Chapter 12 NonFinancial Measures of Performance Topics to

Chapter 12 Non-Financial Measures of Performance

Topics to be Discussed Introduction The Balanced Scorecard A Focus on Quality

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?

Introduction Factors other than financial performance may be needed to be successful. Is quality more important than cost? Is timeliness more important than meeting budget? Is customer service more important than ROI?

Introduction Pause and Reflect Non-financial measures must be used with caution. For example, table turns may be an important non-financial measure of performance for restaurants. However, if too much emphasis is placed on the quick turnover of tables, customers may feel that they are being rushed and, once again, choose to go elsewhere.

Introduction Pause and Reflect, continued Can you identify restaurants that emphasize table turns? How about restaurants that do not emphasize table turns? What was your overall opinion of each type?

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.

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

The Balanced Scorecard Strategy FINANCIAL PERSPECTIVE To succeed financially, what kinds of financial performance should we provide to our investors? CUSTOMER PERSPECTIVE To achieve our vision, how should we be seen by our customers? VISION and STRATEGY LEARNING and GROWTH PERSPECTIVE To achieve our vision, how will we sustain our ability to change and improve? INTERNAL BUSINESS PERSPECTIVE To satisfy our shareholders and customers, at what business processes must we excel?

The Balanced Scorecard Strategy 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.

The Balanced Scorecard Strategy 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 increasing market share and penetrating new markets. Measures of performance include market share, market saturation, and new products introduced into the market place.

The Balanced Scorecard Strategy 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.

The Balanced Scorecard Strategy Innovation and Learning 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

The Balanced Scorecard Strategy Key Concept The balanced scorecard approach requires looking at performance from four different but related perspectives: financial, customer, internal business, and learning and growth.

A Focus on Quality QUALITY: Meeting or exceeding customers' expectations Product performs as it is intended Product should be reliable and durable Features are provided at a competitive price

A Focus on Quality Companies have focused on improving the quality of the products or services by using: TQM Market driven quality Strategic quality management

A Focus on Quality Toyota Motor Corp uses KAIZEN, a system of improvement based on a series of gradual and often small improvements rather than major changes requiring very large investments. www. toyota. com

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.

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

The Costs of Quality Prevention 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.

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 for goods throughout the manufacturing process, and final product testing and inspection.

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.

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 from unhappy customers.

The Costs of Quality Coca-Cola Antwerp, Belgium Plant failed to follow crucial quality control procedures Hundreds of sick customers due to contaminated carbon dioxide pumped into the holding tanks at the bottling plant. Estimated costs of more than $100 million.

Measures Topics Productivity Measures Efficiency and Timeliness Measures Marketing Measures

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?

Productivity Measures Pause and Reflect What type of productivity measures might be appropriate for a nonprofit organization like Motheread Inc. , whose mission is to educate mothers and fathers of the benefits of reading and to provide handson literacy training for parents and their children?

Efficiency and Timeliness Measures Customer Response Time: the time it takes to deliver a product or service after an order is placed. Customer Receives Product Customer Places Order Ready for Setup Order Receipt Time Order is Set Up Order Waiting Time Product Completed Order Manufacturing Time Total Customer Response Time Order Delivery Time

Efficiency and Timeliness Measures Pause and Reflect Are any of the activities in the total manufacturing time likely to be non-value added activities? What about the delivery time?

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

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 for delivery to customers. = Wait time + Processing time + Inspection time + Move time = 12 + 48 = 64 hours = 64 / 8 hours per work day = 8 days + 2

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 = 31. 25 units per year

Northern Lights Custom Cabinets Value-Added Time = Processing time = 48 hours or 6 days Non-Value-Added Time = Wait time + Inspection time + Move time = 12 + 2 = 16 hours or 2 days

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

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?

Efficiency and Timeliness Measures Pause and Reflect Can you think of other examples in which wait time could be considered valueadded?

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

Non-financial Measures of Performance Quality Measures Method of Measuring Customer satisfaction Customer complaints/returned meals/ amount of leftover food Inspections of raw material Amount of food not meeting quality criteria Percentage of scrap Food discarded in kitchen Efficiency and Timeliness Measures Customer response time meal Manufacturing cycle time Time from customer order to delivery of Meals served per hour

Non-financial Measures of Performance Marketing Measures Growth in market share Product innovation Productivity Measures Output per unit of Input Machine availability Method of Measuring Percentage change in sales compared to industry standards Sales of new menu items Finished meals per measure of key ingredients, meals per table per hour (table turns), sales dollars per table, etc Output per hour of pizza oven use and utilization

Non-financial Measures of Performance Pause and Reflect Consider some of the other companies introduced in the book (Top. Sail Construction, Tina’s Fine Juices, and Happy Daze Game Company). Can you think of non-financial measures of performance that might be appropriate for these companies?

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