STRATEGIC BUSINESS ANALYSIS (SBA)

SBA F1: Performance Evaluation

Balance Scorecard
Prepared by: R. Pascual

CPALE SYLLABUS COVERED

1.3 Management Accounting concepts and techniques for performance measurement.
1.3.2 Balance scorecard
1.3.2.1 Nature and perspective of balanced scorecard
1.3.2.2 Financial and non-financial performance measures (productivity, cycle efficiency and
throughput measures)

BALANCED SCORECARD
The balanced scorecard is an integrated performance evaluation tool derived from the company's
objectives, visions and strategies.

The main objective of the balanced scorecard is to provide a more comprehensive performance
evaluation by incorporating non-financial measures to achieve objectives and strategies. The
premise of this integrated tool is that the traditional financial measures are not enough as forms of
performance evaluation tool.

The performance measures on the balanced scorecard provide MOTIVATION and FEEDBACK for
improvement. Therefore, the balanced scorecard should emphasize continuous improvement rather than
just meeting present standards or targets.

The following are the features or characteristics of a balanced scorecard:

• It should be possible by examining a company's balanced scorecard to infer its strategy and the
assumptions underlying that strategy.
• It should clarify and communicate the organization's priorities and objectives to the entire
organization.
• It ensures that there are activities and programs on all areas that will deliver the strategic
objectives set by top management.
• It monitors and measures the progress of the strategic objectives implemented and
communicated through different performance evaluation measures and tools.

PERSPECTIVES OF THE BALANCED SCORECARD

The balance scorecard has four different perspectives, namely, financial perspective, internal business
process perspective, learning and growth perspective and customer perspective. These perspectives are
interrelated to one another as used in performance evaluation.
FINANCIAL PERSPECTIVE

The financial perspective focuses on financial performance and stewardship. It views the financial
performance of the whole organization and the effective use of the financial resources entrusted to
management.

The cause and effect of the other perspective of the balance scorecard is linked to the financial
perspective. This means that the objectives set on the other perspectives have an effect on the financial
performance of the organization.

The financial perspective attempts to answer the question,

"How does the organization look to its shareholders and stakeholders?"

The typical financial goals of a company are related to profitability, growth and shareholder value because
the financial health of any enterprise is critical to long-term survival.

CUSTOMER PERSPECTIVE

The customer perspective views the performance of the organization from the view of its customers. This
perspective attempts to answer the question: "How do customers view the company?" because customers
provide revenue and ultimately income to the company.

Therefore, the balance scorecard requires the mission statement involving customers to be more specific;
meaning, the measures to be used should reflect the factors that really matter to the customers. This
involves knowing and satisfying the customer's wants and needs.

INTERNAL BUSINESS PROCESS PERSPECTIVE

The internal business process perspective helps the organization to understand the importance of
efficiency and effectiveness of the business processes of an organization and supporting technologies
in delivering the customer's needs and wants at the least cost possible.

The goal of this perspective is to properly utilize the resources of an organization in satisfying the customer
perspective. Hence, it attempts to answer the question:
"What must the organization excel at?"
This perspective requires the identification of the business processes that have the greatest impact on
customer satisfaction (i.e. factors affecting cycle time, quality of the products, employee skills and
productivity).

LEARNING AND GROWTH PERSPECTIVE

The focus of learning and growth perspective is improvement and innovation. It is considered as the critical
success factor of an organization because customer's taste and preferences as well as technology
change every time and the company should address such in order to survive in the long-run.

In other words, new knowledge and technology, innovation and improvement are required to contribute to
better business processes which shall address the continuous changing customer's needs and to lower
business costs.

This perspective views human capital, infrastructure and technology as key to a breakthrough performance.
Hence, it attempts to answer the question: "How does the company continue to improve, learn, and
grow?"

To better understand the relationship of the four perspectives of the balance scorecard, refer to the exhibit
below:

Learning and growth, internal business process and customer perspectives are considered as LEADING
ACTIVITIES since they are the necessary activities needed to be done to generate revenues, incur costs,
generate profits and increase the firm's wealth. Simply stated, they lead in generating financial performance
for an organization.
On the other hand, the financial perspective is the lag activity because every other perspective has financial
consequences that affect the firm's profitability and wealth.

The interrelationship between the different perspectives of the balanced scorecard is what makes it a great
performance evaluation tool since its philosophy is anchored not just on financial measures but also to non-
financial measures; where the organizational visions and strategies are translated into goals by addressing
every perspective.

The following are some examples of goals set for each perspective with their corresponding performance
measures:

PERSPECTIVES GOALS MEASURES

New products Percent of sales from new
products
Brand awareness
Customer Partnership Market share (%)
Customer retention (%)
Customer Number of cooperative
engineering efforts
Customer satisfaction and
service response time
Responsive supply On-time delivery
Manufacturing excellence Cycle time, cycle time efficiency

Unit cost and manufacturing

Internal Business Process yield
Design productivity Engineering efficiency
Technology capability Manufacturing configuration vs.
competition

Manufacturing Learning Process time to maturity

Employee training and skill level

Level of waste and production

losses
Innovation Number of patents secured
Learning and Growth
Time to market New product development time

Employee improvement Employee satisfaction scores

Employee turnover rates

Technology leadership New information systems and
technology adaption
Time to develop next generation
of products

Survive Cash flows

Sales growth and operating
Succeed income growth (per division or
segment
Increased market share
 Return on Investment, residual
income and economic-value
added
Financial Prosper Return on sales (ROS) and
Return on equity (ROE)

Gross profit and gross profit ratio

Operating income and operating

income after-tax

OTHER PERFORMANCE MEASURES

MANUFACTURING CYCLE TIME & DELIVERY CYCLE TIME

Manufacturing cycle time (MCT) A.K.A. throughput time represents the total time taken from the moment
a customer's order is initiated into production until the goods are shipped to the customer.

On the other hand, delivery cycle time (DCT) represents the amount of time from when the order is
received from a customer until when the order is finally shipped.
To better understand the difference between manufacturing cycle time and delivery cycle time, please
see the next exhibit.

Based on the above exhibit, the concept of delivery cycle time includes manufacturing cycle time. In
addition, part of delivery cycle time is wait time that occurs before the order is placed into production.

Basically, delivery cycle time is the sum of manufacturing cycle time and wait time before the start of
production.

Delivery Cycle Time = Wait Time + Throughput Time

On the other hand, manufacturing cycle time is the sum of time spent from input to output that includes
process time, inspection time, move time and queue time.
Queue time is the wait time during the production process.

Manufacturing Cycle Time = Process Time + Inspection Time + Move Time +

Queue Time

Both manufacturing cycle time and delivery cycle time are performance measure. under the internal
business process perspective of the balance scorecard since both of them promote efficiency in satisfying
customer needs and wants.

These cycle times tend to create a competitive advantage for a business since customers tend to appreciate
efficient and timely order processing.

MANUFACTURING CYCLE EFFICIENCY

Manufacturing cycle efficiency (MCE) is the ratio of the throughput time dedicated to value-adding activities.
Simply stated, MCE represents the percentage of time an order is in production in which useful work is
being done.

The only element of throughput time that adds value is processing time. Inspection time, move time
and queue time do not add value and should be minimized as much as possible.

Manufacturing Cycle = Value Adding Time

Efficiency (MCE) Throughput Time

The goal of management is to increase MCE which means non-value adding activities should be reduced.
By doing this, cost reduction can be achieved resulting to a much more reasonable selling price in the
eyes of the customers.

Illustration - Manufacturing Cycle Time, Delivery Cycle Time & MCE

GEORGE CORP.'s management has analyzed and identified the following activities with their
corresponding time spent in completing customer orders:

Days
Wait time (before the start of production) 2.50
Inspection time 1.25
Process time 1.50
Move time 1.30
Queue time 3.00

REQUIREMENTS:
(a) What is the manufacturing cycle time?
(b) Determine the delivery cycle time.
(c) Compute manufacturing cycle efficiency.

Solution:

Requirement (a):
Manufacturing cycle time is the sum of all the time spent from the start of production process until delivery
of the goods to the customers.

Inspection time 1.20 days

Process time 1.50 days
Move time 1.30 days
Queue time 3.00 days
Manufacturing cycle time 7.00 days
Requirement (b):
Delivery cycle time is the sum of manufacturing cycle time and wait time before the start of production.

Manufacturing cycle time 7.00 days

Wait time (before the start of production) 2.50 days
Delivery cycle time 9.50 days

Requirement (c):
Manufacturing cycle efficiency represents the portion (in percentage) of the total throughput time dedicated
to value-adding activities. Remember that the only value-adding time of the total throughput time is process
time.

Process time 1.50 days

Throughput time ÷ 7.00 days
Manufacturing cycle efficiency 21.43%

This means that 78.57% of the total throughput time is dedicated to non-value adding activities.

Illustration - Workback Problem on MCE, MCT & DCT

The management reports of GRIZZ CORP. presented the company's average delivery cycle time which is
12 days. In addition, the following information were also presented:
• The average manufacturing cycle time is 10 days.
• The manufacturing cycle efficiency is 25%.
• Inspection time is twice the move time and the queue time is 1.5 days.

REQUIREMENTS:
(a) What is wait time before the start of production?
(b) What is the process time?
(c) What is the inspection time?

Solution (Illustration 10):

Requirement (a):
Since delivery cycle time is the sum of wait time before the start of production and throughput time, the
first requirement is squeezed from such computation.

Manufacturing cycle time 10 days

Wait time (before the start of production) (SQUEEZE) 2 days
Delivery cycle time 12 days

Requirement (b):
Process time is the numerator in computing MCE. Hence, by working it back process time is computed as
follows:

Total throughput time 10 days

Manufacturing cycle efficiency * 25%
Process time 2.5 days
Requirement (c):
Throughput time is the sum of process time, inspection time, move time and queue time. Since process
time and queue time are already determined in the illustration; let "X" be move time and let "2X" be
inspection time because the illustration mentioned that it is twice the move time.

By applying the algebraic approach in solving requirement (c), the equation to be used is as follows:

10 days = 2.5 days + 2X + X + 1.5 days

By combining like terms, the simplified equation is now:

6 days = 3X

Therefore, X = 2 days, which means move time is 2 days and inspection time is 4
days or twice of move time.

To check if everything matches:

Inspection time 4.0 days
Process time 2.5 days
Move time 2.0 days
Queue time 1.5 days
Manufacturing cycle time 10.0 days

PRODUCTIVITY

Productivity is a performance measures that relate the amount of goods and services produced (output)
with the amount and quantity of inputs used to produce such goods and services.

Simply stated, productivity is a ratio of output over input. This means, if a company tends to increase
output relative to input, productivity increases.

The computation of productivity is divided into partial productivity and total factor productivity.

Partial productivity is computed per input factor. It represents the ratio of quantity of output produced over
the quantity of an individual input used.

Partial = Quantity of Output Produced

Productivity Quantity of Input Used

Hence, depending on the type of input used, partial productivity has different forms namely:

• Labor productivity - is computed by using labor hours as the denominator which represents the
quantity of input used.
• Material productivity - is calculated by using the quantity of direct materials used in producing output
of goods as the denominator. This ratio is used in material management.
• Energy productivity - this type of partial productivity is computed by using the energy input as the
denominator of the formula. This ratio is used in assessing the energy needs of the production
process.
• Capital productivity - this is calculated by dividing output by the capital input used. Capital
productivity is also used in assessing the financial position of the company.

Nevertheless, on the above forms of partial productivity, the most commonly used form is labor and material
productivity.
Furthermore, by using partial productivity as a performance measure, management can properly evaluate
the different areas where improvement is required since partial productivity does not take into account
other input factors per computation.

In contrast, partial productivity's main limitation is it fails to display the overall impact of the inputs on the
output; it fails to consider trade-offs among input factors.

Total factor productivity, also called as multi-factor productivity, measures the joint impact of all inputs
on the output. It represents the ratio of quantity of output produced to the costs of all inputs used based
on current period prices.

Total Factor = Quantity of Output Produced

Productivity Costs of ALL Input Used

Total factor productivity measures the overall operational efficiency of a business since all input factors or
resources are used in assessing productivity.

Illustration 11 - Partial Productivity and Total Factor Productivity

JORGE LUMBERS CORP. is a manufacturer of crates, which it sells to different farms and growers. The
following information is available in relation to its production during the current year:

Units of output produced 10,000 units

Direct labor hours 25,000 hours
Direct materials used 30,000 pounds
Direct labor rate per hour P10
Direct materials cost per pound P5

REQUIREMENTS:
(a) Compute the partial productivity for direct labor during the current year.
(b) Compute the partial productivity for direct materials during the current year.
(c) What is the total factor productivity for the current year?

Solution:
Requirement (a):

In computing partial productivity for direct labor, the denominator used is the quantity of input used to
produce the output during the current year is represented by direct labor hours.

Partial = 10,000 units

Productivity 25,000 hours

Partial = 0.40 units per hour

Productivity

Requirement (b):

On this requirement, the quantity of materials in pounds will be the denominator in computing partial
productivity for direct materials.

Partial = 10,000 units

Productivity 30,000 pounds

Partial = 0.33 units per pound

Productivity
Requirement (c):

The denominator used in computing total factor productivity is not the quantity of inputs used but rather
the TOTAL COST of ALL inputs used.

This means that the first thing to do to compute total factory productivity is to compute the total cost per
input factor; and then sum up the total costs computed.

Total cost of direct labor (25,000 hours × P10 per hour) P250,000
Total cost of direct materials (30,000 pounds × P5 per pound) 150,000
Total cost of all inputs used P400,000

Total Factor = 10,000 units

Productivity P400,000

Total Factor = 0.025 units per peso

Productivity

- END OF SBA -