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Vershire

Company

In

1996

Vershire

Company

was

diversified

packaging

company

with

major

divisions,

including

the

Aluminum

Can

division-one

of

the

largest

several

ufacturers

of

aluminum

beverage

cans

in

the

United

States.

Exhibit

the

organization

chart

for

the

Aluminum

Can

division.

Reporting

to

the

shows

man-

sional general manager were two line managers, vice presidents in charge of manufacturing and marketing. These vice presidents headed all of the division's activities in their respective functional areas.

The Aluminum Can division's growth in salesslightly outpacedsalesgrowth


in the industry at large. The division had plants scattered throughout the United States. Each plant served customers in its own geographic region, often producing several different sizes of cans for a range of customers that included

both large and small breweries and soft drink bottlers. Most of these customers
had between two and four suppliers and spread purchases among them. If the division failed to meet the customer's cost and quality speciijcations or its stan-

dards for delivery and customer service,the customer would turn to another
supplier. All aluminum can producers employed essentially the same technology, and the division's product quality was equal to that of its competitors.

Industry
Traditionally, steel, glass, fiber-foil

Backgroundl
containers were made from one of several materials: (paper and metal composite), or plastic. The aluminum, metal con-

tainer industry consisted of the hundred-plus firms that produced aluminum

EXHIBIT 1

AluminumCan
Division

This case was adapted by Anil R.


Chitkar~ pared by Professor David Hawkins. case, prepared by Professor Hamerm~h

(T'94)

under

the

supervision

of

Professors

Govindarajan and RobertN. Anthony.The caseis based(with permission) on ~n earliercasepre1Theindustry backgroundis basedon a similardescriptionin the Crown Cork and SealCompany R".inA"
-:rh~1
Harvarn

Vijay

divi-

Vershire

Company

and tin-plated steel cans. Aluminum cans were used for packaging beverages (beer and soft drinks), while tin-plated steel cans were used primarily for food packaging, paints, and aerosols. In 1970, steel cans accounted for 88 percent of
the metal can production,
the industry. In 1996, aluminum

but by the 1990s aluminum


cans accounted for over

had come to dominate


75 percent of metal

can

production.

The

soft

drink

bottlers

who

purchased

the

containers

were

marily small independent franchisees of Coca-Cola and Pepsi Cola, which represented their independent bottlers in negotiating terms with the container companies. Five beverage container manufacturers accounted for 88 percent of the market. The minimum efficient scale for a container plant was five lines and it $20 million in equipment per line. Raw materials typically accounted for cost 64

percent of the production cost. Other costs included labor (15 percent), marketing and general administration (9 percent), transportation (8 percent), depreciation (2 percent), and research and development (2 percent). For beverage processors, the cost of the can usually exceeded the cost of the contents, with the container accounting for approximately 40 percent of the to-

tal manufacturing cost.Most beverageprocessors maintained two or more suppliers; and some processors integrated backward, manufacturing cans

themselves.On~ large beveragecompany produced one-third of its own container requirements and ranked ducers in the industry. as one of the top five beverage container pro-

Prior to the early 1970s, cans were produced by rolling a sheet of steel, soldering and cutting it to size, and attaching both the top and the bottom. In 1972 the industry was revolutionized when aluminum producers perfected a twopiece process in which a flat sheet of metal was pushed into a deep cup and top was attached. By 1996 the manufacturing process had become even more a

efficient,

producing

over 2,000 cans per minute. of flavoring;


lithograph; and

In addition to production efficiency,aluminum had other advantagesover


steel: It was easier to shape; it reduced the problems
more attractive packaging because it was easier to

it pernlitted
it reduced

transportation

costs

because

of

its

lighter

weight.

Additionally;

aluminum

was

pri-

more attractive recycling material, with a ton of scrap aluminum having almost three times the value of a ton of scrap steel. Four global companies supplied alu-

minum to can producers:Alcoa,Alcan, Reynolds,and Kaiser.Two of thesecompanies, Alcoa and Reynolds, also manufactured aluminum containers.

Divisions

of Vershire

Company

were structured

to encompass

broad product

nesses with two exceptions: the raising of capital and labor relations,which
were both centralized at head office. The budget was used as the primary to direct each division's efforts towards common corporate objectives. tool

categories. Divisional general managers were given full control of their busi-

In May,eachdivisionalgeneralmanagersubmitteda preliminaryreport to
corporate management summarizing the outlook for sales, income. and caDital

Vershire

Company

requirements for the next budget year, and evaluating the trends anticipated
in each category over the subsequent two years. These reports were not and were usually fairly easy to pull together since each division was already detailed re-

quired to predict market conditions in the current year and to anticipate capital expenditures five years out as part of the strategic planning process.
Once the divisional general managers had submitted these preliminary re-

ports, the central market researchstaff at corporateheadquartersbeganto develop a more formal market assessment, exaInining the forthcoming year in detail and the following two years in more general terms. A sales budget forecast was then prepared for each division; and these forecasts were combined

create a forecast for the entire company. In developing division forecasts, the research staff considered several topics, including general econoInic conditions and their impact on customers, and market share for different products by geographic area. Fundamental assumptions were made as to price, new products, changes in particular accounts, new

plants, inventory carryovers, forward buying, packaging trends, industry growth trends, weather conditions, and alternative packaging.Each product line, regardlessof size,was reviewed in the samemanner.
These foreca~ts were prepared at the head office in order to ensure that basic assumptions were uniform and that overall corporate sales forecasts were

both reasonable and achievable.The completed forecasts were forwarded to


their from respective the bottom divisions up, asking for review, criticism, and fine-tuning. to estimate sales for the

The divisional general managers then compiled their own sales forecasts
each district sales manager

comingbudget year.The district managerscould requesthelp from the head office or the divisional staff but in the end assumed full responsibility for the forecasts they submitted. All district sales forecasts were consolidated at the division level for review by the vice president for marketing, but no changes were made in a district's forecast unless the district manager agreed. Likewise, once the budget had been approved, any changes had to be approved by all those responsible for that budget.

This processwas then repeated at the corporatelevel. When all the responsible parties were satisfied with the sales budget, the figures became fIXed ob-

jectives,with eachdistrict being held responsiblefor its own portion. The entire
review and approval process had four objectives:

1. To assess eachdivision's competitiveposition and formulate courses of action


to improve upon it.

2. To evaluate actions taken to increase market share or to respond to competitors' activities.

3. To considerundertaking capital expendituresor plant alterations to improve


existing products or introduce new products.

4. To developplans to improve cost efficiency,product quality, delivery methods, and service.

~~facturing~~~~~
Mer final approval at the divisional and corporate levels, the overall sales

budget was translated into a salesbudget for each plant, broken down accord-

to

Vershire

Company

ing

to

the

plants

from

which

the

finished

goods

would

be

shipped.

At

the

level,

the

sales

budget

was

then

categorized

according

to

price,

volume,

plant

end use. Onc~ the sales numbers

were estimated,

each plant

budgeted

gross profit,

fIXed expenses, and pretax income. Profit was calculated as the sales budget less budgetedvariable costs(including direct material, direct labor, and variable manufacturing overhead-each valued at a standard rate) and the fixed overhead budget. The plant manager was held responsiblefor this budgeted
profit number even if actual sales fell below the projected level. Cost standards and cost reduction targets were developed by the plant's industrial engineering department, which also determined budget performance standards for each department, operation, and cost center within the plantincluding such items as budgeted cost reductions, allowances for unfavorable

variancesfrom standards,and fixed costssuch as maintenancelabor.


Before plant budgets were submitted, controller staff from the head office visited each plant. These visits were extremely important because they provided an opportunity for plant managers to explain their situation and allowed controllers to familiarize themselves with the reasoning behind the managers' numbers so that they could better explain them when they were presented to corporate management. The controllers also used these visits to provide guidance as to whether the budgeted profits were in line with corporate goals, and

to reinforce the' notion that headquarters was in touch with the plant. Each visit usually lasted about half a day. Most of the time was devotedto
reviewing the budget with the plant manager and any supervisors the managers wished to include in the meetings; but time was also allocated for a walk-through so controllers could see for themselves how (and what) the plant em-

ployees

were

doing.

On or beforeSeptember1,plant budgetswere submitted to the division head


office, where they were consolidated and presented to the divisional general managers for review. If the budgets were not quite in line with management's
expectations, plant managers were asked to look for additional savings. When

the

divisional

general

manager

was

satisfied

with

the

budget,

the

budget

and

sent

to

the

Chief

Executive

Officer

(CEO),

who

either

approved

it

or

asked

was

certain

modifications.

The

final

consolidated

budget

was

submitted

for

proval

at

the

Board

of

Directors

meeting

in

Oncea budget had been approved,it was difficult to change.Any problems


that arose between sales and production at a given plant were expected to be solved by people in the field. If a customer called with a rush order that would disrupt production, for example, production could recommend various courses of

action but it was the salesmanager'sresponsibility to get the product to the customer. If the sales manager determined that it was essential to ship the product

right away,that would be done.The customerwas alwaysthe primary concern.


Performance -Measurement and Evaluation

On the second businessday after the closeof eachmonth, every plant faxed certain critical operating varianceswhich were combinedinto a "variance analysis sheet."A compilation of all variance sheetswas distributed the following morning to interested management. Plant managers were not supposed to wait until these monthly statements were prepared to identify unfavorable variances;

December.

ap-

for

Vershire Comoanv

rather, they were expectedto be aware of them (and to take correctiveaction)on


a daily basis.

Four business days after the close of every month, each plant submitted a report showing budgeted and actual results. Onee these reports were received, corporate management reviewed the variances for those items where figures exceededbudgetary amounts, thus requiring plant managers to explain only the

which budgetedtargets had not beenmet.The focuswason net sales,in-

areas

cluding price and mix changes, gross margin, and standard manufacturingcosts. The budgeted and actual information submitted is summarized in Exhibit 2. Supplemental information was provided by supporting documents (see Exhibit

3). Both reports were consolidatedfor eachdivision and for the entire company,
and distributed the next day.

The fIXedcostswere examinedto seeif the plants had carried out their various programs,if the programs had met budgetedcosts,and if the results were
in line with expectations.

in

Man~~~1!_t
The sales department

Incentives
had sole responsibility for the price, sales mix, and plant manager had responsibility for plant operations delivand

ery

schedules.

plant

profits:

Plant managers were motivated to meet their profit goals in a number of


ways. First, only capable managers were promoted, with profit performance being a main factor in determining capability. Second, plant managers' compensation packages were tied to achieving profit budgets. Third, each month a

chart was compiled showing manufacturing efficienct by plant and division.


These comparative efficiency charts were highly publicized by most plant managers despite the inherent unfairness in comparing plants that produced different products requiring different setup times, etc. Some plants ran internal competitions between production lines and departments to reduce certain cost items, rewarding department heads and foremen for their accomplishments.

Questions
1. Outline the strengths and weaknesses ofVershire Company's planning and
control system.

2. Trace the profit budgeting process at Vershire, starting in May and ending

with the Board of.Directors' meeting in December. Be prepared to describe the activities that took place at each step of the processand present the rationale for each. 3. Should the plant managersbe held responsiblefor profits? Why?Why not? 4. How do you assess the performanceevaluation systemcontainedin Exhibits
2 and 3?

5. On balance,would you redesign the managementcontrol structure at Vershire Company? If so, how and why?

The

Vershire Company

'Numbers

in this exhibit

have been'omitted,

--

~,'

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