Business Excellence ’03 Designing PMS Using Tools To Support the Deployment of BSC Lima, Lobo, Favaro, Marcondes Designing Performance Measurement Systems Using Tools To Support The Development Of Balanced Scorecard Paulo Corrêa Lima Campinas State University – Faculty of Mechanical Engineering plima@fem.unicamp.br Carlos Eduardo d’Araújo Villaça Lobo Taktica Manufacturing Consulting clobo@taktica.com.br Cleber Favaro * Taktica Manufacturing Consulting cfavaro@taktica.com.br Andreza Benatti Marcondes DaimlerChrysler Brasil andreza_benatti.marcondes@daimlerchrysler.com balanced scorecard, alignment of strategies, performance management systems, quality, corporate strategic planning 1/8 measurements, performance Fig. 1. INTRODUCTION BSC links performance measures with the manufacturing strategic plan, and consequently with the organization’s overall strategy. Starting with the business’ strategic view, manufacturing performance is evaluated from different points of view. With a growing level of competition, companies have been looking for tools to develop and increase competitive performance. Senge [1] notes that systems react to how they are measured. Therefore, choosing a wrong measure could create, in the worst case, distorted judgment and local sub-optimal performance. On this environment, the design of Performance Measurement Systems (PMS) shows it importance to business’ evolution. According to Hacker [4], the BSC mixes short and long term measures because it uses different points of view. For example, the financial view provides the short-term view and learning and growth provides the long-term view, giving the right balance between different points of view. Maskell [2] characterizes traditional cost systems as irrelevant (not linked with strategy), distorted (overhead allocation) and inflexible (over time). In order to overcome those problems, one of the most relevant PMS developed is the Balanced Scorecard (BSC), proposed by Kaplan and Norton [3]. The importance of these four points of view is verified by the results produced by the interactions among them. Learning and growth leads to improved employee skills, consequently better process quality and process cycle time which leads to on-time deliveries in the internal process point of view. These on time deliveries result in customer loyalty and, finally, a better return on capital from the financial point of view. BSC is well developed and known, but how to deploy it from the high levels down to the lower level inside the company without compromising the integration among the measures in all levels still a problem that should be better investigated. A promising possible solution is to use some kind of methodology as Hoshin Kanri or Axiomatic Design to address this task. According to Kaplan and Norton [3], the BSC permits the organization be customer oriented, highquality product supplier, work teams organized, first come to market, and oriented by long-term results. Finally, the BSC provides a balance between measures. It prevents that managers optimize one measure with the sacrifice of others, known as local optimizations. BALANCED SCORECARD The BSC, shown in Figure 1, provides not only financial measures but also performance measures from the point of view of the customer, the internal business process, and learning and growth. On this paper we are interested on how the measures pointed out on BSC are deployed through all organizational levels. The following sections presents Hoshin Kanri framework and Axiomatic Design approach. The use of them are different possible answers to the necessity of deploy the performance measures in the BSC guaranteeing integration among them. Furthermore it is also presented real cases their use to support BSC deployment. Financial Objectives Goals Measures Initiatives Customer Objectives Goals Measures Internal Process Strategic View Initiatives Objectives Goals Measures Initiatives Learning and Growing Objectives Goals Visite: www.taktica.com.br BSC adapted from Kaplan and Norton [3]. Measures Initiatives 2 domains continues, resulting in a hierarchical decomposition of system requirements and design parameters. AXIOMATIC DESIGN, PRODUCTION SYSTEM DESING AND PMS Axiomatic design is a general design methodology proposed by Suh [5] involving the continuous interaction between the desired objectives and the means to achieve them. The objectives of a design are stated in the functional domain and are called functional requirements (FR’s); the physical solutions are generated in the physical domain and are called design parameters (DP’s). In the production system design decomposition, the FR’s are more general at the upper levels, and are focused in the overall production system design. At the lower levels the FR’s are more specific and focus on the sub-systems or cell design and further on the machine and assembly stations design. The Figure 2 shows the upper levels of Production System Design Decomposition (PSDD) according Cochran et. al.[8]. A basic principle of axiomatic design is translating customers’ needs – external or internal - into FR’s, and then translating them into DP’s. Thus, the design procedure is customer guided. There are also constrains defined in the functional domain that restrain possible design solutions (DP’s). In order to obtain a better design, Suh [5] has proposed two axioms to be used in the selection of design parameters: the independence axiom and the information axiom. The independence axiom states that the FR’s must be independent. This means that an adjustment of a DP should only affect the corresponding FR. Therefore, this design approach requires the design to find one and only one solution (DP) for each objective (FR). The second axiom states that the information content in the design must be minimized. The information content is defined in terms of the probability of a DP satisfies a given FR. Based on this definition, systems that have a high content of information have a low probability of success. Business Objectives / FR (What) DP1 Maximize long-term return on investment Production System Design FR11 FR12 FR13 DP11 DP12 DP13 Maximize sales revenue Minimize production costs Minimize investment over system lifecycle Production to maximize customer satisfaction Elimination of non-value adding sources of cost Investment based on a long term system strategy FR-111 FR112 FR113 DP-111 DP112 Deliver no defects Deliver products on time Meet customer expected lead time Defect-free production processes Through-put time variation reduction DP113 Mean through-put time reduction Fig. 2. Top Levels of PSDD (Cochran et al.[8]) The DP’s show how the system is supposed to achieve the desired objectives or FR’s. In order to measure how well the FR’s are satisfied in practice, the degree to which each DP satisfies its corresponding FR should be stated in terms of measurable parameters. These measures or systems variables can then be used to control the production system. A different way to see the set of performance measures obtained from axiomatic design decomposition is shown in Figure 3. The theory of axiomatic design has been applied to the design of production systems by many authors including Cochran [6], Suh et. al. [7], Cochran et al. [8], Duda [9] and Lobo [10]. According to this decomposition, the highest level FR is to maximize the return on investment over the system lifecycle. The DP for achieving this is the design of the manufacturing system. This DP can be further decomposed into three functional requirements: maximizing sales revenue, minimizing production costs, and minimizing investment over the production system lifecycle. This process of going back and forth between the functional and physical Visite: www.taktica.com.br Physical Implementation / DP (How) FR1 As shown in Figure 3, the FR’s at higher levels of axiomatic design decomposition are the enterprise strategic objectives set. Going through the decomposition of these FR’s, the right solution – DP, to each FR is pointed, and consequently its performance measure. 3 everyone in the company is involved on the task of improve performance from the customer point-ofview. The Hoshin Planning occurs every year and it starts with a research about market share, rivals’ position and market demand. The following action is to collect and analyze the performance data of the last year. The main intend is to study internal and external environment, organizing and stratifying past problems. Fig. 3. The core objectives are defined at the highest level of the company – at the BSC, when the mission of it is defined in general terms. The objectives include all the systems changes required to achieve the aimed goals. Using PSDD with BSC (Lobo et al. [11]) HOSHIN KANRI The managers are informed about those goals and they must validate the proposition. Thus, the process is based on the consensus of different management levels assured by negotiations between them as stated by Rich and Hines [17]. This crossfunctional alignment is the catch ball that consists the hardest phases of Hoshin Kanri development. The name comes from the children’s game where the kids stand in a circle and pass the ball amongst them. In Hoshin, the goals, the means and their deployment represent the ball that is passed from one manager to other trying to create a virtuous circle of continuous improvement as stated by Tennant and Roberts [13]. The Hoshin Kanri was developed in Japan during the 50s as a tool to integrate Total Quality Control and its deployment. Also known as policy deployment, it has being used in Western by a restricted but increasing group of companies, as Xerox, HP and P&G as cited by Mulligan et al. [12] and Witcher and Butterworth [13]. Tennant and Roberts [14] define that the fundamental tasks of Hoshin framework are: To provide a focus on corporate direction by setting, annually, a few strategic priorities; To align the strategic priorities with local plans and projects; To integrate the strategic priorities with daily management; To provide a structured review of progress of the strategic priorities. The involvement of the whole departments is essential, because it is the way to avoid resources’ overload caused by Hoshin plans and projects. Pareto and Fishbone diagrams make possible to find the root cause of low efficiency bringing success to Hoshin plan. Womack and Jones [15] suggest that Hoshin breaks down the top management’s targets and allocates people and resources into few projects in order to achieve the planned goals. Each manager must define a group of three or four quantitative indicators that are set in order to track the results. In the next step the teams elaborate a Hoshin Action Plan that shows in details the corporate objectives and the initiatives to support them. It is also defined a Hoshin Implementation Plan, including tasks, its owners, check points and due dates. The indicators follow this Implementation Plans providing feedback The Deming’s PDCA cycle and the seven quality tool enounced by Ishikawa [16] compound the base of Hoshin approach that aims to create value to the end-customer through quality assurance. Using them Visite: www.taktica.com.br 4 information for elaborating and reviewing strategic planning. 0 To summarize, Akao [18] defines the Hoshin logics as being a transformed PCDA cycle that becomes CAPD, where results are checked, strategy is defined, projects are planned and executed. 1 2 Maximize Sales revenue 2 Deliver no defects 3 Deliver products on time 4 Meet customer expected lead time 5 Operator has knowledg e of required tasks 6 The PMS proposed was based on production system axiomatic design shown in Figure 4. It is also pointed the FR’s related to direct labor – Workers strategic objectives, FR’s related to managers – management strategic objectives, and FR’s related to the board – manufacturing strategic objectives. The set of FR’s for each person on the system is his own balanced scorecard. 3 Operator s Manufacturing Strategic Objectives Management Strategic Objectives Workers Strategic Objectives Fig. 5. Strategic Objectives for the people inside an organization 7 Operator consistent ly performs tasks correctly Determin e capability of process 0 Design Solutions (DP's) 1 Production to maximize customer satisfaction 2 Defect free production processes 3 Throughpu t time variations reduction 4 Mean throughput time reduction 5 Training Program 6 Standard work methods 7 Measure current process 8 Improve capability of process 8 Design of experiment s 9 Supply descriptiv e info to support resource 9 System that conveys nature of problem 0 Performanc e Measures 1 Return sales 2 % of product with defects delivered 3 % of products delivered on time 4 Mean response time 5 Existence of a training plan and number of training hours 6 Number of defects caused by non-standard methods 7 Process parameters 8 Process capability 9 % of problems well described on Relationship among performance measures through hierarchical levels. Figure 5 exemplify the results of applying the deployment in one branch of Production System Design Decomposition. It provides a clear structure to understand the impact of each person on the final results, from the plant manager to the operator. For example, a reduction in the number of defects – shop floor performance measure – due unclear standard methods will result in a reduction in the number of For each FR there is a PM to evaluate in what degree the design parameter selected is satisfying its FR. Different DP’s are possible to address the same FR. The performance measure evaluates how good the FR is satisfied and helps on the selection of the best DP. Visite: www.taktica.com.br 1 Managers The first case is based on a development done to an automotive supplier part. The company would like to develop a PMS that does not fail in financial pitfalls. The company was starting a conversion process from mass to lean production system and tries to adequate its performance measures to better reflect the results and set a direction to continuous improvement cycle. Fig. 4. Strategic Objetives (FR's) Plant Manager APPLICATION OF THE APPROACHES Balanced Scorecards 0 Level 5 defective parts delivered – management performance measure. This, in turn, will result in increased sales revenue, and consequently in better return on investment – board of director’s performance measure. (financial, project, employees, costs, customer, society and environment). To illustrate the approach, the customer perspective was chosen and its two indicators – on time delivery and quality - are tracked. In an initial research in 1999 the performance for on time delivery and quality was 80% and 28% respectively. The department started by identifying the demand for target price report by each customer through a Pareto diagram, shown in Figure 7. Major Customers (1999) The purposed system started on last October 2002 and there are not enough data to quantify the system’s improvement, but the fact that the deployment assigns performance measurement for every level and linked them certified that the system objectives are clear and the efforts are well focused on changing it. 848 BSC and Hoshin Kanri The Industrial Projects Department (IPD) of an automotive company is the second case study. This department is a support financial area that supports all company defining target prices for investments and expenditures. Till 1999, the IPD had difficulties to decide based on data from many corporate levels. At that time, the department decided to implement a BSC using hoshin kanri to deploy its goals and to find the root cause of poor performance. 96 31 Purchasing Fig. 7. Department Scorecard 2 Project 5 Customer 3 Employees 6 Society Development Other Pareto diagram for major customers at the beginning of the project. For the purchasing department – the major customer -, a detailed analysis was done using fishbone diagram. Using brainstorm sections, the causes of non-satisfaction were pointed out and detailed till the root causes being identified - Figure 8. The Figure 6 shows the framework adopted by the department to manage its objectives from strategic level to daily management. Deploying the directive goals it became possible to set a new reference to strategic planning, aiming at creating value at company’s and shareholders point-of-view. 1 Financial Production 18 On time delivery 4 Costs Enterprise Scorecard 7 Environment BSC Customer Perspective Strategy Quality Hoshin Kanri Fig. 8. Action Plan What Pareto Fig. 6. Fishbone Who When Where Why 5W1H How Fishbone Diagram to reach roots causes of nonsatisfaction. Check planned vs. done Deployment of Enterprise Scorecard using Hoshin. To each root cause, an action plan was created in order to improve the process. The format of this plan is a 5W1H (what, who, when, where, why and how). The plans are reviewed monthly and the goals tracked by single indicators assigned to each one. The In spite of defining the original four perspectives purposed by Kaplan and Norton (1992), the enterprise scorecard is divided on seven perspectives Visite: www.taktica.com.br 6 final results are on time delivery and quality, straight linked to the board’s scorecard and the partial targets give feedback information to validate the department’s strategy. CONCLUSION The use of axiomatic design decomposition to deploy BSC performance measures, link strategy and people, driving their actions, not only providing a way to deploy strategy to daily operations but also indicating the performance measurements that should be used. Instead of using the performance measurement system to support the strategy, the performance measurement system is a consequence of the true link, the axiomatic design decomposition. Axiomatic design decomposition leads the system to be designed according to the functional requirements of the system, its own strategic objectives. Consequently, the correct performance measurement for evaluating the production system is the adequacy of the design solution used. The following graphics - Figures 9 and 10, show the planned and effective results since the beginning of this approach. The integration of BSC and Hoshin has provided alignment of efforts to assure that the planned strategic goals were aimed. As Hoshin is strongly based on well known quality tools, the whole department could take part on the process. No training was necessary and improves are reached inexpensively and so fast. The visual management of evolution indicators and its feedback to all hierarchical levels are a significant gain. Axiomatic design decomposition is a powerful tool to deploy BSC although is too complex and need more history to test its applicability. 100% Hoshin Kanri also proves to be a powerful tool to deploy the Scorecard. It establishes links between strategic planning and daily management, supported by quality tools like Pareto and Fishbone diagrams. The fact of those tools are well known, makes the implementation faster and brings fast Looking for root causes of poor performance, it concentrates efforts to cut them, leading to a continuous improvement process that aim at adding more value at customers point-of-view. Planned Done 60% 40% 20% 20 02 20 01 20 00 Year Fig. 9. 100% 80% 80% 90% 60% In spite of having positive results, the application of Hoshin is strongly related with the catchball process whose complexity must be more studied. Planned Done Quality Planned Done60% 40% References 40% [1] Senge, P., The Fifth Discipline, Currency/Doubleday, 1990. [2] Maskell, B.H., Performance Measurement for World Class Manufacturing, Productivity Press, 1991. [3] Kaplan, R., Norton, D., The Balanced Scorecard – Year Measures that Drive Performance, Harvard Business Review, 1992, January: p. 71-79. [4] Hacker, M. E.; Brotherton, P. A., Designing and Installing Effective Performance Measurement Systems”. IIE Solutions, 1998, August: p. 18-23. 19 99 0% 220 0002 2 0% 70% 220 000 11 20% 20 00 80% 20% 20 00 Quality On Time Delivery 100% 100% 11999 999 20 02 Planned and effective results from 1999 to 2002. Year Year Fig. 10. Planned and effective results from 1999 to 2002. Visite: www.taktica.com.br 7 20 02 20 02 19 99 0% 20 01 Quality 80% [5] Suh, N., The Principles of Design, Oxford University Press, 1990. [6] Cochran, D., The Design and Control of Manufacturing Systems. Auburn University, Ph.D. Thesis, 1994. [7] Suh, N., Cochran, D., Lima, P. (1998). Manufacturing System Design. Keynote paper, CIRP General Assembly, CIRP Annals, 1998: p. 47-52. [8] Cochran, D., Duda, J., Arinez, J., Linch, J., The Production System Design Decomposition, MIT Production System Design Laboratory working document, 2000. [9] Duda, J., A Decomposition-Based Approach to Linking Strategy, Performance Measurement, and Manufacturing System Design. Massachusetts Institute of Technology, Ph.D. Thesis, 2000. [10] Lobo, C.E.V. Aplicação do Projeto Axiomático para o Desenvolvimento de Sistemas de Medição de Desempenho para Manufatura. Universidade Estadual de Campinas, Ph.D. Thesis, 2003. [11] Lobo, C., Duda, J., and Cochran, D., Using Axiomatic Design to Support the Development of a Balanced Scorecard, Proceedings of Performance Measurement – Past, Present and Future, editor: Andy Neely, Cambridge, UK, 2000, p. 347-354. [12] Mulligan, P., Hatten, K., Miller, From Issue-based Planning to Hoshin: Different Styles for Different Situations. Long Range Planning, 1996, vol. 29, n. 4: p. 473-484. [13] Witcher, B., Butterworth, R. (1999). Hoshin Kanri: How Xerox Manages. Long Range Planning, 1999, vol. 32, n. 3: p. 323-332. [14] Tennant, C., Roberts, P., Hoshin Kanri: Implementing the Catchball Process, Long Range Planning, 2001, vol. 34: p. 287-308. [15] Womack, J.P., Jones, D.T., Lean Thinking: Banish Waste and Create Health in your Corporation. Simon & Schuster, 1996. [16] Ishikawa, K., What is Total Quality Control – The Japanese Way, Prentice Hall, 1988. [17] Rich, N., Hines, P., Purchasing Structures, Roles, Process and Strategy: Is It a Case of the Tail Wagging the Dog? European Journal of Purchasing and Supply Management, 1998: vol. 4, n.1, 51-61. [18] Akao, Y., Hoshin Kanri: Policy Deployment for Successful TQM, Productivity Press, 1991. Visite: www.taktica.com.br 8