The Balanced Scorecard and
Key Performance Indicators

A Framework for Performance Measurement

When designing Perennial BI for ERP Systems, we wanted to create the dashboards and reports that business managers would be expecting from a Business Intelligence reporting system - charts, graphs and other visualized reports to analyse sales, purchases, stock, profit and loss, and the like.

But we also wanted to create dashboards and reports that worked together in a cohesive way to measure actual performance against targets for a number of Key Performance Indicators (KPI's) - to help business managers make informed decisions about aspects of the business operations that they are responsible for.

The Balanced Scorecard is a popular framework that measures performance across 4 Business Perspectives. A score is calculated for each KPI in each business perspective, and a total score is determined for each perspective in each operatinal division of a company, and for the company as a whole.

Perennial BI is based on this part of the Balanced Scorecard framework - there is a lot more to the Balanced Scorecard than using KPI's for performance measurement. And, we have made some changes to the business perspectives that the Balanced Scorecard uses - in Perennial BI, we call them Business Functions.

The 4 Business Functions that Perennial BI reports across are:

• Sales and Customers
• Purchasing and Suppliers
• Products and Stock
• Financials

The KPI's used in Perennial BI to measure performance against targets are listed under each Business Function as follows:

Sales and Customers

• Customer Pareto - the 80/20 Rule that states that 20% of Customers generate 80% of Sales - to check that the company is not dependant on too few large value customers, and not over-burdened by having to manage too many small value customers.
• Customer Profitability - the percentage of Customers achieving the target Gross Profit Margin for each Operating Division of the Company.
• Sales DIFOT Ratio - the percentage of sales order lines delivered in full and on time to Customers, by Customer and by Product.
• Sales Returns - the percentage of sales invoice lines returned with a credit note.
• Quote Conversion Rate - the percentage of sales quotes converted into sales orders.
• Retention Rate - the percentage of sales to last year for each customer.

Purchasing and Suppiers

• Supplier Pareto - the 80/20 rule, where 20% of Suppliers provide 80% of Purchases - to check that the company. is not dependant on too few large value suppliers, and not over-burdened by having to manage many small value suppliers.
• Purchasing DIFOT Ratio - the percentage of purchase order lines received in full and on time from Suppliers, by Supplier and by Product.
• Orders Not Cancelled - the percentage of purchase order lines not cancelled to all purchase order lines placed.
• Unit Cost Compliance - the percentage of purchase order lines placed with a unit cost that is no more than the standard unit cost for the product being ordered.

Products and Stock

• Product Pareto - the 80/20 Rule, where 20% of Products generate 80% of Sales - to check that the company is not dependant on too few large value products, and not over-burdened by having to manage many small value products.
• Product Profitability - the percentage of Products achieving the target Gross Profit Margin for each Operating Division of the Company.
• Stock Accuracy - the percentage of stock items with accurate stock balances.
• Stock Turnover - the number of times stock turned over per year.
• Slow Moving Stock - the percentage of Stock Value that is Inactive or Slow Moving.

Financials

• Revenue Growth Rate - Sales Revenue Growth Rate Year on Year
• Gross Profit Margin - Gross Profit as a percentage of Sales Revenue
• Operating Expenses to Sales - Operating Expenses as a percentage of Sales Revenue
• Operating Profit Margin - Operating Profit Before Interest and Tax as a percentage of Sales Revenue

That's a total of 19 Key Performance Indicators spread over the 4 Business Functions, and even that number may be too many. For example, Sales Returns, whilst inconvenient, may not be as numerous and as critical as originally anticipated, and may be excluded as the results become known.
KPI's are meant to be Key Indicators of Performance - having too many can cause confusion and wasting time on measuring and managing some non-critical aspects of performance.