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Janua r y 2015 I S T R AT E G IC F I N A N C E 27

COVER STORY

HOW

ZYSCO USES THE

BALANCED SCORECARD

By Yuanhong Chen; Zengbiao Yu, CPA; and Thomas W. Lin, CMA

During the past two decades, the bal-anced scorecard (BSC) has emerged asa useful managerial tool in Westerncompanies. This hasn’t been the case inChina. In this article, we explain howZhongyuan Special Steel Co., Ltd (ZYSCO), a typical Chinese state-owned company,

applied this powerful tool to help it overcome chal-

lenges and achieve new success. The results show that

other companies can also adopt BSC principles to make

positive changes and improve their management and

performance.

Recent Challenges and Operations Reform ZYSCO is a manufacturer of machinery components and

special steel products. Founded in 1970, it has been listed

on the Shenzhen Stock Exchange since 2010. ZYSCO is

the only company in China that has a complete produc-

tion line of melting, forging, machining, heat treatment,

and chrome plating. Its main products include petroleum

drilling tools, retained mandrel, cast pipe mold for indus-

trial equipment, and large, special fine forging such as

metallurgy rollers, die steel, and customized forgings.

ZYSCO also is the main drill collar supplier of CNPC

(China National Petroleum Corporation) and Sinopec

Group (China Petrochemical Corporation). The largest

manufacturer of nonmagnetic drill collars in China with

an 80% domestic market share, it’s also the largest manu-

facturer of retained mandrel in Asia.

Like many other state-owned enterprises in China,

ZYSCO focused its operations and management mainly

on the volume of production and sales. Because of its

advantage in equipment, products, and markets, and

because the economy was booming, the company

achieved great success: Both sales and net income

quadrupled from 2003 to 2008.

Then the global financial crisis struck in 2008. Since

then, ZYSCO has encountered increasing challenges, both

externally and internally. For instance, the price of raw

material (scrap steel) kept increasing. More and more

private enterprises started to produce similar products,

which led to price wars and the shrinking of ZYSCO’s

market share. Cost disadvantages were also serious prob-

lems in the production process because the average yield

was less than 95%, and scrap waste and product defects

exceeded 20 million RMB (Chinese yuan) per year. Addi-

tionally, ZYSCO consumed much more energy than its

competitors did. Therefore, the company’s financial per-

28 S T R AT E G IC F I N A N C E I Janua r y 2015

COVER STORY

BSC SUCCESS FACTORS

What does it take to achieve success with a

balanced scorecard?

1. Make sure there are high levels of integration and teamwork among organizational units and

processes, and promote cooperation among

departments.

2. Improve communication both inside and out- side the organization. Communicate with peo-

ple, and align people and strategy before

implementing a scorecard. Get their feedback

throughout the entire process as well as after

implementation of the new system.

3. Balanced scorecards should be built on the organization’s strategy and strategy map, and

they should be decomposed by the organiza-

tional structure until everyone receives his or

her own balanced scorecard.

4. Make sure all employees understand the strategy and the relationship between their

individual behaviors and the organization’s

strategic objectives.

5. Linking employee performance to pay should always be stressed to provide enough

incentives.

6. Continuously revise and modify the strategy map and balanced scorecard to incorporate and

reflect implementation results, feedback,

environmental changes, and similar information.

formance declined significantly. In two years—from 2008

to 2010—ZYSCO’s earnings per share (EPS) and return

on equity (ROE) decreased by 33% and 60%, respectively.

Top management began to realize the importance of cost

reduction and value creation.

In 2010, in order to improve its financial performance

and meet the requirements of SASAC (State-owned

Assets Supervision and Administration Commission),

ZYSCO came up with a value-oriented management sys-

tem that was focused on value creation for shareholders

using economic value added (EVA®) instead of produc-

tion and sales volume. Under this system, the main strate-

gic objectives became generating higher net income and

reducing the cost of capital.

To deal with its cost disadvantages, ZYSCO’s CEO and

its chief dispatcher (production manager) decided to

institute lean production in all production processes.

They asked the production departments to recycle left-

over materials, to reduce processing time, and to produce

at night to take advantage of the lower time-of-use elec-

tricity price. Also, they invested more in technical reform

(technology) and purchased a new SXP-65 1400t rotary

forging machine from Austria.

Yet these actions didn’t help much in light of the deep-

ening of the global financial crisis. Although the value-

added time increased to 30% of the throughput time, scrap

waste and product defects still exceeded 13 million RMB

per year. According to ZYSCO’s financial reports, the com-

pany’s sales increased by 7% from 2008 to 2011, even

though its net income decreased from 128.82 million RMB

to 90.74 million RMB. ZYSCO’s EPS, ROE, and gross mar-

gin decreased by 42%, 70%, and 27%, respectively. Fur-

thermore, the large investments in technical reform had

brought no benefit. What could the company do?

Management Needed a Strategic Management System In early 2012, ZYSCO top management believed that

there was still great potential for cost reduction. They

also thought there was room for improvement in its

R&D-production-sales process as well as in its account-

ing and information system. With improvements in

these areas, ZYSCO would be able to achieve better

financial performance and succeed in creating value for

its shareholders.

ZYSCO’s management invited an outside consulting

team to help. It consisted of coauthors Yuanhong Chen

and Zengbiao Yu as well as Tsinghua University manage-

ment accounting students. After in-depth discussions

between top management and the consulting team, both

groups agreed that ZYSCO needed a new strategic man-

agement system. This system should be able to integrate

the entire company from top to bottom, transform the

value creation strategy into everyone’s day-to-day job,

promote cooperation among departments, and ensure

strategy execution (value creation). A strategy map and a

balanced scorecard would be the core of this new system.

After in-depth interviews and extensive data collection,

the BSC task force and consulting team identified five

major existing operational problems.

1. Equipment Didn’t Match the Production Mode

Most of the company’s fine forgings and some of its drill

collars are highly customized, and they vary in size and

properties. Furthermore, many customer orders are small.

Therefore, in the past, the company adopted the combi-

nation of MTO (make to order) and MTS (make to stock,

which is based on sales forecast) in its production. But

consultants and BSC task force members noticed that the

company spent 300 million RMB to buy an SXP-65 1400t

rotary forging machine and an annular furnace, both of

which are suitable for continuous and mass production

rather than small orders. As a result, both machines were

frequently idle, which was a grievous waste of money.

The primary cause of this problem was that managers

were blindly pursuing production capacity and volume.

Also, there wasn’t enough supporting information from

the production, sales, and financial departments, which

led to the misdirected investment. Therefore, top man-

agement wanted to have the accounting system provide

more relevant information for managers to use to make

better decisions and to make effective performance evalu-

ations rather than focusing only on bookkeeping and

financial reporting.

2. Significant Bottleneck at the Melt Shop

ZYSCO has a complete production line of melting, forg-

ing, machining, heat treatment, and chrome plating. But

the longer the production line, the more problems would

occur because of bottlenecking. For example, the capaci-

ties of the heating furnaces and annealing furnaces

(which are in the melt shop) were only half the capacity

of the forging and pressing machines. Therefore, the forg-

ing machines always had to stop and wait for the steel

from the melt shop. Yet the company made no effort to

improve the melt shop’s productivity. In fact, the new

SXP-65 1400t rotary forging machine exacerbated the

bottleneck problem.

Janua r y 2015 I S T R AT E G IC F I N A N C E 29

3. Difficulty in Scheduling and Monitoring

ZYSCO also had no production information system, so

production scheduling and real-time monitoring were

difficult. The chief dispatcher said, “I feel that I’m always

busy putting fires out instead of making things better.

Troubles may occur anywhere since we have so many

kinds of products and customers. Sometimes the product

requirements changed, sometimes the date of delivery

changed, and sometimes the equipment failed….When-

ever these troubles happen, I have to call the manufactur-

ing managers together to adjust or reschedule the

production. It’s really time-consuming.”

4. Variation in Workers’ Skills and Product Quality

In ZYSCO, some of the production processes are stan-

dardized, and work is done by automated machines.

Other processes, however, are completed by production

employees, who must exercise personal judgment in their

work. The company had adopted a mentor system for its

production employees, but there were only a few opera-

tions manuals available, and training wasn’t standardized.

As a result, the employees’ skill levels varied, and so did

the product quality.

5. Lack of Communication and Cooperation

between Sales and Production

The sales department manager complained that the pro-

duction department couldn’t always ensure on-time

delivery, which made it difficult to retain key customers.

He said, “I always need to bring our customers to the

production shops asking supervisors to push the produc-

tion on time. It’s ridiculous! It’s the production dispatch-

ers’ responsibility to finish on time.”

On the other hand, the chief dispatcher retorted that

the sales department couldn’t provide accurate forecasts,

and sales orders were always random and urgent. Since

the company’s production cycle is long, it’s impossible to

complete all orders. He noted, “At the peak time, we need

to work overtime and hardly complete the orders. But in

the off-season, there were not enough orders to maintain

30 S T R AT E G IC F I N A N C E I Janua r y 2015

COVER STORY

Develop New Product

Raise Productivity

Lean Production

Optimize Technical Reform Investment

Reduce Inventory

Reduce Process Defect Level

Reduce Production Cost

Increase EVA

Increase Customer Satisfaction

Improve Customer Management

Profit Growth

Balance Production Process

Improve After-sale Service

Product Value of Money

Improve Cost Structure

Improve Capital Efficiency

Customer and Sales Structure

Standardize Staff Training

Construct Manufacturing Information System

Increase Revenue

Reduce Cost of latipaC

Financial Decision Support SystemImprove R&D

Promote Value Creation Philosophy

Increase On-time Delivery

Increase Fixed- Asset Turnover

Increase Accounts Receivable Turnover

Increase Current- Asset Turnover

Increase Inventory Turnover

Increase Asset Turnover

Financial

Customer

Internal Process

Learning & Growth

Improve Product Quality

Customer Relationship

Figure 1: ZYSCO Strategy Map

continuous production. Keep manufacturing continu-

ously and it will lead to excessive inventory, but if we

don’t keep continuity, there would be a large waste of

energy. This puts us in a dilemma.”

All these problems affected ZYSCO’s production effi-

ciency and customer satisfaction negatively, which then

affected its financial performance negatively.

The Existing Performance Evaluation System The consulting team and BSC task force also interviewed

employees and investigated the existing performance

evaluation system. They found three major problems.

First, performance measures in the existing perfor-

mance evaluation system hadn’t changed to tie to the new

company strategic objective of value creation. The mea-

sures of profit and capital efficiency appeared only in the

company’s and top management’s key performance mea-

sures, and most of the departments were still focused on

the volume of production and sales. For example, in the

sales department, key measures were sales and collections,

so the department wasn’t concerned about the price,

profit, and customer relationship. As a result, the strategic

objective had little effect on the actual operation of the

company. Without effective management tools, value cre-

ation was a bad slogan for ZYSCO’s shareholders.

Second, some of the measures didn’t provide enough

incentives or the right incentives. There were too many

subjective measures in the evaluation system, and most of

them were vague. Since there was no clear standard or

manual, operability and controllability of these subjective

measures were weak. Also, some of the measures were

unrelated to or uncontrollable by the department being

evaluated. And the existing evaluation system didn’t take

the complexity of work into consideration, which made

the employees prefer easy work to complex and time-

consuming jobs. In some cases, the person who made the

most effort and did most of the difficult work ended up

with the lowest score and bonus because he or she had a

greater chance of making mistakes.

Third, most targets were set higher than the previous

year, regardless of the actual economic environment and

Janua r y 2015 I S T R AT E G IC F I N A N C E 31

Table 1: ZYSCO Balanced Scorecard

KEY STRATEGIC OBJECTIVES MEASURES WEIGHT TARGET

FINANCIAL PERSPECTIVE

Increase Revenue Net Income 18% Budget

Gross Profit Margin 10% Budget

Improve Cost Structure Costs and Expenses 15% Budget

Improve Capital Efficiency Assets Turnover 10% Budget

CUSTOMER PERSPECTIVE

Increase Customer Satisfaction Customer Satisfaction Rate (based on customer survey) 6% 95%

Improve Customer Management Customer Retention Rate 6% 100%

Percentage of Sales from High-profit Products 5% Budget

INTERNAL PROCESS PERSPECTIVE

Develop New Product Number of New Products 2% As Planned

Lean Production Implementation of Lean Production (evaluated by Board) 5% 95%

Manufacturing Cost Reduction 5% Budget

Capacity Balance 5% As Planned

Optimize Technical Reform Investment Return on Technical Reform Investment 5% Budget

LEARNING & GROWTH PERSPECTIVE

Improve R&D Number of New Patents 1% As Planned

Promote Value Creation Philosophy Promotion of Value Creation (evaluated by Board) 1% 95%

Standardize Staff Training Training Evaluation (evaluated by Board) 2% 95%

Manufacture Information Integration System System Coverage (evaluated by Board) 2% 80%

Financial Decision Support System Financial Decision Support (evaluated by Board) 2% 90%

challenges the company had been facing. Therefore, the

budgeted targets were sometimes unreasonably high and

not reachable, which frustrated the employees.

Implementing the Balanced Scorecard Now it was time to implement the new strategic manage-

ment system. There were three main goals of the new

system.

First, the new system should be able to translate

ZYSCO’s value creation strategy into performance mea-

sures, and it should be able to systematically integrate

every hierarchy and every department as a whole. The

performance measures in this new system should be

SMART (specific, measurable, agreed to by all parties

involved, realistic, and time-based).

Second, the new system should show the relationship

between individual behaviors and the company’s strategic

objectives, and it should make sure all employees under-

stand this relationship and the value creation strategy.

Also, there should be enough incentive for employees to

do the right things.

Third, the new system should focus not only on finan-

cial performance but also on the drivers of financial per-

formance. For example, ZYSCO should pay attention to

its customer relationships, quality control in the produc-

tion process, training of the production workers, estab-

lishing an information system, and more.

Drawing the Strategy Map

The foundation of implementing a BSC in the strategic

management system was ZYSCO’s strategy and strategy

map. Therefore, based on the company’s goals and with

the consulting team’s help, the BSC task force first drew

the strategy map for ZYSCO. As shown in Figure 1, the

value creation strategy (increase EVA) was decomposed

into multiple strategic objectives based on their causal

relationships. These strategic objectives were divided into

four perspectives: financial, customer, internal process,

and learning and growth.

From the financial perspective, the value creation strat-

egy is decomposed into the objectives of profit growth

and reduction of the cost of capital. This is further

decomposed into increasing revenue, improving the cost

structure, and improving capital efficiency.

The customer perspective objectives are to increase

customer satisfaction and improve customer manage-

ment, which would promote a sales increase. Improve

product quality, product value of money, increase on-

time delivery, and improve after-sale service are all drivers

of high customer satisfaction.

The internal process perspective objectives include

developing new products and implementing lean produc-

tion, which could improve customer satisfaction. Lean

production and optimizing technical reform investments

would also improve cost structure and capital efficiency.

The map also shows the five components of lean produc-

tion: reduce production costs, reduce process defect lev-

els, raise productivity, reduce inventory, and balance

production processes.

The learning and growth perspective objectives are to

improve R&D, promote a value creation philosophy,

improve staff training, and construct a manufacturing

information system and financial decision support sys-

tem. They support the success of strategic objectives in

the internal process perspective, and they are the founda-

tion of strategy execution.

Designing the Balanced Scorecard

Next, the consulting team and BSC task force worked out

the balanced scorecard according to ZYSCO’s strategy

map. Table 1 shows how the strategic objectives are trans-

lated into performance measures.

According to the consulting team’s information, at the

company-level BSC, weights of the four perspectives are

usually about 50%, 20%, 20%, and 10%, respectively. The

company uses this as a guideline in deciding the weights

in ZYSCO’s balanced scorecard.

Since the steel industry in China has large overcapacity

problems, the company was advised to downplay revenue

growth and production capacity as financial measures

32 S T R AT E G IC F I N A N C E I Janua r y 2015

COVER STORY

The melt shop is representative of the

production departments. Since it consumes nearly 40%

of the energy of the entire company and is the

company’s bottleneck, it deserves the most attention.

and to focus on increasing net income by controlling

costs and expenses with 15% weight, improving asset

turnover with 10% weight, and increasing gross profit

margin with 10% weight.

For the customer perspective, customer satisfaction

rate is based on a customer survey, which includes evalu-

ation of product quality, on-time delivery, after-sale ser-

vice, and so on. The target is 95%. Since ZYSCO relies

heavily on its key customers such as CNPC and Sinopec,

customer retention rate also accounts for 6% in its BSC,

and the target is 100%. In order to increase net income,

percentage sales from high-profit products (petroleum

drilling tools and retained mandrel) is measured with a

5% weight.

For the internal process perspective, implementation of

lean production, manufacturing cost reduction, and

capacity balance measures account for 5% each. These

three measures for lean production account for 15%

weight in total so the production department would pay

more attention to cutting costs. And the return on techni-

cal reform investment with 5% weight is used to reduce

useless capacity growth.

For the learning and growth perspective, number of

new patents has a 1% weight to motivate innovation. The

other four measures in the learning and growth perspec-

tive have a total weight of 7%. They are subjective and

are evaluated by the board of directors. The targets for

manufacturing system coverage and financial decision

support system are relatively low because system con-

struction had just begun.

Each department’s strategy map and BSC can use the

company’s strategy map and BSC as a guide. The melt

shop is representative of the production departments.

Since it consumes nearly 40% of the energy of the entire

company and is the company’s bottleneck, it deserves

the most attention. The melt shop’s strategy map is

shown in Figure 2. Derived from ZYSCO’s strategy map,

its strategic theme is lean production (at the internal

process perspective).

Table 2 shows the melt shop’s BSC in which the mea-

Janua r y 2015 I S T R AT E G IC F I N A N C E 33

Reduce Manufacturing Cycle Time

Reduce Inventory

Reduce Process Defect Level

Reduce Production Cost

Increase EVA

Increase Customer Satisfaction

Profit Growth

Balance Production Process

Product Value of Money

Improve Cost Structure

Standardize Staff Training

Construct Manufacturing Information System

Increase Revenue

Reduce Cost of latipaC

Improve R&D Promote Value Creation Philosophy

Increase On-time Delivery

Financial

Customer

Internal Process: Lean Production

Learning & Growth

Improve Product Quality

Improve Capital Efficiency

Figure 2: Strategy Map of Melt Shop— “Lean Production” Strategic Theme

sures are more detailed and more specific than in the

company’s BSC. The financial measures hold less weight

since the melt shop isn’t a revenue center. The customer

satisfaction rate is divided into two parts because the melt

shop should be responsible to both its internal customers

(other downstream departments) and external customers.

In order to motivate lean production and cost reduction,

the related measures in the internal process perspective

are weighted much more (37% weight) than in the

company’s BSC (15% weight). Product quality is also

reinforced.

Tables 3 and 4 show the balanced scorecard for the

sales department and the financial department, respec-

tively. For the sales department, the measures mainly

focus on financial (44% weight) and customer (41%

weight) perspectives. The sales department’s coordination

with the production departments on implementing lean

production is also considered and is evaluated by the pro-

duction departments and the CEO. Other important

measures are sales forecast and market analysis, which

account for 5% weight.

The financial department is primarily a service depart-

ment. It has three BSC perspectives: financial measure to

improve cost structure (20% weight); improving internal

34 S T R AT E G IC F I N A N C E I Janua r y 2015

COVER STORY

Table 2: Melt Shop Balanced Scorecard

KEY STRATEGIC OBJECTIVES MEASURES WEIGHT TARGET

FINANCIAL PERSPECTIVE

Increase Revenue Net Income (based on internal transfer price) 5% Budget

Production Plan Completion 10% As Planned

Improve Cost Structure Manufacturing Costs per Unit of Output 10% Budget

Costs and Expenses 10% Budget

Improve Capital Efficiency Inventory Turnover 5% Budget

CUSTOMER PERSPECTIVE Increase Customer Satisfaction Internal Customer Satisfaction Rate

(evaluated by other departments) 3% 95%

External Customer Satisfaction Rate (evaluated by outside customers) 3% 95%

Improve Product Quality Outgoing Defect Level, Product Return Rate 5% As Planned

Increase On-time Delivery On-time Delivery Rate 5% 98%

INTERNAL PROCESS PERSPECTIVE (LEAN PRODUCTION)

Reduce Production Cost Raw Material Utilization 5% As Planned

Energy Consumption 5% As Planned

Reduce Process Defect Level Process Defect Level 3% As Planned

First-pass Yield 3% As Planned

Scrap/Re-work Rate 3% As Planned

Reduce Manufacturing Cycle Time Manufacturing Cycle Time 4% As Planned

Implementation of JIT (evaluated by CEO) 2% 95%

Reduce Inventory WIP Inventory 2% As Planned

Finished Goods Inventory 2% As Planned

Balance Production Process Capacity Balance 5% As Planned

Coordination Among Every Section (evaluated by section chiefs) 3% 95%

LEARNING & GROWTH PERSPECTIVE

Improve R&D Number of New Patents Awarded Separately

Promote Value Creation Philosophy Promotion of Value Creation (evaluated by CEO) 1% 95%

Standardize Staff Training Hours of Training 2% As Planned

Attendance 2% 100%

Manufacture Information Integration System System Coverage 2% 80%

Table 3: Sales Department Balanced Scorecard

KEY STRATEGIC OBJECTIVES MEASURES WEIGHT TARGET

FINANCIAL PERSPECTIVE

Increase Revenue Sales 20% Budget

Contract Completion 10% As Planned

Improve Cost Structure Costs and Expenses 7% Budget

Improve Capital Efficiency Accounts Receivable Turnover 7% Budget

CUSTOMER PERSPECTIVE

Increase Customer Satisfaction Customer Satisfaction Rate 6% 95%

Customer Complaints 4% 0%

Increase On-time Delivery On-time Delivery Rate 5% 98%

Improve After-sales Service After-sales Service Coverage 5% 90%

Response Time 5% As Planned

Improve Customer Management Customer Retention Rate 6% 100%

Percentage of Sales from High-profit Products 6% Budget

New Customer Sales 4% Budget

INTERNAL PROCESS PERSPECTIVE Lean Production Coordination with Production Departments

(evaluated by production departments and CEO) 5% 95%

LEARNING & GROWTH PERSPECTIVE

Promote Value Creation Philosophy Promotion of Value Creation (evaluated by CEO) 1% 95%

Standardize Staff Training Hours of Training 1% As Planned

Attendance 1% 100%

Manufacture Information Integration System CRM System Construction (evaluated by CEO) 2% 95%

Financial Decision Support System Sales Forecast and Market Analysis (evaluated by CEO) 5% 95%

Table 4: Financial Department Balanced Scorecard

KEY STRATEGIC OBJECTIVES MEASURES WEIGHT TARGET

FINANCIAL PERSPECTIVE

Improve Cost Structure Costs and Expenses 20% Budget

INTERNAL PROCESS PERSPECTIVE Lean Production Coordination with Production and Sales Departments

(evaluated by other departments and CEO) 5% 95%

Optimize Technical Reform Investment Investment Project Feasibility Study (evaluated by CEO) 5% 95%

Return on Technical Reform Investment 5% Budget

Coordination with Development Department and Project Management Office (evaluated by other departments and CEO) 5% 95%

LEARNING & GROWTH PERSPECTIVE

Improve R&D Coordination with Technical Center (evaluated by technical center and CEO) 5% 95%

Promote Value Creation Philosophy Promotion of Value Creation (evaluated by CEO) 3% 95%

Standardize Staff Training Hours of Training 1% As Planned

Attendance 1% 100%

Manufacture Information Integration System Production Cost Accounting System (evaluated by production departments and CEO) 10% 95%

Financial Decision Support System Sensitivity and Breakeven Analysis (evaluated by CEO) 10% 95%

Budgeting Accuracy 10% 90%

Restatements of Financial Reports and Qualified Audit Opinion 10% 0%

System Accuracy 10% 99%

Janua r y 2015 I S T R AT E G IC F I N A N C E 35

process measures (20% weight), which are primarily

related to coordination with other departments; and some

learning and growth perspective measures (60% weight).

Other departments create their BSCs according to their

specific responsibilities and goals, which are derived from

ZYSCO’s strategy. Finally, the balanced scorecard should

be decomposed according to the organizational structure

until everyone gets his or her own balanced scorecard.

Also, ZYSCO’s compensation system should be linked

to the new system and new measures, and employee/

manager bonuses should be paid according to their per-

formance evaluation results.

How the New BSC Can Benefit ZYSCO This new BSC strategic management system can help

ZYSCO by altering the behavior of the management team

and employees to overcome operational problems, and

this will eventually benefit the financial performance.

By using a manufacturing information system and a

financial decision support system, investments in equip-

ment that doesn’t match the production mode would be

discontinued or reduced, and the management team

could use the funds for other valuable technology. The

manufacturing information system also would be benefi-

cial to production scheduling and monitoring activities.

By implementing and assessing lean production, as

well as by implementing technical reform, the bottleneck

problem at the melt shop should be less serious. Lean

production and technical reform also play vital roles in

reducing production costs and improving product qual-

ity. Standardization of the staff training process is

designed to supplement the mentoring system so that

product quality is more stable and easier to control.

To promote communication and cooperation between

the sales and production departments, the two would

evaluate each other. For example, the sales department

would rate its satisfaction with the production depart-

ment, and the production department would evaluate the

sales department on its coordination in lean production.

Furthermore, some measures would be used in both

departments’ evaluation, such as on-time delivery rate

and customer satisfaction rate, so managers and employ-

ees in both departments will pay more attention to those

measures. The manufacturing information system and

the financial decision support system would also improve

the cooperation between departments.

Finally, although it would consist of only 1% of the

measures, promotion of a value creation philosophy

would encourage every employee to understand the new

system. Then everyone would know what he or she is

responsible for and what objectives to work on. As a

result, everyone would work toward a common goal—

ZYSCO’s value creation strategy.

Making Progress ZYSCO adopted this new system in the middle of 2012.

Since then, all the processes and procedures we described

here have been put into place, and the company contin-

ues to make progress. For example, both stock market

and financial performance have improved. From June 30,

2012, to September 30, 2014, ZYSCO’s stock perfor-

mance improved dramatically. Its cumulative return was

93.53%, while the market return was only 6.22% and the

average return of the machinery industry was 27.92%.

Meanwhile, as a result of the continuous emphasis on

cost reduction and sales growth of high-profit products,

ZYSCO’s gross margin rose from 9.32% to 12.65%. The

company’s ROE for 2013 was 0.13%, low but still outper-

forming most of its competitors. As for capital efficiency,

ZYSCO’s asset turnover, inventory turnover, and

accounts receivable turnover were 0.45, 3.04, and 4.55,

respectively, which compared favorably with the industry

average of 0.46, 2.03, and 2.33, according to the Wind

Financial Terminal.

We hope the new BSC strategic management system

will continuously help ZYSCO achieve its strategic

objectives. SF

Yuanhong Chen is a doctoral student at the School of Eco-

nomics and Management, Tsinghua University, Beijing,

China. You can reach her at [email protected].

Zengbiao Yu, CPA, Ph.D., is a professor of accounting at the

School of Economics and Management, Tsinghua Univer-

sity, Beijing, China. He also is an IMA® Member-at-Large.

You can reach him at [email protected].

Thomas W. Lin, CMA, Ph.D., is a professor of accounting

at the Leventhal School of Accounting at the University

of Southern California. He also is a member of IMA’s

Sam Gabriel Valley Chapter. You can reach him at

[email protected].

Zengbiao Yu was an independent director of ZYSCO from

2008 to 2013. He and Yuanhong Chen conducted BSC

continuing education training sessions for the company’s

managers, and Tom Lin provided some BSC concepts and

structure for them to use in these sessions.

36 S T R AT E G IC F I N A N C E I Janua r y 2015

COVER STORY

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.