Use of Balanced Scorecard in Auto Industry

As defined by the Balanced Scorecard Institute, the balanced scorecard “is a strategic planning and management system used to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals”. The Balanced Scorecard provides information from four different perspectives which can be used to check which activities are in line with the organization goals and which need attention. The four different perspectives are:

• Financial:  To succeed financially, how should the organization appear to its stakeholders?
• Customer: To achieve its vision, how should the organization appear to its customers?
• Internal Business Process: To satisfy shareholders and customers, what business processes must the organization excel at?
• Learning and Innovation: To achieve its vision, how should the organization sustain its ability to change and improve?

FINANCIAL:

Target Cost Achievement

During the design phase, almost 80% of an automobile’s manufacturing cost can be affected. During manufacturing phase, only 20% changes can be done. Hence, setting of target costs and working with suppliers to achieve the targets is a key financial measure of an automotive company.

Capital Efficiency

The automotive industry is a capital-intensive industry and hence companies need to achieve greater returns on their capital investments, to be competitive. Many companies use capital efficiency measures such as net present value (NPV) or internal rate return (IRR). The need is to incorporate these measures into the reporting structure to reinforce the importance of earning back the cost of capital employed and achieving capital efficiency.

Return on Value Added (ROVA)

A typical automobile company does only a part of the manufacturing in-house, and outsources the rest. Outsourcing reduces the cost of manufacturing, but also reduces the value addition in that step. From a shareholder’s perspective, materials are essentially passed to the end customer at cost, and automotive companies can only generate a profit on the value adding processes that remain in-house. Hence, new types of measures, such as ROVA, are needed to identify the value creating processes within a company and hence decide what to outsource and what to manufacture in-house.

CUSTOMER

Product Portfolio

Having a better product mix as compared to competitors is essential for an automotive company’s success today. A product portfolio map is defined by an automaker’s market segments today. It could be based on traditional, demographic or psychographic dimensions. For each segment, internal and competitive measures such as capacity utilization, sales volume, incentives and vehicle profitability need to be measured. These are the segments in which competition occurs, and hence automakers should measure their rank in each segment.

Total cost of ownership

It is not just the buying price which is important for the customer but the total cost of ownership, which includes the buying price of the vehicle, cost of financing, depreciation, insurance, registration, maintenance, fuel, repairs and other costs. Hence automotive companies must measure themselves not only on the selling price of their vehicles but on the total cost of ownership

Customer Satisfaction

When customers purchase their next vehicle, they do not necessarily remember the fit and finish of the new car they got four or five years ago, but their last trip to the repair shop. Hence it is important to measure both initial quality and reliability over the life of the vehicle to gauge customer satisfaction.

INTERNAL BUSINESS PROCESS

Supplier sourced innovation

It is necessary, not just to obtain good quality raw materials from suppliers at right prices but to put innovation through the entire supply chain, to get innovation faster into the market, ahead of competitors. Supply sourced innovation could lead to product innovation as well as cost, quality and delivery improvement.

Cost reduction

Cost reduction is no longer a one-time exercise but a continuous process. Automotive companies that measure cost reduction throughout the supply chain have a greater advantage than companies that measure cost reduction programs as an offline calculation. Traceability of cost reductions to the bottom line is no longer a luxury but an essential capability of performance measurement in the automotive industry.

Outsourcing/supplier risk

Outsourcing of non-core activities may reduce costs and help to focus on core activities, but may also lead to increasing risks. Although automakers are passing warranty and liability claims down to the responsible suppliers wherever possible, negative public opinion and tarnished brand image generally get associated with the company and not suppliers. Hence risk management is an essential part of the Balanced Scorecard.

LEARNING AND INNOVATION

Intellectual Capital

Although companies are focused on retirement and pension payments for their ageing workers, the brain drain that will occur as these skilled workers exit the workforce is of equal importance. Companies must measure the cumulative years of experience in their key processes and find ways to leverage the vast knowledge base before it exits the company.

Innovation

In the automotive industry, customers are always willing to pay a premium for innovation. Both process innovation and product innovation are required to compete and earn a profit. Companies that can bring better quality in the form of new products and new technology to market faster and cheaper become the winners in the automotive industry. It is necessary to measure the speed at which innovation can be converted from ideas to profit.

Category	Measure	Weightage
	Target Cost Achievement	20%
Financial (45%)	Capital Efficiency	15%
	Return on Value Added (ROVA)	10%
	Product Portfolio	10%
Customer (25%)	Total cost of ownership	10%
	Customer Satisfaction	5%
	Cost reduction	10%
Internal Processes (20%)	Supplier sourced innovation	5%
	Outsourcing/supplier risk	5%
Innovation and Learning (10%)	Intellectual Capital	5%
	Innovation	5%