added Fine-tune your balanced scorecard and make it a machine geared toward continuous improvement by Alex Fedotowsky

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1 added by Alex Fedotowsky In 50 Words Or Less A balanced scorecard (BSC) can be used as a cyclic, continuous improvement tool to create synergy within an organization. Incorporating lean, Six Sigma, theory of constraints and continuous improvement methods into the BSC can help link individual projects and activities to strategic goals and can change an organization s culture. Fine-tune your balanced scorecard and make it a machine geared toward continuous improvement

2 BALANCED SCORECARD The balanced scorecard (BSC) is accepted in the business world as a valid instrument with which to translate and deploy an organization s business strategy throughout its infrastructure. The BSC was first developed by Robert S. Kaplan and David P. Norton as a tool to link the traditional financial lagging metric to three leading of learning and growth, process and customer. At about the same time, Lawrence Maisel developed a similar scorecard approach. June 2010 QP 45

3 The four, sometimes referred to as perspectives, have associated key indicators (KPI). The senior management team normally determines the KPIs to link leading indicators (people, process and customer) to the lagging indicator (financials). To ensure the successful deployment of a BSC, multiple levels of linked KPIs must cascade through divisions, departments and the individual or shop level. When an organization can link the of an individual or the smallest unit to top-tier KPIs, you know you have a working BSC. What must an individual worker, supervisor or manager do each day to move a KPI in the right direction? The cascaded KPIs can provide managers a way to motivate workforce behavior and improve operations within their control in real time and anticipate financial or results. Deploying a completely linked BSC, however, is not easy. Many organizations struggle to make the BSC work as it s intended. In some cases, they simply substitute poorly selected leading to satisfy stakeholders. The BSC can and should be used as a cyclic, continuous improvement tool to create a synergy not easily achieved by competitors. The BSC has the ability to integrate lean, Six Sigma, theory of constraints (TOC) and continuous improvement methods into a cohesive unit that can change an organization s culture and help it achieve its strategic mission. People seem to react positively to posted with goals set by the BSC objectives. When business strategy is deployed through a BSC, a knowledgeable workforce will deliver the solutions to meet the goals. Balanced scorecard (BSC) cycle / Figure 1 PDCA cycle Act Check Plan Do BSC cycle People Process A new look BSC Since its conception, the BSC has gone through multiple designs and changes to fit organizational goals; however, this new way of designing a BSC, which combines lean, Six Sigma, TOC and continuous improvement, will create higher visibility for improvement projects. Lean, Six Sigma and TOC all use a cyclic structure to continuously improve and achieve desired business results. Walter A. Shewhart introduced the plando-check-act (PDCA) cycle (and W. Edwards Deming popularized it) to provide a systematic method to solve problems by applying scientific methods and then moving to the next problem. Cycles of logical steps have become a proven way to continuously improve. By using the BSC, can the improvement cycle be used at the strategic business level? The primary strategic goal for any organization should be to always improve in every way. The BSC can help achieve that. Figure 1 compares the PDCA cycle with the idea of positioning the BSC as a cycle of improvement. As the PDCA cycle starts with the plan phase, a BSC starts with people and repeats. When results don t meet the target, ask the question, What can we do next to support our people to improve the processes that delight our customers and generate more profits? We can refer to this as the people-process-customer-financials (PPCF) cycle. Cyclic nature of improvement Typically, organizations follow one of these four patterns as part of their improvement efforts: 1. Continuous improvement: PDCA and repeat. 2. Six Sigma: Define, measure, analyze, improve, control (DMAIC) and repeat. 3. Lean: Identify value, make value flow and repeat to pursue perfection. 4. TOC: Identify the constraint, exploit the constraint, subordinate everything to the constraint, elevate the constraint and repeat. What s missing in each of these four patterns is an established BSC that can make a difference. Building a BSC, complementing it with the PPCF cycle and repeating as necessary should be an option all organizations must consider. At Organization X, for example, lean Six Sigma projects were not directly linked or referenced to a top-tier KPI. When the BSC is designed to function as a cyclic continuous improvement instrument pulling lean, Six 46 QP

4 BALANCED SCORECARD Sigma and theory of constraints (LSSTOC) projects to move KPIs in a positive direction, the organization has a well-developed improvement system. In many organizations, LSSTOC efforts are often ancillary and not linked to the organization s strategy. Maybe that s why LSSTOC projects are often referred to as the flavor of the month, or they move sluggishly because they do not have senior management s full attention. When each person, manager and department can clearly see how their efforts positively affect a metric for the organization to be more successful, the culture will change. The workforce will see the business need to support and drive LSSTOC projects toward success, with their ideas leading the charge. The BSC has the ability to make that culture change happen. Organizations that have a working BSC can achieve satisfactory results within segments of their organizations. But gaps can exist that consist of incomplete links from work-area to the organization s top-tier KPIs. For example, back at Organization X, a BSC was deployed as a quality sustainment instrument but not as a governing, organizationwide improvement instrument. In this situation, quality (outputs from processes) were sometimes confused as process. Table 1 is a model of a BSC structure that required updated improvements to create a structure to link the cascaded KPIs. In this case, there was only one level of at the departmental level. This scorecard did not provide linked information to improve from red (alert) to yellow (warning) to green (acceptable) status. The BSC structure had missing metric links and lacked well-defined improvement objectives. In this example, the department was in constant firefighting mode from the supporting units that had no local scorecard to gauge their impact on the departmental-level, and a corporate-level scorecard didn t exist. The goal of the new design was to create a clear path from individual from local work-area to the top KPIs (see Table 1). A project was completed to develop a BSC model in which the improvement method would become the framework to transform the organization into a continuous-improvement enterprise. The next step was to design a BSC to best illustrate the new top-level cyclic BSC. The Maisel model provides a good BSC foundation for designing a flow of strategy deployment and upward assessment. The structure in Figure 2 (p. 48) would greatly benefit from better-defined separated and aligned with newly introduced top-tier KPIs. In this case, there were no operational definitions documented to communicate consistency of metric Single level of scorecard at department level / Table 1 Scorecard objective Metric Target Status Process sustain repair station align to customer expectations People improve work environment People optimize workforce effectiveness ISO audits Defect rate On-time delivery Supervisor work-area assessment report Town hall meetings Manager, supervisor training Pass all audits with no major findings Zero defects 95% on-time delivery Weekly on first day of week Monthly on first day of month 80% trained Monthly posted color-coded status resulting in daily firefighting in attempt to change status Management review Personnel goals and actions not linked to improve local, department or corporate-level balanced scorecard. On-time delivery: 87% (yellow) Leadership training: 85% (green) Defect rate: 22% (red) Audits: 100% compliance (green) June 2010 QP 47

5 meaning. The LSSTOC improvement efforts will deliver new process such as throughput, cycle time and process yields. To improve the BSC, the organization needs to pursue a way to integrate the improvement, cyclic nature and language through the structure of the new scorecard s design. The power of the BSC lies in its ability to change the culture, focusing on the people KPIs that will drive the desired results in the process KPIs. Improving the process KPIs will improve the customer KPIs. When customers are satisfied and the BSC strategy is to seek higher levels of customer satisfaction, you can expect positive results recorded in the financial KPI. When you continue this cycle, expect even better customer satisfaction and financial results. We developed a generic version of the new BSC model. Up until now, the BSC has been successfully deployed primarily to sustain quality requirements. A new BSC is designed to incorporate LSSTOC and continuous improvement language into the core strategy and provides the leading indicator with the initiatives to ensure financial (the lagging indicator) success. The future of the BSC is to fit LSSTOC and the scorecard together as a cohesive force. Competitors who cannot accomplish this synergy will fall further behind in their attempts to gain market share from organizations that have accomplished this feat. By cascading the same structure, understandable improvement language, and into all organizational levels, the BSC becomes easier to read and use to improve the business. Alignment model of BSC You can look at the BSC structure in five parts to understand how the levels of an organization can report the KPI results from the work area and line them up with corporate KPI to work toward business objectives. Depending on the size and levels of your organization, you may require fewer levels. 1. Top-tier organizational KPIs. Financial KPI = reported financial reports. KPI = Monthly average customer satisfaction index reported from departments. Process KPI = Monthly average throughput reported from all departments. People KPI = Total average employee retention Corporate top-tier key indicator trend chart / Figure 2 People Process Workforce employee retention rate for entire workforce. Percentage of workforce trained in lean, Six Sigma and TOC. Total number of employeeimplemented improvements per month. Total monthly average throughput. Total monthly average cycle time. Total montly average quality first pass yield. Total reported indexed customer satisfaction. Total reported monthly on-time deliveries. operation cost savings. revenues and profits. People driving processes to satisfy customers to improve financials TOC = theory of constraints 48 QP

6 BALANCED SCORECARD key indicator trend chart / Figure 3 People Process employee retention rate. percentage workforce trained. Number of employeeimplemented lean ideas per month. Monthly throughput. Monthly lead times. Monthly quality first pass yield. Percentage on-time deliveries. Monthly customer complaints. Work area/shop savings/cost avoidance. Vendor parts and materials cost reduction. People driving processes to satisfy customers to improve financials rate reported from all departments. 2. Departmental KPIs. Financial KPI = reported department operating costs and savings. KPI = Monthly average reported customer feedback ratings. Process KPI = Monthly average work areas throughput. People KPI = Monthly average employee retention rate reported from all shops. 3. KPIs. Financial KPI = shop operating costs. KPI = monthly reported complaints. Process KPI = monthly shop or work-area throughput. People KPI = work-area employee retention rate. 4. Management review KPIs. Financial KPI = quarterly reported work-area operating costs and savings. KPI = monthly number of complaints reported to manager. Process KPI = monthly value-added work throughput in supervised area. People KPI = leadership skills assessment. 5. Posted work-area. These will motivate the workforce to make improvements that link to the organizations top KPIs (for example, cycle time, throughout, work in progress and on-time deliveries). Figure 2 illustrates scoreboard layout for a corporate top-tier KPI trend chart as posted throughout the organization in key areas. The people, process, customer and financial labels with arrows provide the workforce a sense of direction and involvement to help management achieve the business goals. This layout can be used at all levels that link to the top-tier scoreboard. Figure 3 illustrates a scoreboard for a localized work area. At this level, the involvement becomes more meaningful in the workforce s daily activities and helps the workforce believe it can make a difference. After lining up the cascaded KPIs, the next goal is to show how a BSC can serve as the big-picture, cyclic improvement machine for any organization. The model is designed to link the ground-level shop and manager s through department and toward the organization s top-tier KPIs. With this model, management will have a cyclic path to perpetually communicate strategy through the organization s infrastructure and have an assessment tool to link projects and activities upward through the organizational layers achieving strategic goals. The paramount goal of any organization should be to continually improve. A BSC designed to facilitate continuous cyclic improvements to achieve a strategic goal should become the primary instrument an organization uses. June 2010 QP 49

7 Online Tables 1-4 at present the new model, starting with the top-tier corporate scorecard. The tables illustrate the connecting structure of the KPI, actions and goals needed to achieve the organization s desired strategic targets. The model s purpose is to illustrate how to communicate with the BSC. In reality, a fine-tuned BSC with objectives, action plans and measures should be worded more precisely to ensure everyone knows the goals and what must be done. The BSC will work if you keep the structure simple, show how it s meaningful to the workforce, use it as motivation and show its cascading alignment. Figure 4 is the final presentation of what a well-aligned BSC model focused on continuous improvement can look like to make sense to stakeholders. Finally, if you are familiar with Eliyhu Goldratt s fivestep process to identify and elevate system constraints, the cascaded alignment of the BSC can serve to detect organizational higher-level constraints at the work-area and department levels. The senior management team will have almost real-time knowledge to help it allocate resources that alleviate the constraint and move on to the next constraint. Figure 5 illustrates how you can follow the trail. Workforce-driven results The BSC is a proven instrument to deploy strategy and tie activities from all levels that help achieve the strategic goals. The BSC can be used as the primary instrument to achieve financial results with customer satisfaction through better processes driven by the workforce. In the earlier example of Organization X, the core Balanced scorecard (BSC) visible cascading structure / figure 4 Corporate KPIs Corporate BSC perspectives Lagging KPI KPI = monthly operating costs and reported profits Strategic objective Action plans Measures Validated total savings by management and customer. Improve on leading KPIs starting with people perspective (PDCA cycle). Overall project cost savings reported. Total lowered operating costs. Validated revenue profits increase. Identify new lean Six Sigma projects. Update top-tier KPI. Corporate financial reports. Future improvement Department opportunities level Strategic objective presented BSC customer. perspectives Action plans LSSTOC projects savings Measures presented. Increase customer satisfaction. Validated savings Weekly by meetings management with customers. Improve on leading Organizationwide KPIs starting Overall project cost savings Lagging KPI and customer. with people perspective (PDCA reported. Retain existing customers. Teams evaluate products and satisfaction KPI = customer KPI = monthly Lower operating Win back lost customers. services costs. cycle). using QFD tools. index. Corporate financial reports. satisfaction department Validated revenue index Reduce customer operating costs. Visit customer profits increase. Identify new LSSTOC projects. site monthly. Percentage complaints. LSSTOC projects savings operating costs Future Unit/shop improvement level opportunities BSC Strategic Update objective and post department Action plans presented. Measures Process Total averaged: presented perspectives customer. Complete LSSTOC projects that KPI. Organization averaged Reduce cycle time. impact system constraints and voice process : Increase customer KPI = of the satisfaction. Validated customer priorities. Weekly savings meetings by finance with Improve on leading satisfaction KPIs starting rating. Overall project cost savings Reduce WIP. Lagging KPI department. Throughput. production Retain existing Maintain customers. customers. with people perspective (PDCA reported. organization. Percentage complaints. throughput Increase KPI throughput. = customer KPI = monthly shop Lower Cycle time. Win back lost Facilitate customers. operating Teams evaluate costs reported. cycle), continue lean and CI products and Corporate financial reports. satisfaction index operating costs employee ideas to improve initiatives. Increase quality and yield. Future improvement services using opportunities QFD WIP. tools. Lean Six Sigma projects processes. Process Department targets: presented Complete to management. Update and post shop KPI Personnel BSC LSSTOC Evaluation Quality projects yield. Strategic that. Department Objectiveaveraged process Action Plans savings presented. Measures People (priority) Train and retain entire 100% of workforce Reduce cycle Provide time impact system constraints and : training for employees Increase to Percentage of (Learning and to meet and KPI improve = production voice internal of the customer Validated priorities. Weekly work meetings area with savings. crossfunctional 100% teams. on-time Improve Percentage on leading of KPIs complaints from Work project cost savings ability to meet/ Reduce WIP. improve processes. employees trained in Throughput. satisfaction. Lagging KPI Validated starting external with people customers. reported. growth) exceed customer throughput requirements. Deploy and maintain Senior leaders periodically visit work lean Six weekly/ Sigma and Increase throughput. Cycle time. KPI = customer 100% Performance on-time monthly delivery. KPI = work delivery. perspective (PDCA cycle). work area Develop and support genuine leadership area. required. job skills. Root cause tools and analysis Percentage of complaints from Corporate financial reports. KPI = employee and teamwork throughout organization. Increase complaints area cost avoidance savings. quality and yield. WIP. Zero complaints. Future on complaints. cost saving Assure internal update customers and posted LSSTOC projects savings Facilitate employee Conduct periodic team meetings with Employee ideas retention to rate. improvement retention rate improve processes. Quality opportunities KPI in your area of yield. presented. Involve entire workforce to improve work Process improvement agenda. Reduce cycle time Number of implemented presented Complete by selected your staff. area lean management. Shop area process : processes. People (Priority) Train and Leading retain KPI Deploy 100% an of employee workforce Reduce idea Provide WIP training improvement for employees ideas Six per Sigma Percentage projects. of employees trained Set targets Weekly Throughput. meetings posted with your KPI Internal trend satisfaction charts (Learning and to meet KPI and = production improve implementation ability to system. meet/ to have skills to employee. improve in LSSTOC and required job skills. growth) exceed customer requirements. Increase processes. throughput Deploy and maintain weekly/ throughput = percentage Increase monthly internal Employee work area customer customers. Cycle time. index. retention. rate. BSC = balanced scorecard Develop and support genuine Increase on-time Managers quality delivery and to periodically yield internal satisfaction. Maintain visit work WIP. and post real-time Percentage of complaints KPI = key indicator Facilitate People Number employee of implemented ideas to Process customer. KPI = employee leadership and teamwork (crossdepartmental, shop). area. 100% WIP = work in progress improve on-time improvement processes. delivery. percent delivery. ideas per Quality yield. retention rate PDCA = plan-do-check-act People (Priority) Train and Conduct retain 100% periodic work team area meetings Zero complaints. Provide employee. training for employees Percentage employees trained QFD = quality function deployment Involve (learning workforce and to improve work workforce Process with to improvement meet and improve agenda. Work to area have Percentage improvements skills to improve of employees with Monthly Complete in LSSTOC and projects required that job Work Percent area for process LSSTOC = lean, Six Sigma, Theory of Constraints processes growth) within their area of ability to Deploy meet/exceed a employee customer idea processes. participating in improvements. skills. influence. = throughput. targets. impact work area constraints. you manage. requirements. implementation system. employee throughput. on-time Reduce Supervisor cycle time. in work area daily. Deploy Employee and maintain retention weekly/ rate. Throughput. BSC = balanced scorecard KPI = shop employee Supervisor leadership training. retention Reduce Conduct WIP. periodic rate. team monthly Number work of area implemented. deliveries. Cycle time. KPI = key indicator retention rate Involve 100% shop workforce to meetings with improvement improvement per WIP = work in progress Increase throughput. Monthly Facilitate employee ideas to WIP. improve work processes within agenda. improve employee. processes in work PDCA = plan-do-check-act their area of influence. Increase yield. lead QFD = quality function deployment Deploy a shop employee idea area. times. Monthly FPY. Percent of employees LSSTOC = lean, Six Sigma, Theory of Constraints People (Priority) percentage Provide implementation 100% training system. for Schedule participating technical in and improvements. lean customer Percentage of employees BSC = balanced scorecard (learning and growth) your workforce. skills training. trained LSSTOC and job skills. workforce Monthly complaints. KPI = key indicator = supervised Develop and display genuine Conduct daily team meetings Employee retention rate. WIP = work in progress area employee retention trained. leadership to motivate your quality with improvement first agenda. Number of implemented PDCA = plan-do-check-act rate workforce. Implement daily ideas from improvement ideas per CI = continuous improvement pass yield. Lead workforce to improve employees in your work area. employee. LSSTOC = lean, Six Sigma, Theory of Constraints Number work processes of within their Percent of employees area of influence. employee participating in improvement. BSC = balanced scorecard implemented KPI = key indicator WIP = work in progress lean ideas PDCA = plan-do-check-act LSSTOC = lean, Six Sigma, Theory per of Constraints month. Management Communicating strategy downward through company structure into the work areas. KPI = key indicator FPY = first pass yield Assessment Linking work-area activities upward through the BSC layers achieving strategic goals. Work area/shop savings/cost avoidance. People driving processes to satisfy customers to improve financials Vendor parts and materials cost reduction. Supervisor addresses resources and constraints with work-area employees daily that impact the BSC. 50 QP

8 BALANCED SCORECARD Applying theory of constraints / figure 5 Following metric trends upward, toward top-tier KPI, can assist in identifying organizationwide system constraints that impede positive BSC results. Top-tier BSC organization s KPI Metrics Department BSC Department BSC Department BSC Priority (red) constraint affecting BSC results, next constraint (yellow). Provides the organization information on where to focus lean Six Sigma, TOC resources to make more of an impact for the top-tier KPIs. BSC = balanced scorecard KPI = key indicator TOC = theory of constraints strategy was to improve processes to reduce cost, increase customer satisfaction and be rewarded financially. The focus was on the BSC structure alone. Of course, the BSC model must be fine tuned with details of a real situation, requiring carefully selected input from multilevel teams, and then linked to a mission and vision statement. Depending on your strategic drivers and situation, your BSC could be noticeably different than the one in the example. The model is valid, however, for organizations desiring a holistic approach to improvement. Incorporating people-driven LSSTOC and continuous improvement activities as the priority method will make the BSC a far more powerful tool and allow the organization to correct inefficiencies, helping it achieve targets set by KPIs. Often, LSS projects get stuck inside a system, generating some results but nothing significant because they don t get the attention of senior managers. By working with TOC in the cyclically aligned BSC model, LSSTOC activities with limited resources can produce a greater return on investment versus the dismal results that will be achieved by spreading resources thinly throughout the organization s improvement projects. The future of the BSC has the logical mechanism to link LSSTOC and the scorecard as a cohesive force. In doing so, organizations that cannot accomplish this synergy will fall further behind in any attempt to gain market share. QP ACKNOWLEDGEMENTS The author wishes to thank the founders of the Prioritized Scorecard system, Mike Simms and Mike Fedotowsky. BIBLIOGRAPHY Goldratt, Eliyhu, Theory of Constraints, North River Press, Goldratt, Eliyhu, and Jeff Cox, The Goal: A Process of Ongoing Improvement, North River Press Kaplan, Robert S., and David P. Norton, The Balanced Scorecard: Translating Strategy Into Action, Harvard Business Press, Olve, Nils-Goran, Jan Roy and Magnus Wetter, Performance Drivers: A Practical Guide to Using the Balanced Scorecard, Wiley, Alexander Fedotowsky ALEX FEDOTOWSKY is an internal lean Six Sigma consultant in the defense aerospace industry with L-3 Communications at Fort Rucker, AL. He has a bachelor s degree in physics from the Massachusetts College of Liberal Arts in North Adams. Fedotowsky received his Master Black Belt from the Harrington Institute and is an ASQ-certified quality manager, software quality engineer, quality improvement associate and manager of quality and organizational excellence. He is an ASQ member. June 2010 QP 51