Creating a Balanced Scorecard
Mason Paper Company (MPC) manufactures commodity grade paper; for use in computer printers and photocopiers. MPC has reported net operating losses for the last two years due to intense price pressure from much larger competitors. The MFC management team—including Kristen Townsend (CEO), Mike Martinez (VP of Manufacturing), Tom Andrews (VP of Marketing), and Wendy Chen (CFO)—is contemplating a change in strategy to save the company from impending bankruptcy. Excerpts from a recent management team meeting are shown below:
Townsend: As we all knew, the commodity paper manufacturing business is all about economies of scale. The largest competitors with the lowest cost per unit win. The limited capacity of our older machines prohibits us from competing in the high-volume commodity paper grades. Furthermore, expanding our capacity by acquiring a new paper-making machine is out of the question given the extraordinarily high price tag. Therefore, I propose that we abandon cost
reduction as a strategic goal and instead pursue manufacturing flexibility as the key to our future success.
Chen: Manufacturing flexibility? What does that mean?
Martinez: It means we have to abandon our "crank out as many tons of paper as possible1 mentality" Instead, we need to pursue the low-volume business opportunities that exist in the nonstandard, specialized paper grades. To succeed in this regard, we'll need to improve our flexibility in three ways. First, we must improve our ability to switch between paper grades. Right now; we require an average of four hours to change over to another paper grade. Timely
customer deliveries are a function of changeover performance. Second, we need to expand the range of paper grades that we can manufacture. Currently, we can only manufacture three paper grades. Our customers must perceive that we are a "'one-stop shop" that can meet all of their paper grade needs. Third, we will need to improve our yields (e.g., tons of acceptable output relative to total tons processed) in the nonstandard paper grades. Our percentage of waste
within these grades will be unacceptably high unless we do something to improve our processes. Our variable costs will go through the roof if we cannot increase our yields!
Chen: Wait just a minute! These changes are going to destroy our equipment utilization numbers!
Andrews: You're right Wendy; however, equipment utilization is not the name of the game when it comes to competing in terms of flexibility". Our customers don't care about our equipment utilization. Instead, as Mike just alluded to, the" want just-in-time delivery of smaller quantities of a full range of paper grades. If we can shrink the elapsed time from order placement to order delivery and expand our product offerings, it will increase sales from current customers and bring in new customers. Furthermore, we will be able to charge a premium price because of the limited competition within this niche from our cost-focused larger competitors. Our contribution margin per ton should drastically improve!
Martinez: Of course, executing the change in strategy will not be easy. We'll need to make a substantial investment in training because ultimately it is our people who create our flexible manufacturing capabilities.
Chen: If we adopt this new strategy, it is definitely going to impact how we measure performance. We'll need to create measures that motivate our employees to make decisions that support our flexibility goals.
Townsend: Wendy. you hit the nail right on the head. For our next meeting, could you pull together some potential measures that support our new strategy?
Required:
1. Contrast MPC’s previous manufacturing strategy with its new manufacturing strategy.
2. Generally speaking, why would a company that changes its strategic goals need to change its performance measurement system as well? What are some examples of measures that would have been appropriate for MFC prior to its change in strategy? Why would those measures fail to support MPC’s new strategy?
3. Construct a balanced scorecard that would support MPC’s new manufacturing strategy. Use arrows to show the causal links between the performance measures and show whether the performance measure should increase or decrease over time. Feel free to create measures that may not be specifically mentioned in the chapter, but nonetheless make sense given the strategic goals of the company.
4. What hypotheses are built into MPC's balanced scorecard? Which of these hypotheses do you believe are most questionable and why?
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EBK INTRODUCTION TO MANAGERIAL ACCOUNTI
- At the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. 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