Creating a Balanced Scorecard [LO4]
Mason Paper Company (MPC) manufactures commodity grade papers for use in computer print- ers and photocopiers. MPC has reported net operating losses for the last two years due to intense price pressure from much larger competitors. The MPC management team-including Kristen Townsend (CEO), Mike Martinez (vice president of Manufacturing), Tom Andrews (vice presi- dent 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 know, 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 possible" 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 utiliza- tion. Instead, as Mike just alluded to, they 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 competi- tion 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 MPC 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 strate- gic 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?