1. Performance Evaluation Using the Balanced Scorecard
Chapter 12
Performance Evaluation Using the Balanced Scorecard

2. 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?

3. 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 ?

4. 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.

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

6. 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?
Strategy
CUSTOMER PERSPECTIVE
How do customers view us?
LEARNING and GROWTH PERSPECTIVE
How do we continue to improve, learn
and grow?

7. 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.

8. 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.

9. 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.

10. 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.
Improving employee morale
Increasing information systems capabilities
Product innovations

11. 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.

12. A Focus on Quality QUALITY:
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

13. 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.

14. 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

15. 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.

16. 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.
Includes costs of inspecting raw materials, testing goods throughout the manufacturing process, and final product testing and inspection.

17. 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.
Includes the material, labor, and other manufacturing costs incurred in reworking defective products and the costs of scrap and spoilage.

18. External Failure Costs
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.

19. 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.

20. 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.

21. 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.

22. 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.

23. Environmental Costing
Environmental External Failure Costs:
The costs of activities performed after discharging
contaminants and waste into the environment.

24. 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?

25. 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 Completed
Order Waiting Time
Order Manufacturing Time
Order Delivery Time
Order Receipt Time
Total Customer Response Time

26. 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

27. 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 =
= 64 hours
= 64 / 8 hours per work day
= 8 days

28. 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
= units per year

29. Northern Lights Custom Cabinets
Value-Added Time
Processing time = 48 hours or 6 days
Non-Value-Added Time
Wait time + Inspection time + Move time =
= 16 hours or 2 days

30. Northern Lights Custom Cabinets
Manufacturing Cycle Efficiency (MCE)
= Value-added time/Manufacturing cycle time
= 6 days / 8 days
= 75%

31. 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?

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

33. End of Chapter 12 I knew I should have paid more attention to
the scorecard!