Question
International Paper Company (IPC) manufactures grade papers for use in computer printers and photocopiers. The company is experiencing decline in profit due to increase price
International Paper Company (IPC) manufactures grade papers for use in computer printers and photocopiers. The company is experiencing decline in profit due to increase price pressure from large competitors. The IPC management team-including Michael (CEO), Andy (VP of Manufacturing), Kevin (VP of Marketing), and Tom (CFO)-is considering a change in strategy to improve the profitability of the company. Excerpts from a recent management team meeting are shown below: Michael: As we all know; the grade paper manufacturing business is all about economies of scale. The largest competition with the lowest cost per unit win. The limited capacity of our older machines prohibits us from competing in the high-volume grade papers. Furthermore, expanding our capacity by acquiring a new paper-making machine is out of the questions 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. Tom: Manufacturing flexibility? What does it mean? Andy: It means we need to pursue the low-volume business opportunities that exist in the nonstandard, specialized paper grades. To succeed in this regard, well 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 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 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! Tom: Just a minute! These changes are going to destroy our equipment utilization numbers! Kevin: Youre right! Tom; however, equipment utilization is not the name of the game when it comes to competing in terms of flexibility. Our customers dont care about our equipment utilization. Instead, as Andy 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 customer and bring in new customers. Furthermore, we will be able to change a premium price because of the limited competition within this niche from our cost-focused larger competition. Our contribution margin per ton should drastically improve! Andy: Off course, executing the change in strategy will not be easy. Well need to make a substantial investment in training because ultimately it is our people who create our flexible manufacturing capabilities. Tom: If we adopt this new strategy, it is definitely going to impact how we measure performance. Well need to create measures that motivate our employees to make decisions that support our flexibility goals. Michael: You are right Tom, this is important. For our next meeting, please pull up some potential measures that will support our new strategy.
REQUIRED: Construct a balanced scorecard that would support IPCs new manufacturing strategy using the table given below. Use arrows to show the causal link between the performance measures and show whether the performance measure should increase or decrease over time.
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