Blunder at Hershey

Even the big boys like Hershey can make a mistake

Description of Hershey, Inc.
Think of Hershey Foods Corporation and chocolate comes immediately to mind. While Hershey is the leading manufacturer of chocolate products in North America, that is not all that Hershey manufactures. Hershey also produces non-chocolate confectionery and chocolate-related grocery products. Hershey has domestic and international operations and distribution channels.
Hershey's grocery products include grocery products include Hershey's baking chocolate, Hershey's chocolate drink, Hershey's chocolate milk mix, Hershey's Chocolate Shoppe ice cream toppings, Hershey's cocoa, Hershey's syrup, Hershey's Hot Cocoa Collection hot cocoa mix, Reese's peanut butter, and Hershey's, Reese's and Heath baking pieces. Internationally, the company exports Hershey's branded confectionery and grocery products to over 90 countries worldwide.
When one hears Hershey, chocolate first comes to mind, the second thought is typically Hersheypark. All recreation and tourism facilities in Hershey are owned by HERCO (Hershey Entertainment and Resort Company), a separate and distinct corporation wholly owned by the Milton Hershey School Trust. Hershey's Chocolate World, however, is owned by Hershey Foods Corporation. (http://www.hersheys.com/about/profile.shtml).
Hershey was organized under the laws of the State of Delaware on October 24, 1927, as a successor to a business founded in 1894 by Milton S. Hershey. The first listing of Hershey (HSY) was December 1, 1927 on the New York Stock Exchange. The listing price was $39 5/8 when the stock first was made public.
Competition
Hershey has many competitors which include Mars, Nestle, Russell Stover, and Palmer. In the domestic non-chocolate category, Hershey's largest competitor is Nabisco. On a dollar basis, Hershey's sales are roughly 80% chocolate and 20% non-chocolate. Hershey sells to 8-10 different classes of trade including grocery wholesalers, chain grocery stores, candy distributors, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, concessionaires and food distributors. Products are sold by full-time sales representatives, food brokers and part-time retail sales merchandisers throughout the United States, Canada and Mexico. The Corporation believes its products are sold in over 2 million retail outlets in North America (http://www.hersheys.com/about/profile.shtml).
Objective
Hershey's objective is to consistently create shareholder value by achieving excellence in every aspect of its business, and its vision is to continually create value for shareholders, customers, and consumers as a focused, branded, global chocolate and confectionery snack company. Hershey Food's leadership is based on three simple criteria high quality, mass distribution, and optimum consumer value.
Major issues
One recent major issue that Hershey would like to forget is their implementation of SAP. Forty percent of annual candy sales are made between October and December. Common wisdom would dictate that an implementation not be scheduled during that peiod. Hershey's new Enterprise Resource Planning (ERP) computer system was designed to facilitate the flow of information between end customers and suppliers. By linking customer orders, raw materials tracking, production scheduling, and shipping, Hershey hoped to minimize inventory-carrying costs and better serve customers.
Despite the complexity of its new system, Hershey opted to go on line all at once, a so-called big bang that computer experts say is rare and dangerous. It proved to be both. Inventory of certain items were overproduced while other fast moving items were under produced. The start-up was initially planned for April, a slow period, but it slipped to July, the time when Halloween orders come in. Hershey's systems difficulties took a toll on it share price as well as upsetting customers. Large multidivisional organizations can take as long as three years to fully implement a new ERP system. Hershey's major issue has proven to be a good example to other companies on what not to do when implementing an ERP system. (ERP on the rise again http://myphlip.pearsoncmg.com/phlip/mpviewce.cfm?vceid=1037&vbcid=56)
EVA at Hershey
Balanced Scorecard Methodology
Definition
The advocates for performance measurement systems point out that if professional sport teams played without keeping score, it would be impossible to tell which team was ahead. However, numerous companies operate without keeping score. One of the most effective means of keeping score is through a performance measurement system such as the balanced scorecard. Developed in the early 1990s, this performance measurement system has become accepted recently. The balanced scorecard is a performance measurement system driven by strategy and includes performance measures in several areas financial, customer, internal business process, and learning-and-growth.
A few years ago, the Gartner Group predicted that close to one half of Fortune 1,000 companies would use the balanced scorecard by the beginning of 2001. To date, numerous companies have used the balanced scorecard's combination of financial and non-financial measures to evaluate and renovate their management systems. By learning about the practical applications of the balanced scorecard, management can use its measures to suit their needs. Additionally, corporate finance managers can develop an understanding of how the tool might strengthen their companies' bottom lines.
One of the most well documented examples of an implementation of the balanced scorecard took place in the mid-1990s at Sears, Roebuck & Company. Rick Quinn, president of Hilton Head, South Carolina-based The Quinn Consulting Group Inc., led Sears' implementation. The implementation was based on the balanced scorecard's four perspectives customer, internal business, financial, and learning-and-growth. At the time of introducing Sears to the balanced scorecard concept in late 1992, Quinn was vice president of quality. Notably, 1992 was a bad year for Sears -- the corporation had a net loss of almost $4 billion that year. But only a year later, Sears posted the largest profit in its history.


Analysis of potential impact on the organization
Currently, Hershey employs about 14,000 people. This may be a small fraction of Sears's 310,000 employees, but the cost of implementing the balanced scorecard would still be significant. Hershey would have to invest significant amount of both human and capital resources to introduce the program just to a small fraction of the company's employees.
Hershey already has a history of embracing changes. Unfortunately some of Hershey's changes were not well executed. For instance, in the summer of 1999, Hershey demonstrated a new computer system that was going to automate and modernize Hershey's operation. The computer system was going to control everything from taking candy orders to loading shipments on trucks. Instead, the new system has paralyzed Hershey's ordering and distribution system, leaving numerous stores without inventory. The problems with the implementation of the automated system created numerous problems between Hershey and their customers.
Hershey worked around the clock to fix the problems, but the problems persisted through the heavy holiday seasons. Since almost one-half of annual candy sales are made between October and December, Hershey lost significant revenues. Hershey took a considerable risk when the company decided to implement the entire computer system all at once. As a direct result of the blunder, the company's stock declined by over fifty percent from a high of over $70 in the fourth quarter of 1998 to about $35 in the first quarter of 2000.
Financial analysis
Even though Hershey had some bad experiences in the past, the impact on the pricing strategy and the market potential for sales should not be ignored with the implantation of the balanced scorecard. The balanced scorecard system provides management with a rich repository of data about many specific relationships. The data gives the management valuable information with which to assess the potential impact of new initiatives. The management can even show that an impact of a small change in one factor on some other variable. For example, in the case of Sears, a one percent improvement in "advocacy" (a management perception measure in employee survey) yields a 4.5 percent increase in employee retention. Furthermore, that one percent improvement in advocacy also yields a 7.4 percent gain in sales per square foot. Impacts such as these have tremendous implications for an organization the size of Sears.
Identification of major cost considerations
For Hershey, one of the keys elements to successfully implementing the balanced scorecard depends on the accurate identification of major cost considerations. Some of the significant items include employee time, management time, and the cost of training. In order to roll out the program successfully across they entire organization, Hershey will need to develop a master budget. This budget has to include a sales budget, a production budget, and a capital budget. Additionally, the master budget would have to consider the requirements for human resources.
Management issues that may affect the organization.
A firm can only focus on a limited number of issues at the same time. If Hershey commits to implementing a balanced scorecard, the company would have to delay or even cancel some of their other initiatives. This is clearly an opportunity cost consideration. By committing the company's resources to one project, other projects would have to get terminated or postponed.
Summary of significant financial risks and projection of rewards
It is clear that a successful implementation of the balanced scorecard could lead to significant rewards. In the case of Sears, for example, the stock priced increased from $8 in 1992 to $20 in 1995. A decade later, the stock is trading at around $50, which is more than a six-fold increase in price. However, the risks are also significant. Just a few years ago, Hershey's shareholders experienced a 50% stock drop when a new computer system rollout went astray.
Additionally, a company-wide implantation of a balanced scorecard may result in a change in key senior management positions. Rick Quinn gauges his audience's enthusiasm and dedication about implementing the balanced scorecard by asking them a difficult question "Are you willing to be fired?" His experience with the balanced scorecard implementations shows that a complete realization may result in senior management changes. Not all the management will be able to adjust to the culture change that goes along with a balanced scorecard methodology. Rick Quinn states "If you're messing around with cultural change, you have to ask yourself whether you're ready to fire some of your senior team if they're not willing to behave differently. Really changing senior management causes some discomfort."
Alternatively, the list of benefits is extensive. Some of the benefits include:
1. Decrease in employee turnover
2. Increase in product quality and efficiency
3. Improvement in customer satisfaction
4. Increase in revenue and margins
5. Increase in stock price.
Conclusions and Recommendations
It is clear that the implementation of the balanced scorecard will not be a simple undertaking. Additionally, the undertaking is likely to last many years. Moreover, every employee in the company would be affected by the implementation. The end-result of a well-executed plan should be positive for the employees, the customers, and the shareholders.
Barriers to implementation
There are numerous and significant barriers to a successful implementation of the balanced scorecard at a company that over a century old. These barriers include capital constraints, human resources constraints, and most of all the constraint of the past negative experiences of embracing changes. There may be members of the senior management team that may not be able to handle the culture change associated with the balanced score methodology. These individuals could hinder and interfere in the implementation. It is clear that recommendation as to the viability of the project to include issues requiring further study.





Income Statement
Period Ending Dec 31, 2001 Sep 30, 2001 Jul 1, 2001 Apr 1, 2001
Total Revenue $1,273,917,000 $1,304,184,000 $898,859,000 $1,080,281,000
Cost Of Revenue $758,847,000 $752,575,000 $516,638,000 $637,506,000
Gross Profit $515,070,000 $551,609,000 $382,221,000 $442,775,000

Operating Expenses
Research And Development N/A N/A N/A N/A
Selling General And Administrative Expenses $346,053,000 $342,622,000 $282,670,000 $298,619,000
Non Recurring $228,314,000 ($19,237,000) N/A N/A
Other Operating Expenses N/A N/A N/A N/A

Operating Income ($59,297,000) $228,224,000 $99,551,000 $144,156,000
Total Other Income And Expenses Net ($1,862,000) $1,862,000 N/A N/A
Earnings Before Interest And Taxes ($61,159,000) $230,086,000 $99,551,000 $144,156,000
Interest Expense $14,860,000 $20,009,000 $16,927,000 $17,297,000
Income Before Tax ($76,019,000) $210,077,000 $82,624,000 $126,859,000
Income Tax Expense ($31,068,000) $89,315,000 $30,185,000 $47,953,000
Equity Earnings Or Loss Unconsolidated Subsidiary N/A N/A N/A N/A
Minority Interest N/A N/A N/A N/A
Net Income From Continuing Operations ($44,951,000) $120,762,000 $52,439,000 $78,906,000

Nonrecurring Events
Discontinued Operations N/A N/A N/A N/A
Extraordinary Items N/A N/A N/A N/A
Effect Of Accounting Changes N/A N/A N/A N/A
Other Items N/A N/A N/A N/A
Net Income ($44,951,000) $120,762,000 $52,439,000 $78,906,000
Preferred Stock And Other Adjustments N/A N/A N/A N/A

Net Income Applicable To Common Shares ($44,951,000) $120,762,000 $52,439,000 $78,906,000

Balance Sheet

Period Ending Dec 31, 2001 Sep 30, 2001 Jul 1, 2001 Apr 1, 2001
Current Assets
Cash And Cash Equivalents $134,147,000 $49,168,000 $21,071,000 $26,254,000
Short Term Investments N/A N/A N/A N/A
Net Receivables $458,665,000 $617,359,000 $341,997,000 $384,982,000
Inventory $512,134,000 $725,703,000 $798,308,000 $624,805,000
Other Current Assets $62,595,000 $75,985,000 $83,939,000 $84,261,000
Total Current Assets $1,167,541,000 $1,468,215,000 $1,245,315,000 $1,120,302,000

Long Term Assets
Long Term Investments N/A N/A N/A N/A
Property Plant And Equipment $1,534,901,000 $1,576,946,000 $1,584,046,000 $1,574,013,000
Goodwill N/A N/A N/A N/A
Intangible Assets $429,128,000 $438,875,000 $466,938,000 $466,758,000
Accumulated Amortization N/A N/A N/A N/A
Other Assets $115,860,000 $127,303,000 $131,200,000 $140,330,000
Deferred Long Term Asset Charges N/A N/A N/A N/A
Total Assets $3,247,430,000 $3,611,339,000 $3,427,499,000 $3,301,403,000

Current Liabilities
Accounts Payable $598,518,000 $622,258,000 $476,217,000 $523,043,000
Short Term And Current Long Term Debt $7,926,000 $238,298,000 $278,683,000 $50,233,000
Other Current Liabilities N/A N/A N/A N/A
Total Current Liabilities $606,444,000 $860,556,000 $754,900,000 $573,276,000
Long Term Debt $876,972,000 $876,981,000 $877,415,000 $877,510,000
Other Liabilities $361,041,000 $332,602,000 $326,560,000 $322,570,000
Deferred Long Term Liability Charges $255,769,000 $299,590,000 $300,717,000 $297,224,000
Minority Interest N/A N/A N/A N/A
Negative Goodwill N/A N/A N/A N/A
Total Liabilities $2,100,226,000 $2,369,729,000 $2,259,592,000 $2,070,580,000

Stock Holders Equity
Misc Stocks Options Warrants N/A N/A N/A N/A
Redeemable Preferred Stock N/A N/A N/A N/A
Preferred Stock N/A N/A N/A N/A
Common Stock $179,950,000 $179,950,000 $179,950,000 $179,950,000
Retained Earnings $2,755,333,000 $2,840,437,000 $2,759,736,000 $2,744,455,000
Treasury Stock ($1,689,243,000) ($1,693,706,000) ($1,683,682,000) ($1,620,366,000)
Capital Surplus $3,263,000 $5,759,000 $7,045,000 $8,215,000
Other Stockholder Equity ($102,099,000) ($90,830,000) ($95,142,000) ($81,431,000)
Total Stockholder Equity $1,147,204,000 $1,241,610,000 $1,167,907,000 $1,230,823,000
Net Tangible Assets $718,076,000 $802,735,000 $700,969,000 $764,065,000



Cash Flow Statement

Period Ending Dec 31, 2001 Sep 30, 2001 Jul 1, 2001 Apr 1, 2001
Net Income ($44,951,000) $120,762,000 $52,439,000 $78,906,000

Cash Flow Operating Activities
Depreciation $48,795,000 $47,495,000 $47,329,000 $46,875,000
Adjustments To Net Income $165,195,000 $6,049,000 $7,404,000 ($4,141,000)

Changes in Operating Activities
Changes In Accounts Receivables $186,683,000 ($291,892,000) $52,002,000 $71,161,000
Changes In Liabilities ($29,949,000) $7,132,000 $7,930,000 ($1,296,000)
Changes In Inventories $222,064,000 $82,576,000 ($164,803,000) ($45,432,000)
Changes In Other Operating Activities ($132,134,000) $130,339,000 ($64,941,000) $104,808,000
Cash Flows From Operating Activities $415,703,000 $102,461,000 ($62,640,000) $250,881,000

Cash Flow Investing Activities
Capital Expenditures ($45,497,000) ($36,022,000) ($46,554,000) ($32,032,000)
Investments N/A N/A N/A N/A
Other Cashflows From Investing Activities ($10,340,000) $55,706,000 ($19,202,000) $9,954,000
Cash Flows From Investing Activities ($55,837,000) $19,684,000 ($65,756,000) ($22,078,000)

Cash Flow Financing Activities
Dividends Paid ($40,153,000) ($40,061,000) ($37,158,000) ($37,378,000)
Sale Purchase Of Stock $8,701,000 $38,200,000 ($67,944,000) $10,931,000
Net Borrowings ($230,421,000) ($40,859,000) $228,315,000 ($208,071,000)
Other Cashflows From Financing Activities ($13,014,000) ($51,328,000) N/A N/A
Cash Flows From Financing Activities ($274,887,000) ($94,048,000) $123,213,000 ($234,518,000)

Effect Of Exchange Rate N/A N/A N/A N/A
Change In Cash And Cash Equivalents $84,979,000 $28,097,000 ($5,183,000) ($5,715,000)


References
Frigo, M. L., & Krumwiede, K. R. (2000, January). The balanced scorecard.
Strategic Finance. Retrieved March 10, 2002 from the World
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http://proquest.umi.com/pqdlink?Ver=1&Exp=07-01-2003&FMT=TG&DID=000000048115890&REQ=1&Cert=gwPAW4QUVT8Tu%2fEy9SqBH5HU6HDFu11iddXuBLARHgEIE0zk9q6GEY1KHSIxo%2btn6i0EieT1SUlfQXsxeavkFaZXYh4g3Bn2nG6ANV14%2folswEc9fjgSeA--
Hershey's biggest dud has turned out to be new computer system. (1999, October 29).
The Wall Street Journal. Retrieved March 10, 2002 from the World Wide
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http://myphlip.pearsoncmg.com/phlip/mpviewce.cfm?vceid=1037&vbcid=56
Kirn, S. The balanced scorecard at Sears a compelling place for feedback and learning.
Case file. Retrieved March 10, 2002 from the World Wide Web:
www.bscol.com/bscoldata/C1A1A_BSR_Sears_Article.pdf
Yahoo! Finance. Retrieved March 10, 2002 from the World Wide Web:
http://biz.yahoo.com/fin/l/h/hsy.html

McLemore, I. Putting the Scorecard to Work. Retrieved March 10, 2002 from the World
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http://www.businessfinancemag.com/archives/appfiles/Article.cfm?IssueID=234&ArticleID=6004

Alex Best