The Balanced Scorecard and Lean Paradigm - Coursework Example

The Balanced Scorecard & Lean Paradigm INTRODUCTION: The balance scorecard development took the better part of a year and the involvement of 12 companies who were considered leaders in performance management. The reason for its development was that In the early years managers in many companies were too focused on one perspective say financial perspective hence Kaplan and Norton Balance Scorecard was developed to enable the managers to focus on all of four perspectives so as to provide a balanced platform so that they could focus their energies and attention equally.(Kaplan and Norton, page 1,2) CONCEPT: The main concept of the balance score card is to enable the managers to focus on more important tasks and processes but that too in a balanced way so every process is given its due share of importance or rather it is not neglected so that the company can achieve its strategic objectives and long term / short term goals which are in line with its mission statement. Now in order to fully benefit from the balance score card managers should establish goals for quality, performance, time and service and then translate these goals into measures say for example we need to prepare one unit or product within five minutes etc. Below is the explanation of the four perspectives: Financial Perspective: The purpose of the financial perspective is to ensure that the companys strategy, implementation, and execution are contributing to bottom-line improvement. (Kaplan and Norton, page 6) Typical financial goals are concerned with: Profitability: How much revenue can we generate (Cash Flow) or how much are we earning currently and are there any ways we can increase the profit margin. Growth: Is there an increase in Sales and how can we increase our sales. Shareholder value: Are we meeting the expectations of long term and short term shareholders. (Return on Investment, Return on Equity) Some of the most common financial measures that are incorporated in the financial perspective are EVA, revenue growth, costs, profit margins, cash flow and net operating income. Customer Perspective: This perspective enables the company to understand the needs and desires of the customers as the saying goes “customer is always right” hence if customers are not satisfied, they will find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline in market share, growth and profit margin. (Kaplan and Norton, page 3) Customers are usually interested in following indicators which in turn will increase market share, growth and profit margin. Time: Delivery of product or service within a specified time frame or at the earliest. Quality: The product should be free of defects. Service: The service provided should be up to the customer’s expectations. Cost: The price of the product should be competitive. Some of the most common financial measures that are incorporated in customer perspective are Number of activities, opportunity success rate, accident ratios & Environment compatibility, overall equipment effectiveness Internal Business perspective: This perspective helps in deciding which processes are most critical for satisfying customers and shareholders expectations thus enabling the company to focus on key processes and activities required by the company to provide the value expected by the customers in terms of efficiency and productivity. It is necessary for the companies to decide which processes and competencies they must excel at and specify measures for each so as to attain them. Internal business perspective also provides the managers with the necessary data to ascertain how well the company is running, and whether its products and services are conforming to customer requirements. (Kaplan and Norton, page 4) Some of the most common financial measures that are incorporated in internal business perspective are Cycle time and yield to enable the company to excel in manufacturing Actual date versus planned launch date, this can help the company to launch its product on the planned launch date without any delays. Innovation and Learning perspective: This perspective is concerned with how the company must learn, improve, and innovate in order to meet its objectives and to be able to attain competitive success. It mainly focuses on the internal skills and capabilities that are required to support the internal processes that create value which in turn are concerned with human capital, organizational capital and information capital. It should be noted that a company has to be creative and develop new ways in order to provide better products and services to its customers so as to remain on the top. Those companies who are averse to innovation and learning will lose their share of the market to other rival companies and will eventually fade out. Some of the most common financial measures that are incorporated in innovation and learning perspective are: Internal promotion, employee turnover, gender ratios. (Kaplan and Norton, page 5) Potential benefits of the Balanced Scorecard The balanced scorecard prevents information overload. It acts as a barrier towards sub-optimization. It puts strategy and vision, not control, at the center. It complements the financial measures with operational measures on customer satisfaction, internal processes, and the organizations innovation and improvement activities. It enables managers to understand many interrelationships leading to improved decision making and problem solving. It enables the companies towards looking and moving-forward instead of backward. (Kaplan and Norton, page 2) Potential Difficulties in Implementing Balanced Scorecard The balanced scorecard can only translate a companys strategy into specific measurable objectives. As companies improve their quality and response time, they eliminate the need for several quality checks which leads to redundancy of employees and which in turn leads to low employee morale. (Kaplan and Norton, page 8) Skeleton of a balanced scorecard for the Accounting Program at medium size public university using the four standard BSC perspectives Financial Perspective: The accounting program must be financially viable that is it should be generating sufficient revenue and at the same time capturing the market which means that more students should be enrolling every semester thus enabling the profits of the owners or investors to rise. Financial Measures: Return on Investment: number of admissions Return on Equity: profit per Semester Customer Perspective: The students will be concerned with the amount of time taken to complete the accounting program, the cost of the program and the qualification / experience of the teachers. Financial Measures: Accounting Program: Number of admission Return Students: Enrollment for advance stage Internal Business perspective: The University should process the admissions quickly, answer the queries and handle any complaints efficiently. Financial Measures: Actual date versus planned launch date: program should start on the date mentioned on brochure. Cycle time: program should be completed within the allotted time frame say 3 months Innovation and Learning perspective: The accounting program should be updated regularly as per the industry requirements and new techniques and methods should be introduced to keep its demand high. Financial Measures: Time to introduce updated syllabus: Time compared to that of competitors. Accounting Program Focus: % of enrollment representing total% of University Programs. Discussion of the reasons behind the differences in the case study using the five lean principles 1. Specify what creates value from the customers perspective In the mass production manufacturing facility there is no activity that would create value in the eyes of the customer as work is not evenly divided and problems exist with defective parts furthermore on-time delivery to customers is rare whereas in the Lean production facility all activities are being conducted to work towards those activities which the customer values such as the aisles are narrow meaning better utilization of space, optimum use of inventory by being aware of the daily products required to be manufactured hence keeping only one hour’s worth of inventory furthermore it can be assumed the parts provided are either of superior quality or they are tested at the supplier’s plant before dispatch to plant hence no rework area is required and on-time delivery to customers is over 99 percent.(Lean Paradigm Modified Version, page 8) 2. Identify and Map the Value Stream In the mass production manufacturing facility the aisles are crammed with repairers, housekeepers, and inventory runners, there is a problem of defective parts and a huge area is wasted where defected products are being kept and there are piles of inventory next to each station whereas in the Lean production facility there is no wastage of space and time spent on manufacturing products is used efficiently and effectively and this can be evidenced by the facility’s narrow aisles, no room for extra inventory around the cellular work stations and speedy on-time delivery to the customers. (Lean Paradigm Modified Version, page 8) 3. Create Flow In the mass production manufacturing facility aisles there are numerous stops which prevent the smooth flow of manufacturing products like the congestion in the aisles which are crammed with repairers, housekeepers, inventory runners and the piles of inventory at the workstations which are one of the causes of late deliveries to customers whereas in the Lean production facility the manufacturing process is smooth and there are no stops or barriers such as the keeping of keeping only one hour’s worth of inventory, delivering finished products to the customers on time and maximum utilization of plant space and workstation area.(Lean Paradigm Modified Version, page 8) 4. Create Pull In the mass production manufacturing facility there are the piles of inventory at the workstations which shows that the management has no idea as to the quantity of products required to be manufactured on a daily basis instead they are just manufacturing them blindly whereas in the Lean production facility the management is aware of customers demands and the number of products required to be manufactured on a daily basis and this can be evidenced by one hour’s worth of inventory being kept at the facility(Lean Paradigm Modified Version, page 8) 5. Strive for perfection by continually removing wastes In the mass production manufacturing facility management is not working towards improving the production process as this can be seen by the uneven division of work and the problems existing with defective parts whereas in the Lean production facility the management is striving towards perfecting the production process by continually removing wastages and this can be evidenced by no rework area, efficient use of inventory and keeping no extra inventory being kept around the workstations.(Lean Paradigm Modified Version, page 9) Discussion of how these differences impact the cost structure In the mass production manufacturing facility the cost structure is different compared to the Lean production facility as it targets a predetermined standard product cost and motivates the managers to overproduce in an effort to reduce variances which is the case here as there are huge piles of inventories next to workstations and products are being manufactured with only quantity in mind whereas in a Lean production facility its aim is to redefine values based on the customer rather than on internal standards meaning customer comes first and to this effect Lean organizations have formal methods for defining and calculating customer value, it concentrates on the entire value stream rather Than individual products or services its report information in user-friendly ways. The difference between traditional income statements and value stream statement is that is presents information on cost of goods sold, applied overhead, and manufacturing variances whereas value stream statements focus on highlighting material purchases, employee and equipment costs, and facility costs. It uses plain language that all value stream team members can understand which has enabled the lean production facility to eliminate wastages and to keep only inventory that is required for in a day. In a traditional manufacturing facility all costs are evenly apportioned whereas in a lean production facility cost are separated meaning those costs which cannot be directly associated with value streams such cost are classified as sustaining costs and are shown separately on the statements. Example of sustaining costs are facility costs, management and support personnel costs, and other functions such as IT and HR that are not associated with the value stream directly. Lean methods result in reduced stockpiles of inventory which the lean facility has proved by keeping only one hour’s worth of inventory whereas the mass production facility stores bulks of inventory which impacts the company’s profitability. The mass production facility assigns the costs such as facility costs in an inefficient way whereas lean enterprises assigns facility costs such as electricity and property taxes to value streams according to the square footage actually used by each value stream. The mass production facility utilizes traditional accounting techniques which require the price of a product which is usually based on product cost where as Lean manufacturing values the products based on how much the customer or market value it therefore we can safely conclude that the lean production facility uses a vastly efficient and cost saving accounting techniques which put the considerations of the customer first as compared to the mass production facility which uses the traditional accounting methods which are not customer friendly and use outdated techniques which lead to increase in costs and their improper allocation. (Lean Paradigm Modified Version, page 8, 9, 10, 25) Bibliography Kaplan RS, and DP Norton. "The Balanced Scorecard--Measures That Drive Performance." Harvard Business Review. 70. 1 (1992) Accounting for the Lean Enterprise:” Major Changes to the Accounting Paradigm.” Institute of Management Accountants (2006) Read More