Coors is a family owned business in the beer industry offering 16 different kinds of beers in the US market.
Coors has 3 production plants in the US with its Colorado plant being the largest brewery in the world and serving 70% of the US market. Coors has implemented a supply chain management (SCM) software solution from the Computer Integrated Logistics (CIL) project to solve urgent problems in the logistical area such as meeting seasonal demand, surges from promotion and introducing new brands each year.Other issues addressed by the CIL project were filling routine customer orders, filling rush orders and shipping beer to distributors before it was spoiled.
The project’s objective was to increase the company’s profitability by reducing cycle times and operation costs while increasing customer satisfaction. The CIL project was followed by the implementation project of a Balanced scorecard (BSC) to maintain CIL’s standards and to focus on continuous improvement, learning to enhance performance and rewarding employees for increased productivity.The traditional cost based performance measures which were developed from the benchmarking data during the CIL project had failed to achieve the desired targets and resulted in performance gaps. Moreover, the unit costs per barrel of beer were still higher than the competitors’. The challenge for the BSC project was to translate Coors’s business strategy into operational and performance-related measures. During a benchmarking process, higher unit costs per barrel of beer were identified for Coors compared to its two main competitors Anheuser-Busch and Miller (Appendix-Exhibit 1).Exhibit 2 identifies gaps in operational measures (load scheduling, load accuracy and production stability) comparing the results of the CIL projects against targets set by management.
We identified some possible causes for these performance gaps as follows: * Lack of training and knowledge about new processes and use of new technology leads to issues in planning and less productivity. * The load scheduling performance measure depends on forecasting accuracy. There is a trade-off between filling rush orders and precise forecasting of the production schedule.High unexpected fluctuations in the number and type of orders will lower the load scheduling performance.
* Suppliers rely on accurate forecasts so the right amount of raw materials is delivered at the right time. If final production plan differs greatly from forecasts then this might lead to shortage of raw materials which in turn affects all performance measures. * Quality problems during the production process which will later affect all the performance measures might be a possible cause. Maintenance of equipment is important for effective production since machine breakdowns and equipment issues affect production stability performance measure as well as load scheduling.
From a change management perspective, it is very important that all open questions are answered and addressed to ensure the success of the BSC project. Main areas of concerns for the employees are that the actions assessed by the BSC performance measures are under their control. Furthermore, it is important that the BSC evolves with changes in the production reality and offers employee participation in feedback process.Detailed answers to the concerns of the employees related to BSC project, can be found in the FAQ’s in Appendix.
In order to breakdown the overall goal of increased profitability, Coors needs to design new performance measures for the BSC project. A BSC measures an organization’s performance from four key perspectives: (1) financial, (2) customer, (3) internal business process and (4) learning and growth. Reducing cycle times and operating costs can be addressed by developing measures focusing on the internal perspective as well as the learning & growth perspective.Increased customer satisfaction can be addressed by identifying measures in the customer perspective. All preceding perspectives ideally feed into increased company profitability which can be measured in financial perspective. The advantage of a BSC is that strong improvements in non-financial measures signal the prospect of creating economic value in the future. A more detailed set of objectives, performance measures and initiatives are suggested in Table 1 in the Appendix. The BSC will be reviewed and assessed quarterly to make sure that BSC targets are met.
Moreover, any new reasonable performance measures will be subsequently incorporated in the BSC. Additionally, performance measures that do not drive correct behavior will be excluded. Coors is assessing the potential of the economic value added (EVA) as a BSC financial performance measure.
EVA reflects the economic profit of the organization. In order to calculate EVA, the accounting financials needs to be adjusted to derive Net Operating Profit After Taxes (NOPAT). The following adjustments (Appendix: Table 2) are added to derive the economic profit and capital: 1) Advertising Costs – three-year life 2) LIFO reserve ) Deferred income tax liability 4) Capitalization of operating leases 5) Net interest expense EVA is calculated as: EVA = NOPAT – WACC * (Total Assets – Current Liabilities), in which WACC = Weighted Average Cost of Capital.
Current liabilities are deducted from the total assets to reflect that no return on capital is requested. Detailed calculations can be found in the Table 3 in Appendix. EVA measures the value created in excess of the required return of the company’s shareholders (shareholders profitability). Combining EVA with the non-financial goals helps in assessing the performance measures of the BSC.EVA is a superior financial measure compared to other financial measures, such as Return on Investment. We recommend Coors to use EVA in combination with the non-financial measures from the BSC project. Furthermore, we recommend the BSC to be drilled at functional unit level, to.
ensure that the performance measures are understandable and controllable for each employee. However, we suggest that EVA should not be used at a lower functional level as employees might not understand the concept of economic profit. For example, a production line supervisor can be measured against the load scheduling and load accuracy performance measures.EVA can be used to analyze the success of higher level management.
In summary, BSC if implemented correctly, translates Coors strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy successfully throughout the company. Appendix: Exhibit 1: Benchmarking analysis Exhibit 2: Key performance measures Table 1: New performance measures and initiatives for effective ;amp; operational BSC for Coors EVA Calculations Table 2: EVA Adjustments EVA adjustments| | | | Capital| Income| Advertising Costs – 3 year life| 900| 300| LIFO reserve| 45| 3|Deferred income Tax liability| 65| 10| Capitalization of operating leases| 30| 5| Net interest expense| 0| 12| Table 3: EVA Calculations All figures in millions FAQ’s: Frequently asked Questions raised by employees about the Coors BSC project. a) Will the balanced scorecard be linked to any incentive plans? Yes, without the BSC linked to any incentive plan, there are no incentives to adhere to the performance measure. b) What if a measure does not drive the correct behavior after implementation? What process will be used to evolve the scorecard? How will my input be heard? The BSC’s performance measures will be constantly reviewed.It is a constant evolvement. If a measure drives a wrong behavior, a central function reporting to senior level needs to adjust the targets or modify the performance measure. c) Won’t the measures reduce our ability to be flexible with our distributors and make last-minute changes for them? Since the company’s strategy aims for fulfilling rush orders, flexibility is a part of the measures in the BSC. However, there is a trade-off between flexibility and forecast accuracy and hence production schedule accuracy.
d) Why is the window on the load schedule performance measure so tight?What difference does it make if we get a load out within plus/minus two hours? If we get it out the day it is scheduled, won’t the load arrive at the distributor as planned? To ensure there are no production gaps, scheduling accuracy is very important. If the scheduling is not accurate, there is impact on the timing and delays tend to cascade further down the network. Since customer satisfaction depends on scheduling accuracy by ensuring on-time delivery this measure is linked to customer satisfaction. Also we are aiming for a JIT process with no finished goods piling up as inventory.
That means that finished products have to be loaded onto the train according to the exact schedule. e) We already have plant measures that are working. Why would we want to change them? The existing measures are not effective and we see production gaps and very high unit costs due to inefficiencies. Hence there is a need to change or to add new measures. f) The production stability measure does not give the production lines incentive to run ahead. Doesn’t it make sense to allow us to run ahead on major brands as a cushion for those times when we have problems? So what should we do when we are more than an hour ahead, shut the line down?No, running ahead with a production line leads to the production of more goods than demanded and leads to piling up of finished goods inventory.
Inventory is idle capital and the products have limited shelf-lives. If possible production should be slowed down to stay in the Just In Time principle to deliver the right good at the right time in the right place. If running ahead occurs then the production has to investigate the causes for it. g) Why would you base production stability, load schedule performance, and load item accuracy on the initial weekly schedule? The schedule changes constantly.Why measure me against a weekly schedule that has changed as a result of something I had no control over? It is a trade-off between flexibility and meeting the weekly schedules. Since the company’s strategy aims for flexibility and there might be rush orders which need to be processed, fixed weekly figures do not make sense.
h) Will the balanced scorecard be used to compare the performance of the three U. S. plants? Since each plant is different, how can we be expected to use the same scorecard? The BSC reflects company strategy and hence the performance measures should be similar in all plants over the long run.If a specific plant lacks some area of expertise completely, a performance measure might be excluded.. The targets might differ between plants reflecting the actual processes and product mix, however, overall measures such as customer satisfaction should be the same throughout the company. i) Product mix can adversely affect the cost per barrel. Will this be taken into consideration in this measure? Variations in the cost per barrel for different products should be considered (e.
g. if there is only brewing of seasonal beer in one production line).The management has to set the targets for the barrels so that at the end the goal for the average cost per barrel is reached. j) Some important measures may be excluded from the scorecard.
If so, will they eventually be added to the scorecard? Yes. Since the BSC is reviewed and revised periodically; the measures that might be excluded initially from the scorecard will be added into it if they turn out to be crucial. k) Will there be a throughput measure on the scorecard? Workers cannot affect the number of barrels coming through the plant. That is determined by sales and scheduling that shifts production between plants.No, the throughput measure should not be used as a general measure but a production line has to meet the quantity demanded.
So in case 1000 barrels are ordered, 1000 should be delivered (within a certain range depending on production process). The actual time needed compared to the scheduled time to produce 1000 barrels must be measured. l) How can you hold me responsible for a measure when I am not the only one who can affect it? The measures must be drilled down to the lowest functional unit where it is influenceable. Group incentives for smaller groups offer a powerful tool to meet a specific target because of social pressure.