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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?

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Chapter 12 l.jpg

Chapter 12

Non-Financial Measures of Performance


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Topics to be Discussed

Introduction

The Balanced Scorecard

A Focus on Quality


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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?


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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?


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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.


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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?


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The Balanced Scorecard

Uses a set of financial and non-financial 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.


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The Balanced Scorecard

Key Concept

The balanced scorecard approach integrates financial and non-financial performance measures.


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INTERNAL BUSINESS PERSPECTIVE

To satisfy our shareholders and customers, at what business processes must we excel?

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?

The Balanced Scorecard Strategy

FINANCIAL PERSPECTIVE

To succeed financially, what kinds

of financial performance should we

provide to our investors?


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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.


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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.


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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.


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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


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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.


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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


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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


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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


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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.


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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


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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.


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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.


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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.


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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.


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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.


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Measures Topics

Productivity Measures

Efficiency and Timeliness Measures

Marketing Measures


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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?


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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 hands-on literacy training for parents and their children?


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Customer Response Time: the time it takes to deliver a product or service after an order is placed.

Efficiency and Timeliness Measures

Customer Receives Product

Customer Places Order

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


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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?


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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


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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 + 2 + 2

= 64 hours

= 64 / 8 hours per work day

= 8 days


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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


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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 + 2

= 16 hours or 2 days


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Northern Lights Custom Cabinets

Manufacturing Cycle Efficiency (MCE)

= Value-added time/Manufacturing cycle time

= 6 days / 8 days

= 75%


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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?


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Efficiency and Timeliness Measures

Pause and Reflect

Can you think of other examples in which wait time could be considered value-added?


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Marketing Measures

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


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Non-financial Measures of Performance

Quality MeasuresMethod 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 Time from customer order to delivery of meal

Manufacturing cycle time Meals served per hour


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Non-financial Measures of Performance

Marketing Measures Method of Measuring

Growth in market share Percentage change insales compared to industry standards

Product innovation Sales of new menu items

Productivity Measures

Output per unit of Input Finished meals per measure of key ingredients, meals per table per hour (table turns), sales dollars per table, etc

Machine availability Output per hour of pizza oven use and utilization


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Non-financial Measures of Performance

Pause and Reflect

Consider some of the other companies introduced in the book (TopSail 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?


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End of Chapter 12

I knew I

should have

paid more

attention to

the scorecard!


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