The Balanced Scorecard for Supply Chain ROI

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Balanced Scorecard

In our , we explored the benefits of migrating financial planning and forecasting from Excel spreadsheets to automated cloud platforms. We covered time savings, cost savings, and a host of process improvements. In this post, we’ll delve deeper into the potential returns of forecasting and planning in general, using the balanced scorecard approach.

The balanced scorecard is a holistic framework used by business management strategists to measure performance, set goals, and prioritize projects. It was introduced in 1992 by business management gurus Dr. Robert Kaplan and Dr. David Norton, who co-published an article for Harvard Business Review entitled “The Balanced Scorecard—Measures that Drive Performance.”

The scorecard is designed to look beyond financial performance data by also assessing the health and performance of non-financial business functions and indicators. This provides a balanced view of an enterprise, venture, or investment, based on four key perspectives, or the four legs as they are often called.

The four legs of the balanced scorecard

Following are the four legs as they relate to the effects of a potential investment on enterprise performance:

  1. Learning and growth: What are we doing to ensure that our people are learning and growing in ways that will improve their happiness and readiness, and increase our competitive advantage?
  2. Internal business processes: Where can we make improvements in quality and efficiency, and how will these improvements advance broader objectives? Will an investment in IT improve accuracy, cut labor hours, and/or speed delivery?
  3. Customer service: How well do we serve customers and what can we do to improve service levels, on-time delivery, or purchase and delivery options? How will a specific investment benefit customers?
  4. Financial performance: How well are we converting financial resources into financial gains? Will a new process or technology cut costs, increase revenue, and/or improve asset utilization and cash flow?

The scorecard approach for ROI

The quality of the quite literally underpins the success (or failure) of the entire organization and all of its stakeholders, including customers, employees, upstream partners, and investors. The reason is simple: GIGO (or garbage in, garbage out).

The idea is that if your most basic forecast assumptions are flawed, so is everything else, such as inventory levels, customer service, production scheduling, and all manner of budgets and plans. So much hinges on the accuracy of the sales forecast. But if your starting values for revenue, expense and whatever else are mere guesses, or last year’s numbers plus 5% (garbage in other words), your forecasts and plans are doomed from the start.

Fortunately, the GIGO monster has an alter ego: golden in, golden out. That is, if your starting values are not mere guesses, but rather the product of automated, statistical analysis, you’ve at least taken the first step toward potentially exceptional forecast accuracy, and better decisions, plans and policies through the supply chain and across the organization. From that point on, multiple layers of advanced analytics (plus management foreknowledge) can help refine predictions.

The results are compelling. The increased forecast accuracy has set the stage for finely optimized demand and supply plans. Inventory optimization alone means reduced stock-outs and lost sales, increased service levels, and improved multichannel purchase and delivery, all of which raise revenue, profitability, customer satisfaction and loyalty.

Let’s say your organization is considering options to improve enterprise planning, one of which would be an investment in an automated, collaborative platform for forecasting and planning. The true end goal is to save time and increase profit well beyond the cost of the investment. A good way to see if it might work is to break it down by each leg of the balanced scorecard. To help, we’ve laid out the potential upside in each case, based on both hard returns and softer benefits.

1. Learning and growth

Automating internal business processes frees sales, demand, supply, and financial planners to pursue other strategic goals, such as training opportunities, process improvements, research, and other high-value endeavors. They are able to focus solely on their core work rather than on creating and maintaining spreadsheets. This benefits the organization directly, but even more importantly, opportunities for professional growth and employee job satisfaction reduces turnover and improves productivity.

Additionally, employees have far more opportunities to share and learn from each other with the aid of a shared, virtual environment for proposal, review, and all manner of collaboration.

2. Internal business processes

This is where the most opportunity may be realized, via the following improvements:

  • Automation: Freeing sales and demand planners from the laborious task of manual forecast preparation not only reduces error, it improves accuracy, eliminates forecast labor hours (90% in many cases), and saves both time and money (measurably). These improvements alone are why so many more organizations are replacing Excel-based processes with cloud-based automation.
  • Rolling forecasts: The ability to automate monthly rolling forecasts markedly improves planning and responsiveness. That’s because planners can respond to continually updated data with re-optimized plans around project scheduling, critical resource allocations, or the timing of investments. That enhances management’s ability to balance growth, margin, and asset utilization on a rolling basis.
  • Collaboration: A  makes it vastly easier for functionally and geographically diverse users to share, review, and reconcile forecasts, budgets, and plans in a single, unified system. Stakeholders can also contribute valuable foreknowledge to further refine forecasts, such as a big new order or a new supplier – items that might otherwise languish in virtual silos.

3. Customer service

This perspective views organizational performance through the eyes of customers or other stakeholders (for example, customer satisfaction with regards to quality, price, and availability of your products or services). Customers provide feedback regarding whether their needs are being met with current products or services. Customer expectations, and competitor offerings, often change and it’s crucial for your business or organization to keep up.

This leg answers the question, “How are we meeting customer expectations?”

4. Financial performance

Let’s close out with just a few of the many hard financial benefits available through careful investment in best-of-breed forecasting and planning:

  • Lower safety stock and faster inventory turnover improve cash flow, the availability of working capital, and the bottom line.
  • Optimized stock holdings cut spoilage and obsolescence costs.
  • Fewer stock-outs reduce lost sales and costly out-of-territory and rush-order shipments.
  • Higher service levels improve customer satisfaction, loyalty, and top-line revenue growth.
  • Lower labor requirements save time and reduce labor cost.
  • Rolling forecast knowledge enhances all facets of capital management and helps make optimal use of financial markets and interest-bearing assets to increase returns.