Professional Documents
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Balanced Scorecard:
Quality and Time
Learning Objectives
16.1 Explain the four cost categories in a costs-of-quality program
16.2 Develop nonfinancial measures and methods to improve quality
16.3 Use costs-of-quality measures to make decisions
16.4 Use financial and nonfinancial measures to evaluate quality
3. Select the activities and cost-allocation bases to use for allocating the indirect
costs of quality to the product.
4. Identify the indirect costs of quality associated with each cost-allocation base.
7. Compute the total costs of quality by adding all direct and indirect costs of
quality assigned to the product.
The Customer Perspective
• Nonfinancial measures of customer satisfaction include:
Market research information on customer preferences for
and customer satisfaction with specific product features.
Market share.
Percentage of highly satisfied customers.
Number of defective units shipped to customers as a
percentage of total units shipped.
Number of customer complaints.
Percentage of products that fail soon after delivery.
Average delivery delays.
On time delivery rate.
The Internal-Business-Process
Perspective
• Two techniques for identifying and analyzing quality
problems:
1. Pareto diagrams.
2. Cause-and-effect diagrams.
Pareto Diagrams, Example
• Pareto diagram—a chart that indicates how frequently each type of
defect occurs, ordered from the most frequent to the least frequent.
• Pareto Diagram for Photocopying Machines at Photon Corporation
Cause-and-Effect Diagrams
• Problems identified by the Pareto diagram are analyzed
using cause-and-effect diagrams.
• Identifies potential causes of defects.
• Also called fishbone diagrams because they resemble the
bone structure of a fish.
• The large “bones” coming off the backbone represent the
main categories of potential causes of failure.
• The four categories are: human factors, methods and
design factors, machine-related factors and materials and
components factors.
Cause-and-Effect Diagram, Example
Cause-and-Effect Diagram for Fuzzy and Unclear Photocopies at Photon Corporation
Six Sigma Quality
• The ultimate goal of quality programs is to achieve Six
Sigma quality.
• This designation signifies that the process is so well
understood and tightly controlled that the mean defect rate
and the standard deviation are both very small.
• To achieve this designation of Six Sigma, companies use
techniques such as Pareto diagrams and cause-and-effect
diagrams to define, measure, analyze, improve, and
control processes to minimize variability in manufacturing
and achieve almost zero defects.
Nonfinancial Measures of Internal-
Business-Process Quality
• Percentage of defective products manufactured.
• Percentage of reworked products.
• Number of different types of defects analyzed using Pareto
diagrams and cause-and-effect diagrams.
• Number of design and process changes made to improve
design quality or reduce the costs of quality.
The Learning-and-Growth Perspective
for Quality
• Drivers of the IBP are learning and growth perspectives of
the BSC. As these improve, the company should experience
an improvement in the internal business process (IBP)
measures. Some measures of learning and growth
perspective include:
• Experience and qualifications of design engineers.
• Employee training.
• Employee turnover ratio.
• Employee empowerment.
• Employee satisfaction.
Weighing the Costs and Benefits of
Improving Quality
• When faced with a quality issue, managers should
evaluate each alternative identifying the relevant costs and
benefits for each alternative.
• Ask the key question: How will total costs and total
revenues change under each alternative?
Advantages of COQ (Financial) Measures
To evaluate the firm’s quality performance, managers use
both financial (COQ) and nonfinancial measures. That’s
because each offers different advantages.
• COQ focuses managers’ attention on how poor quality
affects operating income.
• Total costs of quality help managers evaluate the costs
and benefits of incurring prevention and appraisal costs to
eliminate internal and external failure costs.
• COQ measures assist in problem solving by comparing
costs and benefits of different quality-improvement
programs and by setting priorities for cost reduction.
Advantages of COQ (Nonfinancial)
Measures
• Nonfinancial measures of quality are often easy to quantify
and understand.
• Nonfinancial measures direct attention to physical
processes that help managers identify the precise problem
areas that need improvement.
• Nonfinancial measures provide immediate short-run
feedback (such as number of defects) on whether quality-
improvement efforts are succeeding.
• Nonfinancial measures are useful indicators (such as
customer satisfaction) of future long-run performance.
Time as a Competitive Tool
• Companies view time as a driver of strategy.
• Managers need to measure time properly to manage it. Proper
time management can increase revenues and decrease costs.
• Two operational measures of time:
– Customer response time: how quickly companies respond
to customers’ demands for their products and services.
From the date of receiving the order to the date of actually
delivery to the customer.
– On-time performance: indicates how reliably companies
meet their scheduled delivery dates.
Managers also measure the causes and costs of delays.
Customer-Response Time, Illustrated
Components of Customer-Response Time
Relevant Revenues and Costs of Delays
• Manufacturing cycle times affect both revenues and costs.
• Revenues are affected because customers are willing to
pay a higher price for faster delivery.
• Relevant costs will likely include inventory carrying costs.
The Balanced Scorecard and Time-
Based Measures
We’ll use the structure of the balanced scorecard
perspectives to summarize how financial and nonfinancial
measures of time relate to one another, reduce delays, and
increase the output of bottleneck operations.
• Financial measures:
– Revenue gains or price increases from fewer delays.
– Carrying costs of inventories.
• Customer measures:
– Customer-response time.
– On-time performance.
The Balanced Scorecard and Time-
Based Measures
• Internal-business-process measures:
– Average manufacturing time for key products.
– Manufacturing cycle efficiency for key processes.
– Defective units produced at bottleneck operations.
– Average reduction in setup time and processing time at bottleneck
operations.
• Learning and growth measures:
– Employee satisfaction.
– Number of employees trained in managing bottleneck
operations.
Managers use both financial and nonfinancial measures to
manage the performance of their firms along the time dimension.