Continuous Profit Improvement

Transcription

1 Continuous Profit Improvement Using Balanced Scorecard Analysis Modern business benchmarking was conceived by IBM, Hewlett Packard, Hershey and other major corporations in the early 1980s as each company sought to regain its competitive edge by identifying specific business areas of competitive strength and weakness. These areas included profitability, customer satisfaction, product cycle time, employee productivity and many other elements of a successful business. The concept was simplified and refined into the Balanced Scorecard (BSC) in 1992 by Robert S. Kaplan of the Harvard Business School and David P. Norton, president of Nolan, Norton & Co., an IT consulting firm. The use of BSCs has evolved to the point that companies of all sizes, and in many industries, use it to engineer continuously improving performance. What Is A Balanced Scorecard? The BSC is a concise set of customized performance measures that gives managers a comprehensive view of their businesses in a single management report. It combines the most widely used tools by senior management today into one powerful tool for performance evaluation and planning. Those tools and their frequency of use by senior managers 1 are: Strategic Planning 80% Mission and Vision Statements 76% Benchmarking 68% 1 Management Tools Survey 2001, Bain & Co All executives agree on the goal of improving profit continuously, despite the unique nature of each company. Tactics for achieving that goal are as different as the companies themselves. Product mixes are different, customer bases vary between market channels, seasonal influences provide wide ranging challenges and operating processes may be relatively non standard. Finding meaningful industry benchmarking data is difficult, but any company can develop a customized BSC to measure performance against company objectives by following the easy steps outlined in this article. Copyright 2007 Gerke & Associates

2 Using a BSC will allow managers to evaluate annual performance beyond the limited perspective of Net Profit and comparison with the previous year. The narrow Net Profit view of evaluating business performance is limited to a single year and fails to link a company s short term actions with its long term strategies. The BSC will help management build this missing link. The process of creating a BSC for your company should involve employees at all levels and pull them toward achieving your objectives and the vision you have for your company s future success. Most important, it will assist you in planning for continuous profit improvement in future years by combining metrics for four primary dimensions of everyone s business that are essential to ongoing success and are linked to your strategic plan as shown in Figure 1. The BSC forces companies to look forward and move forward, instead of backward. Used properly, the BSC can become the cornerstone of your successful management system as it clarifies and translates your vision and strategy for the company. Figure 1 Customers Satisfaction Owners Financial Results Vision and Strategy Employees Innovation and Learning Managers Internal Processes This discussion of the Balanced Scorecard for growers will examine these questions: Why Is It Called Balanced? Can I Develop a BSC for My Nursery? After I Create My Company s BSC, How Do I Use It? Why Is It Called Balanced? The Scorecard is called balanced because the selected metrics will balance these perspectives: Interests of all of the various stakeholders in the company s success Short term plans and results with long term plans and results Thinking and behavior of individual managers in different parts of the company Copyright 2007 Gerke & Associates 2

3 Lagging indicators that show where you ve been and leading indicators that point where you re headed Figure 2 is an example of how objectives are met with defined metrics for the critical stakeholders that contribute to your company s success: Figure 2 Stakeholder Measures of Objectives Selected Metrics Owners Financial Results Sales growth, Gross margin % Asset productivity Customers Customer Satisfaction Customer retention % Returns & credits on orders Avg. sales/customer Managers Internal Processes Gross profit/employee Labor cost as % of total costs Sales/square foot Employees Innovation & Learning Employee retention Employee training days Staff satisfaction survey Growth of sales and profits do not occur without people consciously doing strategic things to make the growth happen: Customers are the drivers of your future business success and you must have measurable ways of determining their satisfaction Managers must be motivated and energized to make decisions that are guided by your BSC objectives Employee training, innovation and learning must be occurring continuously if performance is to improve Ownership must be satisfied with the company s financial productivity. Some managers believe they intuitively know their company s level of customer satisfaction and employee productivity. The BSC provides an opportunity to quantify those important performance elements and test the validity of that intuition. Copyright 2007 Gerke & Associates 3

4 Companies with well defined Vision and Strategy can use the BSC management concept to meet their objectives, and meet the objectives of their stakeholders at the same time. According to Kaplan and Nolan, the BSC has been successfully implemented by many companies because of four important BSC characteristics: 1. Presents a top down reflection of the company s mission and strategy. Most measures are bottom up and cannot be linked to the company s strategy. Communicating continuous measurement goals to employees will help underscore the importance of inventory turnover, maximizing sales per customer, controlling cost of goods sold and other business elements that are directly influenced by their behavior. 2. Looks forward. Goals that are articulated in the BSC will drive employees future performance, while traditional Net Profit analysis looks to the past. 3. Integrates external and internal measures. This helps managers ensure that future success for one measure doesn t come at the expense of another measure. 4. Helps managers focus. Analysis by paralysis may result if companies are tracking too many unrelated metrics for management to assimilate. Managers designing their BSCs will agree on basic measures that are critical to the company s success. The BSC approach of combining multiple perspectives into performance metrics helps managers balance the interrelationships of internal and external elements that drive the success of their businesses. It leads to improved decision making that is consistent with corporate objectives and keeps companies moving forward with well articulated continuous improvement strategies. Can I Develop a BSC for My Company? You absolutely can build a BSC for your company and there s no good reason to not do it. If you collect the following examples of basic data you can begin building your BSC today: Number of Employees Net Sales Gross Profit Number of Customers Number of New Customers Copyright 2007 Gerke & Associates 4

5 Number of Square Feet of Production Space (Square Feet of Display Space for retailers) Sales of New Products Saleable Inventory Utilization If you are not collecting this data and measuring performance in some manner, now is the time to begin. Depending on the complexity of your business and the availability of data, you can make your BSC as simple or complex as you want it to be. The BSC concept is applicable to any type of business, including retailers, manufacturers, wholesale suppliers and distributors. For this discussion we will concentrate on manufacturers. How Do I Get Started? Developing a BSC can be simple but not easy, at the same time. It s simple if you have articulated your company s business strategies and objectives to employees. If you haven t developed measurable objectives, it s time to get some outside expertise to help with basic Strategic Planning. This will help you define (in a measurable way) where you want the business to go and how you plan get it there. Armed with welldefined measurable business objectives, you can work on improving performance and how to measure it against the objectives. Often, some employees will be reluctant to speak frankly about company performance that needs to be improved. Retaining the expertise of an outside facilitator to interview key employees for confidential input, and to conduct the BSC planning meetings, will reduce this reluctance. The facilitator can present your strategic objectives to the management team and guide the discussion to identify performance metrics that are linked to the objectives. Involving employees in the design of your BSC is crucial to its success. Otherwise, it may be viewed as just another top down directive. Values for specific metrics can be calculated on spreadsheets and then plotted on the BSC for comparison against your corporate objective values, and against industry data if it is available. The Financial Perspective of the BSC is a logical place to begin, since most manufacturers are familiar with financial measurements. The interrelationships between the example data in Figures 3 6 will be analyzed in the next section of this discussion. Copyright 2007 Gerke & Associates 5

6 Figure 3 Financial Results for Most Recently Completed Fiscal Year Metric Calculation Value Sales Growth % in ((2002 Sales 2001 Sales)/2002 Sales) X % 2002 Gross Profit /Sq. Ft. (Net Sales Cost of Goods Sold)/ Sq. Ft. in 39.2% Production Return on Assets % (Net Profit/Total Assets) X % Asset Productivity Net Sales/Total Assets 4.1 A second important perspective for the BSC is Customer Satisfaction. Figure 4 Customer Satisfaction for Most Recently Completed Fiscal Year Metric Calculation Value Customer Retention % ((2006 Customers/(2005 Customers + New 91% Customers) X 100 Average Purchases/Customer (Net Sales/Total Active Customers) $8,200 Returns & Credits as % of (Returns/Net Sales) X 100 3% Sales Reorders as % of Total Orders (Number of Reorders/Total Orders) X % Thirdly, BSC metrics to measure Internal Processes for manufacturers could include: Figure 5 Internal Processes Metric Calculation Value Employee Gross Profit/Total Employees $18,000 Profitability Labor Costs % (Total Labor Costs/Total Costs) X % Safety Improvement ((2001 Total Accidents 2002 Total Accidents)/ % Accidents) X 100 Inventory Scrap % (cullage) (Cost of Scrap/Cost of Total Inventory) X 100 2% Copyright 2007 Gerke & Associates 6

7 Finally, metrics that evaluate Innovation and Learning by employees are shown in Figure 6. Figure 6 Innovation & Learning Metric Calculation Value Employee Retention % (Total Employees 2002/(Total Employees % + New Employees)) X 100 Training Days per Employee Total Training Days/Total Employees 2.3 Employee Generated (Ideas Implemented/Ideas Submitted) X 100 6% Improvement Employee Satisfaction Survey Rank Satisfaction With Surveyed Job Elements (maximum score=100) 85 Copyright 2007 Gerke & Associates 7

8 Figure 7 Your Balanced Scorecard Balanced Scorecard for XYZ Company Measure XYZ Co. XYZ Co. Industy Rating** Actual Plan Average Financial Sales Growth % 6.7% 5.5% 8.1% Perspective Gross Profit /Sq. Ft. in Production 39.2% 55.4% 51.6% Return on Assets % 2.2% 3.0% 4.2% Times Interest Earned Asset Productivity Customer Customer Retention % 91% 90% 95% Satisfaction Average Sales per Customer $ 8,200 $ 8,000 $ 7,500 Order Fill Rate % 89% 95% 92% Returns & Credits as % of Sales 3% 2% 2% Reorders As % of Total Orders 12% 15% 10% Internal Gross Profit per Employee $ 18,000 $ 25,000 $ 20,000 Processes Labor Costs as % of Total Costs 29% 33% 30% Safety Improvement 13% 10% 10% Inventory Scrap % 2% 3% 5% Innovation Total Employee Retention % 88% 90% 85% Training Days per Employee Employee New Ideas Implemented 6% 5% N/A Employee Satisfaction Survey (100=max) N/A **Color Coding Exceeded plan by >10% Within 10% of plan Below plan by >10% After I Create My Company s BSC, How Do I Use It? By using the BSC approach of linking strategic objectives with action steps for a limited set of metrics, managers will establish the BSC as the cornerstone of a company s strategic management system that drives its future business success. Based on this Copyright 2007 Gerke & Associates 8

9 assumption and interrelated metrics on the sample BSC, some observations and possible action steps include: Financial Perspective 1. Sales growth exceeded plan but is well below the industry average 2. Gross Profit is far below the plan and the industry average. Review pricing, discounting, labor staffing, and other components of Cost of Goods Sold. Severe discounting could have increased revenue but at the expense of profitability. 3. Return on Assets indicates that asset utilization to generate profit must be improved, or that Profit could be eroded as noted in (2) above. 4. Asset Productivity is good but the sales generated a low profit margin. Customer Satisfaction 1. Customer retention was acceptable and sales generated per customer were above average, indicating customers are generally pleased. 2. The Fill Rate and Returns & Credits were relatively high and this could erode existing customer satisfaction. This could indicate weakness in inventory management, errors in order filling and/or plant quality. 3. Reorders were higher than the industry average but 20% below your plan, indicating the expected volume of reorders might be unrealistic. Internal Processes 1. Gross Profit/Employee is low. This could be due solely to the low Gross Profit previously discussed or the employee staffing could be too high. Since Labor Costs are relatively low, the former is more likely. 2. Safety Improvement reflects a reduction in Worker s Compensation claims. Regular safety training will help this trend improve continuously. 3. Scrap costs are below plan and the industry average. This can be a combination of accurate forecasts that result in minimal surplus and closely managed production work. Excessive scrap is a severe drag Copyright 2007 Gerke & Associates 9

10 on Gross Profit so strong emphasis is essential for continuous profitability. Innovation 1. Employee Retention is above average for the industry. Employee Satisfaction is further evidenced by the favorable implementation of Employee New Ideas and the high ranking on the Employee Satisfaction Survey. 2. Training Days per Employee exceeded the plan goal and may be part of the reason for the strong Safety Improvement discussed earlier. This saves on insurance premiums, as well as on indirect costs of accidents which can be much higher than the direct costs. Lost time for key employees at critical times can also affect efficiency, customer satisfaction and profitability. Conclusion The BSC is not a business fad because it measure the most basic elements needed for continuous future success. If kept simple and focused on core metrics for your company it will provide a management system for continuous profit improvement for your company. By making the BSC the cornerstone of the way you run your business, all employees will be involved in managing to achieve strategic objectives that will lead your company to breakthrough improvements in customer service, employee productivity and satisfaction, product quality, business processes and long term profitability. Today is the ideal time to begin building continuous profit improving by employing the Balanced Scorecard! (Note to Editor: See below for possible sidebar) Balanced Scorecard benchmarking analysis will help your company: Improve profit continuously Involve employees in decision making that is guided by your objectives Determine objective ways to measure customer satisfaction Link short term actions with long term strategic goals Reduce costs and improve operational performance Copyright 2007 Gerke & Associates 10

11 Joe Weston is a senior consultant at Gerke & Associates, Inc., a management consulting company in Columbia MO. He was a VP Sales & Marketing and CEO in the retail and wholesale channels of a consumer products industry. Copyright 2007 Gerke & Associates 11