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Management Decision Emerald Article: Developing an employee balanced scorecard: linking frontline performance to corporate
Management Decision Emerald Article: Developing an employee balanced scorecard: linking frontline performance to corporate

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

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D eve lo p i n g an e m p lo yee b al an c e d sc o r e c ar d : li n ki n g f r o n tli n e p e r f o r m an c e to c o r p o r ate o b j e c ti ve s

Ti m R . V. D a vi s Professor of Management and Director of International Business Programmes, Cleveland State University, Cleveland, Ohio, USA

I n c r e asin g e m p h asis is b ein g

g ive n to c or p or ate m e asu r e- m e n t syste m s wh ic h in te g r ate

c u stom e r satisfac tion ,

p r oce ss q u ality, in n ovation an d n an cial p e r form an c e . M an ag er s ar e r e aliz in g th at n on -n an c ial cr ite r ia (c u s- tom e r ser vic e , p r oc e ss q u al-

ity, n e w p r od u c t d eve lop m en t) are as im p or tan t as n an cial

c r iter ia in cor p or ate m e asu r e - m e n t syste m s. T h e se fac tor s n e e d to b e m on itor e d c losely an d th e ir r e lation sh ip stu d - ie d . M an y e x ec u tives h ave d iffic u lty b alan cin g th e var i- ou s typ e s of m e asu r e s at d iffe r en t le ve ls of th e com - p an y. P r ovid es a d e taile d acc ou n t of h ow a b alan c ed set of m e asu r e s was tr an s- lated in a lar g e c om p an y th rou g h cor p orate , g r ou p , d ivision al an d p lan t leve ls.

C on clu d es th at th e tr an sla-

tion of a c or p or ate sc or e c ar d in to a fr on tlin e em p loye e scor e c ar d is e sse n tial for th e im p le m en tation of str ate g y in m ost rm s. P r ovid e s re c om - m e n d ation s on h ow th is c an b e d on e .

T h e au th or wou ld like to

th an k M ar yb e th C on n olly, a

for m er e m p loye e of G en e r al

E le ctric (U S A), for h e r assis- tan c e with th is ar ticle

Management Decision 34/ 4 [1996] 14–18

© MCB University Press

[ ISSN 0025-1747]

Managers in large companies often have difficulty translating objectives, strategies and perfor mance measures at different levels

of the company. Objectives at the senior man- agement level frequently have no clear con- nection with perfor mance priorities lower down. Generally, financial objectives take precedence at the top, while production vol- ume, quality and service objectives have the highest priority at the frontline, employee level. How lower level production and service

objectives translate into upper level financial results is usually not clear. The need to integrate objectives and strate- gies across levels and functions is becoming more critical as fir ms compete on a broader ar ray of perfor mance criteria[1 ]. Kaplan and Nor ton[2 ] have proposed a “balanced score- card” which integrates measures of customer satisfaction, process perfor mance, product or service innovation and finance. They contend that these areas of measurement are of uni- versal impor tance to most businesses. Man- agements 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 show- ing how a balanced scorecard system can be implemented at different levels of the fir m[3 ]. This ar ticle 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, star ting at the cor porate management level and working down, from group to division, to the manufacturing plant floor.

GE c o r p o r ate sc o r e c ar d

In the early 1990 s, John Welch, chief executive officer of the General Electric Company, pre- sented general goals for the company which broadly fit the four categories of balanced scorecard measures. First, from a customer perspective, customer satisfaction was sin- gled out as a top priority for all GEs busi- nesses. Second, from an inter nal process and productivity perspective, all business groups were required to reduce inventory levels and

increase inventory tur ns. Third, from an innovation perspective, GEs goal was to grow globally through new product development and business expansion. Finally, from a finan- cial perspective, the goal of GE was to be number one or number two in the industry in ter ms of sales and profit or exit the business. The task of each business group, division and plant was to develop specific objectives, mea- sures and plans to achieve these goals. The measures are summarized under GEs cor po- rate goals in Table I.

GE L i g h ti n g Bu si n e ss Gr ou p

sc o r e c ar d

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 profitable history but has encountered stiff

overseas competition in recent years, par ticu- larly from Osram. This has affected profitability and necessitated perfor mance 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 tradi- tional functional depar tments. This cross- functional str ucture is integrated at every level of the group. These teams help to develop divisional, product line and plant goals and strategic plans. This team str ucture was helpful in the development of a balanced scorecard for LBG. Based on the cor porate directives, the LBG defined 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 produc- tivity 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 par t, by meeting the inventory goal of ten tur ns per year. Also, an ongoing target of 25 per cent of total sales from new products introduced in the last five years was set.

Tim R.V. Davis

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

Management Decision

34/ 4 [1996] 14–18

These measures appear under the group goals in Table I.

N o r th Am e r i c an Pr o d u c ts D i vi sio n

sc o r ec ar d

The division of LBG which manufactures lamp products in Nor th America is the Nor th American Products Division (NAPD). NAPD comprises 26 manufacturing locations in the USA, Canada and Mexico. It is a ver tically integrated operation in which most of the key components of the finished lamp are produced in “component plants”. The cross- functional str ucture of LBG helped to facili- tate goal setting across different depar tments and levels of the company. Group, divisional and plant personnel par ticipated on multi- level 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 per- centage 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 satis- faction levels. “Cost” targets involve trim- ming expenditures in all facets of manufac- turing (i.e. product design, product repro- ducibility and product manufacture). Control of costs is measured in ter ms of productivity improvement from year to year. An annual reduction goal of 5 per cent in cost was tar- geted for the group. “Vitality” is a measure of innovation and refers to new products which have been introduced within the last five years. In order to maintain its market leader- ship 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 five years. The first three measures (speed, quality and cost) were metrics that were defined as

Ta bl e I Balanced scorecard measurement system GE Lighting Business Group

 

Customer

Int ernal

Innovation

satisfaction

Financial

process

learning

measures

measures

measures

measures

Corporat e

Customer satisfaction 95 per cent on time; global expansion

Number 1 or 2 in sales; Number 1 in profit

Increase inventory

New product

scorecard

turns; process

development

 

improvement

Group

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”

Number 1 in sales/profit reduce working capital; total cost productivity > 5/ 6 per cent

Total “cost” productivity > 5/ 6 per cent; reduce inventory levels

Ten inventory

New products (25 per cent of sales last five years)

scorecard

turns; process

(LBG)

improvement

Division

Ten inventory turns; process improvement

Vitality; 25 per cent of sales in new products; improve product design

scorecard

(NAPD)

 

Plant

Speed in customer service Total cost productivity Ten inventory turns;

 

scorecard

(external) 95 per cent on > 5/ 6 per cent; per cent

process improvement quality (number of

(OLP)

time fill rate; customer

direct material yields,

complaints (number of labour productivity, defects per million) customer complaints packing; reduce inventory Materials: equipment per million) survey results levels speed, quality incoming material, training, assembly process Labour: equipment downtime, overtime,

 

production rates

Frontline

Customer service (internal) 95 per cent on time

Reduce material costs

Assembly process:

employee

(waste)

and overtime,

reduce – number of poor solders, number of cracked bulbs, number of bent bases, number of cracked stems

scorecard

increase productivity

 

(production rates)

Tim R.V. Davis

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

Management Decision

34/ 4 [1996] 14–18

manufacturing initiatives. Vitality was con- sidered a marketing, engineering and R&D initiative. These depar tments were responsi- ble for the increased rate of new product development and improved product design.

Man u f ac tu r i n g p l an t sc o r e c ar d

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 inter nal customers, while the assembly plants mainly had exter nal cus- tomers. Generally, the component plants had different quality measures, while the assem- bly plants shared similar measures. The scorecard of the Ohio Lamp Plant (OLP) will be examined here. OLP assembles finished light bulbs and employs over 700 people. The plant has two principal product lines: par type bulbs (outdoor spotlights and floodlights) and reflector bulbs (indoor spot- lights and floodlights). 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 impor tant to recognize that measurements which are impor tant to higher level managers cash flow, market share, quar terly sales growth, operating income by divisions, retur n on equity have little meaning for depar tment managers and supervisors in manufacturing plants. Yet these people will have a major influence on the achievement of cor porate and divisional perfor mance objectives. These objectives must be translated into actions and measures that depar tment managers and supervisors can understand and control. Members of the cross-functional teams developed plant mea- sures and actions to coincide with the divi- sional priorities of improved speed, quality, and reduced cost (see Table I).

C us t om e r s a t i s f a c t i on m e a s ur e s

Speed was tracked by the two measurements:

customer service levels and inventory tur nover rates. Customer service levels were measured by the percentage of line items (stock-keeping units) filled (line fill 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 prod- uct line) and by individual line items. The key measures of these three groupings for score- card pur poses was the product family cus- tomer service level. Customer service levels

were monitored daily. Weekly conference call meetings of division staff, plant managers and product line managers reviewed cus- tomer service levels, raw material and compo- nent par t availabilities, and potential future sales levels. The product quality por tion of customer satisfaction was evaluated both inter nally and exter nally. 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 par t on the difficulty of the manufacturing process. The exter nal 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 cus- tomer surveys were also car ried out to moni- tor customer satisfaction levels compared with competitors.

F i n a n c i a l m e a s ur e s

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 previ- ous 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 specific target which, when all plants were combined, amounted to a rate of ten tur ns per year for the division. Inventory levels of raw materi- als, in process material, and finished goods were reviewed on a monthly, quar terly and annual basis.

I n t e rn a l pr o c e s s m e a s ur e s

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

S t a nd a r d m a n a g e m e n t r e por t s

While these measures were the primary focus of the plants, upward repor ting was not lim- ited to these measures only. Traditional repor ting of items such as actual versus oper- ating plans and accounting variance repor ts were also produced. In effect, the creation of

Tim R.V. Davis

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

Management Decision

34/ 4 [1996] 14–18

the manufacturing initiatives did not dis- place previous repor ting but, instead, focused attention on those areas and measures which needed the closest attention. Perfor mance at OLP on the customer satis- faction measures of product quality and ser- vice 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 flat.

F r o n tli n e e m p lo ye e sc o r e c ar d

The existence of the balanced scorecard for the manufacturing plants provided overall direction for the product and depar tment 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 pro- ductivity” 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 shopfloor level. This led to the development of a set of measures which were ter med the “frontline employee score-

card”. The measures provided guidance to lower level employees on where they should focus their effor ts to influence the plant scorecard measures. Action planning occur red at both the plant and product line levels. Employee perfor mance measures focused on the few items which had the biggest impact on the achievement of produc- tivity goals. Three major cost categories drove total cost productivity at OLP and accounted for 94 per cent of the total costs incur red by the plant direct materials, labour and packing materi- als. 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 deter mine what factors affected yields and shrinkage. Unnecessary raw material consumption occur red when defective light bulbs were produced or product was lost during the pro- duction 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 incom- ing quality of raw materials increased the percentage of defective, finished lamps);

3 experience and training of plant personnel (the more experienced and well trained the employees, the fewer er rors tended to be made in production);

4 control of the lamp assembly process (poor process control resulted in higher production losses).

The most significant cause of material shrinkage was the control of the lamp assem- bly process. Fur ther root cause and Pareto analysis were done to deter mine 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 intro- duced 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 con- ducted on labour usage, the second most significant element of total cost. The primary scorecard measures which were targeted in this area were equipment downtime, daily production rates, and over time usage. Causes of these problems were also identified and tracked.

R e s ul t s i n t h e O hi o L a m p Pl a n t

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

Gui d e li n es f o r th e d e velo p m e n t o f

an e m p lo ye e sc o r e c ar d

The process followed at GE and OLP can be replicated in any company. Higher level objec- tives always need to be conver ted into activi- ties and measures which are meaningful to lower level employees. The following guide- lines are recommended for developing an “employee balanced scorecard”. First, the employee scorecard should be closely integrated with the plant, divisional,

Tim R.V. Davis

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

Management Decision

34/ 4 [1996] 14–18

group and cor porate measures of the com- pany. 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 par ticipation will inspire greater ownership of the measures and the commit- ment to accomplishing them. This approach is compatible with “open book management” in which a great deal of financial and non- financial infor mation is shared with employ- ees[4 ]. By showing employees how their per- for mance influences the bottom line, front- line employees are encouraged to act like owners and ensure the future of their jobs. Third, if the plant is unionized, union offi- cials should be included in the earliest discus- sion of the measurement system. Union mem- bers will need to be assured that the system gives employees more, not less, control over their jobs. Four th, the measures selected must be timely. Production employees need infor ma- tion in real time so that they can respond and solve problems on the spot. Fifth, the mea- sures selected should focus on the critical aspects of perfor mance. Plant personnel should use root cause and Pareto analysis to deter mine what aspects of the work have the largest impact on the targeted perfor mance goals. Root cause analysis should be done on an ongoing basis as par t of a companys con- tinuous improvement effor ts. Sixth, new measures that are introduced should be balanced with the other scorecard

Ap p li c atio n q u estio n s

1 In what ways could an employee balanced scor ecar d suppor t str ategic and oper a- tional planning in your company?

2 How could the measures used by the man- ufacturing fir m in this case be adapted for use by a service fir m?

3 Why is a multilevel, cross-functional team str ucture impor tant for

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 impor tant not to create too many measures that may overload frontline employees. Seventh, balanced scorecard measures should be entered into the computer so that cur rent figures can be accessed instantly by people in different depar tments and at differ- ent levels of the company. Balanced scorecard software is now available for this pur pose. The cor porate balanced scorecard can be a valuable tool in getting all members of the organization to focus on a few common busi- ness goals. The employee scorecard is the vital link which can increase the probability that upper level, cor porate and divisional scorecards are translated into frontline mea- sures which employees can achieve.

Re fe r e n c e s

1

Brown, M.D., “Measuring cor porate perfor- mance”, Long Range Planning, Vol. 2 No. 27 ,

1994

, pp. 89-98 .

2

Kaplan, R.S. and Nor ton, D.P., “The balanced scorecard measures that drive perfor mance”, Harvard Business Review, January-Febr uary

1992

, pp. 71-9 .

3

Maisel, L.S., “Perfor mance measurement: the balanced scorecard approach”, Jour nal of Cost Management, Vol. 6 No. 2 , 1992 , pp. 47-52 .

4

Case, J., Open-book Management, Har per Busi- ness, New York, NY, 1995 .

implementing a balanced scorecard? How could this type of str ucture be ar ranged in your organization?

4

Could the balanced scorecard measure- ment system be integrated with an individual or group perfor mance appraisal system? What may be some of the advantages?