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Management Decision

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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Developing an employee balanced scorecard: linking frontline performance to corporate objectives

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.

GE Lighting Business Group scorecard


The Lighting Business Group (LBG) of GE is a global leader in the lighting industry LBG . manufactures and sells a complete line of light bulbs (known as lamps). This group has a protable history but has encountered stiff overseas competition in recent years, particularly from Osram. This has affected protability and necessitated performance improvement in customer service, product quality and productivity LBG is organized on . the lines of a functional product team matrix with product line teams overlaid on traditional functional departments. This crossfunctional structure is integrated at every level of the group. These teams help to develop divisional, product line and plant goals and strategic plans. This team structure was helpful in the development of a balanced scorecard for LBG. Based on the corporate directives, the LBG dened a number of strategic goals. LBG committed to a target of 70 per cent of sales from overseas markets by the year 2000. The 95 per cent on time customer service target was embraced as an achievable objective and was considered critical to meeting the increased sales objectives. Total cost productivity levels of greater than 5 per cent were targeted by reducing lamp manufacturing costs. Financial objectives were also set to reduce working capital from operations, in part, by meeting the inventory goal of ten turns per year. Also, an ongoing target of 25 per cent of total sales from new products introduced in the last ve years was set.

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

These measures appear under the group goals in Table I.

North American Products Division scorecard


The division of LBG which manufactures lamp products in North America is the North American Products Division (NAPD). NAPD comprises 26 manufacturing locations in the USA, Canada and Mexico. It is a vertically integrated operation in which most of the key components of the nished lamp are produced in component plants. The crossfunctional structure of LBG helped to facilitate goal setting across different departments and levels of the company Group, divisional . and plant personnel participated on multilevel cross-functional teams and came up with divisional scorecard measurements (see Table I) that were consistent with the LBGs goals. Speed refers to how fast the customer is served and also includes the inventory levels

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

Frontline employee scorecard

Customer service (internal) 95 per cent on time

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.

Manufacturing plant scorecard


In each plant, measures were developed to track speed, quality and cost. Differences in customer requirements and manufacturing processes meant that the quality measures varied in some plants. Component plants mainly had internal customers, while the assembly plants mainly had external customers. Generally, the component plants had different quality measures, while the assembly plants shared similar measures. The scorecard of the Ohio Lamp Plant (OLP) will be examined here. OLP assembles nished light bulbs and employs over 700 people. The plant has two principal product lines: par type bulbs (outdoor spotlights and oodlights) and reector bulbs (indoor spotlights and oodlights). These products have product line managers who are responsible for the manufacturing processes of each line. Cross-functional product line teams were used to translate the divisional measures into a plant scorecard. It is important to recognize that measurements which are important to higher level managers cash ow, market share, quarterly sales growth, operating income by divisions, return on equity have little meaning for department managers and supervisors in manufacturing plants. Yet these people will have a major inuence on the achievement of corporate and divisional performance objectives. These objectives must be translated into actions and measures that department managers and supervisors can understand and control. Members of the cross-functional teams developed plant measures and actions to coincide with the divisional priorities of improved speed, quality, and reduced cost (see Table I).

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.

Internal process measures


Each of the measures and actions had to be planned together because most of them were interdependent. For instance, the cost productivity target of between 5-6 per cent was a nancial goal. But the means to achieve it was through internal process, productivity improvements (improved process design, just-in-time delivery).

Customer satisfaction measures


Speed was tracked by the two measurements: customer service levels and inventory turnover rates. Customer service levels were measured by the percentage of line items (stock-keeping units) lled (line ll rate), with an overall goal of 95 per cent on time shipments. This measure was calculated for the total product line, by product family (groupings of similar products within a product line) and by individual line items. The key measures of these three groupings for scorecard purposes was the product family customer service level. Customer service levels

Standard management reports


While these measures were the primary focus of the plants, upward reporting was not limited to these measures only Traditional . reporting of items such as actual versus operating plans and accounting variance reports were also produced. In effect, the creation of

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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.

Frontline employee scorecard


The existence of the balanced scorecard for the manufacturing plants provided overall direction for the product and department manager and supervisors. But most of these measures represented nebulous goals, at best to frontline plant personnel. Most hourly employees could not explain total cost productivity and how they could help the plant to achieve this years goal. It was essential that the scorecard be decomposed into measures that were meaningful to lower level employees at the shopoor level. This led to the development of a set of measures which were termed the frontline employee scorecard. The measures provided guidance to lower level employees on where they should focus their efforts to inuence the plant scorecard measures. Action planning occurred at both the plant and product line levels. Employee performance measures focused on the few items which had the biggest impact on the achievement of productivity goals. Three major cost categories drove total cost productivity at OLP and accounted for 94 per cent of the total costs incurred by the plant direct materials, labour and packing materials. Of these three, the single largest element of cost, direct materials, had the greatest potential for cost reduction. For this reason, plant personnel needed to analyse material waste. Root cause and Pareto analysis were used to analyse raw material usage and to determine what factors affected yields and shrinkage. Unnecessary raw material consumption occurred when defective light bulbs were produced or product was lost during the production process. Observations showed that material shrinkage was due to four factors: 1 speed of the equipment ( the faster the equipment, the greater the loss of raw material if the process was not closely controlled); 2 quality of incoming materials (poor incoming quality of raw materials increased the percentage of defective, nished lamps);

Results in the Ohio Lamp Plant


The early results of implementing a balanced scorecard in the LBG were encouraging, although different plants and facilities achieved varying levels of success. The benets of the new measurement system at OLP were immediate and positive. In 1993 and early 1994, total cost productivity gains averaged close to 1 per cent. Later in 1994 and 1995, productivity levels improved dramatically to close to the 5/6 per cent goal. These improvements in productivity were not achieved at the expense of other scorecard measures. Quality measures improved over the same time period. Inventory levels fell. Customer service levels dropped slightly, but this was mostly a result of external raw material availability problems. The improvements from these projects beneted both OLP and other manufacturing facilities with the same or similar product lines.

Guidelines for the development of an employee scorecard


The process followed at GE and OLP can be replicated in any company Higher level objec. tives always need to be converted into activities and measures which are meaningful to lower level employees. The following guidelines are recommended for developing an employee balanced scorecard. First, the employee scorecard should be closely integrated with the plant, divisional,

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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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