For many years, our plants were structured as standard expense centers. Then, a few years ago, the company changed them to profit centers. Now some managers I respect are telling me that that was a bad decision. The accountants are saying that plants always should be standard expense centers since they can’t control volume. And I’ve heard no end to complaints from the plant managers that the system is unfair since they operate at the mercy of the sales people. On the other hand, nothing is ever completely fair. I’m not yet convinced that having the plants as profit centers is as big a problem as folks are making it out to be.

The speaker was Anthony Roberts, Division General Manager (DGM) of the Aluminum Can Division of Vershire Company, a diversified packaging company with several major divisions. Mr. Roberts’ division was one of the largest manufacturers of aluminum cans in the United States. It had 15 sales districts, which were headed by a Vice President for Marketing, and 7 manufacturing plants, which were under a Vice President for Manufacturing. Both vice presidents reported to Mr. Roberts. He continued:

I’ve asked our divisional controller, the VPs for manufacturing and marketing, all seven plant managers, and five our our more senior district sales managers to attend a half-day meeting next week to hash this out. We’ve got to decide once and for all what we’re going to do about this. I’ve spoken to people at the head office, and they’ll go along with whatever I recommend, so the decision is ours. Either we keep the plants as profit centers and the plant managers stop complaining, or we shift to something else. But if we make a shift, I don’t want to hear more complaints later on. And I certainly don’t want to shift to an arrangement that will cause our profits or ROA [return on assets] to suffer.

BACKGROUND

The metal container industry consisted of about 100 firms that produced aluminum and tin plated steel cans. However, the industry was highly concentrated, with five beverage container manufacturers accounting for almost 90 percent of the market. Vershire was one of these. Indeed, over the past few years, Vershire’s Aluminum Can Division’s sales growth had slightly outpaced the industry average.

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 . . .

Assignment

1. What are Vershire’s strategic success factors? That is, what must the company do well to be successful?
2. List the strengths and weaknesses of Vershire’s management control process. How does this process relate to the strategic success factors you listed in Question 1?
3. List the strengths and weaknesses of Vershire’s current reports? In undertaking this part of the analysis, you should address each item in Exhibits 1 and 2.
4. List the strengths and weaknesses of Vershire’s current responsibility center structure? Please be as explicit as you can. In particular, you should address the question of whether the plants should be held responsible for profits. If so, why? If not, where should profit responsibility be placed?
5. In general, what are the strengths and weaknesses of Vershire’s management control system, including the motivation process? What would you keep, eliminate, or add? Why?