CHAPTER

© jsnyderdesign / iS

tockphoto11PERFORMANCE EVALUATION

REVISITED

11

WHAT’S UP AT C&C?

► Several changes to implement in the coming year with the hope of improving profitability

► Managers have a habit of waiting to see the final income statement before assessing operations

► Managers need to be more proactive, but they don’t know how

PERFORMANCE EVALUATIONREVISITED AND EXPANDED

Unit 11.1

111.Unit 11.2Unit 11.3

© Tom

wang112 / iS

tockphoto

11

TWO TYPES OF MEASURES

► Lagging indicators• Measurement occurs after action has occurred

► Leading Indicators• Useful in predicting future performance through a

cause-and-effect relationship• Gives time to take corrective action

► Need to use a combination of lagging and leading indicators

11

CAN LAGGING BECOME LEADING?

TEST SCORE

LEVEL OF STUDYING

COURSE GRADE

11

FINANCIAL AND NONFINANCIAL MEASURES

► Financial• The traditional way of measuring success• Based on accounting results• Objective in nature

► Nonfinancial• Not based on accounting results• May be more subjective in measurement• Growing in use

► Need both

11

EXAMPLES OF NONFINANCIAL MEASURES

Source: Chee W. Chow and Wim A. Van der Stede, “The Use and Usefulness of Nonfinancial Performance Measures,” Management Accounting Quarterly, 7, no. 3 (Spring 2006): 3.

11

ARE NONFINANCIAL MEASURES IMPORTANT?

Source: Deloitte LLP, In the Dark: What Boards and Executives Don’t Know about the Health of Their Businesses, 2007

11

BUT…

How would you rate your organization’s record of measuring and monitoring financial and nonfinancial aspects of

performance?

What are the main barriers to the effective use of nonfinancial

performance measures by your organization?

Source: Deloitte LLP, In the Dark: What Boards and Executives Don’t Know about the Health of Their Businesses, 2007

11

CHARACTERISTICS OF A GOOD MEASURE

► Specific – relates to the process and is clear

► Measurable – complete and accurate

► Actionable – can be influenced

► Relevant – relates to corporate objective

► Timely – must be received in time to matter

11

THE TRICK IS TO MEASURE WHAT YOU WANT TO BE DONE.

A MANAGEMENT TRUISM…

11

WHY USE PERFORMANCE MEASURES?

Source: David Hatch, “Smart Decisions: The Role of Key Performance Indicators,” Aberdeen Group, September 2007

11

HOW DOES MEASUREMENT PLAY OUT?

► A company measures delivery outcomes based on total delivery costs. The delivery department chooses slower, cheaper means of deliver which results in numerous missed delivery dates.

► An attorney’s performance is measured in billable hours. On a four-hour flight to one client he spends three hours researching a second case. At the end of the day he bills a total of seven hours for the four-hour flight.

11

A REAL LIFE EXAMPLE

► Domino’s Pizza once promised to deliver pizza in 30 minutes or less, guaranteed, or it was free

► In 1992, the company paid $2.8 million to the family of an Indiana woman killed by a driver

► In 1993, a judgment of over $78 million against the company (settled for an estimated $15 million) ended the guarantee

THE BALANCEDSCORECARD

Unit 11.1Unit 11.2Unit 11.3

© Tom

wang112 / iS

tockphoto

112.

11

WHAT IS THE BALANCED SCORECARD?

► A performance measurement system that includes both financial and non-financial measurements

► Aligns and focuses organization efforts and resources on corporate strategy

► Generally includes four performance perspectives► Bain & Co.’s annual survey found 47% of global

companies were using BSC at the end of 2011

11

LEARNING AND GROWTH PERSPECTIVE

Employee turnover percentage

Training hours per employee

Training $ spent per employee

Number of employees possessing relevant professional certifications

Percentage of vacancies filled with internal candidates

Technology spending per employee

Suggestions generated by employees

Employee satisfaction rating

Revenue per employee

Is the company developing its employees and providing the technologies they need to

facilitate change and improvement?

11

INTERNAL BUSINESS PROCESSES PERSPECTIVE

Is the company improving its business processes to provide maximum customer value?

Percentage of on-time deliveries

Defect rate Manufacturing cycle efficiency

Time to launch a new product

Time to resolve customer inquiry

Number of equipment breakdowns

Cost per unit Rework hours Average lead time

11

CUSTOMER PERSPECTIVE

Is the company meeting customers’ needs?

Customer satisfaction index

Number of customer complaints

Percentage of revenue from new customers

Number of new customers Market share Customer attrition rate

Customer loyalty index Customer return rate Customer profitability

11

FINANCIAL PERSPECTIVE

Net income Earnings per share Return on investment

Residual income EVA Revenue growth

Profit margin Cash flow Net income per employee

Is the company meeting its financial goals?

11

HOW THE BSC WORKS

11

THE BALANCED SCORECARD

11

BUILDING A BSC

► Solidify corporate strategy► Develop a strategy map (cause and effect

relationships)► Determine operational objectives► Select appropriate measures

• 4 – 7 per perspective• Leading and lagging

► Set targets for each measure

11

C&C’s STRATEGY MAP

11

C&C’S LEARNING AND GROWTH BSC

Strategic Objective Measure Goal

Develop trained workforce Employee turnoverEmployee satisfaction% of cross-trained direct labor workers

< 5% 90% satisfied or

very satisfied > 80%

Infuse corporate culture of quality throughout workforce

Number of employee-generated quality improvement suggestions

• 5 per quarter

11

C&C’S INTERNAL BUSINESS PROCESSES BSC

Strategic Objective Measure Goal

Achieve operational excellence

Defect rateCapacity utilizationNumber of quality complaints from customersAverage production time

< 1% 85% < 2 per quarter 45 minutes, pants

30 minutes, jerseys135 minutes, jackets

11

C&C’S CUSTOMER BSC

Strategic Objective Measure Goal

Develop reputation for quick turnaround

On-time delivery Customer order lead

time

100% < 5 days

Retain and grow customer base

Sales growth to existing customers

Sales growth to new customers

Customer satisfaction

12% 20% 100% rating of

good or excellent

11

C&C’S FINANCIAL BSC

Strategic Objective Measure Goal

Increase profit Profit growth Revenue growth Return on assets Return on investment Contribution margin per

product

10% 10% 9% 12% Flexible budget

BENCHMARKING

Unit 11.1Unit 11.2Unit 11.3

© Tom

wang112 / iS

tockphoto

113.

11

BENCHMARKING

► Comparing performance to that of another organization

► Searching for successful practices that lead to world-class performance and replicating those

► Does not have to be in the same industry

MEASURES OF MEETINGDELIVERY EXPECTATIONS

Unit 11.1Unit 11.2Unit 11.3 Unit A11

© Tom

wang112 / iS

tockphoto

A11

11

DELIVERY CYCLE TIME

11

MANUFACTURING CYCLE EFFICIENCY

Value-added processing timeTotal manufacturing cycle time