Strategic Performance
Management
CHAPTER 12
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
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LLC.
12-2
The Balanced Scorecard – From
Strategy to Performance Measures
Performance Measures
Financial
Has our financial
performance improved?
Customer
Do customers recognize that
we are delivering more value?
Internal Business Processes
Have we improved key business
processes so that we can deliver
more value to customers?
What are our
financial goals?
What customers do
we want to serve and
how are we going to
win and retain them?
Vision
and
Strategy
What internal business processes are
critical to providing
value to customers?
Learning and Growth
Are we maintaining our ability
to change and improve?
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12-3
Learning Objective 1
Identify examples of
performance measures that are
appropriate for each of the four
balanced scorecard categories.
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12-4
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and influence.
Customer
Financial
Performance
measures
Internal
business
processes
Learning
and growth
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12-5
Learning and Growth Performance
Measures
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LLC.
12-6
Internal Business Process Measures
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12-7
Customer Measures
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12-8
Financial Measures
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12-9
The Balanced Scorecard – Financial v.
Nonfinancial Measures
The balanced scorecard framework rejects the notion that
improving process-oriented measures automatically leads to
financial success
Including a financial perspective serves the purpose of holding
organizations accountable for translating improvements in
nonfinancial performance to “bottom-line” results
If favorable trends in a company's learning and growth, internal
business processes, and customer measures do no translate to
financial results, the balanced scorecard is designed to force the
organization to re-examine its strategy for differentiating itself from
competitors.
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12-10
Learning Objective 2
Identify the four types of quality
costs and use them to create a
quality cost report.
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12-11
Quality of Conformance
Costs incurred to prevent defects or that
result from defects in products are known as
quality costs. Many companies are working
hard to reduce their quality costs.
When the overwhelming majority of products
produced conform to design specifications
and are free from defects.
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12-12
Prevention and Appraisal Costs
Support activities
whose purpose is to
reduce the number
of defects
Prevention
Costs
Appraisal Costs
Incurred to identify
defective products
before the products
are shipped to
customers
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12-13
Internal and External Failure Costs
Internal Failure
Costs
Incurred as a result
of identifying defects
before they are
shipped
External Failure
Costs
Incurred as a result
of defective
products being
delivered to
customers
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12-14
Examples of Quality Costs
Prevention Costs
• Quality training
• Quality circles
• Statistical process
control activities
Internal Failure Costs
• Scrap
• Spoilage
• Rework
Appraisal Costs
• Testing and inspecting
incoming materials
• Final product testing
• Depreciation of testing
equipment
External Failure Costs
• Cost of field servicing and
handling complaints
• Warranty repairs
• Lost sales
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12-15
Quality Cost Reports
Quality cost reports provide an estimate of the financial consequences of
the company’s current defect rate.
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12-16
Uses of Quality Cost Information
Help managers see the financial
significance of defects.
Help managers identify the relative
importance of the quality problems.
Help managers see whether their
quality costs are poorly distributed.
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12-17
Limitations of Quality Cost Information
Simply measuring and reporting quality cost
problems does not solve quality problems.
Results usually lag behind quality
improvement programs.
The most important quality cost, lost sales,
is often omitted from quality cost reports.
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12-18
Learning Objective 3
Understand how to calculate
throughput (manufacturing cycle)
time, delivery cycle time,
manufacturing cycle efficiency
(MCE), and overall equipment
effectiveness (OEE).
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12-19
Operating Performance Measures – Part
1
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
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12-20
Operating Performance Measures – Part
2
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
Value-added time
Manufacturing cycle time
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12-21
Operating Performance Measures – Part
3
Overall Equipment Effectiveness (OEE)
Measures the productivity of a piece of equipment
in terms of three dimensions—utilization, efficiency,
and quality.
OEE = Utilization rate ×Efficiency rate × Quality rate
Utilization rate = Actual run time ÷ Machine time available
Efficiency rate = Actual run rate ÷ Ideal run rate
Quality rate = Defect-free output ÷ Total output
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12-22
Quick Check 6
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
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12-23
Quick Check 6a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
Throughput
time = Process + Inspection + Move + Queue
d. 13.4 days.
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
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12-24
Quick Check 7
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
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12-25
Quick Check 7a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
DCT = Wait time + Throughput time
c. 13.4 days.
= 3.0 days + 10.4 days
d. 10.4 days.
= 13.4 days
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LLC.
12-26
Quick Check 8
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
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LLC.
12-27
Quick Check 8a
A TQM team at Narton Corp has recorded the following average
times for production:
Wait
Inspection
Process
3.0 days
0.4 days
0.2 days
Move 0.5 days
Queue 9.3 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%. MCE = Value-added time ÷ Throughput time
b. 1.9%.
= Process time ÷ Throughput time
c. 52.0%.
= 0.2 days ÷ 10.4 days
d. 5.1%.
= 1.9%
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12-28
Quick Check 9
Narton Corp has provided the following information for a machine whose
limited capacity is prohibiting the company from producing and selling
additional units:
Actual run time this week
Machine time available/week
Actual run time this week
Ideal run rate
Defect-free output this week
Total output this week (including defects)
4,550 minutes
6,500 minutes
3.8 units per minute
6,500 minutes
16,000 units
17,290 units
What is the machine’s OEE?
a. 50.3
b. .615
c. .984
d. 1.7
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12-29
Quick Check 9a
Narton Corp has provided the following information for a machine whose
limited capacity is prohibiting the company from producing and selling
additional units:
Actual run time this week
Machine time available/week
Actual run time this week
Ideal run rate
Utilization rate: .70
Defect-free output this week
Efficiency rate: .95
Total output this week (including defects)
minute)
4,550 minutes
6,500 minutes
3.8 units per minute
6,500 minutes
(4,550 minutes
÷ 6,500 minutes)
16,000 units
(3.8 units
per minute ÷ 4 units per
17,290 units
What is the machine’s OEE?
Quality rate: .925 (16,000 units ÷ 17,290 units)
a. 50.3
b. .615
OEE:
.615 ( .70 × .95 × .925)
c. .984
d. 1.7
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12-30
Learning Objective 4
Understand how to construct
and use a balanced scorecard.
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12-31
Selecting Balanced Scorecard Measures
The four categories of a balanced scorecard are interrelated
to one another.
A company’s employees need to continuously learn and
grow in order to improve internal business processes
Improving business processes is necessary to improve
customer satisfaction
Improving customer satisfaction is necessary to
improve financial results.
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12-32
The Balanced Scorecard – Jaguar
Example
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12-33
The Balanced Scorecard – Jaguar
Example – Part 2
• In essence, the balanced scorecard lays out a
theory of how the company can take concrete
actions to attain its desired outcomes (financial,
in this case)
•Jaguar’s strategy seems plausible, but it should
be regarded as only a theory.
• One of the advantages of the balanced scorecard
is that it continually tests the theories underlying
management’s strategy
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12-34
Tying Compensation to the Balanced
Scorecard
• Incentive compensation should be linked
to balanced scorecard performance
measures
• Managers must be confident that the
performance measures are reliable,
sensible, understood by those who are
being evaluated, and not easily
manipulated.
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12-35
Corporate Social Responsibility
Performance Measures
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs of all
stakeholders when making decisions beyond those
that produce financial results to satisfy stockholders
Many of the world’s largest companies prepare corporate
social responsibility performance reports (also called
sustainability reports) that are shared with their external
stakeholders.
The Global Reporting Initiative (GRI) is a leading
organization in the field of social and environmental
performance measurement
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12-36
Corporate Social Responsibility and the
Balanced Scorecard
The balanced scorecard provides a useful
framework for organizing and managing the types
of social and environmental performance
measures that companies often include in their
sustainability reports.
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12-37
Corporate Social Responsibility and the
Balanced Scorecard – Part 2
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12-38
End of Chapter 12
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