE). The MCE is computed by relating the value added time to the through time, the formula of MCE is:
MCE Formula: Manufacturing Cycle Efficiency (MCE) = Value added time ÷ Throughput (manufacturing cycle) time
If the MCE is less than 1, then non value added time is present in the production process. An MCE of 0.5 for example, would mean that half of the total production time considered of inspection, moving, and similar non value added activities. In
ICMAP STAGE 3, Q 3 CMAPA WINTER 2010
KHALID AZIZ 0322-3385752
many manufacturing companies, the MCE is less than 0.1 (10%), which means that 90% of the time a unit is in process is spent on activities that do not add value to the product. By monitoring the MCE, companies are able to reduce non value added activities and thus get products into the hands of the customers more quickly and at a lower cost. To provide an example of these measures, consider the following data for Novex company.
Example: Novex company keeps careful track of the time relating to orders and their production. During the most recent quarter, the following average times were recorded for each unit of order.
Wait time Inspection time Process time Move time Queue time
Days 17.0 0.4 2.0 0.6 5.0
Goods are shipped as soon as production is completed.
Required:
1. Calculate the throughput time, or velocity of production. 2. Calculate the manufacturing cycle efficiency (MCE). 3. What percentage of the production time is spent in non-value-added activities? 4. Calculate the delivery cycle time
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Solution: 1. Throughput time = Process time + Inspection time + Move time + Queue time
2.0 days + 0.4 days + 0.6 days + 5.0 days 8.0 days
2. In this example, only process time represents value added time; therefore, manufacturing cycle efficiency would be computed using the following formula:
MCE = Value added time ÷ Throughput time 2.0 days ÷ 8.0 days
0.25
Thus once put into production, a typical unit is actually worked on only 25 % of the time. 3. Since the MCE is 25%, the complement of this figure, or 75% of the total production time is spent in non-value-added activities. 4. Delivery cycle time = wait time + Throughput time
17.0 days + 8.0 days 25.0
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