Balanced Scorecard and Supply Chain Perfomance. The Case of the Kenya Nut Company

TABLE OF CONTENTS

DECLARATION

DEDICATION

ACKNOWLEDGEMENT

LIST OF TABLES

LIST OF FIGURES

ABSTRACT

CHAPTER ONE

INTRODUCTION
1.1 Background of the study
1.1.1 Balanced Scorecard
1.1.2 Supply Chain Performance
1.1.3 Kenya Nut Company
1.2 Statement of the problem
1.3 Research objectives
1.4Value of the study

CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
2.2 Balanced Scorecard
2.3 The Balanced scorecard measures
2.3.1 Customer Perspective
2.3.2 Financial Perspective
2.3.3 Learning and Growth Perspective
2.3.4 Internal Business Perspective
2.4 Supply chain performance measurement
2.5 Challenges in the implementation of the balanced scorecard
2.6 Conceptual framework

CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Population of Study
3.4 Data Collection
3.5 Data Analysis

CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 Introduction
4.2 Response Rate
4.3 Demographic data
4.4 Extent of the BSC on Supply chain performance
4.5 Relationship between the BSC and Supply chain perfomance

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
5.2 Summary of Findings
5.3 Conclusions
5.4 Recommendations
5.5 Limitations of the Study
5.6 Suggestions for Further Research

References

Appendices

Appendix I: Research Questionnaire

LIST OF TABLES

Table 4.1: Respondents Department

Table 4.2: Years respondents have worked at KNC

Table 4.3: Gender of respondents

Table 4.4: Age of respondents

Table 4.5 Test for coefficients

LIST OF FIGURES

Figure 2.1:The Balance scorecard perspectives

Figure 2.2 Conceptual framework

Figure 4.1: Financial measures

Figure 4.2: Customer measures

Figure 4.3: Internal business measures

Figure 4.4: Learning and growth measures

Figure 4.5:Challenges in the implementation of the BSC

ABBREVIATIONS

illustration not visible in this excerpt

ABSTRACT

The study sought to determine the Balanced Scorecard measures on supply chain performance at Kenya Nut Company. The objectives of the study were to establish the extent to which the BSC measures have been used at KNC and the challenges faced in implementing the BSC. The research design involved a case study of employees at KNC .Data was collected using a questionnaire that was administered through a drop and pick method. Tables, graphs and regression analysis were used to present the findings. The study established that the BSC measures are greatly used to establish the supply chain performance at KNC. Some of the measures that are extensively used include percentage of sales margin, profit margin, range of products offered, accuracy of forecasted demand, level of partnerships with suppliers among others. It was also established that some critical measures have not been intergrated into the organization. These measures can greatly improve the performance of KNC and overcome its challenges of slow production growth, lack of customer awareness, poor information systems and high processing costs. This measures include return on supply chain assets, cost per operation hour, order lead time, product development life cycle.

The study also established some of the challenges faced in implementing the BSC such as too much time in developing and updating the BSC, too many measures being used and difficulty in determining the measures. . It was also clear that there was a very significant relationship between BSC measures and supply chain performance represented by R2 value of 0.73 which translates to 73% variance explained by the four independent variables of financial measures, customer satisfaction, internal business processes, learning and growth.

Further research can be done on the same study but to a wider group of companies to establish whether the BSC measures are used. It has also been recommended that other organizations embrace the BSC measures to embrace the benefits such as product leadership, improved flexibility, and increased information capital among others. The challenges affecting KNC in implementing the BSC should be monitored so that KNC can fully adopt the BSC in its supply chain.

CHAPTER ONE INTRODUCTION

1.1 Background of the Study

As businesses evolve into the 21st century, the management focus driving most organizations is supply chain superiority (Brewer & Speh, 2000). Supply chain management is becoming a necessity in the competitive marketplace hence the need to have performance measurement tools that can lead to successful supply chains. The balance scorecard (BSC) proposed by Kaplan & Norton (1996) is a performance evaluation tool that includes non-financial perspectives such as customer ,internal business process, and learning and growth perspectives, as well as the financial perspective to give managers a balanced view of overall organizational performance. It strikes a balance between financial and non-financial measures thereby enabling organizations to achieve holistic supply chain excellence. The BSC was developed as an enhancement to the previously traditional methods of measuring performance such as return on investment (ROI), payback period and net present value (NPV). The traditional methods majored on financial aspects of a firm ignoring other performance indicators. They followed financial accounting principles without any forward-looking perspective and measurement was restricted directly to measurable indicators only (Horvath, 1996). This was unrealistic in modern supply chain management applications, where a performance measurement system has to take into account a wider range of controlling targets such as customers requiring a range of benefits that are both tangible and intangible (Bhagwat & Sharma, 2007).

Performance measurement is the process of quantifying effectiveness and efficiency of organisational functions (Neely, Gregory & Platts, 1995). Neely (1996) also explained that performance measurement refers to the use of a multi-dimensional set of performance measures that includes both financial and non-financial measures that quantify what has been achieved as well as measures that help predict the future. Therefore, supply chain performance measurement is the process of determining the productivity of the whole supply chain from suppliers to consumers involving functions such as inventory management, transportation, customer service, storage, delivery and order fulfillment. In today’s world, supply chain excellence is more than just reduced costs. It also includes better customer service, reduced lead times, advancement in technology hence the need of performance measurement systems that can capture all the required data (Brewer & Speh, 2000).

1.1.1 Balanced Scorecard

The BSC has received a great deal of attention as it integrates financial and nonfinancial performance measures to help organizations in the learning and improvement of their internal and external processes (Ababneh, 2008). The BSC has four perspectives: the innovative and growth perspective which measures how an organization improves and introduces new products, the internal business perspective which measures the effectiveness of the organizations processes, the customer perspective measures how the customer perceives the value created by the organization, while the financial perspective measures growth and return on investments provided by the organization to shareholders.

The balanced scorecard was developed to address weaknesses associated with traditional performance measurement systems including providing a holistic approach as it addresses both the financial and non-financial aspects unlike the traditional performance measurement tools. It is designed to help firms that have overemphasized on short term financial performance (Brewer & Speh, 2000). It tracks financial results as well as monitoring the process of building capabilities and acquiring assets for future growth (Kaplan & Norton, 1996). Prior traditional measurement systems cannot capture the measurements that are needed in the modern companies today. High quality services ,intellectual capital ,skilled employees and responsiveness are intangible assets that are important but cannot be captured in the balance sheet hence customers, shareholders and the management cannot know the real worth of a company (Chavan, 2009). In addition, developing a world class performance measurement system hinges on a clear understanding of a firm`s competitive strategy, operational goals and the employee competencies required to achieve the firm`s objectives (Becker, 2011). Performance measurement systems can therefore only create value when they are matched with the firms operational goals. The BSC aligns the performance measures with the objectives of the organization. According to Kaplan and Norton (1996) the objectives and measures of the BSC are consistent and mutually reinforcing rather than a collection of financial and non-financial measures that are unrelated.

1.1.2 Supply Chain Performance

According to Chan (2003) performance measurement describes the feedback or information on activities with respect to meeting customer expectations and strategic objectives. The purpose of a performance measurement system is to ensure that standards and objectives are set clearly, performance is regularly and objectively assessed for accomplishments, and that actions are taken to improve and enhance performance potential in the future (Ababneh, 2008). The basis of competition for winning companies in today’s economy is supply chain superiority (O’Marah, 2000). With organizations seeking benefits of shorter lead times, responsiveness, flexibility and shorter product development cycles, excellence in supply chain performance is inevitable.

Alazab A., Alhyari, Alazab M. and Venkatraman, (2010) found that a good performance measurement system should be able to provide to all stockholders where they are, how the organization is doing and where the organization is going. Measuring supply chain performance can therefore facilitate a better understanding of the supply chain, positively influencing supply chain partners and improving its overall performance (Chen & Paulraj, 2004). Supply chain performance measurement systems are essential for better decision making by management and good communication across the entire supply chain including supply chain partners and employees. Performance measures enable a more open and transparent communication between people leading to a co-operative work environment hence improved organizational performance (Gunasekaran & Kobu, 2007). Performance measurement systems are also necessary tools required to support decision making (Berrah & Cliville, 2007). Moreso, supply chain measurement systems ensure timely feedback of information enabling the organization to correct or improve processes in the supply chain. Perfomance measurement provides information for management feedback for decision makers thereby assisting in directing management attention, revising company goals and re-engineering business processes (Thakar, Marwah & Gupta, 2012).

1.1.3 Kenya Nut Company

Kenya Nut Company (KNC) is a Thika-based Kenyan company formed in 1972 and one of the leading producers of macadamia nuts worldwide (http://www.kenyanut.com,4th June 2013). The company was appointed by the Government of Kenya to spearhead and invest in the development of macadamia nut industry in Kenya (Mbora, Jamnadass & Lilleso, 2008). KNC has a vertically integrated supply chain that ensures a continuous chain of the products such as macadamia nuts, organic nuts, coffee and cashew nuts from suppliers to the final consumer.

According to the Food and Agriculture Organization as cited by Mogeni (2012) macadamia nuts production in Kenya is high, earning the country over Ksh.1billion every year. However, KNC faces challenges of slow production growth, lack of customer awareness, poor information systems and high processing costs in its supply chain. The BSC can improve the supply chain by overcoming the challenges faced through the use of financial, customer, internal business, and learning and growth perspectives. The main purpose of this research is to demonstrate the extent to which KNC uses the BSC in its supply chain.

1.2 Statement of the Problem

The BSC has been applied successfully in organizations in the USA and many thriving applications have been documented (Tonge, 1996). A range of benefits have been attributed to the BSC in supply chain management, including reduced costs, increased market share and sales, and solid customer relations (Fergueson, 2000). Nevertheless, many companies have not succeeded in maximizing their supply chain’s potential because they have often failed to develop the performance measures needed to fully integrate their supply chain to maximize effectiveness and efficiency (Gunasekaran, McGaughey, Patel & Ronald, 2004). KNC is one of the companies that is yet to maximize their supply chain performance. With its products being consumed both locally and in international markets such as U.S.A, Japan and Germany, the company still faces challenges that inhibit its performance. Though KNC contributes to the 10,000metric tons of macadamia nuts produced each year in Kenya, the production growth rate has been slow (Gitonga, Muigai, Kahangi, Kamau & Gichuki, 2009). According to Mogeni (2012) there is increasing demand for KNC products from importing countries such as U.S.A,Japan and Germany hence the need to increase production. Between the year 2000 and 2006, U.S.A doubled its local consumption and increased its imports more than four times without changing its production levels thus offering Kenya a huge market potential for macadamia nut (Gitonga et al., 2009). Furthermore, having local competitors such as Jungle nuts and Equatorial nuts as well as in other countries such as South Africa and Guatemala (Cabi, 2005), there is need for the company to implement performance measures that ensure world class performance. World Horticultural Trade and U.SA Export Opportunities (2002) indicated that KNC faces challenges relating to lack of consumer awareness, poor information systems, low purchasing power, high prices due to high processing costs and lack of government support as the government puts more emphasis on other food products such as tea, sugar and coffee.

KNC can overcome these challenges by having a BSC that can improve its functions such as sourcing, production, storage, packaging and distribution in the supply chain that relate to the challenges. For example, the BSC can overcome the challenge of high processing costs through the internal business perspective by having measures such as reduced order cycle time and efficient capacity utilization. An all rounded approach of the BSC can be used to capture the required production capacity, partnerships with stakeholders such as the Kenyan government, technological and demand capacity.

There has been literature on the balanced scorecard in various service industries such as telecommunications where the BSC is used in performance measurement at Essar Telecom Kenya Limited, (Nyaega, 2006), BSC in healthcare organizations (Gurd & Gao, 2007) and hospitality industries (Denton & White, 2000). The literature did not cover the BSC in manufacturing industries and specifically the food industry .In addition, there is little evidence of the BSC in regard to supply chain management. Brewer and Speh (2000) provided a modified version of the BSC to measure supply chain performance in totality and not within a specific industry. (Wongrassamee, 2003) notes that the BSC is not a template that can be applied to business in general or even industry wide due to different market situations, different product types and competitive environments that require different scorecards. Hence there is need to determine the BSC measures that are specific to the supply chain at KNC. Bigliardi and Bottani (2010) developed the BSC for the supply chain in food companies. The case studies exploited in the paper validated the BSC model, but did not investigate its implementation in factual cases. The recommendations on the paper further suggested applying the model to test its suitability in a wide range of food companies. The study did not focus on the BSC in food companies in the Kenyan market. The research questions for this study include include ,what is the extent to which the BSC measures are used in KNC ,what is the relationship between the BSC and supply chain performance at KNC and what are the challenges faced in implementation of the BSC at KNC ?

1.3 Objectives

i. To determine the extent to which the balanced scorecard measures are used on supply chain performance at KNC
ii. To determine the challenges faced in the implementation of the BSC at KNC.

1.4 Value Of The Study

The study will be of significance to scholars, academicians, organizations in the food industry and the management and staff at KNC.

The study will assist the management and staff of KNC on how to better improve their supply chain performance using the balanced approach. The management of KNC may also find the study results useful as it will aid in decision making.

The study will be of importance to Scholars and academicians as they will have more knowledge on the relationships between the BSC measures and the supply chain goals. The study will therefore act as a source of reference for scholars and academicians.

In addition,the findings of the study will enable organizations in the food industry to appreciate the challenges and success factors that accrue from the implementation of the balance scorecard in a supply chain

CHAPTER TWO LITERATURE REVIEW

2.1 Introduction

This chapter will examine findings from various scholars and authors about the balanced scorecard on supply chain performance. The chapter discusses the balanced scorecard measures relating to financial, customer, internal business, and learning and growth perspectives, challenges faced in the implementation of the BSC and the conceptual framework showing the relationship between the independent and dependent variables.

2. 2 Balanced Scorecard

The balanced scorecard has been used extensively in businesses, industries, government and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, thereby improving internal and external communications and monitoring organizational performance against strategic goals (Nyaega, 2006).

The BSC is seen as a tool that meets the need for improvement and change especially when venturing into the competitive market. Jacobs and Maiga (2003) argued that the BSC could be considered as a main tool in evaluating organizations comprehensively when dealing with highly changeable environment and as a response to the new global competition . The balanced scorecard has attained significance globally from academicians to industry practitioners. By the year 2000, at least 40%of Fortune 1000 companies were reported to using the balanced scorecard in their performance measurement (Frigo & Krumiede, 2000). A survey done by Bain and Company on more than 708 companies showed 62% of the companies having used the balanced scorecard approach as one of their management tools (Hendricks, Menor & Wiedman, 2009). This signifies the balanced measurement of business processes. Increased competition is thus forcing companies to review ways of becoming more efficient and effective through various performance measures (Gautreau & Kleiner, 2001)

Most researches on the use of the BSC approach have focused on its application within a strategic management context (Jones, Knotts & Udell, 2006). Recent articles have now focused on the BSC in various areas such as supply chain performance management. According to Chia, Goh and Hum (2009) most of the applications and case studies of the BSC are descriptions of how companies have adopted, created, and implemented the scorecard in their organizations or industry. Park, Lee and Yoo (2005) designed an adapted supply chain performance analysis approach based on the BSC model. The findings state that the BSC can provide insights to supply chain management solutions and product characteristics. Bhagwat and Shamar (2007) developed a balanced scorecard that measures the day to day business operations. The purpose of the study was to see how small and medium sized enterprises applied the BSC concept. From the study, it was concluded that the BSC provides guidance in the evaluation and measurement of supply chain management if it is used on a daily routine. Chia et al. (2009) assessed how different stakeholders along the supply chain perceived performance measurement from a BSC approach. They conducted a survey on how the four perspectives of the BSC are perceived to manufacturers, retailers, international procurement offices and logistics service providers. From the findings, it was clear that the stakeholders agreed to the use of the BSC in improving supply chain performance. They recommended a study on the actual measures adopted by the supply chain entities involved using a BSC approach. Brewer and Speh (2000) provided a modified version of the BSC to measure supply chain performance holistically without emphasis on a specific industry. The empirical paper provided example measures that are but a tiny fraction of the possible measures that can be developed. Cuthbertson and Piotrowicz (2011) state that supply chain performance measurement systems should not be considered as a generic context-independent process, but as a system tailored to the specific supply chain requirements. Bigliardi and Bottani (2010) developed a BSC framework for the supply chain in food companies. Through the interviews developed from the two case studies, it was established that the BSC perspectives are instrumental in the food supply chain. Mbogo (2008) had a case study on how the BSC is used as a continuous improvement tool at Kenya Revenue Authority (KRA). The case study findings established that management had a key role in the BSC implementation, creating strategic awareness and ensuring attainment of organization objectives and goals at KRA. It is thus evident that the BSC has been used both empirically and in literature, however no specific studies have addressed the BSC in the Kenyan food industry specifically in the Kenya Nut Company.

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