Chapter 12

Performance Evaluation Using

the Balanced Scorecard

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?

Introduction

•Factors other than financial performance may be needed to be successful.

•Is quality more important than cost?

•Is timeliness more important than meeting the budget?

•Is customer service more important than Return On Investment ?

The Balanced Scorecard

•Uses a set of financial and nonfinancial measures that relate to the critical success factors of the organization.•Helps to keep management focused 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.

The Balanced Scorecard

The balanced scorecard approach integrates

financial and nonfinancial performance measures.

The Balanced Scorecard Approach to Performance

MeasurementFINANCIAL PERSPECTIVE

How do we create value for our stakeholders?

FINANCIAL PERSPECTIVEHow do we create value for our

stakeholders?

CUSTOMER PERSPECTIVEHow do customers view us?CUSTOMER PERSPECTIVE

How 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

The Balanced Scorecard

Financial Perspective•Primary goal of every profit-making enterprise is to show a profit.•However, here financial performance is seen in the larger context of the company’s overall goals and objectives relating to its customers and suppliers, internal processes, and employees.

The Balanced Scorecard

Customer Perspective

Critical success factors include increasing the quality of products and services, reducing delivery time, and increasing customer satisfaction.

Measures of performance include the number of warranty claims and returned products, customer response time and the percentage of on-time deliveries, and customer complaints and repeat business.

A second dimension deals with the increasing market share and penetrating new markets. Measures of performance include market share, market saturation, and new products introduced into the market place.

The Balanced Scorecard

Internal Operations Perspective

Deals with objectives across the company’s entire value chain—from research and development to post-sale customer service.

Critical success factors improve quality throughout the production process, increasing productivity, and increasing efficiency and timeliness.

The Balanced Scorecard

Learning and Growth PerspectiveLinks 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.

Improving employee moraleIncreasing information systems capabilitiesProduct innovations

The Balanced Scorecard

The balanced scorecard approach requires looking at performance from four

different but related perspectives: financial,

customer, internal business process, and learning and growth.

A Focus on Quality

QUALITY: Meeting or exceeding customers'

expectations

Product performs as it is intended

Product must be reliable and durableThese features are

provided at a competitive price

A Focus on Quality

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 ISO to control the quality of products sold in Europe.

The Costs of Quality

To facilitate the comparison of the benefits of providing high-quality products or services with the costs that result from poor quality. Four general categories of quality costs include:

•Prevention costs

•Appraisal costs

•Internal failure costs

•External failure costs

The Costs of Quality

Prevention Costs

Costs incurred to prevent product failure from occurring.

Incurred early in the value chain and includes design and engineering, as well as training, supervision, and the costs of quality improvement projects.

The Costs of Quality

Appraisal (detection) Costs

Incurred in inspecting, identifying, and isolating defective products and services before they reach the customer.

Includes costs of inspecting raw materials, testing goods throughout the manufacturing process, and final product testing and inspection.

The Costs of Quality

Internal Failure Costs

Incurred once the product is produced and then determined to be defective, but before it is sold to customers.

Includes the material, labor, and other manufacturing costs incurred in reworking defective products and the costs of scrap and spoilage.

The Costs of Quality

External Failure Costs

Incurred after a defective product is delivered to a customer.

Includes 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.

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.

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.

Environmental Costing

Environmental Detection Costs: The costs of activities executed to determinewhether products, processes, and other activitieswithin the firm are in compliance with appropriateenvironmental standards.

Environmental Costing

Environmental Internal Failure Costs:

The costs of activities performed to eliminateand manage contaminants and waste that have been produced but not discharged into the environment.

Environmental Costing

Environmental External Failure Costs:

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

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?

Efficiency and Timeliness Measures

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 Complet

edOrder

Receipt Time

Order Waiting

Time

Order Manufacturin

g Time

Order Delivery

Time

Total Customer Response Time

Efficiency and Timeliness Measures

Northern Lights Custom Cabinets

Manufacturer of approximately 30 custom cabinets each yearWait time =12 hoursInspection time = 2 hoursProcessing time = 48 hoursMove time = 2 hours

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

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

Northern Lights Custom Cabinets

Value-Added Time Processing time = 48 hours or 6 days

Non-Value-Added TimeWait time + Inspection time + Move

time = 12 + 2 +

2 = 16 hours or 2 days

Northern Lights Custom Cabinets

Manufacturing Cycle Efficiency (MCE)

= Value-added time/Manufacturing cycle time

= 6 days / 8 days= 75%

Efficiency and Timeliness Measures

In a brewery, beer must sit in storage vats for a period of time while waiting

to be bottled or packaged for

delivery.Is this “wait time”

value-added or non-value- added?

Marketing Measures

Marketing Measures are linked to the financial, customer service, and learning and growth

perspectives of the balanced scorecard.

End of Chapter 12I knew I

should have paid more

attention tothe scorecard!