1. CHAPTER © jsnyderdesign / iStockphoto 11 PERFORMANCE EVALUATION REVISITED

2. 11 WHAT’S UP AT C&C? ► Several changes to implement in the coming year with the hope of improving profitability ► Managers have a habit of waiting to see the final income statement before assessing operations ► Managers need to be more proactive, but they don’t know how

3. PERFORMANCE EVALUATION REVISITED AND EXPANDED Unit 11.1 111. Unit 11.2Unit 11.3 © Tomwang112 / iStockphoto

4. 11 TWO TYPES OF MEASURES ► Lagging indicators Measurement occurs after action has occurred ► Leading Indicators Useful in predicting future performance through a cause-and-effect relationship Gives time to take corrective action ► Need to use a combination of lagging and leading indicators

5. 11 CAN LAGGING BECOME LEADING? TEST SCORE LEVEL OF STUDYING COURSE GRADE

6. 11 FINANCIAL AND NONFINANCIAL MEASURES ► Financial The traditional way of measuring success Based on accounting results Objective in nature ► Nonfinancial Not based on accounting results May be more subjective in measurement Growing in use ► Need both

7. 11 EXAMPLES OF NONFINANCIAL MEASURES Source: Chee W. Chow and Wim A. Van der Stede, “The Use and Usefulness of Nonfinancial Performance Measures,” Management Accounting Quarterly, 7, no. 3 (Spring 2006): 3.

8. 11 ARE NONFINANCIAL MEASURES IMPORTANT? Source: Deloitte LLP, In the Dark: What Boards and Executives Don’t Know about the Health of Their Businesses, 2007

9. 11 BUT… How would you rate your organization’s record of measuring and monitoring financial and nonfinancial aspects of performance? What are the main barriers to the effective use of nonfinancial performance measures by your organization? Source: Deloitte LLP, In the Dark: What Boards and Executives Don’t Know about the Health of Their Businesses, 2007

10. 11 CHARACTERISTICS OF A GOOD MEASURE ► S pecific – relates to the process and is clear ► M easurable – complete and accurate ► A ctionable – can be influenced ► R elevant – relates to corporate objective ► T imely – must be received in time to matter

11. 11 THE TRICK IS TO MEASURE WHAT YOU WANT TO BE DONE. A MANAGEMENT TRUISM…

12. 11 WHY USE PERFORMANCE MEASURES? Source: David Hatch, “Smart Decisions: The Role of Key Performance Indicators,” Aberdeen Group, September 2007

13. 11 HOW DOES MEASUREMENT PLAY OUT? ► A company measures delivery outcomes based on total delivery costs. The delivery department chooses slower, cheaper means of deliver which results in numerous missed delivery dates. ► An attorney’s performance is measured in billable hours. On a four-hour flight to one client he spends three hours researching a second case. At the end of the day he bills a total of seven hours for the four-hour flight.

14. 11 A REAL LIFE EXAMPLE ► Domino’s Pizza once promised to deliver pizza in 30 minutes or less, guaranteed, or it was free ► In 1992, the company paid $2.8 million to the family of an Indiana woman killed by a driver ► In 1993, a judgment of over $78 million against the company (settled for an estimated $15 million) ended the guarantee

15. THE BALANCED SCORECARD Unit 11.1 Unit 11.2 Unit 11.3 © Tomwang112 / iStockphoto112.

16. 11 WHAT IS THE BALANCED SCORECARD? ► A performance measurement system that includes both financial and non-financial measurements ► Aligns and focuses organization efforts and resources on corporate strategy ► Generally includes four performance perspectives ► Bain & Co.’s annual survey found 47% of global companies were using BSC at the end of 2011

17. 11 LEARNING AND GROWTH PERSPECTIVE  Employee turnover percentage  Training hours per employee  Training $ spent per employee  Number of employees possessing relevant professional certifications  Percentage of vacancies filled with internal candidates  Technology spending per employee  Suggestions generated by employees  Employee satisfaction rating  Revenue per employee Is the company developing its employees and providing the technologies they need to facilitate change and improvement?

18. 11 INTERNAL BUSINESS PROCESSES PERSPECTIVE Is the company improving its business processes to provide maximum customer value?  Percentage of on-time deliveries  Defect rate  Manufacturing cycle efficiency  Time to launch a new product  Time to resolve customer inquiry  Number of equipment breakdowns  Cost per unit  Rework hours  Average lead time

19. 11 CUSTOMER PERSPECTIVE Is the company meeting customers’ needs?  Customer satisfaction index  Number of customer complaints  Percentage of revenue from new customers  Number of new customers  Market share  Customer attrition rate  Customer loyalty index  Customer return rate  Customer profitability

20. 11 FINANCIAL PERSPECTIVE  Net income  Earnings per share  Return on investment  Residual income  EVA  Revenue growth  Profit margin  Cash flow  Net income per employee Is the company meeting its financial goals?

21. 11 HOW THE BSC WORKS

22. 11 THE BALANCED SCORECARD

23. 11 BUILDING A BSC ► Solidify corporate strategy ► Develop a strategy map (cause and effect relationships) ► Determine operational objectives ► Select appropriate measures 4 – 7 per perspective Leading and lagging ► Set targets for each measure

24. 11 C&C’s STRATEGY MAP

25. 11 C&C’S LEARNING AND GROWTH BSC Strategic ObjectiveMeasureGoal Develop trained workforce  Employee turnover  Employee satisfaction  % of cross-trained direct labor workers  < 5%  90% satisfied or very satisfied  > 80% Infuse corporate culture of quality throughout workforce  Number of employee- generated quality improvement suggestions 5 per quarter

26. 11 C&C’S INTERNAL BUSINESS PROCESSES BSC Strategic ObjectiveMeasureGoal Achieve operational excellence  Defect rate  Capacity utilization  Number of quality complaints from customers  Average production time  < 1%  85%  < 2 per quarter  45 minutes, pants 30 minutes, jerseys 135 minutes, jackets

27. 11 C&C’S CUSTOMER BSC Strategic ObjectiveMeasureGoal Develop reputation for quick turnaround  On-time delivery  Customer order lead time  100%  < 5 days Retain and grow customer base  Sales growth to existing customers  Sales growth to new customers  Customer satisfaction  12%  20%  100% rating of good or excellent

28. 11 C&C’S FINANCIAL BSC Strategic ObjectiveMeasureGoal Increase profit  Profit growth  Revenue growth  Return on assets  Return on investment  Contribution margin per product  10%  9%  12%  Flexible budget

29. BENCHMARKING Unit 11.1Unit 11.2 Unit 11.3 © Tomwang112 / iStockphoto113.

30. 11 BENCHMARKING ► Comparing performance to that of another organization ► Searching for successful practices that lead to world-class performance and replicating those ► Does not have to be in the same industry

31. MEASURES OF MEETING DELIVERY EXPECTATIONS Unit 11.1Unit 11.2Unit 11.3 Unit A 11 © Tomwang112 / iStockphoto A 11

32. 11 DELIVERY CYCLE TIME

33. 11 MANUFACTURING CYCLE EFFICIENCY Value-added processing time Total manufacturing cycle time