Applying balanced scorecards to supply chain performance
ISE Magazine November 2018 Volume: 50 Number: 11
By M. Balaji, S.N. Dinesh and V. Veera Parthiban
The balanced scorecard has been a widely used supply chain performance measurement tool because it can enable distinct competitive advantages. Business, industry, government and nonprofit organizations use it extensively to monitor organizational performance, improve internal and external communication and streamline the enterprise’s vision and mission.
Since its introduction in the late 20th century, researchers have investigated the advantages and disadvantages of this integrated approach. Evidence reveals that implementing balanced scorecards as a performance measurement tool has a number of benefits, particularly regarding overall productivity and profitability, despite some limitations.
Globalization and changing customer requirement are forcing industries to adapt new and efficient manufacturing practices, where they often changing their traditional ways of business to remain competitive. Unlike much of the Western world, which in the last few decades has adopted a “supply chain vs. supply chain” mentality, companies in subcontinent India have yet to leverage the supply chain for competitive advantages. This must change, as multinational companies are fully exploiting their supply chains and, in the digital age, even moving toward web-enabled supply chains. Globalization and a liberalized 21st century economy will leave Indian companies behind unless their management focus evolves toward a more effective supply chain management.
Peter C. Brewer and Thomas W. Speh wrote in one of their journal that supply chain management is an important management practice for determining world-class performance. Economic globalization, e-business and new technologies pose challenges to all organizations. Effectively competing in the global market requires organizations to focus on improving operational functions with effective supply chain management.
As proof, Ravinder Kumar, K.S. Rajesh and Ravi Shankar successfully implementing supply chain management to help an organization beat the competition by reducing costs, increasing market share, increasing sales and sustaining customer relationships. But they noted, designing a supply chain alone is not enough to guarantee improvement. Managers must periodically evaluate the supply chain’s performance to achieve competitive advantage.
The balanced scorecard’s genesis and evolution
Robert S. Kaplan and David P. Norton developed the balanced scorecard a quarter year ago. They added strategic nonfinancial performance measures to the traditional financial metrics to give managers and executives a clear, holistic view of organizational performance. This performance measurement framework has evolved from a simple framework to a complete strategic planning and management system.
The balanced scorecard was devised because of the need to incorporate nonfinancial variables to measure organizational – particularly business – performance. The balanced scorecard gives managers a formalized mechanism to balance financial and nonfinancial results in the short and long term, evaluating performance through four different perspectives: Financial, customer, internal business process and learning and growth. To implement balanced scorecards effectively, organizations require sufficient management tools and procedures to provide accurate, timely information and communicate this data throughout an organization. Choosing proper channels enables an enterprise to increase the efficiency of communication and the transformation of information technologies.
The balanced scorecard can be seen as a management system that bridges the gap between strategic objectives set at an organization’s senior level and their operational execution. The scorecard takes the company’s vision, translated each key statement into measurable steps and then presents information to compare and evaluate the critical success factors.
Researchers and managers noted that the balanced scorecard does not formulate strategies, instead describe an existing strategy consistently to enhance its successful execution. The balanced scorecard is one of the most highly rated management tools today and can help organizations achieve better results when compared to traditional performance measurement systems.
Let’s take a look at the conceptual framework and related literature involving balanced scorecard implementation, the concept of the balanced scorecard, how SWOT (strengths-weakness-opportunities-threats) analysis fits in and real-time applications of Kaplan’s and Norton’s approach.
They described how the balanced scorecard concept can be implemented in many ways, although the system must be adapted to fit each specific organization. A good scorecard reflects the strategic plan of the organization, provides a framework that helps shape work behavior, allows each person to measure individual performance and gives data to make changes immediately so that performance is enhanced. As mentioned earlier, the balanced scorecard framework covers four different perspectives: financial, customer, internal business process and learning and growth.
Show us the money
The financial perspective seeks to answer what financial stakeholders expect or demand. According to Ayesha Farooq and Zareen Hussain, the most common performance measures are return on investment (ROI), cash flow, net operating income and revenue growth, as the wrote in “Balanced Scorecard Perspective on Change and Performance: A Study of Selected Indian Companies”.
The financial perspective represents the long-term goal of organizations to provide superior returns based on the capital invested. Financial measures have been the traditional method of analyzing organizational success, involving elements such as profitability, sales growth and revenue per sales visit. It is important for organizations to know from where they get money and how they invest these funds, although financial indicators do differ from company to company.
However, companies often make the mistake of focusing too much on financial indicators, totally or partially ignoring other perspectives, as Ivanov and Avasilcai wrote in their 2014 paper. Still, timely and accurate funding data will always be a priority, and managers should do whatever necessary to provide it.
The essential components of productivity improvement include cost reduction by lowering direct and indirect expenses, along with the efficiency of financial and physical utilization. Revenue growth includes generating more revenue and income from existing customers, from existing products sold in new markets and from creating new products for new markets.
According to Kaplan and Norton, the three core financial themes are revenue growth, cost reduction and asset utilization. A critical appraisal of the financial perspective reveals, therefore, that the focus should be on how to increase the number of new products, minimize product/service costs and maximize revenue flow.
The customer perspective seeks to answer the following question: To achieve our vision, how should we appear to the customers? The answer relies on identifying your target customers, understanding their expectations and determining the value proposition in serving them.
According to Farooq and Hussain’s 2011 paper, choosing measures for the customer perspective of the balanced scorecard depends on the type of customers desired and the value that the organizations provide to them. In other words, the purpose of the customer perspective is to focus on the target customers. This will help organizations create strategies consistent with the type of customers they want. Businesses commonly use customer perspective key performance indicators (KPIs) such as customer satisfaction ratings to assess their performance.
A review of this perspective clearly indicates that these days, the customer is a king who should be served and handled with care. Having your supply chain satisfy customers could lead to expanded market share.
An internal perspective
The internal perspective must reflect the organization’s core skills and the critical technology involved in adding value to the customer’s business, Heila Pienaar and Cecilia Penzhorn wrote in “Using the Balanced Scorecard to Facilitate Strategic Management at an Academic Information Service”.
Since internal processes are core factors in any organization’s success, the four core processes of operations management, customer management, innovation and regulatory social processes must be excellent.
First, operations management processes must achieve superior supplier capability, improve the cost, quality and cycle times of operations, improve asset utilization and deliver goods and services to customers. Second, customer management processes must acquire new customers, satisfy and retain existing customers and generate growth. Third, the processes of innovation must develop innovative products and services from excellent research and development. And fourth, regulatory and social processes must project a firm image of social and regulatory responsibility that allows the company to earn money in the long run.
A review of the internal process perspective surfaces the facts that enterprises should decide on what processes and competencies they must excel at and specify measures for each of them. Improving the quality of products, innovating new products, customer satisfaction, on-time delivery of goods and services to customers all play a dominant role in the internal process perspective.
Learning and growth perspective
The learning and growth perspective seeks to answer the question: To achieve our vision, how will we sustain our ability to change and improve? As Farooq and Hussain’s 2011 research in Procedia Social and Behavioral Sciences asserted, the learning and growth perspective deals with employee satisfaction, alignment of employee skills with jobs, the number of employee suggestions implemented and the hours taken for employee training.
Ivanov and Avasilcai’s 2014 research asserted that the need for employee knowledge, skills and abilities can be important, especially when new technologies and processes come to the market. A company’s ability to innovate, improve and learn corresponds directly to a company’s value. Continuous learning processes with innovation can bring about efficiency in an enterprise’s operating domain. The learning and growth perspective aligns employee incentives and rewards with the strategy.
A review of this perspective clearly concludes that employee participation plays a major role in effective organizations. In fact, this perspective is the backbone to a successful scorecard because it involves employee skills and information systems. Employees and their skills are important not only for their specific tasks, but also for their creativity and ability to develop new ideas.