Base on kaplan and nortons balanced scorecard review and evaluate current KPIS system and create new KPIS to improve aldila company performance

Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin HO CHI MINH CITY OPEN UNIVERSITY UNIVERSITÉ LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL OF ECONOMICS & MANAGEMENT MBQPM4 NGUYEN THANH TUAN Base on Kaplan and Norton’s Balanced Scorecard Review and evaluate current KPIs system And create new KPIs to improve Aldila company performance MASTER FINAL PROJECT MASTER IN BUSINESS QUALITY AND PERFORMANCE MANAGEMENT Ho Chi Minh City (2014) Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin STATEMENT OF AUTHENTICATION I certify that all materials presented below are my own work If any work adopted from other sources is duly cited and referenced as much Base on the theory and concept from Kapland and Norton’s balance scorecard model, I’ve studied and developed KPIs in ALDILA Company The management and board of Aldila have agreed to deploy idea from this research It is a great encourage With supporting data and reports from colleagues in other departments, I’ve used some tools to perform for improvement Ho Chi Minh City, June 22, 2014 Nguyen Thanh Tuan Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin ACKNOWLEDGEMENTS There are a number of people without whom this thesis may not have been written and also to whom I am greatly indebted I would like to thank all professors who have trained me a lot of useful knowledge in total 12 modules Especially, Dr Jacques Martin who has important instructions on modern strategic management and balanced scored card That is a lot of contribution on this project Then, the next is my thanks to Board Management and colleagues at Aldila Vietnam Company for their sharing useful information and giving me a chance to apply it I am also unforgettable supported from our friends who have studied with me during this course Page Author: Nguyen Thanh Tuan TUTOR Tutor: Professor Jacques Martin S COMMENT Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin TABLE OF CONTENTS CHAPTER I: INTRODUCTION Page 1.1 Aldila company introduction 12 1.2 Aldila organizational chart 13 1.3 Reasons for choosing the subject 14 1.4 Project learning objectives 15 1.5 Personal learning objectives 15 CHAPTER 2: LITERATURE REVIEW 2.1 The origins of the Balanced Scorecard 17 2.2 The evolution of the Balanced Scorecard 18 2.3 The Balanced Scorecard perspectives 19 2.3.1 Customer Perspective 20 2.3.2 Internal Process Perspective 20 2.3.3 Learning and Growth Perspective 21 2.3.4 Financial Perspective 21 2.4 What is “balance”? 21 2.4.1 Linking the BSC to the company’s strategy 24 2.4.2 The BSC introduces the balance elements 25 2.4.3 The BSC as a management system & strategic framework for action 26 CHAPTER 3: RESEARCH METHODOLOGY 3.1 Research question 30 3.2 Method 30 3.2.1 Case study 30 3.2.2 Focus group interviews 31 3.2.3 Pareto 32 Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin 3.2.4 Fish bone 32 3.3 Action research 32 3.4 Development of interview questions 33 CHAPTER 4: ANALYZING CURRENT ALDILA KPIs SYSTEM PERFORMANCE 4.1 Company’s information: SWOT, PESTEL 35 4.2 Analyze case study base on current KPIs 39 4.3 Select and define measures 40 4.3.1 Finance 41 4.3.2 Customer 42 4.3.3 Internal process 46 4.3.4 Learning and growth 51 CHAPTER 5: BSC EVALUATION AND PROPOSE NEW KPIs 5.1 Find improving opportunities factors by focus group 57 5.2 Pareto chart 58 5.3 Fishbone analysis 60 5.4 New (Sub) KPIs and target to improve company performance 62 CHAPTER 6: CONCLUSION 69 REFERENCES 70 Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin ABBREVIATIONs BOM Bill of Material BOMs Board of Management BSC Balanced Scorecard CEO Chief executive officer CS Customer Service CSF Critical Success Factors DMAIC Define, Measure, Analyze, Improve and Control DOE Design of experiment FC Forecast FDI Foreign Direct Investment HR Human Resource IE Import / export IT Information Technology KPI Key Performance Indicator MIS Management Information system MRP Manufacturing Resource Planning NPD New Product Development OTD On time delivery PESTEL Politic-Economic-Social-Technological-Ecologic-Legal PO Purchase Order RM Raw Material ROI Return on Investment SCM Supply Chain Management SPM Shaft per man SWOT Strength-Weakness-Opportunity-Threat WTO World Trade Organization Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin LIST OF FIGUREs Figure 1-01: Aldila Vietnam Organizational chart Figure 2-01: Translating Vision and Strategy: Four Perspectives Figure 2-02: Linked measures from the four perspectives Figure 2-03: Strategy Map (Kaplan and Norton, 2004) Figure 2-04: Linking the BSC to the company’s strategy Figure 2-05: The Balanced Scorecard framework Figure 2-06: The BSC as a Strategic Framework for action Figure 4-01: Sale volume 2013 vs target Figure 4-02: Customer vs shipped shaft qty in 2013 Figure 4-03 OTD status 2013 vs target Figure 4-04 Forecast accuracy in 2011 ~ 2013 Figure 4-05 Return rate vs sale volume in 2013 Figure 4-06 Yield in 2013 vs target Figure 4-07 Monthly scrap rate report in 2013 vs target Figure 4-08 Production line efficiency Figure 4-09 Production process flow chart Figure 4-10 Labor force age survey during 2007 to 2011 Figure 4-11 Labor force occupation survey during 2007 to 2011 Figure 4-12 Employee turnover rate in 2013 - 2014 Figure 5-01 Pareto chart of KPIs per perspective Figure 5-02 Fishbone analysis of Aldila current problems Figure 5-03 Material cost per unit report in Jan to Apr 2014 Figure 5-04 Daily shaft per man report from Jan to May 2014 Figure 5-05 Forecast accuracy from Jan ~April in 2014 Page Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin LIST OF TABLEs Table 4-01 Aldila Vietnam SWOT analysis Table 4-02 Aldila Vietnam PESTEL analysis Table 4-03 Current KPIs system in ALDILA Table 4-04 Customers and percentage order per volume in 2013 Table 4-05 Top down time and causes in 2013 Table 4-06 Qty and rate of normal - multi skill worker Table 5-01 Ranking KPIs list per perspective Table 5-02 New KPIs system in Aldila to improve company performance Page 10 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin CHAPTER 1: INTRODUCTION 1.1 Aldila company introduction 1.2 Aldila organizational chart 1.3 Reasons for choosing the subject 1.4 Project learning objectives 1.5 Personal learning objectives Page 11 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin Table 5-01: Ranking KPIs list per perspective Perspective Finance Customer Internal process Learning & Growth Total: Code F1 F2 F3 F4 C1 C2 C3 I1 I2 I3 I4 LG1 LG2 KPIs ROI Sale volume Days of Inventory stock Stock Provision On time Delivery (OTD) Return Rate Order confirmation Lead Time Yield Scrap Rate Production lead time Machine down time rate Employee Turn-over Rate Implemented training rate Ranking Mark Weighting Priority 27% II 23% III 2 30 11 37% I 13% IV 30 100% 5.2 Pareto: After evaluating, company will use a Pareto chart to classify each perspective: Figure 5-01: Pareto chart of KPIs per perspective Page 58 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin With the above evaluation, internal process: 11/30 mark in our evaluation is our first priority to improve To grow and prosper, managers must be able to anticipate, recognize and deal with change in the internal environment Change is a certainty It is a reason for managers must actively engage in a process that identifies change and modifies business activity to take best advantage of change That process is strategic planning The internal environment is controllable and changeable through planning and management processes In this perfective, Yield is our first priority to improve because it affects directly to our productivity and quality When yield is high, company can save processing time and lead time, reduce material, labor and facility cost for rework The second is our scrap rate The biggest challenge is discovering the root cause of the issue so company can make the improvements which will allow to approach the goal of 100% quality High scrap rate is cost and reduce profit Reducing rework and scrap from occurring can generate money that goes right to company’s bottom line Scrap and rework affect the on time delivery and customer expectation Finance: 8/30 mark in our evaluation is our second priority to improve: ROI is our first priority in finance perspective to improve Financial strength is a factor in its own right that influences the internal environment of the organization It is a key factor to implement strategic plan and ROI is a central financial metric for asset purchase decisions Customer: 7/30 mark in our evaluation is our third priority to improve: On time Delivery (OTD) is our first priority in customer perspective Late delivery, company could face worst results such as:  Loss of customer confidence: When company delivers products late, it brings clients into doubts regarding the serious deadline issues faced by the company If late delivery takes place, customers might get affected by it More serious, company will be lost customer confidence  Loss of profits: when customers would not pay for late delivery of products, businesses would eventually lose and continue to suffer in terms of its profitability and revenue  Delays in cash flows: Cash flows in and out of the business but continuous cash flow outs lead to a serious and alarming situation taking place within the company This could bring business process in a credit crunch and financial crisis  Inefficiency: Company is not using its resources efficiently It leads to high costs of production when it comes to a full stop The business has to incur for the production cost and employees' salaries and wages Page 59 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin Learning & Growth: 4/30 mark in our evaluation is fourth priority to improve: Employee Turn-over Rate: Turnover is healthy for any business People leave, training needs to happen and everything essentially changes It takes time and cost to train for replacements In order to enhance effectiveness of these main KPIs, company needs to analyze in details current situation to find out root causes by using Fishbone analysis 5.3 Fishbone analysis: Figure 5-02: Fishbone analysis of Aldila current problems With the above analysis:  In internal process perspective: To control yield better, company needs to assure material be controlled from the vendor side That’s why supplier performance KPIs needs to be created and measured timely Page 60 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin If new products are designed in proper method and evaluated carefully all aspects from cost, lead time, quality, productivity, localize materials and scrap rate then yield of these products will be high and stable when run mass production Therefore, NPD performance must be set up Then, exact BOMs can be updated and use for related department as input information  In finance perspective: during brain-storming discussion, labor and material cost are too high percentage in product price Thus, their KPIs are also need to be set up and improved Further, cash flow need to be controlled strictly by supporting of account payable and credit terms  In customer perspective: Forecast accuracy will contribute to improve OTD OTD and customer satisfaction are two main indicators to satisfy customer requirements So, they must be set up to measure customer satisfaction Parallel, monitoring order increasing per year by customer will help company to reflect sales volume increasing It helps company to classify customers and adjust suitable service strategy  In Growth and Learning: quality of workforce is very valuable At this point, company already recognized about it and multi-skills will support for short term strategy because it help company adapt with high rate of employee turnover Besides, to strengthen staffs skill, company should have training for indirect employee Page 61 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin 5.4 New (Sub) KPIs and target to improve company performance: Table 5-02: New KPIs system in Aldila to improve company performance Persp ective Meas KPI ureme nt Year 2013 Targe Targ t et 2013 2014 Return on Investment F1 % 22 30 35 (ROI) PIC Initiative Supply chain Reduce development cost Increase total manager/ unit sales and Profit/unit BOMs Re-organize Supply chain to save cost Increase the number of customers Sale volume F2 PCS 2.9M ~2.8M 3.2M Sales/ BOMs Increase the frequency of repurchase Develop Marketing depts Train our Sales staffs Days of Inventory stock F4 Day % 42 14 35 15 23 11 Finance Stock Provision F3 Accounts payable Credit term F5 F6 Day Day 60 75 45 45 30 30 Material Re-organize Supply chain function Manager/ Reduce replenishment lead times BOMs Reduce variability of demand and supply Material Re-organize Supply chain function Manager/ Eliminate obsolete stocks Pareto our BOMs inventory Purchasing/ BOMs Sales/BOMs Supplier evaluation: Term and condition when our purchasing team deals with our supplier to improve our cash flow Our sales team deals with our customers about their payment terms It represents a direct link between Labor cost/unit F7 $ 1.8 1.5 1.2 Production/ productivity and the cost of labor used in BOMs generating output We can save cost by increasing productivity Production/ Material cost/unit F8 $ 3.2 2.5 2.0 Material/ Engineering/ BOMs To see how materials cost will be influenced to our price/ unit Is there any ways to reduce it? Customer Set “on-time delivery” as a top goal of On time Delivery (OTD) C1 % 81 85 90 Planning/ Production our organization Make on-time shipments to review performance Identify and redesign “key” processes to prevent on-time deliveries Page 62 Author: Nguyen Thanh Tuan Return Rate C2 Order confirmation Lead Time C3 ppm Day Tutor: Professor Jacques Martin 134 18 120 21 80 14 Eng/ QA/ Production Planning/ Production Analyze customer complaints Re-organize Labor manufacturing flexibility JIT to Improve improve manufacturing concepts Unstable and incorrect forecasts will Forecast Accuracy C4 % 71% 90% 95% Sales/BOMs affect directly to our planning activities It affects indirectly to our suppliers and customers Customer Satisfaction Index Rate C4 % 71 75 80 Sales/BOMs C5 % 12 15 18 Sales/BOMs increasing order per year by Customer Yield I1 % 62 68 80 Eng/ QA/ Production Satisfy customer requirements Define increasing order rate by customer per year to prepare capacity plan Reduce rejection and improve quality of product Save labor and material cost and improve OTD Set clear accountability for defects/scrap Scrap Rate I2 % 6.5 4.0 3.0 Eng/ QA/ Production Review the defect Pareto and focus on top Identify the “real” root causes of the defects Track and actively review results Production lead process Internal time Machine down-time rate New I3 Day 11 I4 % 74 80 85 Production /Eng/QA Engineering/ Maintenance product development Improve delivery lead time Analysis stoppage reason Project I5 % 62 80 85 Project management: define critical process and product cost Give action plan to improve process capability (NPD) on time Localization Rate of I6 RM % 23 30 50 Purchasing Localization plan & Tools Supplier performa nce Evaluate OTD Quality I7 % % 19 9.4 12 10 supplier performance to Purchasing/ improve lead time, cost and quality to BOMs create added value in supply chain Page 63 Author: Nguyen Thanh Tuan Cost % Shaft/man/day I8 Productivity PCS Tutor: Professor Jacques Martin 8.5 22.4 26 Perceived Cost = Quoted Price / Past 30 Performance Eng/ QA/ Production Set target and control productivity for each work locations Train to upgrade worker skills Employee turn-over analysis by job Employee Turn- classification: direct worker between % 6.7 official worker vs temporary worker and BOMs/ HR indirect employee with high skill and management level Growth Learning & over Rate LG Implemented LG training rate Multi-skills for direct labor Training performance LG for indirect employee LG % 82.5 80 95 % 28 40 55 % 27 50 70 Training/ HR HR & Production Training/ HR Training plan and evaluation Multi-skill and rotation Ensure all staffs understand company strategy and get higher skill/ability Finance: Establish labor and material cost per unit KPI Assign production and material planner to create report to follow up they need to inform related employee when seeing actual cost is higher than target Labor cost is divided by department and they also have their own target Production supervisor need to check head count of his/her department and assure manpower is matching with production and working schedule It’s same way to control material cost Base on production schedule received, production supervisor will check and approve material request from their subordinate Assure material is just enough to supply for their production plan Low inventory also prevent missing parts that cause wrong date between actual and system Material and Labor cost: Material cost is one of the largest costs of manufacturing products The material cost per unit was accounted direct material and indirect material Golf shaft have some main material as prepreg, paint, ink or decal and many miscellaneous material tape, knife Labor is one of the largest expenses of manufacturing products Aldila should keep track of labor cost per unit to make sure that wages are not growing faster than profits To this, Aldila need to make some calculations and create a standard cost card for each product Page 64 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin Then standardize the process of figuring the labor cost per unit It will be able to track each product and make adjustments as wages rise Beside that company need to train to increase awareness for all employees about saving electricity, workers need to turn off machine, close vane of high pressure air, water supply, light or air conditioner when they leave their working location Figure 05-03: Material cost per unit report in Jan to Apr 2014 Page 65 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin From Mar to April, cost per unit was reduced from $0.44 to $0.42 Productivity report developed to control labor cost: each department will have their own target and supervisor in charge to control it every day That is key point to help overall shaft per man increased from in May and company will try to hit 30shafts/man in the following months Figure 5-04: Daily shaft per man report from Jan to May 2014 Figure 05-05: Forecast accuracy from Jan ~April in 2014 Page 66 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin In order to control forecast accuracy, company will hold weekly meeting with main customer: Ping, Callaway to understand their demand change, their sharing to control current orders Then, company can discuss with them to adjust planning activity and set priority level for urgent orders Yield: To increase yield, QA must analyze factory s overall yield to list down defects which has high priority to improve Then, company creates improving teams (team members who have good experience on process and well understand about lean and six sigma concepts) at each process A manager must be involved in each team as advisor to lead, evaluate and give decision if needed New product development (NPD) New project on-time: This is the complete process of bringing a new product to market There are two type of NPD in Aldila:  New product suggested from customer: each season company will receive new product program from customer Development department will in charge to cooperate with customer and follow their new specification to run pilot and evaluate process capability and cost of new product Standard time to compete a project is within months  New design own by Aldila: this is a competitive factor that Aldila want to create in strategy Company own special structure or cosmetic design and keep the pattern This can be sells direct to the market or to customer base on investigation date from sale department on golf market and commercializing new product within the overall strategic process of product life cycle management used to maintain or grow their market share Every year, at least or new design will be develop Project set up clearly: customer requirement, time frame, forecast volume, person in charge: duty and responsibilities, review and update information to related department Localization Rate of RM & Tools: In order to improve product cost, purchasing team must source materials and tools locally with shorter lead time and lower price They will cooperate with engineering and quality department to review material cost structure to find new supplier in local who are able to supply similar type of material with competitive quality and cost Beside that they reevaluate product quality, cost and reduction of production lead time, order material lead time (Quality, Time and Cost) Any new supplier can satisfy these factors will be chosen Page 67 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin Learning and growth: Base on analyzed employee turnover Pareto result, company found that temporary workers take in the high percent of turnover Perform a survey to find out reasons of their resignation: working environment, salary, benefits such health care, allowance, transportation Base on this result, HR department will create new policies to improve and attract them in the assigned budget so that workers can be comfortable and increase their retention Employee development: provide some policies to make employees feel respectful and provide opportunities for professional growth Increase employee’s loyalty and involvement to organizational decision and success in future Page 68 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin CHAPTER 6: CONCLUSION In conclusion, after analyzing and evaluating our BCS base on 04 perspectives: Finance, Customer, Internal process, Learning and Growth by using KPIs case study, focus group, Pareto chart and fishbone Company found out that there are many potential opportunities to improve by created suitable sub KPIs It helps company to manage not only financial indicators which present operation outcomes in the past but also performance in customer and organizational internal processes in order to orient for future plans These KPIs performance are implemented and monitored to win the strategic objectives in long-term These KPIs must be specific, measureable, support for improvement purposes and achieve business plan Top managers must consider on resources and costs carefully before setting up sub KPIs Besides, they must have clear vision and adjust it timely to adapt with business environment Communication effectiveness and clear procedure are very important It needs to be from top-down, between each department, internal and external Internal process is our most importance to focus on To create added value, company will need to concentrate on how to improve internal processes by increasing our worker productivity and their skills Besides, QA must perform improvement to find out the root cause of defects and reduce scrap rate, return rate Most of main raw materials (RM) have been imported from US which high prices and transportation costs so purchasing needs to source for localization KPIs of internal process has been built base on financial target and meanwhile finance KPI will try to achieve long term strategy objectives In finance area, company needs to increase Return on Investment by reducing development costs, train for Sales staffs to provide a better service to satisfy customer requirements in purpose of increasing sale volume From analyzed data, it will give managers a way to ensure that all levels of the organization understand the long term strategy Both department and individual objectives are aligned with it Through company s vision, top managers and department managers can share information to realize personal vs department goals then achieve company’s business performance efficiency Effective performance helps managers to consolidate overall company’s operation Company can evaluate business efficiency in both short- and long-term strategy to adjust timely the strategy from changeable macro environment Page 69 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin REFERENCES Kaplan, R S and Norton, D P (1992): The balanced scorecard – measures that drive performance, Harvard Business Review, Vol 70, No 1, pp 71-79 Kaplan, R S and Norton, D P (1993): Putting the Balanced Scorecard to Work, Harvard Business Review, September-October, pp 2-17 Kaplan, R S and Norton, D P (1996a): Linking the Balanced Scorecard Strategy, California Management Review, Vol 39, No I, pp 53-79 Kaplan, R S and Norton, D P (1996b): Using the balanced scorecard as a strategic management system, Harvard Business Review, January-February, pp 37- 48 Kaplan, R S and Norton, D P (2004): Measuring the strategic readiness of intangible assets, Harvard Business Review, February, pp 1-14 Kreuger, R A (1988): Focus groups: A practical guide for applied research, Sage, London Lewis, M (2000): Focus group interviews in qualitative research: A review of the literature Action Research E-Reports, Kreuger, R A (1988): Focus groups: A practical guide for applied research, Sage, London Othman, R (2007): Enhancing the effectiveness of the balanced scorecard with scenario planning, International Journal of Productivity and Performance Management, Vol 57, No 3, pp 259 – 266 Page 70 Author: Nguyen Thanh Tuan 10 Tutor: Professor Jacques Martin Robert S Kaplan & David P Norton, (1996) The Balance Scorecard: Translating Strategy into Action Harvard Business School Press 11 Paul R Niven, (2002 & 2006) Balance Scorecard Step-by-Step: Maximizing Performance and Maintaining Results John Wiley & Sons, Inc Website: http://management.about.com/cs/generalmanagement/a/keyperfindic.htm http://www.strategy2act.com/solutions/performance-benchmarking.htm https://mspartner.microsoft.com/en/us/pages/sales%20and%20marketing/customersatisfaction-index.aspx http://hajarian.com/esterategic/tarjomeh/taghavi.pdf: “Strategy Maps: Guide to align to Intangible Assets” http://smallbusiness.chron.com/effects-sales-volume-increase-decrease-unit-fixed-cost36066.html http://smallbusiness.chron.com/advantages-multiskilled-labor-18280.html http://guides.wsj.com/management/recruiting-hiring-and-firing/how-to-reduce-employeeturnover/ http://sloanreview.mit.edu/article/building-your-companys-capabilities-through-globalexpansion/ Page 71 Author: Nguyen Thanh Tuan Tutor: Professor Jacques Martin http://www.leoisaac.com/planning/strat016.htm http://www.connstep.org/blog/how-to-reduce-rework-and-scrap-to-improve-cash-flow/ http://en.wikipedia.org/wiki/Key_performance_indicators Page 72 ... organization appears to customers in order to achieve the organization’s vision and mission This reflects the factors that are really important to customers (Kaplan and Norton, 1992) Kaplan and Norton... as much Base on the theory and concept from Kapland and Norton’s balance scorecard model, I’ve studied and developed KPIs in ALDILA Company The management and board of Aldila have agreed to deploy... employee, and system performance to long-term financial success to translate their strategy into action It will help to improve in short term Build up new KPIs system to support company? ??s strategy and