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Wednesday, September 21, 2005

[ALI] [Article] Using the Balanced Scorecard in the DC

Using the Balanced Scorecard in the DC
      Presentation byThomas W. Speh, Ph.D., Rees Distinguished Professor,
Miami University of Ohio.
      Expanding beyond the traditional operational and financial measures
typically used to assess performance, the balanced scorecard uses a set of
metrics that focuses on measuring a firm’s performance in four areas:
financial results, how well the customer is served, the effectiveness of
major internal processes, and how well the firm has positioned itself for a
successful future. This fourth area, Speh says, “is where the balanced
scorecard brings value. It forces you to think of what you’re doing in order
to grow and improve,” and to reach the goals that you’ve set for the company
or facility.
       The balanced scorecard converts a warehouse’s typical “value drivers”
— such as customer service, innovation, or operational efficiency — to a
series of defined metrics that are linked together. “The balanced scorecard
is robust,” Speh noted. Build a balanced scorecard properly, and “you’ll
come up with a broad scorecard of how well you’re doing in the warehouse.”
      Some measures are financial while others are qualitative; some
should be internal, while others should be external. Some measures should be
lagging, that is, that report what you’ve done (such as profit or cost).
Other measures should be leading indicators, to provide early feedback on
future performance such as measures related to error rates or cycle time.
      • Financial — Similar to measures typically used in a warehouse or
DC like return on investment in the warehouse, or net profit margin.
      • Internal processes — These track warehouse process efficiency and
effectiveness, such as orders picked per man-hour, warehouse order cycle
time from receipt to shipment, and a ratio of storage space used vs.
      • Customer-related measures — Examples include a customer’s
perception of on-time delivery or customer satisfaction with order accuracy.
A third-party logistics provider might track the ratio of long-term
customers vs. first-year customers.
      • Innovation and growth — These metrics evaluate how well the
warehouse or organization is postured to grow or “re-invent” itself. “This
is critical, and the most difficult,” Speh said. “Think of this as investing
in enabling assets — assets that help you develop and grow.” Examples
include annual training dollars per warehouse associate, employee morale, or
dollars invested in IT systems per year.
Finding the right balance
      Understanding cause and effect relationships between measures is
critical to identifying the metrics that should be tracked. For example, how
does training relate to customer satisfaction? Does low employee morale
affect your damage rates, and do your damage rates have an impact on
customer satisfaction and, ultimately, on profitability?
       Speh suggested starting at the executive level when setting up a
balanced scorecard, then cascading the top-level measures to lower
hierarchical levels in the warehouse or DC. “This approach helps to ensure
that each level of management is working to achieve the goals that support
the firm’s overall mission and strategy.”
"Words of wisdom" for companies considering the balanced scorecard approach:

• Start slowly, and assign a champion who is trained in the balanced
scorecard approach.
• Establish a timeline for implementation.
• Focus on what drives value for the DC, based on the organization’s
mission, strategy and goals.
• Link balanced scorecard measures to employee rewards & incentives.
• Work hard at getting buy-in to the balanced scorecard metrics at all
levels of the company.
• Use as few metrics as possible at each level of management.
• Take a phased-in approach. Pick 3 or 4 measures to implement. After those
are in place, move on to another set of new metrics.

       Whether or not you implement a set of balanced scorecard measures,
Speh concluded, the process of “thinking about, designing and implementing a
set of performance measures may be more important than the measures
themselves.” The improved understanding of interrelationships of various
aspects of your business, and how they help you achieve your strategy and
goals, can pay off handsomely in the long run.

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