40 IEE Manufacturing Engineer | April/May 2005

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A BalancedApproach

By Ketan Varia

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THE BALANCED SCORECARD, OFTEN CONSIDERED THE DOMAIN OF THE BOARD, IS ACRUCIAL METHODOLOGY FOR MANUFACTURING MANAGERS TO IDENTIFY BOTTLENECKS ANDEXCEPTIONS, AND SOMETHING AGAINST WHICH IMPROVEMENT TOOLS CAN BE TARGETED

Government driven ‘top down’ targets,continue to attract criticism from peopleat the coalface, particularly in theeducation and health fields. Theannouncement of overstated resultsrecently in the private sector – such as oil

reserves – shows us that target setting is rife, withspectacular consequences following when reality hits. Isthere an alternative to business performance improvementfrom the head office target driven approach to a processthat actually drives improvement?

During the early part of the 20th century, performancefocus was primarily result driven and this did not matteras huge growth and demand dictated financial results, notthe effectiveness of underlying process. However, with thematurity of manufacturing and commodity markets,internal processes and organisation culture became asignificant lever to financial outcomes. The concept of theBalanced scorecard was first introduced by Robert Kaplanin 1992 in the Harvard Business Review, in which thepremise was that a business should not only measure itsfinancial output but also other areas of performance(process, customer and people). Furthermore it should givethese areas the same focus as financial performance.Kaplan showed that these measures are interdependentand, without a balance on all areas, world-class sustainableperformance cannot be created. Thus, the balancedscorecard concept is a unique way of measuringperformance – a visual, sustainable and accountableprocess, managed locally – yet with a direct impact on thebottom line. This approach is different from traditionaltarget setting that often focuses on pure output rather thanon improving and sustaining the underlying process.

In a process/output diagram for a discretemanufacturing company, measurement and improvementof velocity (ratio of value add time to lead time), results inincreased cash and reduced costs as subsequent outputresults (fig 2). A process/output diagram of this naturehelps business units understand the underlying drivers to

performance improvement and will form the basis ofcreating scorecards.

Scorecards themselves can be created for a look and feelthat suits the business. The most important things are thatthey should be visual and straightforward to understand. Ilike to think that the scorecard should pass the ‘two minutetest’ – a casual observer should be able to pick up the keymessage from the scorecard in this time. A typical scorecardis illustrated in fig 3 and, as can be seen, complaints in‘customers’ and absenteeism in ‘people’ vividly stand out,with the process area all on ‘green’. Attached to thescorecard would be actions from meetings and detailedhistory of measures giving further information as required.The period that a scorecard is refreshed is very dependenton the business unit processes, in my experience a monthlyupdate is one that works well in almost all ➔

Special report: Manufacturing management

IEE Manufacturing Engineer | April/May 2005 41

The premise was that a businessshould not only measure itsfinancial output but other areas of performance

‘‘’’

Financial

Process People

Customer

Measurementof velocity

Averagebatchsize

Technicalcompetency

Improvedvelocity

Reducedbatchsize

Improvedcompetency

Reduced workin progress

Less scrap

Improvedquality of

output

Reducedcosts

Increasedrevenue

Increasedcash

Reducedspace

Reducedcosts

Lessdissatisfiedcustomer

Fig 1: The concept of balance

Fig 2: Process/Output diagram

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organisations, although a greater frequency could beapplicable to intensive service industries. The scorecardshould be located strategically for each business unit (thefoyer for example) and I have seen the potentialopportunities this generates for interesting discussionduring customer, supplier and head office visits.

COMPARING CARDS One interesting aspect of local scorecards is that these,created in different divisions of a business, can be linkedto a head office scorecard. A scorecard for the head officewill of course look much different than one that exists atthe coalface – however the head office scorecard shouldhave a direct process/output link to local scorecards. Thisintegrated approach can help head office review the effectof improvement on business outcomes and strategies. Ahuge benefit of this approach is that irrelevant measuresare eliminated, freeing management across all units andhead office to focus on what really matters to the business.

So far, I have explained the concept of the scorecard,

which, on the face of it, seems relatively straightforwardto execute. However, the implementation of the scorecard(fig 4) can often be more challenging than execution of thescorecard itself. It is important that the implementationapproach should be focused around a team of people who

42 IEE Manufacturing Engineer | April/May 2005

are involved in the day to day processes and measures, thatneed control and improvement. It is this cross-functionalteam that brainstorms and debates the balanced measures,takes ownership and agrees its own considered targets.Targets should be based on the ‘capability of the process’and also ‘the voice of the customer’ – and, moreimportantly, measurement of these values trigger processimprovement, and not blame. This is clear distinction fromarbitrary calculated targets, which occur frequently in allsectors of industry, to one that relates to the local executionand is defined by the local customer. Hence this way oftarget setting reduces the risk of sub optimisation, wherefocus on meeting an arbitrary set target to the detrimentof another measure resulted in sub optimisation of thewhole process. At the outset business managers must buyin to the concept of the scorecard as, without this,sustainability is not possible. One useful way of doing thisis to give the unit manger the overall accountability forimplementation, together with the support framework tomake it happen. Indeed, thorough consideration needs to

be made to what KeyPerformance Measuresalready exist, whetherthey are relevant, whocollects data and the useof measures. Someoutput driven measuresmay actually need tocontinue to exist, due tolegal or regulatoryrequirements. On arecent visit to a client Idiscovered that defectswere measured againstthe overall percentage ofscrap, and was set bycorporate standards. Noconsideration was givento what the customer’sview was of the process,

what was acceptable yield to the customer for each stockkeeping unit and the actual capability of the existingprocess or machinery. The consequence was that localmanagement played a numbers game, hiding the true scrapand underlying problems via extra inspection, and clever

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...Most pernicious of all, targets are based on the illusion that the centrecan drive change... The opposite is true. Improvements in...services willgenerally come from individuals and teams finding better ways to work

The Economist (editorial) April 2001

‘‘’’

Customer People

Process Performance

On tim

e and in full delivery

Customer referrals

Customer complaints

Set up time machine

Lead

tim

e of a

ssem

bly

Scra

p %

Abs

ente

eism

Leav

ers

Competence

Units sold

Margin

Payment on tim

e

Next steps fromReview Meeeting

ActionXxxFff

Whoffffffff

Detail measuresspreadsheet

Fig 3: An example of a scorecard that could be used by a discrete manufacturing process

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IEE Manufacturing Engineer | April/May 2005 43

Special report: Manufacturing management

massaging of numbers. The amount of overall waste thesegames generate is still frighteningly visible in manycompanies.

Enhancing the scorecard occurs during a meeting withkey stakeholders, consider inviting customer and suppliersof the processes, where the work done to date is presented.The stakeholders present will be asked to take fullaccountability of agreeing measures, targets, accountabilityand improvement. The measures agreed so far go throughvalidation and debate– this is critical, aspeople who are closeto the process (not aperformance manager)will execute themeasurement. Thethree measures ofprocess capability,customer target and customer tolerances are the keyindicators to assess the state of a balance scorecard segment.Based on the results, the scorecard is lit red, green or amber.A red status is for when customer tolerances are breached.An amber status should be applied when the measurementmeets customer requirements but is statistically out ofcontrol, thus the chances of future defects is high. Examplesof amber status issues include recent rail crashes, where theunderlying processes were on amber and shown to be out ofcontrol...waiting for failure to occur. A green status is whenthe process is in statistical control and within customertolerances.

DIGESTING AND IMPROVINGReviewing and sustaining of the scorecard should takeplace in regular management team reviews, involving therelevant people. The focus of attention should be on redand amber measures only. Improvement action teamsshould be set up to look at underlying causes of the issueusing problem solving tools such as process mapping androot cause analysis. In a facilitated framework these canoften yield surprisingly good results. Some of the issuesmay just be down to the way measurements are beingcarried out, or a small difference in process methodsbetween workers that creates widely different results. Itis important that senior management shows support for,and has patience with, this activity, as quick fixes neverprove sustainable. If there is a lack of history in aparticular measure, it can take time to monitor the trendsand create targets. It is not important to have all themeasurement segments in place before launching thescorecard – in fact, if 50% of measures are available, thescorecard should be launched, with the outstandingmeasures following in due course.

A client of mine recently spent a full day reviewingperformance, and managed to cover less then 20% ofagenda; classic paralysis by analysis and a resultingblame culture. Following the implementation of thescorecard the meeting was remodelled as a two-hourmonthly meeting focusing only on red and amber statusmeasures with an emphasis on improvement teams totackle underlying problems and report back on results.This freed up a huge amount of management time,

empowered people and gave confidence to seniormanagers that a process existed for improvement.

WHAT IF IT ALL GOES RIGHT? I am often asked by clients what would happen once theirteams have resolved all their issues and all scorecardsegments are green. If all improvements come into fruitionand all measurements are lit at green, then there areseveral options. Perhaps stabilised measures andsustainable processes can be replaced with others. It ispossible to reduce variability for specific activities tofurther reduce costs from the business. However, it is morelikely that customer requirements will become moreexacting or evolution of needs will throw up furtherchallenges in improvement for the long term of thebalanced scorecard.

The balanced scorecard approach is a relevant andpractical way of measuring and sustaining businessperformance. However, it needs management involvement,patience and facilitation to succeed. Companies as diverseas food retailers (Tesco) to engineering and maintenance(Network Rail) have successfully implemented their ownversions of such scorecards. If implemented correctlyscorecards free up management time, stop ‘paralysis byanalysis’ and empower people who have the ability to makeimprovements. Overall this approach, like the approachesof lean, agility, ERP, kaizen, Six Sigma and so forth, shouldbe used with discrimination, it is certainly not the answerto all challenges faced in the business world. ■

Ketan Varia is an independent consultant specialising inprocess improvement and & previously worked for Ernst &Young Management Consulting. He runs a one day tailoredworkshop on the balanced scorecard.

Briefbusiness onscorecard

Agreescorecardsegments

Agreeaccountabilityfor measures

Assesscapability

and customertargets

Enhancescorecard

Reviewand

sustainscorecard

Fig 4: Steps toimplementing ascorecard

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