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A hybrid model for a performance measurement system of business: A case study in critical logistics process

The performance evaluation of companies is an important issue. Balanced Scorecard (BSC) and Six Sigma approaches are widely in use in business in this context. In this study, BSC and Six Sigma performance management systems have been elaborated,
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     Vol. 8(20), pp. 937-949, 28 October, 2014 DOI: 10.5897/AJBM2014.7492  Article Number: E747B2D48214   ISSN 1993-8233 Copyright © 2014  Author(s) retain the copyright of this article http://www.academicjournals.org/AJBM African Journal of Business Management Review    A hybrid model for a performance measurement system of business: A case study in critical logistics process Kasim Baynal* and Gokhan Ozkan Kocaeli University,Turkey. Received 7 July, 2014; Accepted 10 October, 2014   The performance evaluation of companies is an important issue. Balanced Scorecard (BSC) and Six Sigma approaches are widely in use in business in this context. In this study, BSC and Six Sigma performance management systems have been elaborated, their strengths, which can be used in practice by a number of enterprises in a variety of sizes, have been identified; and a new hybrid model of performance measurement system has been developed by merging together the aspects of both management systems that complement each other. The hybrid system can be expressed in terms of operational availability data, and can compare performance qualifications. In practice, performance measurement results obtained for five critical branch offices of a logistics business, by applying the model for operations/processes from the perspectives of Costs, Internal Processes, Customer and System Development and Assessment have been compared by model performance and model efficiency, and the results achieved have been scrutinized. Key words: Balanced scorecard, six sigma, six sigma business scorecard, logistics, operational availability. INTRODUCTION Performance measurement and assessment of complex processes or systems are indeed of vital importance. In a globalizing world, performance measurement should be regarded as a must, rather than as an option. Organi-zations cannot be sustained without setting strategic goals, using operational methods, achieving and main-taining targeted results; nevertheless, in cases when the changes in the management are not integrated with the performance obtained, success can only be achieved by chance. Rapid development in information systems in recent times has both facilitated and generalized access to information. As a result of technological developments globally removing local boundaries, in addition to the concepts, price, place where the product is sold together with the distribution channels, and promotion – as set forth by Prof. Eugene McCarthy in his “Basic Marketing” (Perreault and McCarthy, 2004), “marketing mix” or so-called 4P approach (Product, Price, Place, Promotion)- performance and process management have also become essential. Products developed as a result of large scale surveys also have to be backed up by rigorously elaborated strategies, so that the products can achieve the targeted market share. Performance assessments, as in other statistical studies, are performed on a limited number of sampling   *Corresponding author. E-mail: kbaynal@kocaeli.edu.tr     Authors agree that this article remain permanently open access under the terms of the Creative Commons  Attribution License 4.0 International License     938 Afr. J. Bus. Manage. processes representing the characteristics of all processes. Only in this manner can a set of controllable processes and also controllable budgets, schedules, tools and staff be achieved. The processes included in the sample universe should be chosen among those processes that represent the characteristics of the whole. Negative aspects arising in chosen processes should be characterized as having tangible impacts on general performance. Those processes, which possess such characteristics as described, can be designated as critical processes in this study. Critical processes should be capable of representing business performance and assuring accordance between the strategy and process by an analysis of performance. Performance measurement models are studied in many areas also in an academic environment. Kumar et al. (2008) emphasized the importance of the implementation cost of six sigma methods and represent new two optimization models that will assist management to choose process improvement opportunities. Parast (2011) developed a theoretical base for the effectiveness of Six Sigma projects on innovation and firms’ performance. Farooq and Hussian (2011) prepared a questionnaire and collected the responses from organizations which were segregated on the basis of public and private sector and also manufacturing and service industry. Rajes et al. (2012) proposed a set of strategies for BSC of 3PL service providers by the aid of Delphi method. Jazayeria and Scapens (2008) researched the evolution of a performance measurement system in BAE Systems, for a UK aerospace company. Zheng et al. (2009) used the rough set theory and fuzzy set together to reduce the data processing and reduced computation complexity of measurement model. Yu et al. (2010) developed an organizational performance evaluation framework that takes account of the dynamical system behaviors for innovative healthcare service by the interactions in the traditional Balance Scorecard structure. Morgan and Strong (2003) presented an empirical investigation about performance management structure of medium and large, high technology, industrial manufacturing firms. Bentes et al. (2012) presented the case of a telecom company to illustrate and critically analyzed the integration of the two methodologies, Balanced Scorecard (BSC) and Analytic Hierarchy Process (AHP) with the discussion of the advantages and disadvantages of the design. Lyell and McDonnell (2007) emphasized that health  system performance management is a complex problem and offered a dynamic Balance Score Card structure. Paranjape et al. (2006) evaluated Balanced Scorecard in the study and mentioned the difficulties of implementations into dynamic systems.  Ahmadi et al. (2012) suggested a model based on Balance Score Card, for performance evaluation and conducted a case study through this model. Kuik et al. (2010) presented a Six Sigma implementation strategy within the global supply chain   network in a developing country, i.e. Malasia. MacBryde et al. (2014) mention the positive effects of having a performance management system like Balanced Scorecard in order to have a progress towards achieving strategic goals despite the absence of nine critical success factors defined in management literature. Shahada and Alsyouf (2012) discuss the efficiency of using six sigma, balance scorecard, simulation and cost-benefit analysis in identifying the process problem(s) and solving them effectively. Zhang et al. (2010) show the six-Sigma quality process operation pattern and the differences between six-sigma quality process and traditional management method in supply-chain management processes and associated technology. In this study, a model, which can be used in businesses on various scales, is proposed. In the model, a hybrid model of performance measurement system, which is developed by utilizing the Balanced Scorecard (BSC) and Six Sigma approaches, is used. The BSC approach has been included in the model, within the businesses organized vertically from top to bottom, considering its relatively high effectiveness – compared to its peers – in the achievement of strategic and financial targets. The Six Sigma approach, on the other side, has been incorporated into the model as an effective approach in increasing customers’ satisfaction from bottom to top in hierarchical processes/operations on the business base. In the developed model, business performance is represented in terms of operational availability data used widely in the field of logistics. Approaches to performance measurement systems Businesses have to achieve their growth targets set in order to survive and to increase their profitability. The control of what extent the targets in question are achieved is done by methods called performance management systems.  After World War II, several national economies grew significantly, leading to a globally competitive environ-ment. From time-motion studies to quality improvement tools, businesses employed methods to improve their performance. Beginning in the 1970s, Japanese auto makers challenged the U.S. industry by Utilizing quality management tools taught by J. M. Juran, Edwards Deming, Phil Crosby, Genichi Taguchi, and others. In the 1980s, other ways to promote the process and performance standards were created, such as the ISO 9000 quality management system developed by the International Organization for Standardization (ISO) and the Malcolm Baldrige National Quality Award (MBNQA) guidelines established by the U.S. Motorola pioneered and successfully i mplemented the Six Sigma methodology to reap rich benefits (Pande et al., 2000). Figure 1 shows the evolution of various techniques (Gupta, 2003). Franceschini et al. (2007) denote that global process    Baynal and Ozkan 939 Figure 1. Performance Control Methods (Gupta, 2003).   “To succeed financially, how should we appear to our shareholders?” VISION & STRATEGY “To achieve our vision, how should we appear to our customers?” Financial PerspectiveInternal Business Process Perspective Costumer Perspective Learning and Growth Perspective“To achieve our vision, how will we sustain our ability to change and improve?” “To satisfy our shareholders and customers, what business  process must we excel at?”   Figure 2. BSC Points of View (Kaplan and Norton, 1996a) management and coordination are carried out by the performance measurement system that is at the highest level of the hierarchy. The performance measurement system is responsible for coordinating indicators across the various functions, and for aligning the indicators from the strategic (top management) to the operational (shop floor/purchasing/execution context) levels. Performance control methods are utilized to monitor business processes in operation and to keep the deviations identified in performance under control. Beneath their monitoring and control functions, perfor-mance management systems are further expected to be sensitive to internal and external developments in businesses. The Six  Sigma Business Scorecard (SSBSC) model is defined as a model that was evaluated as to reduce the factors of failure of the BSC and Six Sigma approaches in practice. Balanced scorecard  As shown in Figure 2 (Kaplan and Norton, 1996a), the BSC, instead of traditional financial data of enterprises with performance reviews, can be enriched by the    940 Afr. J. Bus. Manage. following operating processes that have been aligned with the vision and strategy (Ahmadi et al., 2012): 1. The customer perspective (How do our customers see us?) 2. Internal Business / internal process (What do we need to be superior?) 3. Learning and growth perspective (Are we developing by creating the value continuously?) 4. Financial perspective (How should we be seen by our shareholders?) Balanced Scorecard is a dynamic performance assess-ment system or management technique (Zheng et al., 2009), which is based on non-physical dimensions (values) such as humans, systems, and development and perfection of incorporating activities in line with future customers’ satisfaction, orientation and expectations. It is also beneficial in learning and developing the methods to keep up with the change – together with physical (financial) values derived from historical data the busines-ses have in hand; this measures these dimensions using specific indicators that provide strategic feedbacks to maintain equilibrium and integration between these dimensions. It also determines applicable strategies of data. Construed in a general sense, the aim of the BSC performance management system is to achieve a steady and gradual growth of corporate development and corporate life, and to bring success to the business in a competitive environment of the recent information age by changing the performance (Kaplan and Norton, 1996b). Moreover, BSC is not only a measurement system. Businesses open to innovation use BSC as the center and regulatory framework of management processes. Businesses may at the first stage establish a Scorecard for very limited purposes. For example, such purposes may be reaching consensus, focusing on strategy and ensuring complete penetration of strategy across the corporation. The real power of BSC is demonstrated not only as a measurement system, but also in cases when it is used as a management system (Kaplan and Norton, 1996b). Six Sigma Linderman et al. (2003) have defined Six Sigma as a systematic problem-solving technique aiming to decrease customers’ defined defect rates substantially or to improve system inputs by using statistical and scientific methods in the development of new strategic systems, products and services. Total Quality Management (TQM) and Six Sigma are approaches which support each other. TQM is a management philosophy targeting an ideal perfection at “zero-defect” level. On the other side, Six Sigma is a method, a methodology, which can be used for the measurement of the quality of processes as one of the focal points of TQM. Its goal is to decrease defect rates to a level of 3.4 per million. Six Sigma differs from TQM or similar approaches primarily in the measureability of its results, in its penetration covering all processes across the entire corporation without being limited to a single department or function, and in how it can alter the corporate culture (Gupta, 2003).  As a statistical measurement technique, Six Sigma is a quantitative indicator measuring how good the products, services and processes are. It shows by how much the process deviates from the zero-defect ideal. The Six Sigma approach uses “Defects per Unit” (DPU) as measurement unit. A defect is defined as anything that causes customer dissatisfaction. DPU is the best tool for measuring the quality of a process or a product. Sigma coefficients used as three Sigma, four Sigma or six Sigma represent the occurrence frequency of defects. The higher the Sigma value is, the lower the probability of defect. Balanced Scorecard and Six Sigma weaknesses The inadequacy of two methods mentioned above is summarized as follows   in practice.   Saydam (2007) suggests vertical and horizontal inte-gration for an effective performance and perception management in businesses. Vertical integration repre-sents the compatibility  among all layers of an organization from bottom to top. In other words, the subject the organization seeks to manage and key messages to be created around this subject should be expressed by a newly recruited office personnel or for example by a driver, demonstrating same enthusiasm, same diligence and same content, as is done by the top manager of the corporation. Furthermore, horizontal integration is defined as “ensuring the compatibility and cooperation among communication works managed by social stakeholders, since these are interacting with each other strongly” (Saydan, 2007). Most businesses have measurements for sales and profitability. They do not, however, have measurements for operational effectiveness (Gupta, 2003). Indeed, sales figures and profitability are the outputs of the business. Measures to increase profitability and efficiency have to be applied to the inputs. Positive outcomes from regulations to be imposed on outputs have never been observed. For performance and efficiency, one has to start with regulations on input(s) compatible with the strategy, and henceforth maintain vertical and horizontal integration. Regarding the Six Sigma approach, it appears that Six Sigma measurements focus on performance at the process level; however, the measurements are not aggregated or correlated to corporate wellness.    Corporations have found it   difficult to  establish a corporate sigma level that correlates with the overall corporate performance (Gupta, 2003). Six Sigma is a performance management system envisaging control over all organizational processes of the business. However, the impression of Six Sigma in practice is that difficulties are experienced in achieving a process/strategy synergy with Six Sigma. The effective-ness attained in process management cannot, either always or directly, be reflected towards the upper levels of the organization. While implementing a BSC, managers articulate their strategy for the organization. Departments go through the training and attend sessions to develop the vision, strategy, and measurements that will lead to a BSC (Harry and Schroeder, 1999). They develop objectives and targets as well as action plans. Weaknesses in the organization can be identified through the reporting process and corrected through the learning process. BSC practice starting at the management level is observed to be extremely effective in setting the vision, strategy and performance assessment parameters at the department level, by trainings and active participations. However, the strategy constituting BSC’s starting point cannot be duly delegated or explained to employees at the process level. In practice, this makes the success of the BSC approach effective in many cases only up to the department level, but not at the process level. Such failure observed by 90% in the business where the BSC is applied is correlated with this practice (Gupta, 2003). Consequently, accomplishing integration under the framework of a strategy is of vital importance for businesses from the perspective of performance mana-gement. BSC practices as performance management tools are inadequate below the department level at organizational layers and in process management, whereas Six Sigma practices are inadequate in achieving the integrity of process and strategy. Six Sigma Business Scorecard The strengths and convenient practices of BSC and Six Sigma practices, which could not achieve the desired success individually, have been analyzed under the scope of this study. The Six Sigma Business Scorecard (SSBSC) has been developed as an easily adaptable performance management system that inspires leaders who are going to embrace the business as a whole, and offers managers, chances for development and employees opportunities for innovation by maintaining profitability and growth at optimum level. An effort has been made to in the study to winnow out the weaknesses of the analyzed methods and to integrate the areas in which they are effective, together, in order to build integrity. In this model, the business was considered in the form Baynal and Ozkan 941 of a pyramid. The business pyramid and the positioning of the performance management systems are shown in Figure 3. The upper part of the pyramid represents the top management layer of the business. The performance measurement system used effectively for top mana-gement is the BSC approach. In this layer, strategies are developed, and, starting with the transformation of the strategy into a vision and measurable targets, BSC approach processes are run. For middle management, which constitutes the second layer of the business pyramid, analyses of costs, internal processes, system development and assessment and also for customers’ points of view are conducted and success scores are calculated, again using the BSC approach. The Six Sigma approach is used for the base of business pyramid, the parts designated as operation/ process level. At this stage, operation/process success scores are calculated using the BSC approach, and then converted into values of defects per unit and probability of corporate defect rates at the per million level, and finally into operational availability data, in order to establish a decision mechanism. The business pyramid and the positioning of the performance management systems are shown in Figure 3. Turkey is a rapidly developing country. And most of the companies in Turkey are small and medium sized. These organizations are performing the 62.6% of the overall import and 38.5% of the overall export according to the reports published in 2014 for the year 2013 by the Turkish Statistics Organization (TUIK). It is difficult for those small and medium-sized organizations to run big ERP applications or hire BSC or Six Sigma professionals to monitor their performance. On the other hand, these organizations set goals, objectives and targets to maximize performance. With this proposed model, basic elements of the BSC and six Sigma models are combined together to support these small and medium-sized companies in establishing their goals, objectives and targets aligned with their processes. In the developed model, the following are explained in depth in the case study; 1. Determination of the strategy, 2. Determination of indicators of viewpoints of cost, internal processes, customer and system development-evaluation, and calculation of their weights and scores of success for realization of the strategy and 3. The performance of the business to be expressed as operational availability data Case study: The performance measurement practice in critical logistics processes In practice, the performance of a logistics business
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