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Balance scorecard
- 1. 11th Edition Chapter 10 McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 2. The Balanced Scorecard Management translates its strategy into performance measures that employees understand and accept. Financial Customers Performance measures Internal Learning business and growth processes McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 3. The Balanced Scorecard:From Exh. 10-11 Strategy to Performance Measures Performance Measures Financial What are our Has our financial financial goals? performance improved? What customers do Vision Customer we want to serve and Do customers recognize that how are we going to and we are delivering more value? win and retain them? Strategy Internal Business Processes What internal busi- Have we improved key business ness processes are processes so that we can deliver critical to providing more value to customers? value to customers? Learning and Growth Are we maintaining our ability to change and improve? McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 4. The Balanced Scorecard: Non-financial Measures The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 5. The Balanced Scorecardfor Individuals The entire organization Each individual should should have an overall have a personal balanced scorecard. balanced scorecard. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 6. The Balanced Scorecard A balanced scorecard should have measures that are linked together on a cause-and-effect basis. If we improve Another desired Then one performance performance measure measure . . . will improve. The balanced scorecard lays out concrete actions to attain desired outcomes. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 7. The Balanced Scorecard and Compensation Incentive compensation should be linked to balanced scorecard performance measures. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 8. The Balanced Scorecard Exh. 10-13 Jaguar Example Profit Financial Contribution per car Number of cars sold Customer Customer satisfaction with options Internal Business Number of Time to options available install option Processes Learning Employee skills in and Growth installing options McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 9. The Balanced Scorecard Jaguar Example Profit Contribution per car Number of cars sold Customer satisfaction Results with options Satisfaction Increases Strategies Increase Number of Time to Options options available install option Time Decreases Increase Employee skills in Skills installing options McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 10. The Balanced Scorecard Jaguar Example Profit Contribution per car Results Cars sold Number of cars sold Increase Customer satisfaction with options Satisfaction Increases Strategies Increase Number of Time to Options options available install option Employee skills in installing options McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 11. The Balanced Scorecard Jaguar Example Results Profit Contribution per car Contribution Increases Number of cars sold Customer satisfaction with options Number of Time to options available install option Time Decreases Strategies Increase Employee skills in Skills installing options McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 12. The Balanced Scorecard Jaguar Example Results Profit Profits Increase If number Contribution per car Contribution of cars sold Increases and contribution per car increase, Number of cars sold profits increase. Customer satisfaction with options Satisfaction Increases Strategies Increase Number of Time to Options options available install option Time Decreases Increase Employee skills in Skills installing options McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 13. Delivery Performance Measures Order Production Goods Received Started Shipped Process Time + Inspection Time Wait Time + Move Time + Queue Time Throughput Time Delivery Cycle Time Process time is the only value-added time. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 14. Delivery Performance Measures Order Production Goods Received Started Shipped Process Time + Inspection Time Wait Time + Move Time + Queue Time Throughput Time Delivery Cycle Time Manufacturing Value-added time Cycle = Efficiency Manufacturing cycle time McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 15. Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 16. Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days Throughput days= Process + Inspection + Move + Queue b. 0.2 time c. 4.1 days = 0.2 days + 0.4 days + 0.5 days + 9.3 days = 10.4 days d. 13.4 days McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 17. Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1% McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 18. Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% MCE = Value-added time ÷ Throughput time b. 1.9% = Process time ÷ Throughput time c. 52.0% = 0.2 days ÷ 10.4 days d. 5.1% = 1.9% McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 19. Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 20. Delivery cycleQuick Check time = Wait time + Throughput time = 3.0 days + 10.4 days = 13.4 days A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
- 21. End of Chapter10 McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Editor's Notes
- #3 A balanced scorecard consists of an integrated set of performance measures that are derived from and support a company’s strategy. Importantly, the measures included in a company’s balanced scorecard are unique to its specific strategy. The balanced scorecard enables top management to translate its strategy into four groups of performance measures – financial, customer, internal business process, and learning and growth – that employees can understand and influence.
- #4 The premise of these four groups of measures is that learning is necessary to improve internal business processes, which in turn improves the level of customer satisfaction, which in turn improves financial results. Note the emphasis on improvement, not just attaining some specific objective.
- #5 The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers.
- #6 While the entire organization has an overall balanced scorecard, each responsible individual should have his or her own personal scorecard as well. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard.
- #7 A balanced scorecard, whether for an individual or the company as a whole, should have measures that are linked together on a cause-and-effect basis. Each link can be read as a hypothesis in the form “If we improve this performance measure, then this other performance measure should also improve.” In essence, the balanced scorecard lays out a theory of how a company can take concrete actions to attain desired outcomes. If the theory proves false or the company alters its strategy, the measures within the scorecard are subject to change.
- #8 Incentive compensation for employees probably should be linked to balanced scorecard performance measures. However, this should only be done after the organization has been successfully managed with the scorecard for some time – perhaps a year or more. Managers must be confident that the measures are reliable, not easily manipulated, and understandable by those being evaluated with them.
- #9 Assume that Jaguar pursues a strategy as shown on your screen.
- #10 If “employee skills in installing options” increases, then the “number of options available” should increase and the “time to install an option” should decrease. If the “number of options available” increases and the “time to install an option” decreases, then “customer satisfaction with options” should increase.
- #11 If the “customer satisfaction with options” increases, then the “number of cars sold” should increase.
- #12 If the “time to install an option” decreases and the “customer satisfaction with options” increases, then the “contribution per car” should increase.
- #13 If the “number of cars sold” and the “contribution per car” increase, then the “profit” should increase.
- #14 Delivery cycle time is the elapsed time from when a customer order is received to when the completed order is shipped. Throughput (manufacturing cycle) time is the amount of time required to turn raw materials into completed products. This includes process time, inspection time, move time, and queue time. Process time is the only value-added activity of the four times mentioned.
- #15 Manufacturing cycle efficiency (MCE) is computed by dividing value-added time by manufacturing cycle (throughput) time. A manufacturing cycle efficiency less than one indicates that non-value-added time is present in the production process. Next we will look at a series of questions dealing with delivery performance measures.
- #16 Here’s your first question on delivery performance measures asking for a computation of throughput time.
- #17 Throughput time is the sum of process time, inspection time, move time, and queue time. The total for these four times is ten point four days.
- #18 Here’s your second question on delivery performance measures asking for a computation of manufacturing cycle efficiency.
- #19 Manufacturing cycle efficiency is found by dividing value-added time by throughput time. Process time is the only value-added time. Process time of zero point two days divided by throughput time of ten point four days results in a manufacturing cycle efficiency of one point nine percent.
- #20 Here’s your third question on delivery performance measures asking for a computation of delivery cycle time.
- #21 Delivery cycle time is the sum of wait time plus throughput time. The total for these two times is thirteen point four days.
- #22 Standards are used for both the cost and quantity of resources used in manufacturing goods or providing services. Comparing standards to actual performance results in either favorable or unfavorable variances. Variance analysis leads to better cost control and performance evaluation. A balanced scorecard consists of an integrated set of performance measures that are derived from and support a company’s strategy. The balanced scorecard enables top management to translate its strategy into four groups of performance measures – financial, customer, internal business process, and learning and growth – that employees can understand and influence.