BETTER BEAUTY, INC. CASE STUDY ( Management Control Systems _ Page 196)

Planning and budgeting

Since he assumed the presidency, Mr. Williams had taken steps to formalize some of BBI's administrative processes and procedures. Long-range planning was still done informally at the top corporate level, and the company's long-range goals and strategies were nor communicated in detail to all functional managers. The annual budgeting process, however, involved several levels of management. Budgeting began in mid- July when top management gave each functional area preliminary targets for its operating and capital budgets. Included in this package was a set of other performance measures specific to the function. For example, marketing managers were given preliminary sales growth targets for each of the various categories of existing products, manufacturing managers were given preliminary cost targets by product category, and R&D managers were given cost improvement targets and timetables for the introduction of new products. The functional managers and their subordinates were expected to coordinate their plans with those of other functional managers and to prepare their plans down to the product level. A series of budget reviews was held in October and early November, and final budgets and performance targets were fixed by mid-November. During the year, formal performance reviews were- conducted on a monthly basis. Managers were expected to be able to explain any major variances in actual versus planned performance to a top executive committee. If significant variances were expected to continue, the budgets were revised, although it was understood by all the managers involved that the original budget would be the standard used to evaluate individual manager's performance at year end.

Capital budgeting

Capital budgeting reviews took place in mid-September. Functional managers presented formal capital appropriation requests to a top management commit- tee. For several years the company had published guidelines suggesting that each project being presented should be justified by showing a two-year payback on invested funds. This short-term focus was emphasized on a continual basis given the increasing price and profit squeeze facing the firm. The guidelines for developing and presenting a capital appropriations request were formalized in the budget manual and included the following instructions for 2013:

1. Budgeted capital spending proposals must be guided by the general trends indicated in the operating budget, especially as regards unit (volume) growth product introduction. and new product introductions.

2. Capacity expansion projects should be restricted to those absolutely necessary to achieve 2013 profit and sales goals and objectives. They must also meet she criterion of providing the appropriate economic returns in a timely fashion.

3. Cost reduction projects should be given a high priority. However, serious consideration will be given by corporate to business constraints at the time approval is requested.

4. Spending of a replacement nature should be deferred unless a serious impediment to operations is threatened.

5. Spending for quality improvement should be considered only if the product's marketability is seriously affected.

6. All non-research expenditures related to marketing of new products are to provide an economic justification and reflect approval by the appropriate senior executive.

Incentive compensation

Incentive compensation was provided annually to man- agers down to the director level in the firm (one organizational level below vice president). In January, after the audit was finalized, a bonus pool was established as a pre-established percentage of corporate net income. In February, just after the annual performance review meetings, a bonus committee, consisting of the top company officers, allocated this pool to individual managers. The evaluations of performance were done subjectively, but based heavily on objective measures of performance.

In normal years, average bonuses for vice presidents were approximately 50% of base salary. In good years, the bonuses could range up to 100% of salary. The average and maximum bonuses for director-level personnel (one level below vice president) were 60% of those for the vice presidents. Formal performance- dependent bonuses were not paid to personnel below the director level.

Cost reduction program

An important part of Mr. Williams's upgrading of BBI's management systems was the implementation of a formal cost-reduction program supported by a lean management philosophy. Cost reductions were deemed to be of two basic types: cost avoidance projects (CAPS) and cost improvement projects (CIPS). Any project designed to reduce direct materials costs without a related change in existing products or manufacturing processes was designated as a CAP. The company's CAP goal was an annual 5% reduction in materials costs. CIPS were projects designed to effect cost reductions through process or product changes, such as reformulation of a product to incorporate less expensive ingredients. The company's budgeting manual explained the CIP goal: Each manufacturing location is to develop and implement Cost Improvement Programs (CIPS) as part of their annual budget package. CIPS are specific action programs directed towards a measurable reduction in existing manufacturing cost levels. The annualized savings from these CIPS should be equal to or greater than 5% of the prior year's total cost of goods manufactured, adjusted for the volume and mix changes. The action programs should encompass all factors of manufacturing, including:

all labor costs associated with manufacturing

all overhead expenses associated with manufacturing

only those material costs resulting from: reduced usage and improved yields reduced freight-in costs.

The Purchasing and Value Analysis departments were most directly responsible for identifying CAP projects. R&D and Engineering were the departments who were directly charged with identifying CIP projects. The CIP ideas, however, had to be implemented by the operating manager most directly affected. In most cases, this manager was in manufacturing.

The CIP/CAP projects were expected to achieve a one-year payback where possible. CIP/CAP projects that did not promise to meet this payback criterion were subjected to close scrutiny by Mr. Williams's staff before approval would be granted. When the cost reduction program was first introduced, the company realized many important and significant cost savings. In recent years, however, the company had not been achieving its cost improvement targets. The targets and actual results of the cost reductions achieved for each of the years 2009-2013 are shown in Exhibit 4.

An example:

The A-53 project Some of the major problems in the cost reduction pro- gram can be illustrated by describing one large CIP project called the A-53 project. The A-53 project involved the substitution of an aqueous aerosol, Dymel-152a/ Hydrocarbon, for the existing fluorocarbon mixture. As a liquefied gas propellant, Dymel-152a had obvious safety and quality benefits over the existing com- pressed gas fluorocarbon being used. Designed for the low-pressure spray that defined perfume propellants, Dymel-152a had a much lower fill pressure when mixed with fragrance concentrate than the currently used compressed gas alternative. This meant that BBI could eliminate the use of bottles with relatively expensive plastic coatings that had been necessary with com- pressed gas fluorocarbon currently in use. The plastic coating had been required to ensure the bottles' integrity and to pass industry safety standards, such as stability when placed in a warm water bath. The other advantage was that Dymel-152a was less flammable than the current fluorocarbon blend, providing advantages in both safety and in the production procedures that could be used.

BBI and the other firms in the fragrance industry had used fluorocarbons as propellants almost exclusively up until the mid-1970s, when fluorocarbons were banned by the US government because of concerns about their destroying the ozone layer of the atmosphere. The propellant suppliers who had relied on fluorocarbons as their major sources of revenues were severely affected by the ban. Immediately following the ban, these companies aimed much of their research toward developing a new ozone-safe fluorocarbon propellant. One of these improved gases was currently in use at BBI. That being said, hydrocarbons, especially products like Dymel152a, were still deemed superior in many ways. Personnel in BBI's R&D department noted the development of Dymel-152a and immediately saw its potential advantages. They tested the new propellant in simulated production settings and found it superior to the propellants being used. Based on these results, they prepared a Capital Appropriation Request, the summary page of which is shown in Exhibit 5. A summary of their investment analysis is shown in Exhibit 6.

On January 14, 2013, BBI's capital appropriations committee met and approved the money for the A-53 project. Mr. Williams's initial reaction to the project was very enthusiastic, as indicated in the memo shown in Exhibit 7. Shortly thereafter, Don Jacobi (VP-R&D) had people in his department draw up specifications for the use of Dymel-152a on the production line. The propellant switchover was scheduled to take place on March 1, 2013. Right from the start, the A-53 project ran into several serious problems. One problem was a production delay - the implementation could not be effected until the middle of April. More seriously, though, was when Dymel-152a was put into bottles that were not properly filled with fragrance, it became very unstable. The pressure inside the larger bottles then rose from 40 pounds per square inch (psi) to over 200 psi, a level that the larger-sized bottles (2 oz. and larger) without a plastic coating could not always withstand. As a result, quality control had to reject many bottles because of cracking, and several bottles had even exploded while still in the production area.

Question 1:

Based on the information provided in the case, identify 3 goals of the organization and/ or part of the organization identified in the case.

Question 2:

a. Identify 5 of the most important or immediate issues (i.e the specific decision or problem, challenge or opportunity faced by the decision maker) raised in the case. Avoid generic statements, such as "bad communication".

b. Provide an example from the case of each of the issues identified above which illustrates each issue identified and the impact on the organization

Question 3:

The company has identified they have limited resources( time, money, staff time) to make any change however they have asked you to identify the most important issue they should address.

a. identify the issue the one issue should address

b. what should be done, by whom and when

c. Explain why the issue should the single one the company should focus on

Question 4:

a. Identify and discuss 2 management controls raised in the case that are not working correctly or having unintended impacts or should be there and is not. Provide example from the case.

b. For each of the management controls identified above:

• Explain what is not working correctly or missing and provide and example from the case.
• Identify the intended affect of the control and the behaviour that it will influence in the organization
• Discuss the relative value of addressing this issue

Question 5:

The company seems very focused on cost alone. As we learned, there needs to be a balanced view of the organization when looking at performance. What other areas should be considered and why? Explain your answer as if you were presenting a written response to the company.