Performance Evaluation Using the Balanced Scorecard CHAPTER 14 Performance Evaluation Using the Balanced Scorecard © 2009 Cengage Learning

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 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 ?

The 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

The Balanced Scorecard Key Concept The balanced scorecard approach integrates financial and nonfinancial performance measures.

The Balanced Scorecard Approach to Performance Measurement FINANCIAL PERSPECTIVE How do we create value for our stakeholders? INTERNAL BUSINESS PERSPECTIVE At what business processes must we excel? CUSTOMER PERSPECTIVE How do customers view us? Strategy LEARNING and GROWTH PERSPECTIVE How do we continue to improve, learn and grow?

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

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

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)

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

The Balanced Scorecard Key Concept The balanced scorecard approach requires looking at performance from four different but related perspectives: financial, customer, internal business, and learning and growth.

Measuring and Controlling Quality Costs 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

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.

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

Costs incurred to prevent product failure from occurring. The Costs of Quality Prevention 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.

Appraisal (detection) Costs The Costs of Quality Appraisal (detection) Costs Incurred 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.

Internal Failure Costs 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. Include 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. 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.

Measuring and Controlling Environmental Costs The 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 determine whether products, processes, and other activities within the firm are in compliance with appropriate environmental standards.

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.

Environmental Costing Environmental External Failure Costs The costs of activities performed after discharging contaminants 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 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 Waiting Time Order Manufacturing Time Order Delivery Time Order Receipt Time Total Customer Response Time

Efficiency and Timeliness Measures Northern Lights Custom Cabinets Manufacturer of approximately 30 custom cabinets each year Wait time = 12 hours Inspection time = 2 hours Processing time = 48 hours Move 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: time spent actually manufacturing a product Processing time = 48 hours or 6 days Non-value-added Time: includes wait time, moving time, etc. Wait time + Inspection time + Move time = 12 + 2 + 2 = 16 hours or 2 days

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%

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

Marketing Effectiveness Key Concept The four perspectives of the balanced scorecard revolve around measures of quality, environmental management, productivity, efficiency and timeliness, and marketing effectiveness.