MODULE 5

INTERNAL PROCESSES
PART 1: MANAGING OPERATIONS

Overview
This chapter outlines the concepts, philosophies, and cases relevant to the Internal
Business Processes perspective of the Balanced Scorecard. For most companies today,
having multiple measurements for cross-functional and integrated business processes
represents a significant improvement over their existing performance measurement
system to improve quality, time, productivity, and cost. These philosophies,
methodologies, and measurement systems shall work hand in hand to satisfy the
stakeholders’ interests.

Module Objectives
After a thorough study of the topics, the learner will be able to:
 Distinguish internal business processes perspective of the Balanced Scorecard
(BSC) and its parts.
 Differentiate efficiency, utilization, and productivity.
 Understand and apply the performance measures related to Internal Business
Processes (IBP).
 Identify and explore the key Total Quality Management approaches and Statistical
Process Control (SPC) techniques.
 Learn how to create and interpret data in a BSC: IBP perspective.

Course Materials
According to Kaplan and Norton (1983), in the Internal Business Process
perspective, executives identify the internal processes which the organizations must
excel to enable the business unit to:
a. Deliver the value propositions that will attract and retain customers in
targeted market segments; and
b. Satisfy shareholder expectations of excellent financial returns.
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The main focus on this perspective is on identifying the critical processes for
achieving the objectives of the customers, shareholders, and other key stakeholders.
Each business has a unique set of processes for creating value for customers and
producing financial results. Kaplan and Norton have found, however, that a generic
value-chain model provides a template that companies can customize in preparing their
internal-business-process perspective. Refer to the Internal Business Process
Perspective Generic Value Chain Model below.

To expand the illustration above to common strategic objectives, and lead and
lag indicators for each process, see diagram below.
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The table below shows the commonly used IBP performance measures along
with the desired changes per indicator.

Efficiency, Utilization, and Productivity

The diagram below shows the distinct formulae and definitions of efficiency,
utilization, and productivity.

Other Process Performance Measures

1. Run time – the time required to produce a batch of parts.
= Time required to produce each unit x Batch size

2. Setup time – the time required to prepare a machine to make a particular item.
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3. Operation time – sum of setup time and run time for a batch of parts that are run
on a machine.
= Setup time + Run time

4. Flow/Cycle time – average time it takes a unit to move through an entire process,
or average time between completion of units.

5. Value added time – time in which useful work is actually being done on the unit.

6. Process velocity or throughput Ratio – ratio of value added time to the flow time.
= Value added time / Flow time

7. Cycle time – average time between completion of units; can be used

interchangeable with Flow time.

8. Throughput rate – output rate that the process is expected to produce over a
period of time.
= 1 / Cycle time

9. Total average value of inventory – total average investment in raw material,

work-in-process, and finished goods inventory.

10. Inventory turnover – a measure of number of times inventory is replaced over the
year.

11. Days-of-supply – number of days of inventory of an item.

12. Little’s Law – states that there is a long-term relationship between inventory,
throughput, and flow time of a production system in steady state.
Inventory = Throughput rate x Flow time

13. Idle time ratio – production down time compared to the total labor hours.
= 100 x (Production downtime / total labor hours)

14. Activity ratio – expected hours needed to produce actual output as compared to
the actual hours needed to complete.
= 100 x (Expected hours / Actual hours)

15. Labor capacity – budget vs. actual comparison of labor hours.

= 100 x (Actual Hours / Total Budgeted Labor Hours)
Improving Process Flow
1. Perform activities in parallel.
2. Change the sequence of activities.
3. Reduce interruptions.
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Module 4 – Customer Perspective

Total Quality Management (TQM)

TQM is a process of managing the entire organization, so it excels in all dimensions
of products and services that are important to the customer, aiming to:
1. Design carefully the product and service; and
2. Ensure that the organization’s systems can consistently produce the design.

Quality is often times subjective – Philip Crosby, W. Edwards Deming, and Joseph
Juran shows slightly differing quality definitions and methods, but they all agree that it
requires:
1. quality leadership from senior management,
2. customer focus,
3. total involvement of workforce, and
4. continuous improvement.
Three basic assumptions justify the analysis of costs of quality:
1. Failures occur;
2. Prevention is cheaper; and
3. Performance can be measured.
These costs of quality are classified into four types:
1. Appraisal costs
2. Prevention costs
3. Internal failure costs
4. External failure costs
Philosophy and methods associated with TQM are but not limited to the following:
1. Six Sigma – philosophy and methods used to eliminate defects in products and
processes, with a statistical quality goal of no more than 3.4 defects out of every
million units, i.e. Motorola and General Electric.
a. It uses the defects per million opportunities metric (DPMO).
DPMO = 1,000,000 x (No. of defects / (No. of Opportunities x No. of
Units))
b. Methodology – DMAIC (Dumb Managers Always Ignore Customers)
i. Define: Customers and their priorities, project suitable for Six
Sigma, Critical-to-Quality (CTQ) characteristics
ii. Measure: Process and defects, processes that influence CTQ
iii. Analyze: Causes of defects
iv. Improve: Means of removing causes of defects, process variations
v. Control: Maintenance of improvements
c. Analytical Tools
i. Flowcharts, e.g. SIPOC (Supplier, Input, Process, Output,
Customer)
ii. Run Charts – depict trends in data over time
iii. Pareto Charts
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iv. Check sheets

v. Cause-and-effect diagrams
vi. Opportunity flow diagram
vii. Process control charts
viii. Failure mode and effect analysis
ix. Design of Experiments
d. Lean Six Sigma – combines the implementation and quality control tools
of Six Sigma and the inventory management concept of lean
manufacturing – reducing waste while achieving high-volume production
through the use of Just-In-Time (JIT) inventory methods.
2. Shingo System – a philosophy of production management to (1) reduce
equipment setup times drastically by single-minute-exchange-of-die (SMED)
procedures and (2) use source inspection and the poka-yoke system to achieve
zero defects.
a. Three types of checks – uses poka-yokes (procedures that prevent
mistakes from becoming defects):
i. Successive check
ii. Self-check
iii. Source inspection
3. ISO 9000 and ISO 14000 – international standards to help companies document
that they are maintaining an efficient quality system.
a. ISO 9000 – formal standards for quality management requirements and
B2B dealing, focusing on:
i. Customer focus;
ii. Leadership;
iii. Involvement of people;
iv. Process approach;
v. Continual improvement;
vi. Factual approach to decision-making; and
vii. Mutually beneficial supplier relationships.
b. ISO 14000 – family standards on environmental management.
c. Other standards:
i. QS-9000 – for automotive industry;
ii. ISO/TS 16949 – aligns international standards on automotive;
iii. ISO 14001 – environmental standards for automobile industry;
iv. ANSI/ASQ Z1.4-2003 – provides methods for data for inspection
by attributes; and
v. TL 9000 – for telecommunications industry.
4. Other concepts/philosophies:
a. TQM triangle
b. Deming Wheel / Deming’s 14-Point TQM Plan
c. Juran’s Quality Trilogy
d. Universal Breakthrough Sequence
e. Crosby’s 14-steps to quality
f. Kaizen Philosophy / 10-Step Service Kaizen Methodology
g. Taguchi’s Loss Function
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Module 4 – Customer Perspective

Statistical Quality Control (SQC)

Statistical Quality Control (SQC) covers the quantitative techniques designed to
evaluate quality in a conformance view (meeting the specifications set during the design
of products or services) – this includes periodic sampling and analysis of data using
statistically derived performance criteria.
Variations which may arise from evaluation of processes can be classified into
two:
1. Assignable variation – caused by factors that can be clearly identified and
managed possibly, e.g. untrained workers; and
2. Common variation – caused by random factors that are inherent in the process,
e.g. limitations on equipment performance.
Some useful statistical formulae and concepts to help understand this topic are:
1. Mean – average value of a set of numbers
a. xi is the observed value and n is the total number of observed values:

b. Excel application

2. Standard Deviation
a. Given the same variables above, the formula is:

b. Excel application
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3. Upper and Lower Specification Limits – the range of values in a measure

associated with a process that is allowable given the intended use of a product or
service, which is represented by a smooth curve of incremental cost vs.
acceptability (Taguchi’s view of cost of variability).

Process Capability
While process limits relate to how consistent the process is for making a product
or rendering a service, a specification limit are related to the design of the part or
service. Companies with Six Sigma processes insist that a process making a part be
capable of operating so that the design specs limits are six standard deviations away
from the process mean. The problem with this is for a large company producing in
large volumes, testing each part can be extremely expensive. Thus, as a quality
control measure, companies use samples that are periodically checked.

 Capability index (Cpk) – measure of how well is the process capable of

producing as compared to the design specifications.

This is represented by a distribution plot where the Cpk is the mean and the
tails are to processes relative to design specs. The more off center, the
greater the chance to produce defective parts.
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 Z score (Z) – to get the cumulative probability of the left and right side of the
normal distribution plot.

Statistical Process Control

Statistical Process Control involves testing of a random sample of output from a
process to determine whether the process is producing items within a prescribed range,
which are based on qualities or variables that are measurable. These quality
characteristics are called Attributes (either conforming or nonconforming). As a
standard procedure, investigate points or occurrences that are outlying or way above or
below the mean/central line.

 Attributes Sampling
o p-charts – measuring by samples using a single decision – either good
or bad. The process is assumed to be working correctly if the
samples continue to stay between the control limits.

p is the fraction defective, sp is the standard deviation (SD), n is

the sample size, and z is the number of SD for a specific confidence.
Typically z = 3 or
z = 2.58. Note that the sample should be large enough to allow
counting of the attribute, at least expect to count the attribute twice in
each sample.

o c-charts – used when it is ideal to monitor the number of defects per

unit. It works under the assumption that defects occur randomly in a
unit. The normal approximation is used to the Poisson distribution
and construct the chart using the following:
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Module 4 – Customer Perspective

The z uses the same assumptions as the p-chart, z = 3 (99.7%

confidence) or z = 2.58 (99% confidence).
 Variables sampling – quality characteristics that are measured in actual units
of measurement, i.e. weight, volume, inches, centimeters, or other measure.
Sample sizes for industrial applications are usually small, since it need to be
tested for a reasonable length of time, and a large sample costs more.

Testing samples may start off with higher frequency, then will taper off as the
confidence in the process builds. Control limits are set to three deviations
above and below the mean (99.7% confidence level) as a standard practice.
o X-chart – simply a plot of the means that were taken in a process.
o R-chart – a plot of the average of the range within each sample.
 Acceptance Sampling – performed on products that already exist to determine
what percentage of products conform to specifications, which are executed
through a sampling plan.
 Operating Characteristic Curves – a curve to present intermediate values
of good or bad, displaying a probability of acceptance with varying
percentages of defectives.

Case 1. Management of Vogel Im Käfig, Germany, would like to reduce the amount of
time between when a customer places an order and when the order is shipped. For the
first quarter of operations during the current year the following data were reported:

Required:
(a) Compute the throughput time.
(b) Compute the manufacturing cycle efficiency (MCE) for the quarter.
(c) What percentage of the throughput time was spent in non–value-added
activities?
(d) Compute the delivery cycle time.
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(e) If by using Lean Production all queue time during production is eliminated, what
will be the new MCE?
Case 2. Tenseiga, Inc., automated its plant and installed a flexible and tech-savvy
manufacturing system. The company is also evaluating its suppliers and moving toward
Lean Production. Many adjustment problems have been encountered, including
problems relating to performance measurement. After much study, the company has
decided to use the performance measures below, and it has gathered data relating to
these measures for the first four months of operations.

Mr. Jakken, their Chief Operations Officer (COO), has asked for your help in computing
throughput time, delivery cycle time, and MCE. The following average times have been
logged over the last four months:

Required:
a) For each month, compute the following:
a. The throughput time.
b. The MCE.
c. The delivery cycle time.
b) Evaluate the company’s performance over the last four months.
c) Refer to the move time, process time, and so forth, given above for April.
a. Assume that in May, the move time, process time, and so forth, are the
same as in April, except that through the use of Lean Production the
company is able to completely eliminate the queue time during
production. Compute the new throughput time and MCE.
b. Assume in June that the move time, process time, and so forth, are again
the same as in April, except that the company is able to completely
eliminate both the queue time during production and the inspection time.
Compute the new throughput time and MCE.
Case 3. Gracefield, Inc.’s CEO, Isabella, wants to diversify their products by creating a
segment for supplying high end fresh meat to be distributed through online stores,
grocery stores, and hypermarkets. While this industry has fairly non-differentiated
products, she created a R&D department with the vision of developing a new flavoring
that will kick off the market once the main product stabilizes in sales.
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Module 4 – Customer Perspective

Required:
a) Fill in the possible strategic objectives and KPIs per process.

Case 4. Sangsum Electronics Inc.’s COO, Jeon Tae Jin, plans to recalibrate their
inventory and manufacturing system to reduce costs while improve the quality of their
products. Sangsum is a start-up technology-based business currently focused on
producing smartphones across South-East Asia.
Required:
b) Their manufacturing cycle efficiency should be increased by employing which of
the following techniques?
Flexible Batch
JIT System Manufacturing Manufacturing
System System
Yes or No?

Rationale

Case 5. See the BSC of Ymir’s Pizza & Pasta below.

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Required:
a) Fill in the blanks on Variance (Actual vs. Target) column above.
b) Which of the following KPIs improved based from the prior period targets?
c) Which of the following KPIs improved based from current period targets?
d) What are the points for improvement for Ymir’s Pizza & Pasta?
e) If the company incentivizes achieved targets, which department/s will receive
incentives?
f) Based on the performance measures presented in this module, can you
prescribe 2-3 performance measures which will help Ymir’s Pizza & Pasta meet
its one-liner, “Fast and Yum”.

Reading materials:
1. Managerial Accounting (15th Ed.) by Ray H. Garrison, Eric W. Noreen, and Peter
C. Brewer (2015)
2. The Balanced Scorecard: Translating Strategy Into Action by Robert S. Kaplan,
David P. Norton (1996)
3. Total Quality Management and Operational Excellence (14th Ed.) by John S.
Oakland (2014)
4. Operations and Supply Chain Management (15th Ed.) by F. Robert Jacobs and
Richard Chase (2018)
5. Business Process Management and the Balanced Scorecard by Ralph S. Smith
(2007)
6. https://scytec.com/the-difference-between-efficiency-utilization-and-productivity/