3000 words paper

Case 504

Coors: balanced scorecard

Case 504 755

Hugh Grove and Tom Cook, University of Denver, and Ken Richter, Coors Brewing Company

This case demonstrates the importance of supply chain management, and the comparison of various strategies through the use of EVA". The case also requires the creation of a balanced scorecard to highlight the impact of any changes in strategy.

By the end of 2010, Coors had finished the implementation of a three-year computer-integrated logistics (CIL) project to improve its supply chain management. Coors defined its supply chain as every activity involved in moving production from the supplier's supplier to the customer's customer. (Since, by federal law, Coors cannot sell directly to consumers, Coors customers are its distributors whose customers are retailers whose customers are consumers.) Coors' supply chain included the following processes: purchasing, research and development, engineering, brewing, conditioning, fermenting, packaging, warehouse, logistics and transportation.

This CIL project was a cross-functional initiative to reengineer the business processes by which Coors' logistics or supply chain was managed. The project objective was to increase company profitability by reducing cycle times and operating costs and increasing customer (distributor) satisfaction.

The software vendor used for this project was the German company Systems Applications and Products (SAP), which provided the financial and materials planning software modules. The following major supply chain problems were corrected by this CIL project:

• meeting seasonal demand

• meeting demand surges from sales promotions

• supporting the introduction of more than three new brands each year

• filling routine customer (distributor) orders

• filling rush orders

• moving beer from production through warehouse to distributors before the beer spoiled.

The shelf-lives for Coors products were 60 days for beer kegs and 112 days for all other beer packages. Matt Vail, head of Coors' Customer Service Department, had been the CIL project leader

since the inception of the project. He had developed such expertise with supply chain manage­ ment that he had just been hired by a supply chain consulting firm. In early 2011, on his last day of work for Coors, he was talking with Ken Rider, head of Coors' Quality Assurance Department.

Ken had just been placed in charge of the new balanced scorecard (BSC) project at Coors. The initial motivation for this project was to assess whether the supply chain improvements were being maintained. However, the project was broadened to become a company-wide BSC. Accordingly, the project strategy was to implement a performance measurement process that: (1) focused on continuous improvement, (2) rewarded reasonable risk taking and learning to improve performance, and (3) enabled employees to understand the opportunity and reward for working productively.

Matt: The supply chain management project was really challenging and rewarding. I hate to leave Coors, but the consulting firm made me such an attractive offer that I could not refuse it. I hope you have such positive experiences with this follow-up balanced scorecard project.

Source: Adapted from Grove, H., Cook, T. and Richter, K. (2000) 'Coors: balanced scorecard', /MA Cases from Management Accounting Practice, Volume 15 (Montvale, New Jersey: Institute of Marketing Accounting Practice).

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756 PART V Case study problems

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This new project will be a real challenge. We need to build on all the improvements made by your supply chain project. My project team was excited to see that our CEO discussed the supply chain project in his 2010 shareholder letter. He said that significant productivity gains in 2006 were due to our project, which streamlined purchasing, brewing, packaging, transportation and administration of the supply chain. Perhaps an economic value added (EVA®) analysis could be done to assess these supply chain productivity gains. That's an interesting idea, to analyse performance in the financial quadrant of the bal­ anced scorecard with EVA®. Another challenge for my project is how to translate the Coors vision statement and related business strategies into operational performance measures. You also need to identify any gaps between the vision statement, business strategies and current performance. Do you have any experiences from your project that I could use? Well, we did obtain some benchmarking data to develop targets for some performance

measures for our supply chain project. I can give you these measures, but they are limited due to confidentiality problems in obtaining such data. Maybe Coors should

join one of the commercial benchmarking databases. Thanks. I am also aware of certain employee resistance to developing a new set of per­ formance measures for this balanced scorecard approach. We had similar employee resistance to changes in the business processes of the supply chain. We were able to use the following crisis motivation. At that time, Coors could not support all the new beer brand introductions proposed by our marketing people, due to the antiquated 1970s software that was then being used for our supply chain management. The marketing people wanted to introduce three new brands each quar­ ter, and we could support only three new brands each year! We also learned that we needed to get more employee involvement in the project. That's a good idea. In fact, I've already developed a list of the most frequently asked questions about the balanced scorecard from initial meetings with employees involved in the supply chain. You have lots of challenges awaiting you. Good luck in your new project. Make sure that today's improvements in supply chain performance don't become tomorrow's problems!

Company background

Coors had been a family-owned and operated business from its inception in 1873 until 1993 when the first non-family member became president and chief operating officer. However, Coors family members still held the positions of chairman of the board of directors and chief executive officer and also held all voting stock. Only non-voting, Class B common stock was publicly traded. Coors has been financed primarily by equity and has borrowed capital only twice in its corporate history. The first long-term debt, $220 million, 8.5% notes, was issued in 1991, and the final $40 million of principal repaid at the end of 1999. The second long-term debt, $100 million, 7% unsecured notes, was issued in a 1995 private placement. Of this principal, $80 million was due in 2009 and the last $20 million is due in 2012.

Coors had 16 beer brands, including a speciality line, Blue Moon, that competed with the domestic micro brewing industry. However, Coors continued to focus on its four key premium brands: Coors Light, Original Coors, Killian's Irish Red and Zima. Coors Light was the fourth largest selling beer in the United States. In packaging, Coors had to compete with the major competitors' value packaging, such as 12-packs and 30-packs.

Competition in the beer industry was strong, especially in the United States. Anheuser-Busch (A/B) was the market leader with approximately 44% of the US market, 80 million barrels sold,

Case 504 757

$8 billion beer sales and $1 billion net profit. Due to its size, A/B was the acknowledged price leader in the industry. A/B also had 13 domestic production plants, including one in Fort Collins, Colorado, to achieve its customer service goal of having no major domestic distributor more than 500 miles away from one of its beer production plants.

Number two in this market was Miller, owned by Philip Morris, w ith approximately 22% market share, 40 million barrels sold, $4 billion beer sales and $460 million net profit. Miller had seven domestic production plants. Coors was number three with an 11 % market share 20 million barrels sold, $2 billion beer sales and $80 million net profit. Coors had three production plants in the United States. Its Colorado plant was the largest brewery in the world and served 70% of the US market with its 10 can lines, 6 bottle lines, and 2 keg lines.

No other domestic brewers had market share in excess of 5%. In the late 1990s, there had been consolidation of the larger companies in the domestic beer industry. The most recent example was Stroh Brewing Company (SBC) with about 5% market share. SBC had signed agreements to sell its major brands to Miller and the remaining brands to Pabst Brewing Company. SBC would then exit the beer industry by 2003.

Benchmarking and performance gaps

Only limited benchmarking information was available since Coors had not yet decided to join any of the commercial benchmarking databases. (The largest one in the United States, the Hackett Group Study, sponsored by the American Institute of CPAs, has about 700 participating companies.) Benchmarking analyses using company annual reports revealed performance gaps with Coors' two major competitors (Exhibit 504.1).

There were insignificant differences in price per barrel as A/B was the industry price leader and the other competitors closely followed A/B's pricing decisions. A/B had this pricing power because its domestic market share of 44% was twice that of Miller and four times that of Coors.

The major motivation for the CIL supply chain project came from the deficiencies in the sup­ ply chain performance. The CIL project had become fully operational by the end of 2010, but more time was needed to realise the full benefits of such a project. There was still a significant amount of volatility in the production process that contributed to the Colorado redistribution centre's being the largest bottleneck in the supply chain. For example, Coors often could not meet its goal to load beer product directly off the production line into waiting railroad cars.

Thus, Ken's project team had already added three new non-monetary performance measures and created challenging performance targets for these measures to track anticipated additional efficiencies from the CIL project. Also, top management had created financial goals for key monetary performance measures in an attempt to become more competitive. These key perform­ ance measures are shown in Exhibit 504.2.

The gaps in current performance at the end of 2010 indicated problems with Coors' tradi­ tional, cost-based performance measures. For example, direct labour variances were becoming less important due to the highly automated nature of the beer production lines. Also, current performance measures were fragmented and inconsistent between plants, unclear, not linking the separate business processes to the organisation goals, not balanced to prevent overemphasis in

Exhibit 504.1

Beer industry competitor

Anheuser-Busch Miller Coors

Benchmarking analysis

Manufacturing cost per barrel ( $)

48.00

50.00

55.00

S,G &A cost Net profit per barrel($) ($)

27.50 12.50

27.00 11.00

29.00 4.00

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758 PART V Case study problems

Exhibit 504.2 Key performance measures

CIL project

Performance measure Pre

Non-monetary: Load schedule (1) 30%

Load item accuracy (2) 90%

Production stability (3) 25%

Monetary (per barrel):

Manufacturing cost $56

S, G &A cost $30 Net orofit S3

Performance

Post Target Gap

60% 100% 40%

95% 100% 5%

50% 100% 50%

$55 $53 $2

$29 $27 $2 S4 S6 S2

one area at the expense of another, not able to be acted on at all levels, and used to punish rather than reward continuous improvement.

Balanced scorecard and change management issues

Ken was thinking that he could develop a crisis motivation for his balanced scorecard project, similar to the strategy used by Matt for his CIL project. Ken knew that Coors' traditional, cost-based performance measures were not driving desired results, as indicated by the various performance gaps. He thought that continuous improvement required clearly defined, aligned business process and activity measures that support a balanced scorecard.

Ken had already had preliminary meetings about this BSC project with employees who were involved in supply chain management. He had developed a list of frequently asked questions (FAQs), as follows:

1 Will the balanced scorecard be linked to any incentive plans?

2 What if a measure does not drive the correct behaviour after implementation? What process will be used to evolve the scorecard? How will my input be heard?

3 Won't the measures reduce our ability to be flexible with our distributors and make last-minute changes for them?

4 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 our the day it is scheduled, won't the load arrive at the distributor as planned?

5 We already have plant measures that are working. Why would we want to change them?

6 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?

7 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?

8 Will the balanced scorecard be used to compare the performance of the three US plants? Since each plant is different, how can we be expected to use the same scorecard?

9 Product mix can adversely affect the cost per barrel. Will this be taken into consideration in this measure?

10 Some important measures may be excluded from the scorecard. If so, will they eventually be added to the scorecard?

Questions 759

11 Will there be a throughput measure on the scorecard? I cannot affect the number of barrels coming through my plant. That is determined by sales and scheduling that shifts production between plants.

12 How can you hold me responsible for a measure when I am not the only one who can affect it?

Balanced scorecard project: additional thoughts

Ken was wondering whether he should do an EVA® analysis to demonstrate its potential for a BSC financial performance measure. Coors' net operating profit before income taxes had increased from $75 million in 2003 to $105 million in 2010. According to both the CEO's shareholder letter and a value line analysis, the major reason for this increase was the pro­ ductivity improvement from the supply chain management project, which cost $20 million. This $30 million improvement in net operating profit before income taxes was also predicted to become a permanent improvement for both 2011 and 2012 operations. Ken's project team had compiled five annual adjustments (all increases) and other financial information just in case Ken

decided to do an EVA® analysis (Exhibit 504.3). At the end of 2010, Coors had total stockholder equity of $730 million and total liabilities of

$670 million. Total liabilities included $170 million of interest-bearing debt as well as current liabilities, deferred income taxes and pension liabilities. Coors' weighted average cost of capital was 10%. Ken was curious about what gaps might exist between vision statements and current business strategies for both Coors and the O&T department. However, he did not want this gap analysis to wind up overloading the BSC with too many performance measures. He was also concerned about what performance targets and reporting frequencies to establish for various BSC performance measures. Other challenges were how to link BSC performance measures and how to gain employee acceptance of the BSC.

Ken realised that he had some serious challenges ahead of him in order to create and imple­ ment a balanced scorecard for Coors. It was now January 2011 and top management was press­ ing for a quick installation of the balanced scorecard in order to use it for evaluating performance in 2011.

Exhibit 504.3 EVA adjustments (in $ millions)

Adjustment Capital Income

1 Advertising costs (three-year life) 900 300 2 LIFO reserve 45 3 3 Deferred income tax liability 65 10 4 Capitalisation of operating leases 30 5 5 Net interest exoense 0 12

Questions

Provide possible explanations for the performance gaps identified by Coors benchmarking analysis.

2 Answer the FAQs already raised by employees about the Coors BSC project.

3 Considering the prior gap and benchmarking analyses, design specific performance measures with benchmarked targets (where feasible) and reporting frequency to create an operational and acceptable BSC for Coors.

4 Perform an economic value added (EVA•) analysis to assess its potential as a BSC financial performance measure for Coors.

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