Balanced Scorecard and Manufacturing Companies

18. May 2017

The balanced scorecard method (BSC for short), which we introduced in the previous article, is a tool for measuring performance efficiency of a company while focusing on its strategic direction. This strategy prioritizes economic indicators which are monitored and evaluated as you go along and any found derogations are minimized.

The main topic of this article is the use of BSC in manufacturing companies. To create and start using the BSC it is necessary to bring this strategy into already well-established activities of the company. Firstly, it is important that the managers of the company, where this tool for performance efficiency assessment is about to be used, know the answers to the following questions:

  • What goals are key for the company and its strategy?
  • Which indicators should be used?
  • How to plan realization of set goals and evaluate feedbacks?
  • Who will be responsible for possible derogations?

BSC views a production company from several viewpoints and from each the focus is placed on different problems concerning the company’s functioning. In the last article, we mentioned that these are: internal business processes, finances and finance indicators, customers, and education and growth. It is in the company’s interest to judge and evaluate problems in such way that every decision is made in compliance with other goals the company has. If the introduction of the BSC method is successful, it allows us to look at the company on the whole and systematically at the same time thanks to all the different perspectives.

Let us list a few examples of some measurable quantities in a manufacturing company. These indicators are generally called Key Performance Indicators (KPIs for short). To begin with let us look at the indicator of usage of material. With every material that is used in a company there is a given standard amount which is needed for one piece of product. We monitor how much or less of the material is actually used and ascertain a possible quantitative derogation. We are also interested in how the purchaser prices of the material change compared to the norm for a unit of material determined in advance. This difference is the quantitative derogation which helps us ascertain the so-called aggregate efficiency – exceeding or saving of direct material costs. Similarly, we can monitor for example waste material, product error percentage discovered during batch release testing, and other values.

Other KPIs are for example finance indicators, which stem from easily measurable economic values. These tell us whether the company’s strategy leads to the predetermined goals and whether there is any noticeable improvement. Some of the most important finance indicators are rate of return (profitability) indicators: Return On Assets, Return On Capital Employed, Return On Equity); and also Earnings Before Interest and Tax indicator or its modifications, Economic Value Added indicators, or indicators of sales and sales growth.

It is also useful to monitor the time for supply turnover. This shows us the average amount of days the supply spends in the company until they are used or sold. This is closely connected to the periodicity of deliveries of products and material and the standard optimal size of one delivery. The supply turnover period should be in most cases as short as possible because this means that the material doesn’t spend too much time in the warehouse unnecessarily, it is immediately used for production and the company is not binding financial means unnecessarily and can use them somewhere else.

What is just as important is the approach the company has to individual customers and how they support sales. The number of sold products is monitored together with the average price of a purchase etc.; but also how satisfied customers are, how often they come back to purchase more or how successful getting new customers is.

The education and growth indicator is directed more inside of the company, on individual employees. Even in manufacturing companies it is important to conduct continuous education of employees and to pass on experience. In these companies, it may be knowledge about working with new materials, instruments, and devices, or the effort to innovate. But it is also about communication between the manufacturing department and sales and purchasing.

We hope that our articles shed some light on the BSC method and its possible usage for company direction. In the next article, we will focus on the previously mentioned SWOT analysis which evaluates strengths and weaknesses of a company and opportunities or risks in its environs.

Author: Martina Švecová

Autor: Klára Honzíková

Author: Klára Honzíková