Case 3

Case 3 The Coors Case Balanced Scorecard Hugh Grove, School of Accountancy Daniels College of Business, University of Denver  Tom Tom Cook, Department of Finance Daniels College of Business, University of Denver  en !ichter, "ro#uct $uality Control %anager  Coors Bre&ing Company

By the end of 1997, Coors had finished the implementation of a threeyear computer-integrated logistics (CI! pro"ect to impro#e its supply chain management$ Coors defined its supply chain as e#ery acti#ity in#ol#ed in mo#ing production from the supplier%s supplier to the customer%s customer$ (Since &y federal la', Coors cannot sell directly to consumers, Coors customers are its distri&utors 'hose customers are retailers 'hose customers are consumers$! Coors%s supply chain included the follo'ing processes purchasing, research and de#elopment, engineering, &re'ing, conditioning, fermenting, pac)aging, 'arehouse, logistics, and transportation$ This CI pro"ect 'as a cross-functional initiati#e to reengineer the &usiness processes

&y 'hich Coors%s logistics or supply chain 'as managed$ This reengineering pro"ect impro#ed supply chain processes and applied information technology to pro#ide timely and accurate information to those in#ol#ed in supply chain management$ The pro"ect o&"ecti#e 'as to increase company profita&ility &y reducing cycle times and operating costs and increasing customer (distri&utor! satisfaction$ The soft'are #endor used for this pro"ect 'as the *erman company Systems  +pplications  roducts (S+!, (S+!, 'hich pro#ided pro#ided the the financial and and materials planning soft'are modules$ The S+ planning soft'are &ecame Coors%s load configurator soft'are, 'hich ta)es distri&utor demand forecasts and the production schedule and creates a shipping schedule for the follo'ing 'ee)$ The follo'ing ma"or supply chain pro&lems 'ere corrected &y this CI pro"ect . meeting seasonal demand, . meeting demand surges from sales promotions, . supporting the introduction of more than three ne' &rands each year, . filling routine customer (distri&utor! orders, . filling rush orders,

. mo#ing &eer from production through 'arehouse to distri&utors &efore the &eer spoiled$ (The shelf li#es for Coors products 'ere /0 days for &eer )egs and 11 days for all other &eer pac)ages$! 2att ail, head of Coors%s Customer Ser#ice 4epartment, had &een the CI pro"ect leader since the inception of the pro"ect$ 5e had de#eloped such e6pertise 'ith supply chain management that he had "ust &een hired &y a supply chain consulting firm$ In early 199, on his last day of 'or) for Coors, he 'as tal)ing 'ith 8en ider, head of Coors :uality +ssurance 4epartment$

8en had "ust &een placed in charge of the ne' &alanced scorecard (BSC! pro"ect at Coors$ The initial moti#ation for this pro"ect 'as to assess 'hether the supply chain impro#ements 'ere &eing maintained$ 5o'e#er, the pro"ect 'as &roadened to &ecome a company-'ide BSC$ +ccordingly, the pro"ect strategy 'as to implement a performance measurement process that (1! focused on continuous impro#ement, (! re'arded reasona&le ris) ta)ing and learning to impro#e performance, and (3! ena&led employees to understand the opportunity and re'ard for 'or)ing producti#ely$

Matt 

The supply chain management pro"ect 'as really challenging and

re'arding$ I hate to lea#e Coors, &ut the consulting firm made me such an attracti#e offer that I could not refuse it$ I hope you ha#e such positi#e e6periences 'ith this follo'-up &alanced scorecard pro"ect$

Ken

This ne' pro"ect 'ill &e a real challenge$ ;e need to &uild on all

the impro#ements made &y your supply chain pro"ect$

Matt 

2y pro"ect team 'as e6cited to see that our Cation%s #ision, strategy, programs, measurements, and re'ards$ +n inno#ati#e aspect is that the components of the scorecard are designed in an integrati#e manner to reinforce each other as indicators of &oth current and future prospects for the company$ The &alanced scorecard ena&les management to measure )ey dri#ers of o#erall performance, rather than focusing on short-term financial results$ It helps management stay focused on the entire &usiness process and helps ensure that actual current operating performance is in line 'ith long-term strategy$ 8aplan and Dorton (199! are generally gi#en credit for creating the &alanced scorecard in the early 1990s$

 + recent sur#ey found that 0E of large +merican companies 'ant to change their performance measurement systems (Birchard 199F!$  +nother recent sur#ey found that /0E of ortune 1,000 companies ha#e or are e6perimenting 'ith a &alanced scorecard (Sil) 199!$ Such changes ha#e &een dri#en &y the e#ol#ing focus on a team-&ased, process-oriented management control system$ The &alanced scorecard has four perspecti#es or ?uadrants that generate performance measures to assess the progress of a company%s #ision and strategy, as follo's . Customer perspecti#e ho' do customers see usA . Internal &usiness perspecti#e 'hat must 'e e6cel atA . Inno#ation and learning perspecti#e can 'e continue to impro#e and create #alueA . inancial perspecti#e ho' do 'e loo) to shareholdersA The BSC is a set of discrete, lin)ed measures that gi#es management a comprehensi#e and timely e#aluation of performance$ The BSC tries to minimi>e information o#erload &y pro#iding a limited num&er of measures that focus on )ey &usiness processes &y le#el of management$ or e6ample, top management needs summari>ed, comprehensi#e monetary measures 'hile lo'er le#els of management

and employees may need &oth monetary and nonmonetary measures on a more fre?uent &asis$ +lso, such measures need to trac) progress concerning the gap &et'een a company%s performance and &enchmar)ed targets$ The BSC considers fre?uency of measurement, depending on the type of measure$ *enerally, nonmonetary measures are reported more fre?uently than monetary measures$ or e6ample, nonmonetary operating measures, such as machine do'ntime, percentage of capacity used, and de#iations from schedule, may &e measured daily$ =ther nonmonetary measures, such as manufacturing cycle time, deli#ery accuracy, customer complaints, and spoilage, may &e measured 'ee)ly$ Some nonmonetary and monetary measures, such as in#entory days, accounts recei#a&le days, product returns, and 'arranty costs, may &e measured ?uarterly$ =ther nonmonetary and monetary measures, such as ne' products introduced, mar)et share, total cost of poor ?uality, return on in#estment, and employee training, may &e measured annually$

Company Bac)ground Coors had &een a family-o'ned and operated &usiness from its inception in 173 until 1993 'hen the first non-family mem&er &ecame president and chief operating officer$ 5o'e#er, Coors family mem&ers still held the positions of chairman of the &oard of directors and chief e6ecuti#e officer and also held all #oting stoc)$ =nly non#oting, Class B common stoc) 'as pu&licly traded$ Coors has &een financed primarily &y e?uity and has &orro'ed capital only t'ice in its corporate history$ The first long-term de&t, G0 million, $FE notes, 'as issued in 1991, and the final GH0 million of principal 'as to &e repaid &y the end of 1999$ The second long-term de&t, G100 million, 7E unsecured notes, 'as issued in a 199F pri#ate placement$ =f this principal, G0 million is due in 00 and the last G0 million is due in 00F$ In the mid-1970s Coors 'as a regional &re'ery 'ith an 11-state mar)et, selling one &rand in a limited num&er of pac)ages through appro6imately 00 distri&utors$ Traditionally, Coors &eer had &een a non-pasteuri>ed, premium &eer$ (5o'e#er, 'ith a recently de#eloped sterili>ation process, its products no' ha#e the same shelf life as its competitors% pasteuri>ed products$! The Coors plant in *olden, Colorado, 'as its only production facility, and it had no other distri&ution centers$ =#er

the ne6t F years, Coors changed dramatically &y e6panding into all F0 states and #arious foreign mar)ets$ By the end of the 0th century, Coors had production facilities in *olden, Colorado, 2emphis, Tennessee, a, Spain$ It had e6panded to using 1 Jsatellite redistri&ution centersK in the Lnited States &efore the CI pro"ect reduced this num&er to eight$ Beer shipments 'ere made &y &oth truc) and railroad cars$ Coors had appro6imately /F0 domestic &eer distri&utors, although a&out 00 of them accounted for 0E of Coors%s total sales$ Coors also had se#eral "oint #entures and international distri&utors in Canada, the Cari&&ean, atin +merican, e, +MB 'as the ac)no'ledged price leader in the industry$ +MB also had 13 domestic production plants, including one in t$ Collins, Colorado, to achie#e its customer ser#ice goal of ha#ing no ma"or domestic distri&utor more than F00 miles a'ay from one of its &eer production plants$ Dum&er t'o in this mar)et 'as 2iller, o'ned &y hilip 2orris, 'ith appro6imately E mar)et share, H0 million &arrels sold, GH &illion &eer sales, and GH/0 million net profit$ 2iller had se#en domestic production plants$ Coors 'as num&er three 'ith an 11E mar)et share, 0 million &arrels sold, G &illion &eer sales, and G0 million net profit$ Coors had three production plants in the Lnited States$ Its Colorado plant 'as the largest &re'ery in the 'orld and ser#ed 70E of the L$S$ mar)et 'ith its 10 can lines, si6 &ottle lines, and t'o )eg lines$ Do other  domestic &re'ers had mar)et share in e6cess of FE$ In the late 1990s,

there had &een consolidation of the larger companies in the domestic &eer industry$ The most recent e6ample 'as Stroh Bre'ing Company (SBC! 'ith a&out FE mar)et share$ SBC had signed agreements to sell its ma"or &rands to 2iller and the remaining &rands to a&st Bre'ing Company$ SBC 'ould then e6it the &eer industry &y 000$ rom 193 through 199, Coors 'as the only ma"or L$S$ &re'er to increase its sales #olume each year, although industry sales had gro'n only a&out 1E per year in the 1990s$ Coors had outpaced the industry #olume gro'th rate &y one or t'o percentage points each year$ Coors had accomplished this gro'th &y &uilding its )ey premium &rands in )ey mar)ets and strengthening its distri&utor net'or), recently 'ith impro#ed supply chain management$

Coors%s ision Statement and Business Strategies Coors%s #ision statement 'as as follo's =ur company has a proud history of #isionary leadership, ?uality products and dedicated people 'hich has ena&led us to succeed in a highly competiti#e and regulated industry$ ;e must con tinue to &uild on this foundation and &ecome e#en more effecti#e &y aligning and uniting the human, financial and physical aspects of our company to

&ring great tasting &eer, great &rands and superior ser#ice to our distri&utors, retailers and consumers and to &e a #alued neigh&or in our communities$ =ur continued success 'ill re?uire team'or) and an e#en stronger dedication &y e#ery person in our organi>ation to a common purpose, our ision$ +chie#ing our ision re?uires that 'e &egin this "ourney immediately and 'ith urgency for it 'ill re?uire significant change for us to thri#e and 'in in our industry$ Lsing this #ision statement, top management had decided to focus on four fundamentals impro#ing ?uality, impro#ing ser#ice, &oosting profita&ility, and de#eloping employee s)ills$ In the 1997 Coors annual report, &oth the Cation$ The ?uality and inno#ation 'e employ in all 'e do encourage &eer drin)ers to see) out our &rands and ma)e Coors the en#y of our competition$ =ur use of current, accurate information, and appropriate technology ena&les all indi#iduals in our organi>ation to monitor and control their 'or), &e fle6i&le and mo#e 'ith speed$ ;e #alue learning and e6ercise a tenacious approach to eliminate 'aste and reduce cost$ ;e reali>e that in a competiti#e 'orld, 'e must &ring #alue to our &rands and continually aspire to a higher le#el of performance to compete successfully$ The =T department had also adopted and e6tended the follo'ing supply chain guiding

principles from the 'or) of the CI supply chain pro"ect team to create its o'n &usiness strategies . Simplify and sta&ili>e the process$ . e the o#erall process$ . ;hat gets measured gets done$ Benchmar)ing and erformance *aps =nly limited &enchmar)ing information 'as a#aila&le since Coors had not yet decided to "oin any of the commercial &enchmar)ing data&ases$ (The largest one in the Lnited States, the 5ac)ett *roup Study, sponsored &y the +merican Institute of C+s, has a&out 700 participating companies$! erformance gaps 'ith Coors%s t'o ma"or

competitors 'ere noted &y the follo'ing financial information o&tained from annual reports Ta'le () Benchmarking Analysis

Beer *n#ustry %anufacturing Cost S,G + A Cost Competitor per Barrel per Barrel et "rofit

 +nheuser-Busch

GH$00

G7$F0

G1$F0

2iller

GF0$00

G7$00

G11$00

Coors

GFF$00

G9$00

GH$00

There 'ere insignificant differences in price per &arrel as +MB 'as the industry price leaderThere 'ere insignificant differences in price per &arrel as +MB 'as the industry price leader and the other competitors closely follo'ed +MB%s pricing decisions$ +MB had this pricing po'er &ecause its domestic mar)et share of HHE 'as t'ice that of 2iller and four times that of Coors$ The ma"or moti#ation for the CI supply chain pro"ect came from the deficiencies in the supply chain performance$

The CI pro"ect had &ecome fully operational &y the end of 1997, &ut more time 'as needed to reali>e the full &enefits of such a pro"ect$ There 'as still a significant amount of #olatility in the production process that contri&uted to the Colorado redistri&ution center%s &eing the largest &ottlenec) in the supply chain$ or e6ample, Coors often could not meet its goal to load &eer product directly off the production line into 'aiting railroad cars$ Thus, 8en%s pro"ect team had already added three ne' nonmonetary performance measures and created challenging performance targets for these measures to trac) anticipated additional efficiencies from the CI pro"ect$ +lso, top management had created financial goals for )ey monetary performance measures in an attempt to &ecome more competiti#e$ These )ey performance measures are sho'n in Ta&le $ The gaps in current performance at the end of 1997 indicated pro&lems 'ith Coors%s traditional, cost-&ased performance measures$ or e6ample, direct la&or #ariances 'ere &ecoming less important due to the highly automated nature of the &eer production lines$ +lso, current performance measures 'ere fragmented and inconsistent &et'een plants, unclear, not lin)ing the separate &usiness processes to the organi>ation goals, not &alanced to pre#ent o#eremphasis in one area

at the e6pense of another, not a&le to &e acted on at all le#els, and used to punish rather than re'ard continuous impro#ement$

Ta'le -) ey "erformance %easures

C*. "ro/ect "erformance "erformance %easure "re "ost Target Gap onmonetary

oad schedule

1! 30E

/0E

100E

H0E

oad item accuracy

(! 90E

9FE

100E

FE

roduction sta&ility

(3! FE

F0E

100E

F0E

%onetary (per &arrel!

2anufacturing cost

GF/

GFF

GF3

G

S, *  + cost

G30

G9

G7

G

Det profit

G3

GH

G/

G

otes (these nonmonetary performance targets are &ased on 'ee)ly

schedules generated &y the supply chain soft'are! (1! Truc) or rail car loaded on time 'ithin t'o hours of scheduled lead time, (! Commitments to distri&utors e6act product and e6act ?uality,

(3! roduction of scheduled product and ?uantity at planned time$

Balanced Scorecard and Change 2anagement Issues 8en 'as thin)ing that he could de#elop a crisis moti#ation for his &alanced scorecard pro"ect, similar to the strategy used &y 2att for his CI pro"ect$ 8en )ne' that Coors%s traditional, cost-&ased performance measures 'ere not dri#ing desired results, as indicated &y the #arious performance gaps$ rom the #ision statement and &usiness strategy analysis, he thought that long-term sustaina&ility and impro#ement in performance could &e achie#ed &y lin)ing the &alanced scorecard to the annual strategic planning process$ 5e also thought that continuous impro#ement re?uired clearly defined, aligned &usiness process and acti#ity measures that support a &alanced scorecard$ 8en had already had preliminary meetings a&out this BSC pro"ect 'ith employees 'ho 'ere in#ol#ed in supply chain management$ 5e had de#eloped a list of fre?uently as)ed ?uestions (+:s!$ 5e thought that these +:s might help guide him in implementing a &alanced scorecard for Coors$ These )ey +:s are listed as follo's 1$ ;ill the &alanced scorecard &e lin)ed to any incenti#e plansA

$ ;hat if a measure does not dri#e the correct &eha#ior after implementationA ;hat process 'ill &e used to e#ol#e the scorecardA 5o' 'ill my input &e heardA 3$ ;on%t the measures reduce our a&ility to &e fle6i&le 'ith our distri&utors and ma)e last-minute changes for themA H$ ;hy is the 'indo' on the load schedule performance measure so tightA ;hat difference does it ma)e if 'e get a load out 'ithin plusMminus t'o hoursA If 'e get it out the day it is scheduled, 'on%t the load arri#e at the distri&utor as plannedA F$ ;e already ha#e plant measures that are 'or)ing$ ;hy 'ould 'e 'ant to change themA /$ The production sta&ility measure does not gi#e the production lines incenti#e to run ahead$ 4oesn%t it ma)e sense to allo' us to run ahead on ma"or &rands as a cushion for those times 'hen 'e ha#e pro&lemsA So 'hat should 'e do 'hen 'e are more than an hour ahead, shut the line do'nA 7$ ;hy 'ould you &ase production sta&ility, load schedule performance, and load item accuracy on the initial 'ee)ly scheduleA The schedule changes constantly$ ;hy measure me against a 'ee)ly

schedule that has changed as a result of something I had no control o#erA $ ;ill the &alanced scorecard &e used to compare the performance of the three L$S$ plantsA Since each plant is different, ho' can 'e &e e6pected to use the same scorecardA 9$ roduct mi6 can ad#ersely affect the cost per &arrel$ ;ill this &e ta)en into consideration in this measureA 10$ Some important measures may &e e6cluded from the scorecard$ If so, 'ill they e#entually &e added to the scorecardA 11$ ;ill there &e a throughput measure on the scorecardA I cannot affect the num&er of &arrels coming through my plant$ That is determined &y sales and scheduling that shifts production &et'een plants$ 1$ 5o' can you hold me responsi&le for a measure 'hen I am not the only one 'ho can affect itA 13$ 5o' often 'ill the scorecard &e updatedA 1H$ ;ill the scorecard &e used as a clu&A 1F$ ;ho 'ill put together this scorecardA

Balanced Scorecard ro"ect +dditional Thoughts 8en 'as 'ondering 'hether he should do an