Balanced Scorecard

Balanced Scorecard AL F. BERBANO Balanced Scorecard is a strategic management system that defines a strategic- based responsibility accounting system. Strategy is defined as choosing the market and customer segments the business unit intends to serve, identifying the critical interna...

Balanced Scorecard AL F. BERBANO Balanced Scorecard is a strategic management system that defines a strategic- based responsibility accounting system. Strategy is defined as choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives. The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives: 1. the financial perspective; 2. the customer perspective; 3. the internal business process perspective, and 4. the learning and growth (infrastracture) perspective. Common Characteristics of Balanced Scorecard 1. It should be possible, by examining a company’s balanced scorecard, to infer its strategy and the assumptions underlying that strategy. 2. The balanced scorecard should emphasize continuous improvement rather than just meeting present standards or targets. 3. Some of the performance measures on the balanced scorecard should be non-financial. Common Characteristics of Balanced Scorecard 4. The scorecards for individuals should contain only those performance measures they can actually influence. 5. The ultimate objectives of the organization are usually financial, but better financial results cannot be attained without improving customers’ perceptions of the company’s products and services. In order to improve customers’ perceptions of products and services, it is usually necessary to improve internal business processes so that the products and services are actually better. And in order to improve the business processes, it is necessary that employees learn. The Balanced Scorecard as a motivation and feedback mechanism. The performance measures on the balanced scorecard provide motivation and feedback for improving. The Financial Perspective The financial perspective establishes the long-term and short-term financial performance objectives. The financial perspective is concerned with the global financial consequences of the other three perspectives. Thus, the objectives and measures of the other perspectives must be linked to the financial objectives. The financial perspective has three strategic themes: 1. Revenue growth 2. Cost reduction 3. Asset utilization The Customer Perspective The customer perspective is the source of the revenue component for the financial objectives. This perspective defines and selects the customer and market segments in which the company chooses to compete. The Process Perspective To provide the framework needed for this perspective, a process value chain is defined. The process value chain is made up of three processes: 1. Innovation process 2. Operations process 3. Post sales process Cycle time - is the time required to produce one unit of product. Velocity - is the number of units that can be produced in a given period of time (e.g., units per hour) The Learning/Innovation and Growth Perspective The learning and growth perspective is the source of the capabilities that enable the accomplishment of the other three perspectives’ objectives. Some Internal Business Process Performance Measures a. Delivery Cycle Time - this is the total elapsed time between when an order is placed by a customer and when it is shipped to the customer. Part of this time is wait time that occurs before the order is placed into production. b. Throughput (Manufacturing Cycle) Time - this is the total elapsed time between when an order is initiated into production and when it is shipped to the customer. It consists of process time, inspection time, move time, and queue time. The only element that adds value is processing time. Inspection time, move time, queue time, and their associated activities do not add value and should be minimized. Some Internal Business Process Performance Measures c. Manufacturing Cycle Efficiency (MCE) - MCE is the ratio of value added time (i.e., process time) to total throughput time. It represents the percentage of time an order is in production in which useful work is being done. The rest of time represents non-value added time (i.e. inspection time, move time, and queue time. Manufacturing Cycle Efficiency (MCE) can be found as follows: MCE = Processing Time Processing Time + Move Time + Inspection Time + Wait Time Quality Cost Measurement: Quality-linked activities - are those activities performed because poor quality may or does exist. Costs of quality are costs that exist because poor quality may or does exist. Control activities - are performed by an organization to prevent or detect poor quality. Control costs are the costs of performing control activities. There are two broad categories of control costs: prevention costs and appraisal costs. Prevention costs are incurred to prevent poor quality in the products or services being produced. Appraisal costs are incurred to determine whether products and services are conforming to their requirements or customer needs. Quality Cost Measurement: Failure activities - are performed by an organization or its customers in response to poor quality. Failure costs are the costs incurred by an organization because failure activities are performed. There are two broad categories of failure costs: 1. Internal Failure costs - are incurred because products and services do not conform to specifications or customer needs and the conformance is detected prior to being delivered to outside parties. 2. External Failure costs are incurred because products or services fail to conform to requirements or satisfy customer needs and the nonconformance is detected after being delivered to outside parties. Productivity Measurement: Productivity - measures the relationship between actual inputs used ( both quantities and costs) and actual outputs produced. Partial productivity - compares the quantity of output produced with the quantity of an individual input used. = Quantity of Output Produced Quantity of Input Used Total Factor Productivity - the ratio of quantity of output produced to the costs of all inputs used based on current period prices. = Quantity of Output Produced Costs of all Inputs Used Thank you!