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Emerald Article: Developing an employee balanced scorecard: linking frontline performance to corporate objectives Tim R.V. Davis
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To cite this document: Tim R.V. Davis, (1996),"Developing an employee balanced scorecard: linking frontline performance to corporate objectives", Management Decision, Vol. 34 Iss: 4 pp. 14 - 18 Permanent link to this document: http://dx.doi.org/10.1108/00251749610115116 Downloaded on: 25-03-2012 References: This document contains references to 4 other documents Citations: This document has been cited by 4 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 3399 times.
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Tim R.V. Davis Professor of Management and Director of International Business Programmes, Cleveland State University, Cleveland, Ohio, USA
Increasing emphasis is being given to corporate measurement systems which integrate customer satisfaction, process quality, innovation and nancial performance. Managers are realizing that non-nancial criteria (customer service, process quality, new product development) are as important as nancial criteria in corporate measurement systems. These factors need to be monitored closely and their relationship studied. Many executives have difficulty balancing the various types of measures at different levels of the company. Provides a detailed account of how a balanced set of measures was translated in a large company through corporate, group, divisional and plant levels. Concludes that the translation of a corporate scorecard into a frontline employee scorecard is essential for the implementation of strategy in most rms. Provides recommendations on how this can be done.
Managers in large companies often have difficulty translating objectives, strategies and performance measures at different levels of the company Objectives at the senior man. agement level frequently have no clear connection with performance priorities lower down. Generally, nancial objectives take precedence at the top, while production volume, quality and service objectives have the highest priority at the frontline, employee level. How lower level production and service objectives translate into upper level nancial results is usually not clear. The need to integrate objectives and strategies across levels and functions is becoming more critical as rms compete on a broader array of performance criteria[1]. Kaplan and Norton[2] have proposed a balanced scorecard which integrates measures of customer satisfaction, process performance, product or service innovation and nance. They contend that these areas of measurement are of universal importance to most businesses. Managements task is to balance the emphasis that is given to these interdependent factors and ensure that appropriate weight is given to them at different levels of the company . As yet, few cases have been presented showing how a balanced scorecard system can be implemented at different levels of the rm[3]. This article will examine the system that was developed by the US based, General Electric (GE) Lighting Business Group. It will describe the process of developing a balanced scorecard system, starting at the corporate management level and working down, from group to division, to the manufacturing plant oor. increase inventory turns. Third, from an innovation perspective, GEs goal was to grow globally through new product development and business expansion. Finally, from a nancial perspective, the goal of GE was to be number one or number two in the industry in terms of sales and prot or exit the business. The task of each business group, division and plant was to develop specic objectives, measures and plans to achieve these goals. The measures are summarized under GEs corporate goals in Table I.
The author would like to thank Marybeth Connolly, a former employee of General Electric (USA), for her assistance with this article
GE corporate scorecard
In the early 1990s, John Welch, chief executive officer of the General Electric Company, presented general goals for the company which broadly t the four categories of balanced scorecard measures. First, from a customer perspective, customer satisfaction was singled out as a top priority for all GEs businesses. Second, from an internal process and productivity perspective, all business groups were required to reduce inventory levels and
Management Decision 34/ 4 [ 1996] 1418 MCB University Press [ ISSN 0025-1747]
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Tim R.V. Davis Developing an employee balanced scorecard: linking frontline per formance to corporate objectives Management Decision 34/ 4 [1996] 1418
required to serve the customer satisfactorily . For all plants, this is measured by the percentage of on time deliveries. The divisions goal was to meet the 95 per cent on time requirement. Quality refers to customer satisfaction with products and service (zero stockouts) which exceed all competitor satisfaction levels. Cost targets involve trimming expenditures in all facets of manufacturing (i.e. product design, product reproducibility and product manufacture). Control of costs is measured in terms of productivity improvement from year to year. An annual reduction goal of 5 per cent in cost was targeted for the group. Vitality is a measure of innovation and refers to new products which have been introduced within the last ve years. In order to maintain its market leadership position, the goal for the group and the division was to generate 25 per cent of sales revenue from products which have been introduced in the last ve years. The rst three measures (speed, quality and cost) were metrics that were dened as
Table I Balanced scorecard measurement system GE Lighting Business Group Customer satisfaction measures Corporate scorecard Group scorecard (LBG) Division scorecard (NAPD) Plant scorecard (OLP) Customer satisfaction 95 per cent on time; global expansion Customer satisfaction (95 per cent on time); 70 per cent overseas sales Speed in customer service (95 per cent on time) zero stockouts; product quality Financial measures Number 1 or 2 in sales; Number 1 in prot Internal process measures Increase inventory turns; process improvement Innovation learning measures New product development New products (25 per cent of sales last ve years)
Number 1 in sales/ prot Ten inventory reduce working capital; turns; process total cost productivity improvement > 5/ 6 per cent Total cost productivity > 5/ 6 per cent; reduce inventory levels
Ten inventory turns; Vitality; 25 per cent of process improvement sales in new products; improve product design Ten inventory turns; process improvement quality (number of defects per million) Materials: equipment speed, quality incoming material, training, assembly process Labour: equipment downtime, overtime, production rates Assembly process: reduce number of poor solders, number of cracked bulbs, number of bent bases, number of cracked stems [ 15 ]
Speed in customer service Total cost productivity (external) 95 per cent on > 5/ 6 per cent; per cent time ll rate; customer direct material yields, complaints (number of labour productivity, customer complaints packing; reduce inventory per million) survey results levels
Reduce material costs (waste) and overtime, increase productivity (production rates)
Tim R.V. Davis Developing an employee balanced scorecard: linking frontline per formance to corporate objectives Management Decision 34/ 4 [1996] 1418
manufacturing initiatives. Vitality was considered a marketing, engineering and R&D initiative. These departments were responsible for the increased rate of new product development and improved product design.
were monitored daily Weekly conference call . meetings of division staff, plant managers and product line managers reviewed customer service levels, raw material and component part availabilities, and potential future sales levels. The product quality portion of customer satisfaction was evaluated both internally and externally The in-house quality measure . for OLP was defects per million lamps (DPM). DPMs were tracked daily by production group to ensure quick response to process variations. Targets varied from product to product, based in part on the difficulty of the manufacturing process. The external quality measure was based on communication with the customer. It comprised the number of customer complaints per million lamps shipped (CCPM). Customer complaints were measured monthly, and trend analysis revealed potential problems. Frequent customer surveys were also carried out to monitor customer satisfaction levels compared with competitors.
Financial measures
The primary measure of cost for OLP was total cost productivity. This measure, after adjustments for changes in volume and mix, represented the ability of the manufacturing facilities to reduce cost levels from the previous year. It was used in developing the annual operating plans and longer range plans to set overall targets for continuous improvement. The targeted level for total cost productivity was between 5-6 per cent annually OLP had a . goal for 1994 of 5.6 per cent. The plant goal for inventory levels was to achieve a specic target which, when all plants were combined, amounted to a rate of ten turns per year for the division. Inventory levels of raw materials, in process material, and nished goods were reviewed on a monthly, quarterly and annual basis.
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Tim R.V. Davis Developing an employee balanced scorecard: linking frontline per formance to corporate objectives Management Decision 34/ 4 [1996] 1418
the manufacturing initiatives did not displace previous reporting but, instead, focused attention on those areas and measures which needed the closest attention. Performance at OLP on the customer satisfaction measures of product quality and service previously had been close to the targeted levels. But total cost productivity was way below the targeted levels of 5-6 per cent annual improvement. Productivity in the plant was at.
3 experience and training of plant personnel (the more experienced and well trained the employees, the fewer errors tended to be made in production); 4 control of the lamp assembly process (poor process control resulted in higher production losses). The most signicant cause of material shrinkage was the control of the lamp assembly process. Further root cause and Pareto analysis were done to determine the types of defects in the assembly process. Poor solders, cracked bulbs, bent bases and cracked stems were the main types of problems found. Improved production procedures were introduced to deal with these assembly problems. Scorecard measures were also developed to track the causes of these production defects. Root cause analysis process was also conducted on labour usage, the second most signicant element of total cost. The primary scorecard measures which were targeted in this area were equipment downtime, daily production rates, and overtime usage. Causes of these problems were also identied and tracked.
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Tim R.V. Davis Developing an employee balanced scorecard: linking frontline per formance to corporate objectives Management Decision 34/ 4 [1996] 1418
group and corporate measures of the company This keeps the entire organization . focused on the same agreed set of objectives. Second, lower level employees should be involved in the development of the measures. Employee participation will inspire greater ownership of the measures and the commitment to accomplishing them. This approach is compatible with open book management in which a great deal of nancial and nonnancial information is shared with employees[4]. By showing employees how their performance inuences the bottom line, frontline employees are encouraged to act like owners and ensure the future of their jobs. Third, if the plant is unionized, union officials should be included in the earliest discussion of the measurement system. Union members will need to be assured that the system gives employees more, not less, control over their jobs. Fourth, the measures selected must be timely Production employees need informa. tion in real time so that they can respond and solve problems on the spot. Fifth, the measures selected should focus on the critical aspects of performance. Plant personnel should use root cause and Pareto analysis to determine what aspects of the work have the largest impact on the targeted performance goals. Root cause analysis should be done on an ongoing basis as part of a companys continuous improvement efforts. Sixth, new measures that are introduced should be balanced with the other scorecard
measures. A typical balanced scorecard in a manufacturing plant will probably include measures of quality, volume, material cost, yields and labour usage. These measures need to be balanced and prioritized. It is also important not to create too many measures that may overload frontline employees. Seventh, balanced scorecard measures should be entered into the computer so that current gures can be accessed instantly by people in different departments and at different levels of the company Balanced scorecard . software is now available for this purpose. The corporate balanced scorecard can be a valuable tool in getting all members of the organization to focus on a few common business goals. The employee scorecard is the vital link which can increase the probability that upper level, corporate and divisional scorecards are translated into frontline measures which employees can achieve.
References
1 Brown, M.D., Measuring corporate performance, Long Range Planning, Vol. 2 No. 27, 1994, pp. 89-98. 2 Kaplan, R.S. and Norton, D.P., The balanced scorecard measures that drive performance, Harvard Business Review, January-February 1992, pp. 71-9. 3 Maisel, L.S., Performance measurement: the balanced scorecard approach, Journal of Cost Management, Vol. 6 No. 2, 1992, pp. 47-52. 4 Case, J., Open-book Management, Harper Business, New York, NY, 1995.
Application questions
1 In what ways could an employee balanced scorecard support strategic and operational planning in your company? 2 How could the measures used by the manufacturing rm in this case be adapted for use by a service rm? 3 Why is a multilevel, cross-functional team structure important for implementing a balanced scorecard? How could this type of structure be arranged in your organization? 4 Could the balanced scorecard measurement system be integrated with an individual or group performance appraisal system? What may be some of the advantages?
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