Each plant is responsible to serve a geographical area, both for large and small-scale customers. The industry is very competitive, as each manufacturer employs the same technology and everyone was viewed by customers to have the same product quality as anyone in the industry. Thus, customers can readily shift from one supplier to another in cases that delivery schedules and product qualities were not met. Vershire employs a long-term budgetary control system. Corporate sales budgets are prepared both in a top-down and bottom-up approach.
These sales budgets are then translated to sales target per production plants and became the basis of target profits for each plant. Upon the end of the period, managers are then evaluated based on these target profits, even when budgeted sales are not met. Also, other performance measures are at place that is inconsistent and do not derived meaningful results. Although Vershire has been successful especially in the Aluminum Can division, the changing environment and industry conditions may result to necessary changes to company policies and procedures.
Problem Statement How can Vershire maintain its profitability and current position in the industry? How can the company delegate responsibilities to appropriate personnel to best serve the interest of both the company and the welfare of its people? Framework In examining a company, one should know first what the company intends to achieve. In this way, it can be evaluated if the companys actions and decisions were in line to achieving its objectives.
Thus, the groups analysis begins with what Vershire is currently doing, assess its relevance in attaining the long-term goals of Vershire and consider their appropriateness to existing industry conditions. Focus will be given in reviewing the present budgetary system and performance evaluation methods employed by the company for its managers. In performing this, a BCG matrix will be utilized to determine the current industry position of Vershire, identify the suitable strategy and decide on actions that will support such strategy.
In addition, advantages and disadvantages of the budget control and performance evaluation schemes on hand will be recognized. To aid in reinforcing the suitable strategy identified, a Porters Five Forces Model will also be used. Analysis Just like any other profit-oriented organization, Vershires objectives were to boost its profitability and increase the returns derived by its shareholders. Particularly for the Aluminum Can Division, growth in sales has been increasing beyond the general industry growth rate.
This signifies that Vershire is reaching the end of the Star Quadrant in the BCG matrix and will enter the Cash Cow pace in the years to come. It will be expected that sales growth of the company will start to stabilize within the industry average, as growth beyond what the industry experiences is not sustainable given that major competitors are present and existing technology do not give any competitive advantage to anyone. Vershire will be experiencing slower growth with considerable market share in the beverage container production. Porters Five Forces Model
Buyer Power The industry practice for most of the breweries and bottlers has been to maintain two to four suppliers of beverage cans. This implies that buyers have significant power that suppliers have to deal with to be profitable. Aluminum cans are fairly generic in nature, which means that one product of Vershire can be readily substituted by another product made by other companies. Therefore, quality measures and delivery lag time have been a serious matter to deal with in the industry, or else one will be at the verge of losing customers.
Competitors always stand ready to accept orders in cases that specifications of a customer are not met. Supplier Power On the other side, because of the relative greater buyer power, suppliers like Vershire have little influence on the behavior of its customers. To maintain its market share, quality standards have to be maintained and even improved to meet the tastes of its current and possible customers. In addition, Vershire faces the possibility of forward integration by its own suppliers of aluminum materials, as two of the four major sellers of aluminum also manufacture aluminum containers already.
Moreover, even some of beverage processors have employed backward integration and manufactured their own containers. Threat of New Entrants The minimum efficient scale in the beverage container industry requires five lines. Because of the substantial amount of capital needed for the required equipment per line, which is marked to be around $20 million, there is no significant risk concerning likely additional major participant in the industry. Furthermore, differentiation is hard to achieve given the essentially same technology available to anyone who wishes to enter container production.
Threat of Substitute Products Aluminum has several advantages over steel, suggesting that bottling companies may not be very open to switching from the use of aluminum cans to steel cans. Among the benefits of using aluminum cans include the reduced problems of flavoring, easier to lithograph that allows better packaging initiatives, easier to shape, and lower transportation costs because of its weight. Because of this, in both financial and non-financial perspective, aluminum is favored over steel in packaging of beer and soft drinks.
Thus, it will be expected that aluminum can producers will continue to experience dominance in the beverage container production. Rivalry among Existing Firms The market for beverage containers is dominated by five companies, including Vershire, covering around 88% of the total market. With this, Vershires actions are influenced of what the four major competitors are doing. The decisions should be made taking into account the possible reactions and responses of its rivals in the industries.
Budgetary Control System Sales Budget At the moment, Vershire applies a multi-stage sales budget preparation scheme in which both corporate and division-level budgets are prepared. General Managers provide a general overview of their respective industries for the next year and the subsequent two years, while the corporate market research team dwells into details of each and every one of said industries to propose a corporate sales budget. In addition, a general manager makes his own division budgets through inputs regarding sales outlook from district managers under him.
Based on this, the company is able to assure that corporate sales forecasts are both reasonable and achievable for the coming year. Because these are based on research that are in depth and includes several factors, top management is ensured that submitted budgets by the market research staff are fairly realistic and is in the best interest of the company. District managers will be cautious in understating their sales target for the next period, as budget proposals from the corporate staff will serve as check figures if they are deliberately misrepresenting information for their own personal gain.
However, because of this method, company resources were used for the same purpose of developing a corporate budget. Instead of efficiently allocating resources, the company was not able to do so because a common objective is being done in two different ways. A better alternative may be present where the company can reallocate its time and resources. Manufacturing Budget After sales budgets are prepared for each division, these are divided and forwarded to production plants under each division. These sales figures ecame the basis for each plants budgeted expenses, both fixed and variable, and the resulting target gross profit and pretax income.
The resulting profit will then be the sole responsibility of the plant manager regardless of the actual sales that will happen. This method enables the company to make plant managers accountable for their actions and decisions regarding the plants operations. Because their judgments are very vital to attaining their target profit for the year, they will be prudent in running their plant knowing that they are the ones who will suffer first upon making careless decisions.
The drawback of this setup however lies on the assigned responsibility of a plant manager for the overall profit of a plant, in spite of actual sales attained. Because their budgets are prepared on a sales figure that was given to them, the realization of their target profits are largely dependent on actual sales. Even if they have controlled their costs below budgeted expenses, if sales are insufficient, profits will be below what is expected. Performance Measurement and Management Incentives Vershire uses budgets as the main tool for evaluating the performance of its divisions and their corresponding production plants.
Every month, budgeted and actual results are prepared and submitted to corporate management, and variance reports to interested parties. As mentioned above, plant managers are responsible for plant profits and thus are evaluated on whether such target income has been achieved or not for the period covered. In addition, comparison between different plant and division efficiency were posted. Since sales are beyond the control of plant managers, their performance evaluation based on profits is misleading.
Efforts of plant managers to operate their plants efficiently and lower down their costs will be overshadowed if actual sales are well below the projected figures. This may result to managers becoming less motivated in carrying out their jobs in the best way possible. As for the charts showing comparisons between plants and divisions, care should be taken to compare plants that are really comparable. Conclusion Based on the above analyses, Vershire is considered to be approaching the cash cow quadrant characterized by slow growth with large market share.
With this, the company should strive to maintain its current share in the beverage container industry. To do so, issues on customer relationship, budgetary control system, performance evaluation and management incentives should be addressed accordingly. This may involve eliminating current company procedures or modifying existing ones. Recommendation To actively maintain its market share, the group recommends that Vershire should take initiatives to reduce its expenses and thus, the cost of its products.
In doing this, quality standards should be kept beyond or at least at par with industry practices to meet customer specifications all the time. This will result to lower product returns or product reworks that will save company resources, as well as maintain company sales numbers. The controller should be wary of large back orders or rework schedules and investigate or inquire on these issues. Trends that may be observable should be noted and brought to the attention of division and plant managers that may imply worn out equipment or untrained workers.
Corporate controller should also determine which customers are contributing much to the companys profitability, so that sales management team will know where to put more customer service to build long-term relationship and goodwill for the company. Targeting every customer with equal effort may hurt Vershire in the long-run, especially that major customers have one to three alternative suppliers at hand. Delivery lag times should be reduced by employing an efficient distribution system through proper scheduling of people and delivery vehicles.
Back orders should be eliminated as much as possible; so as to keep customers pleased since competition is very tough. Moreover, the controller should propose the redesign of the budget preparation system. Instead of the corporate market research team preparing sales budget for each division, they should focus on assisting district managers in formulating their own sales target. Expenses will be reduced and resources will be allotted to more productive activities. The market research team should have general guidelines upon which the sales budget per district will be built around.
Controller should review prior period sales, both budgeted and actual, to determine the reasonableness of the proposed sales figures for the next year. Benchmarking with competitors may be of help in testing these suggested sales budgets. For the plant managers, rather than being considered as a profit center, it should be categorized as a cost center. This is better in line with both the interest of the company and the interest of its workforce. In making the change, the company retains the accountability of its plant managers for its performance, but instead of profits they will be evaluated based on budgeted against actual costs incurred.
This setup improves the current situation, as plant managers will be assessed based on factors that they have complete control. However, quality standards should be in check every time so that company reputation will not suffer, since managers may have the incentive to cut down costs sacrificing the quality of the output. To reinforce the use of budgets to assess performance of managers, charts showing manufacturing efficiency between division and plants should be modified. That is, plants should be grouped according to similarity of products or production processes so that comparison will be more effective.
In this way, managers will also be more motivated since they knew that comparisons are impartial. The controller can also pinpoint plants and divisions that are inefficient, since it can be easily seen through the charts grouped appropriately. If a plant with the same product or the same processes can do a job in lesser costs, those that exceed such costs should be questioned and asked for explanations. Still though, differences should be taken into account by the controller in performing the comparison including varying cultural, social, and political factors.