This case study is being done as a part of SGMT 6970 course of Fall 2011 class, Schulich School of Business

1. SGMT 6970
Parmalat USA Turaround
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SGMT 6970 (Fall 2011)
Professor Derrek S. Lennox
Balanced Scorecard: Parmalat USA
Turnaround
November 6th
2011
Ajay Singh

2. SGMT 6970
Parmalat USA Turaround
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Business Description
Parmalat USA was in the business of processing and marketing of milk and dairy products, and
in baking business with cookies as its primary product. The consumers for Parmalat USA were
mainly in New York Metropolitan region where it held number one milk supplier position. It also
served consumers in the regions of Pennsylvania, Connecticut, New Jersey and the rest of the
New York state. The consumers continue to demand the drinking milk products from Parmalat
due to health and indulgence reasons, any added value remains the key unique selling point like
the higher shelf life for UHT (ultra-high-temperature treated) milk. Moreover, fresh liquid milk
(unflavored) remains the staple product consumed by Americans on a daily basis and the given
category constitutes 89.2% of the US milk market. The products offered by Parmalat USA were
fresh milk (both flavored and unflavored), Concentrated milk, Long-life milk (both flavored and
unflavored), ice-cream mix and bakery products.
The products were mainly sold through supermarkets/hypermarkets, discounters, small grocery
retailers, other grocery retailers and non-grocery retailers. As prevalent with the trend in the
developed regions, Supermarkets/hypermarkets remained the most important retail formats for
drinking milk products where it accounts for almost 82.3%1
of the market value and thus also
commanded the majority share of the Parmalat’s sales. Considering the highly fragmented nature
of milk market in US, the major buyers (supermarkets and hypermarkets) often hold the strong
negotiating power in the market place who offers milk products directly to the customer.
Parmalat did business in two of three fundamental tranches of supply chain of milk that includes
processing/packaging and final distribution to retailers. These two tranches accounts for more
than half of the retail price whereas production costs account for rest.
1
As per Datamonitor estimates

3. SGMT 6970
Parmalat USA Turaround
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Parmalat USA Turaround
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Balanced Scorecard – Parmalat USA
Perspective Objectives Measures Target (6months) Target (12Months) Weights
Liquidity Cash Lag 90days 37days 12%
Gross Profit Margin 16% 20% 8%
Distribution, General & Administrative cost as
% of total operating cost
85% 74% 10%
Retain Customers Retention ratio for top 10customers 75% 100% 15%
On-time Delivery percentage >90% >95% 5%
Number and frequency of customer
complaints
Less than 10% of
top 100customers
Less than 5% of top
100customers
5%
Total cost of quality (cost of prevention,
appraisal, internal and external failure)
Less than 5% Less than 3% 5%
Process Efficiency: ratio of process time to
cycle time
>80% >90% 5%
Percentage of capacity utilization >70% >85% 10%
Equipment Reliability: percentage of time
available for production
>90% >95% 7%
Optimize Workforce Revenue per employee $450k $550k 7%
Stock ownership for key employees 70% covered 100% covered 5%
Bonus pay per personal performance 5% 10% 6%
100%
Improve Fixed Asset Utilization
Key Employee retention
Internal
Learning & Growth
Financials
Customer
Lower Costs
Customer Satisfaction
Improve Operating Processes

5. SGMT 6970
Parmalat USA Turaround
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Objective Justification Section
Liquidity: The US subsidiary of Parmalat is going through tough times in light of the unraveling
of the financial fraud at the parent company. They didn’t have the enough money to meet their
financial obligations and just got $8 million loan which would get them to the next 90 days.
Therefore, it is of utmost importance to focus on cash so that they can pay the bills and sustain
the business through the organizational re-structuring. I have chosen cash lag as a measure of
improving cash position (liquidity) where average collection period for A/Rs and average
number of day inventory in hand have to be reduced whereas average payment period for A/P
has to be increased. I have used projected balance sheet given in Exhibit 7 of the case to set my
targets. For the first 6 months, the target is to reduce the cash lag cycle from current 140.5 days
to 90 days and further reduce it to 37 days by the year end. The given measure will not only
improve the cash position of the company by focusing on A/R and A/P but also inculcate
operational efficiency by reducing the inventory conversion period.
Lower Costs: Parmalat USA has to significantly cut costs in order to be a viable business and
thereby generate interest from GE for additional capital investment in its business. In 2003,
Parmalat USA and its subsidiaries have a net loss of over $12 million. Cost needs to be reduced
at both COGS level as well as operating expenses. I have chosen Gross Profit Margin to ensure
improvements at COGS level and target is chosen as 16% and 20% for the first 6 months and
year-end respectively. The calculations are based on the projected Income Statement as given in
Exhibit 8 of the case. There may not be much scope in negotiating milk prices as they are fixed
by regulatory board but other improvements can be made through economies of scale and
operational efficiency.

6. SGMT 6970
Parmalat USA Turaround
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The other targeted cost area is Distribution, General & administrative costs which need to be
brought down to 74% of the total operating expense by the year-end. I have chosen not to target
selling and marketing costs for reduction as they may be needed to restore customer confidence
in Parmalat’s brands and help customer retention.
Retain Customers: One of the other important pillars of Parmalat USA’s turnaround is the
customer retention. The company is looking at a shrinking market with a forecasted sales
reduction by almost 50% and in that scenario; it is of paramount importance to hold on to your
most important customers that may comprise supermarkets chains or other grocery chains. The
target is to have a retention ratio of 100% of their top 10 customers in the New York
Metropolitan area so that they can continue to be a significant player in the region.
Customer Satisfaction: The new focus of the management team is quality and customer service
so that it can lead to loyal and profitable customer relationship. It will be measured by On-time
Delivery percentage which is a key performance criterion for retailers and supermarket chains
which need timely milk supply to satisfy its daily consumption by end consumers. The other
measure used in the BSC is the customer management system which will track the number and
frequency of complaints from top 100 customers in the region. It will help to expand the
relationship with the targeted customers. The target is to enhance the customer satisfaction by
reducing the customer complaints to less than 5% from top 100 customers by the year-end.
Improve Operating Process: As shown in the Strategy Map, improvement in the operating
processes has a direct bearing on the lower costs, better liquidity and enhanced customer
satisfaction. I have chosen the measures as total cost of quality which is targeted to bring down
to less than 3% of COGS by the year-end. It has been calculated by being targeted at 10% of the
processing cost which in-turn is 32% of the COGS (as per Dairy Supply chain, Euromonitor).

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Parmalat USA Turaround
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The other measure is process efficiency which is being calculated as the ratio of process time to
the cycle time. The target is to reduce the delay between the supplies being received on the
factory floor and the final product ready to be delivered. The adherence to this measure will not
only ensure higher percentage of on-time delivery but also reduce processing cost.
Improve Fixed Asset Utilization: One of the desired outcomes of the Parmalat USA turnaround
is a sleek organization with improved fixed asset utilization. The management has already
decided to close the Brooklyn facility to consolidate operations at Wallington plant. One of the
measures chosen for this objective is the capacity utilization of the plant. Higher capacity
utilization will decrease the processing costs and increase the plant productivity. If I assume 60%
of milk processing is being done in Wallington plant (considering it to be the bigger of the two
processing plants) and projected net sales are halved, then I have used the capacity utilization
target for the Wallington plant as more than 85% so that it can support the new sales numbers.
The other important measure to optimize fixed asset utilization is equipment reliability so as to
ensure high equipment availability for production. I have chosen more than 95% target for
equipment reliability as it directly impacts production schedule and costs.
Optimize workforce: The number of employees need to be trimmed down so as to reflect
shrinking market share and lower projected sales. The workforce needs to be lean and optimal
for the new Parmalat to be successful and competitive in the marketplace. I have chosen the
measure as revenue per employee and target it to be $550k per employee by year end which is an
improvement of 24% over pre-restructured Parmalat USA
Key Employee Retention: Parmalat USA has to trim its workforce so that it is leaner and flexible
organization but it also has to ensure the retention of key employees who can help the company
to steer through the difficult times. The process includes identification of these key employees

8. SGMT 6970
Parmalat USA Turaround
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from all divisions including Operations, R&D, Marketing, HR and Finance. Then, one of the
measures identified for this objective is to provide stock ownership for these employees. It needs
to be ensured that 100% of the key employees have been covered with stock ownership of the
post-bankruptcy organization by the year-end. The other measure is to provide a target bonus of
5% and 10% after 6-months and 12-months respectively. These bonuses will be linked to
meeting the performance objectives of both the company as well as the individual employee.

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Parmalat USA Turaround
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Appendix 1

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Parmalat USA Turaround
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Appendix 2
2004 2005 2006 2007 2008
Cash 6,456$ 6,414$ 5,707$ 3,500$ 3,500$
A/R 43,328$ 28,442$ 27,896$ 28,875$ 29,532$
Inventories 18,498$ 11,229$ 10,877$ 11,326$ 11,468$
Current assets 87,890$ 65,693$ 64,088$ 63,219$ 64,107$
7% 10% 9% 6% 5%
49% 43% 44% 46% 46%
21% 17% 17% 18% 18%
Sales 128,469$ 289,738$ 297,162$ 307,685$ 314,745$
COGS 108,280$ 234,360$ 238,726$ 244,829$ 248,966$
Gross Profit Margin 15.7% 19.1% 19.7% 20.4% 20.9%
Average Collection Period of A/R 123.1 35.8 34.3 34.3 34.2
Average Number of days inventory in hand 62.4 17.5 16.6 16.9 16.8
Purchases 109,971$ 282,469$ 296,810$ 308,134$ 314,887$
A/P 13,547$ 12,411$ 16,029$ 16,559$ 16,901$
Average payment period for A/P 45.0 16.0 19.7 19.6 19.6
Cash Lag 140.5 37.3 31.2 31.5 31.5
Current Liability 42,684$ 26,644$ 29,947$ 30,873$ 37,080$
Current Ratio 2.1 2.5 2.1 2.0 1.7
Total Assets 157,540$ 128,371$ 125,349$ 122,490$ 121,412$
Asset Turnover Ratio 0.8 2.3 2.4 2.5 2.6
Distribution 15430 30749 30660 30531 30576
G&A 3431 10034 10034 10334 10234
Total 18861 40783 40694 40865 40810
Total Operating Expense 22167 55147 55061 54034 53781
% of total operating expense 85% 74% 74% 76% 76%