- Discussion of Operating Performance Measures
- Explanation of a Balanced Scorecard and performance evaluation


[SLIDE 1]

In addition to measuring the returns on investments, companies increasingly view time as a driver of strategy.  These types of measurements are nonfinancial and help organizations to improve the management of their resources.  Three important performance measurements of time used by organizations is:

<strong>Delivery Cycle Time</strong>- The amount of time from when a customer order is received to when the completed order is shipped. This time is clearly a key concern to many customers, who would like the delivery cycle time to be as short as possible. Cutting the delivery cycle time may give a company a key competitive advantage and may be necessary for survival. The formula is:  
<span style="color: red;">
Delivery cycle time = Wait time + Throughput time</span>

<strong>Throughput (Manufacturing Cycle) Time</strong>-  The amount of time required to turn raw materials into completed products. The throughput time, or manufacturing cycle time, is made up of process time, inspection time, move time, and queue time. Only one of these four activities adds value to the product and that is process time. The other three activities -- inspecting, moving, and queuing -- add no value and should be eliminated as much as possible in the manufacturing process. The formula is:  
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Throughput time = Process time + Inspection time + Move time + Queue time</span>

<strong>Manufacturing Cycle Efficiency (MCE)</strong>-  The value-added manufacturing time divided by manufacturing cycle time.  The formula is:
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MCE = Value-added time (Process time) /  Throughput (Manufacturing cycle) time</span>

Any non-value-added time results in an MCE of less than 1. An MCE of 0.5, for example, would mean that half of the total production time consists of inspection, moving, and similar non-value-added activities. In many manufacturing companies, the MCE is less than 0.1 (10%), which means that 90% of the time a unit is in process is spent on activities that do not add value to the product. Monitoring the MCE helps companies to reduce non-value added activities and thus gets products into the hands of customers more quickly and at a lower cost.


[SLIDE 2]

If an organization is to achieve its mission and objectives, identification of the areas in which it needs to excel must be done in order to establish measures of performance in these critical areas. Effective performance measurement requires an approach that uses both financial and nonfinancial measures that are linked to a company's mission and objectives. One such approach that has gained wide acceptance is the balanced scorecard.

The balanced scorecard is a framework that links the perspectives of an organization to the organization's mission, objectives, resources, and performance measures. The balanced scorecard focuses on achieving financial objectives and it also highlights the nonfinancial objectives that an organization must achieve to meet and sustain its financial objectives. The scorecard measures an organization's performance from four perspectives:<ul>
<li><strong>Financial</strong>: the profits and value created for shareholders</li>
<li><strong>Customer</strong>: the success of the company in its target market</li> 
<li><strong>Internal business processes</strong>: the internal operations that create value for customers</li>
<li><strong>Learning and growth</strong>: the people and system capabilities that support operations</li>
</ul>
The balanced scorecard reduces managers' emphasis on short-run financial performance such as quarterly earnings, because the key strategic nonfinancial and operational indicators, such as product quality and customer satisfaction, measure changes that a company is making for the long run. By balancing the mix of financial and nonfinancial measures, the balanced scorecard broadens management's attention to short-run and long-run performance. In many for-profit companies, the primary goal of the balanced scorecard is to sustain long-run financial performance. Nonfinancial measures simply serve as leading indicators for the hard-to-measure long-run financial performance.

Managers should carefully select performance measures for their own company's balanced scorecard, keeping the following points in mind.<ol>
<li>Performance measures should be consistent with, and follow from, the company's strategy. If the performance measures are not consistent with the company's strategy, people will find themselves working at cross-purposes. </li>
<li>Performance measures should be understandable and controllable to a significant extent by those being evaluated.</li>
<li>Performance measures should be reported on a frequent and timely basis. For example, data about defects should be reported to the responsible manager at least once a day so that problems can be resolved quickly.</li>
<li>The scorecard should not have too many performance measures.</li>
</ol>
With those points in mind, let's look at how a company's strategy affects its balanced scorecard.


[SLIDE 3]

A useful first step in designing a balanced scorecard is a strategy map. A strategy map is a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the financial, customer, internal business-process, and learning-and-growth perspectives. They use structural analysis to think carefully about the causal links in the strategy map. There are five types of conditions to consider in a structural analysis and they are: 

<strong>Strength of ties (causal links)</strong>- the causal links between strategic objectives can be qualified as strong, moderate, or weak. Managers and management accountants, who have a deep understanding of the business, determine if a tie is strong, moderate, or weak based on historical data, logic, and judgment.

<strong>Orphan objectives</strong>- a strategic objective with only weak ties leading out of it to other strategic objectives. Orphan status indicates an opportunity to evaluate the value that the strategic objective brings to the overall strategy. Orphan objectives do NOT contribute to the larger strategy in a way that warrants allocation of resources.

<strong>Focal points</strong>- a strategic objective that has many other links funneling into it. A focal point indicates strategic complexity; many strategic objectives need to be coordinated to achieve the focal objective.

<strong>Trigger points</strong>- a strategic objective where many ties spur out from it, resulting in the achievement of many strategic objectives. Trigger points are exciting because if an organization can achieve the trigger point strategic objectives, they enable multiple strategic objectives to be achieved.

<strong>Distinctive objectives</strong>- strategic objectives that distinguish an organization from its competitors, based on the organization's strategy. They are frequently located within the learning and growth and internal-business-process perspectives, because they define important activities undertaken by a company to satisfy customers and achieve financial performance.

In essence, the balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes. One of the advantages of the balanced scorecard is that it continually tests the theories underlying management's strategy. If a strategy is not working, it should become evident when some of the predicted effects (i.e., more car sales) do not occur. Without this feedback, the organization may drift on indefinitely with an ineffective strategy based on faulty assumptions.


[SLIDE 4]

Companies frequently use balanced scorecards to evaluate and reward managerial performance and to influence managerial behavior. Using the balanced scorecard for performance evaluation widens the performance management lens and motivates managers to give greater attention to nonfinancial drivers of performance. For the balanced scorecard to be effective, however, managers must view it as a fair way to assess and reward all important aspects of a manager's performance and promotion prospects. Managers must be confident that the performance measures are reliable, sensible, understood by those who are being evaluated, and not easily manipulated. The tying of appropriate compensation incentives to performance targets increases the likelihood that the goals of responsibility centers, managers, and the entire organization will be well coordinated. 

The effectiveness of a performance management and evaluation system relies on the coordination of responsibility center, managerial, and company goals. Performance can be optimized by linking goals to measurable objectives and targets and by tying appropriate compensation incentives to the achievement of the targets. Common types of incentive compensation are cash bonuses, awards, profit-sharing plans, and stock programs. Each organization's unique circumstances will determine the correct mix of measures and compensation incentives for that organization. If management values the perspectives of all of its stakeholder groups, its performance management and evaluation system will balance and benefit all interests. 

In conclusion, the balanced scorecard is a dynamic measurement system that evolves as an organization learns more about what works and what doesn't work and refines its strategy accordingly.