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Development of a Lean Activity-Based Scorecard

for Process Improvement

Poonsiri Ariyawongrat, M.S.,
Kim LaScola Needy, Ph.D., P.E., CFPIM
Department of Industrial Engineering
University of Pittsburgh
Pittsburgh, PA 15261, USA


Companies are operating under increased pressures to make significant process improvements in areas such as
quality, productivity, and innovation because the customer expects more product choices, but at lower prices with
higher quality and faster delivery. It is evident that companies need more accurate, timely, and reliable operational
and financial information to permit the managers to make effective strategic and tactical decisions about pricing,
product line development, process improvements, product mix, investment decisions, etc. This paper introduces the
integration of an activity-based costing system together with a balanced scorecard in a lean manufacturing
environment resulting in a Lean Activity-Based Scorecard. The proposed model and implementation steps are
identified and examined, with an emphasis on the interface and interaction of each of the three major
complementary components of the Lean Activity-Based Scorecard. The research suggests that the Lean Activity-
Based Scorecard is a powerful tool that supports a company with its process improvement efforts, leading to higher

Keywords: activity-based costing, balanced scorecard, lean manufacturing, process improvement

1. Introduction
Companies struggle with numerous challenges including determining best strategies and objectives, coping with
limited resources, determining how best to economically obtain additional resources, how to optimally allocate these
scarce resources, and ultimately how to measure success as cited in [1]. Moreover, companies need to consider the
relationship between various inputs, objectives, and the associated improvement outcomes in their business process
as shown in Figure 1. When examining companies that are successful over the long-term, it can be noted that these
companies continually work toward improvements in many different areas including: cost reduction [2,3], value-
creation [4,5,6], discontinuous and continuous process improvement [7,8,9], production flow improvement [10,11],
and quality improvement [12]. However, when companies practice these improvement activities without
appropriate, ongoing, strategic-operational alignment, it may lead to sub-optimizing shareholder value, missed
targets, incorrect prioritization, and investing in the wrong initiatives [13].

Inputs Objectives Improvement Metrics

Multiple goals Competitive Higher quality
Series of projects Efficiency On-time delivery
Multiple customers/suppliers Effectiveness Higher flexibility
Multiple products/services Zero Defect Higher profit
Limitation of resources Max profit Higher product diversification
Money (Capital) Max product Higher market growth
Workforce diversification Higher IRR
Material Max market growth Lower risk
Time Max IRR Higher customer satisfaction
Culture Min risk Higher employee satisfaction
Unconnected lean techniques Max customer satisfaction Etc.
Data collected/maintained Max employee satisfaction
Innovation and Technology Flexibility
Etc. Etc.

Figure 1. Inputs, Objectives, and Improvement Metrics

To support this shortcoming, this paper proposes a framework for the integration of three process improvement
methodologies: lean manufacturing, balanced scorecard, and activity-based costing to form a Lean Activity-Based
Scorecard (Lean ABS). There are a growing number of US companies that are in the process of implementing (or
currently practicing) one or more of these methodologies. Despite this enthusiasm and promises for various
improvements, companies cannot always easily connect the changes to the outcomes that they observe. For
example, by implementing lean manufacturing, lead-time was reduced by 25%. Furthermore, some of these process
improvement methodologies have conflicting objectives. For example, companies, focusing on quality
improvement, may not initially see financial improvement [14] or cost reduction. In fact, costs could go down in
one department or area and may increase in another. Therefore, it is essential to account for the linkage between
outcomes and other related parameters such as cost and strategy.

1.1 Lean Manufacturing (lean)

Lean manufacturing is defined as A systematic approach to identifying and eliminating waste (non-value added
activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of
perfection [15]. Most lean initiatives use various types of tools and techniques in order to make process
improvements. Major tools and techniques of lean manufacturing are:
Cellular manufacturing applies group technology by grouping machines, processes, and people into cells
responsible to produce or assemble parts or products.
Visual and workplace organization techniques such as 5-S housekeeping.
Quick-changeover/Setup reduction methods such as using a technique of Single Minute Exchange of Dies
Value stream mapping identify value and waste throughout the system in order to improve the flow of the
entire value stream. Encourages a one-piece flow [11].
Pull/Kanban and other inventory control systems designed to reduce inventory, improve quality, and lower
Total Preventive Maintenance (TPM) performing maintenance proactively instead of on a reactive basis.
Other continuous improvement processes such as a Kaizen Blitz.

1.2 Balanced Scorecard (BSC)

The balanced scorecard (BSC) [16,17] is a methodology to help businesses align their strategy into action plans by
applying the cause-and-effect relationship within a performance measurement system. This methodology attempts
to balance between short-term and long-term objectives, between financial and nonfinancial measures, between
lagging and leading indicators, and between external and internal performance perspectives [16]. Measures are
constructed that aid target setting and performance measurement in areas critical to the strategies. Hence, BSC is a
performance measurement system, derived from vision and strategy, and reflecting the most important aspects of the
business. It supports strategic planning and implementation by combining the actions of all parts of an organization
around a common understanding of its goals, and by facilitating the assessment and revision of strategy.

The BSC provides an effective way of communicating priorities to all levels of an organization. For this purpose,
Kaplan & Norton introduced four different perspectives with their related strategies [17]:
Financial perspective reflecting how the company looks to shareholders with its strategy for growth,
profitability and risks by using commonly accepted financial measures of performance such as ROI, asset
turnover and earnings per share.
Customer perspective focusing on how the company looks to customers, indicated by market share and
customer satisfaction for example. The strategy in this perspective relates to value creation and differentiation
of served customer.
Internal business processes perspective aiming at what the company must excel at, and typically takes
account of response times and product quality for instance. The strategy focuses on the business processes that
bestow beneficially to customer and financial perspectives.
Innovation and learning perspective focusing on the ability to change and improve over time and will be
reflected in employee attitudes and morale, organizational culture and so forth.

1.3 Activity-Based Costing (ABC)

ABC emerged to help explain what drives overhead costs, and thus eliminates the practice of arbitrarily allocating
overhead to products and services. Moreover, by adopting an ABC methodology, companies can eliminate
unprofitable products, adjust their prices, or modify their activities to become more profitable. ABC provides more
accurate and quantitative evidence of product, customer, and division level profitability. Some of the various ABC
applications are strategic analysis, value analysis, cost analysis, budgeting, life -cycle costing, and target costing.
Researchers state that ABC methodologies provide most useful information in the strategic planning stage at which
point managers need to manage in the future [18,19].

2. Integration Framework (Lean ABS)

To survive today and flourish in the future, companies must manage and continuously improve their business
processes. Implementation of a Lean ABS provides the needed structure along with the expectation of performance
improvement. Some of the compelling reasons to integrate these three methodologies (lean, BSC, and ABC)
It is difficult to include non-aggregated cost and profitability goals in the BSC if there is a lack of ABC
information. ABC provides existing data that can be used in the scorecard for detailed activity cost and
profitability goals [20].
Because the Lean ABS links the activities of lean initiatives in the ABC model to the organizations goals, it is
possible to compute the cost to support each goal. This enables management to assess the cost/effectiveness of
each goal and to deploy resources to high-value goals during the planning cycle.
An integrated system assists management in aligning the activities of the lean initiatives with their strategies.
Hence, the Lean ABS ties ABC and lean information to the entire business process.
Since traditional accounting measurements often fail to provide crucial information for decision-making in lean
manufacturing [21,22], companies need an effective performance measurement such as BSC. Maskell [23]
emphasizes that for performance measures to be relevant they must be expressed in terms that directly relate
them to the business strategy.

The proposed Lean ABS model and implementation strategy are described and examined, with an emphasis on the
interface and interaction of each of the three major complementary components. The research suggests that the
Lean ABS is a powerful tool that supports a company with its process improvement efforts, leading to higher
performance. The Lean ABS development process, presented in Figure 2, can be decomposed into three major
phases. These phases are (1) Design, (2) Development, and (3) Evaluation.

BSC? ABC? Lean?
Yes Yes Yes Data
Assess Output
company Lean ABS?
Customers Business Plans Performance
Develop Related Data Phase 1
organizational Suppliers Resources Processes


Develop Process Establish Identify Lean ABS

Plan/ Business MOGS Establish linkage improvement
Activity between MOGS and initiatives Scorecard
lean initiatives Identify Cost/
Identify Critical Cost Drivers /
Success Factor Cost Pools
Perform profitability analysis
Identify, select Lean ABS
Lean tools &
Identify Potential on products/customers/projects techniques Action Plan
Assign Costs to Cost
Data Sources

Identify & Update, review,

Determine Performance Calculate Cost
Assign Cost Drivers Data follow Lean renew & maintain
Analyze to Cost Pools process the Lean ABS
Select & Balance Conduct
Measures Identify Activities, Identify Value
Classify VA-NVA Drivers Assessment
Available Non -
financial Data BSC ABC Lean Refine the
system Establish Changes
in supporting
Develop Value Integrate with systems Evaluate model
Planning &
Chain Profile Budgeting system Others effectiveness
Inventory Address
Quality System
Control performance gaps
Phase 3
Phase 1 Phase 2

Figure 2. Lean ABS Development Process

2.1 Phase 1: Design
The objective of this phase is to determine whether these process improvement methodologies are applicable,
effective, and offer beneficial contribution to companies. One of the significant steps in this phase is that top
management must be totally committed to the implementation plan and be able to provide the necessary resources
(e.g., the capital and the team) [24]. In addition, the entire workforce must also be committed, because the success
of the implementation of lean, ABC, and BSC is based on these commitments. The process begins with performing
an assessment and analysis on the current state of the company via value stream mapping, and by interviewing key
personnel and examining company documentation. Organizational structure and overall business planning should
be developed in order to support these initiatives.

In this first phase, financial and operational data must be collected in order to set a baseline and identify
opportunities for improvement. Data can be acquired by interviewing key personnel, observing the shop floor, and
reviewing various types of documents and reports (e.g., financial and non-financial information such as job routings,
variance reports, and inspection logs). Data should relate to the entire value-chain including the company, its
strategy, lean manufacturing, training, compensation/reward system, balanced scorecard, the market, products, the
manufacturing processes, customers, and suppliers. All of this information is crucial in developing an integrated
model for a Lean ABS. Details are described in Table 1.
Table 1. Data Co llection Parameters
Category Data Category Data
Company - Companys mission, strategies, Customers - Customer acquisition
objectives - Customer profitability
- Number of years in business - Customer satisfaction
- Companys size and number of - Customer retention
employees - Types and numbers of customers (new
- Other companys information or retaining customer)
including structure and culture, and Manufacturing - Job shop or flow shop
their factors of lean, ABC, and BSC Process - Fabrication and/or assembly
implementation. - Production lead time/cycle time/setup
- Type of industry time
- Seven wastes (Muda) in process
Strategy - Types of companys strategies Market - Percent of market share
- Strategy development /deployment - Competition
process (formal & informal)
- Short term and long term initiatives Suppliers - Supplier relationship/role
- Issues (strategic relevance, urgency, - Number of suppliers
criticality, actionability) [25]
BSC - Types of measures Lean - Lean tools and techniques used
-Performance (financial/operational, manufacturing - Development process (balance, level,
Measurement quantitative/qualitative) synchronize)
- Numbers o f measures - Implementation time, implementation
- Weighting of measures for decision- cost
making - Types of focused improvement (process
- Ability of collecting data & flow / cost improvement, etc.)
availability of data - Benefits from implementation and
- Frequency of review, update, and limitations
maintenance of scorecard - Performance measurement/management
- Critical success factors process
- Needed changes in supporting systems
Products - Main products and cost of products Training - Frequency of training program
- Numbers of products (new products, - Numbers and levels of training skills
old products) - Types of skills (technical, human, and
- Labor content of products (high, lean skills)
medium, low) - Skill assessment [26]
- Sales volume of products (high, Compensation/ - Types of compensation and reward
medium, low) Reward system (monetary or non-monetary)
- Duration of product life cycle - Linkage to employee satisfaction
- Product complexity - Linkage to employee retention
2.2 Phase 2: Development
This phase will bring complementary interconnectivity functions of lean, ABC, and BSC in concert with
process/business improvement. This process begins with applying BSC.

- First, establish companys mission, objectives, goals, and strategies (MOGS) in order to align all processes.
Without clear MOGS, companies cannot be competitive and successful.
- Prioritize the goals and strategies.
- Determine the companys critical success factors and performance measures.
- Simultaneously, list the initiatives associated with the MOGS that link the lean vision to be a world-class
manufacturing company. Porter stated that operational effectiveness (by adopting lean) and strategy are a
fundamental goal to any company [27].
- Identify, select, and balance which measures should be included in the Lean ABS.

- After establishing MOGS, identify improvement initiatives and then identify lean tools and techniques. For
q Cellular manufacturing need to level and balance the manufacturing flow, and smooth the material
flow [28].
q Visual management need to prepare charts, graphs or other visual devices.
- Link the lean tools and techniques to MOGS.
- Integrate with: manufacturing, quality, inventory control, and planning systems.
- Develop lean process plans.

- Trace the cost of resources used in production to products [29,30] by ABC.
q Identify costs, activities, cost drivers, and cost pools.
q Assign costs to cost pools.
q Assign cost drivers to cost pools.
q Calculate costs.

- Perform activity analysis, value analysis, and profitability analysis.
q Identify non-value added and value added activities.
q Identify profitability of products, customers, and lean action plans.
- Link cost data and lean data back to performance measurement system.
- Prepare the changes in supporting systems.
- Develop Lean ABS.
- Prioritize and finalize the Lean ABS action plan.
- Continually update, review, renew, and maintain the Lean ABS to reflect changes to the business process.

2.3 Phase 3: Evaluation

In this phase, the company should conduct an assessment of the Lean ABS model by investigating the development
plan focusing on the interactions among the three methodologies and interface with other company systems such as
the training system, and compensation and reward systems. Then the system should be refined where necessary. It
will be useful to assess the model by interviewing key stakeholders in the entire value chain of the company
(customers, suppliers, managers, employees, etc.) to check whether the model is effective. Effectiveness of the
model will be determined by how it contributes to the alignment of the company strategy to the right action plan,
achieving excellence in productivity, quality, and preventing poor decision making resulting from distorted costs.

3. Conclusion
This integration framework of three process improvement methodologies: lean manufacturing, activity-based
costing, and balanced scorecard combine to form a Lean Activity-Based Scorecard. The system allows companies
to create a better linkage between the performance management system and the firms strategy. In addition, the lean
activities of the organization can be communicated and aligned with its strategies throughout the organization for
better process improvement by using financial and non-financial information.
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