Qperating'prot was determined by subtracting the SHOs

generaliand.administrative expenses and any corporate overhead

allocated to. it from'the direct prot. The general and administra
tiOn expenses included secretarial support, order processing,1
. voicing, acCOunting, and branch level personnel expenses. Finally, .
' . the branch 5 prOt before tax was determined by adjusting the '

branchs- operating prot for any extraordinary items, such as

_ disposing of- defective products or merchandising EOOdS '

' The SHQ- manager was held responsible for advertising, sal1 q)
ries, and administration expenses, even though any changes in the a,
level of salary and administration expenses had to be negotiated
With the head ofce. The primary measure used to evaluate SHO
performance was the difference between actual profit and planned
prot before taXes The difference, rather than the actual amount,
was iised so that any advantages due to location and product mix
were factored out of the evaluation. This approach was necessary
because SHOs responsible for districts with historically high mar-
ket shares were inherently more protable than SHOs responsible
'- _ for historically low market share districts as fewei sales, promo
tional, and advertising efforts were required per- yen of sales due '
, to lower levels of competition. Product mix had to be factored out
because Canned products were more profitable than bottled ones.
Consequently, any SHO that sold a higher percentage of canned
beer than another was automatically more protable. '

. Each SHO Was subdivided into sections and branches. Sales

sections were located inside the 5H0, while sales branches were
located outside it. A typical sales section or branch contained
between ve and six salespeople and was responsible for market
ing Kirin 3 products in a relatively small geOgraphical region. Each
section oi branch was held responsible for some of the rebates

piovided in its region, nearly all of the promotion expenses for

. the region, and some of the advertising xpenses. They were held
responsible for only some of the rebates ecause rebate levels in a
given geographical area reected decisi01 3 made at the head ofce
and the bi 1nch as well as the section.

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The SHO reporting SYStem reported branch or. section PrOIIfI' I

ability and contribution margin These reports Were used to moni~
Q tor how well each branch or section was managed. Every year Ia
budget was prepared for each branch and section. Actual results
were compared monthly to budget gures to monitor the level of
branch and section revenues and expenses. The monthly marginal
prot, or more precisely, the contribution to prots generated, was
considered the key to monitOring branch and section performance.
This monthly contribution was accumulated for tlie year and was
a used to determine the level of the year-end incentives paid to each .
branch and section. Individual line items within the budget were
not monitored closely because managers Were expected to make
their own decisions regarding the amountIof promotiQIn andadi '
vertising undertaken. Before increasing the overall levels of. these
costs, however, a section or branch manager WaS-I.'reqtiir_d to;
demonstrate to his direct supervisor that the additional eXpendi-.
tures would increase the units marginal prot. Poorly performing
branches or sections were not punished, but the-I branch or sec-
tion 3 result was knoWn to the SH0 management and above, and-
the circulation of poor results had been known to- influence the
promotion of branch or section managers: No.,bene tsIWCrIe
awarded to individuals under the incentive system. Management
believed that employees were rewarded by seeing their-- section or
branch become more successful. Superior performance was not
ignored, however; individuals tended to be promoted from sucI
cessful sections (Cooper 1994d, 6) ' . '
The beer division had developed an inCentive plan to provide
successful SHOS with additional promotion and advertising funds
for the last 'six months of the year. The majority of Ithdse funds;
was used to promote products during the December yearend.
holiday season when beer consumption was much higher than 111 :
the other winter months. For example, while only 30 percent of
annual sales occurred in he four winter months, December ac-
counted for one- -third of tliose sales, or about 10 percent of annual
sales. The additional ptomotidn and advertising funds allowed the I
branches and sections to increase their yearend IsalIes despite in-I 'I

"nnn nnmond-v 4-: An

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'IIIdesigned to mak
, under his contro
IIing things aboUt the system at

- . monitored and the reward syste I

I I quite large by Western standards, with only ve to six peop e in,

The SOMRIS isI. Ia- IIIcIlassic. prot center control system that is
e a manager responsible for the revenues and Costs

1. From the Western perspective, the only surpris-

e the number of sections that are

m. While the number of centers is

Ieach center, the prot pressure is driVCn to the bottom of Ithe sales

I- organization. Everyone 111 the sales division 15 aware of the system

I :II III-II 'Ian'd interacts with it on an ongoing basis. The reward system is
I :I I. I; typically Japanese. -Work'ers are not directly rewarded or punished
T :I-.' 3: for their performance} Association with a more successful branch
or section is the 1nd1v1dual Is reward. The leader of the unit benets

' from an improved chance of promotion.

I' Plant Management Reporting ISyIstIem _ .

The PMRS has two primary objectives: to improve cost manage-

I merit and to introduce the concept of prot control. Kirin 5 man-

. I, I'-.I agement felt that it was important to improve the brewery s ability
Ito manage costs because: overall costs had continued to rise despite
more than ten years I'Iof aggressive cost reduction programs.

I I reducing material, personnel, and facility investment costs, not on

Under the old system, cost reduction programs focused on

brewery protiabilityII Thus, brewery managers knew their cost

reduction objectivegand how well these objeCtives were achieved,

 Iint they did not know how protable their breweries were. Fur-

-.III'II'tlIiIermo're, managers-I could not be certain that the cost reductions

'- were improving the brewery sI protability:

II iI'For example, theII corporate head office might initiate a program

I '. to reduce overtime c-Osts. At the 'end of the year, the head office

I 'I Ivvquld report back 10' the facility that it had saved a certain

amount of money by reducing overtime by such a percentage.

I I 1' Unfortunately, there was no way to be certain that the reported

I I savmgs represented Ire'a'l Profits. The overtime Imight have been

reduced Ct by bIIICQITUngI more efficient but by increasinq un-

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"1111.11

Al
1

Vuu. .-

\1-

. sum

presi:3:n::::e:let iiiiuprot- oriented approach would create

es which was V'consid'eied especially

important given existing market cond1t1ons The introduction of
new beer products made it mOre difcult to maintain production
efciencies. For example, a bottling line s capacity. was decreased.-I'
when additional products were introduced because the number of
required changeoVers increased. Furthermore, even with beer saleS'
increasing at only .2 percent per annum, existing breweries werei'leI
reaching their capacity. Consequently, it was important to create

pressures that would lead to increased output Volumes, thus avoid-

ing the need to build new brewer1es

The PMRS generated pressure to increase Ip'rIoIduction volume V

because it converted the breweries to profit centers. Since brew.
eries could boost their profits both by increasing production voIV-VI
ume as well as by decreasing costs, 1nc|ud1ng revenue in- the . I
evaluation metric changed the irVicentIiVes .roVIr brewery personnel-I. : .
For example, when a brewery was treated as a cost center,- man I.IIII
agement would view overtime negatively because it increased
costs. If a breWery Was considered a profit center, oVertime . V
would be viewed positively if the additianTVIal revenue it generated ' I
exceeded its costs. Thus, shifting- to a profit center orientation ' ' I
enabled each plant manager to act like an entrepreneur and
maximize brewery profitability. (Cooper. 1V'9VV9.V4IdV, 7)
The cosfsfdto set pricemre based upon the actual results .' .'
of the rst ten n10ntth' of the prior year. These costs included both? I. I.
variable and xed expenses. The budgeted costs included any cost-I
reductions that had been achieved in. those ten months but were: i
not adjusted for any anticipated savings during the coming year; .1
Reported prots were used to deter111ineIthe size of the lnC11.-' 7'
tives awarded to the plant at the end of the year Again, individualIII
employees did not benet directly from the Vincentive plan InsteVaClI', . -
the Vgeneral manager ofl tl 1e plant was 11 cc to use the incentive funds I'

luv- u] vu-nvuu- :- IVI

to improve the morale of the workforce. He could, if he VVlShed

throw a patty, purchase a karaoke set for the employees; plant 3
, gardV,.'en or even purchase a new piece of equipment that, while or
cost justied, onLild 1mprove working conditions. Unlike the sales
I ofce thcVenI'tive Vsystem in which the incentive was awarded in the
same year as it was earned, the plant incentive scheme awarded
the incentive at the beginning of the next year.
I The prot of each brewery was monitored monthly using a
._ bireWery protability report that was similar in structure to the
.'SHQ protability report. The variable costs of production were
subtracted from the monthly Sales-of the brewery to the SHOE f0
, give I-cheI marginal prot. Variable production costs included the
.. majorIraw material expenses, major material expenses, variable
,V'processViIrVig costs, and any carryover from seminished goods.
' V Fixed costs of production were subtracted from the resulting mar -
ginal prot to give the operating prot. Fixed costs included the
xed portiOn of processing costs, labor expenses, depreciatipn,
V I and general and administrative expenses. Any ext1a01d1nary items, m
I, such as the disposal of excess raw materials and the safe of seiapTEp
were subtracted from or added to the operating Iprot to give the
plant prot. Finally, payments to headquarters were subtracted to
.give the nal plant prot. A simplied Plant Protability Report

I is Vshown' m Figure 12 3.
The VcIOSt- -oVriented variance between actual and planned prot 11

was the VpV'rirnary measure used to evaluate plant performance. This

number was used because it factored out the effects of the plant s
scale and} product mix on productivity. The volume- oriented vari-
IancesI were not considered the responsibility oVVf the plants because
Changes in Sales levels and hence, productiono vIolumes were out-
side the control of plant management.

.The PMRS is a classic control system that could be found just

as easily in a Western rm as in a Japanese rm. What is most
interesting about it is the way in which it was eXpeCted to increase
the. output level of the breweries, a direct outcome of the applica
tion of the pret pressure.
pres: {5:122:11 1111: :grfisvtvhat unexpected benet of it was: the

to become more effective and efuent.

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VIl ,eV

Because under the Old system breweriestwere treated as'IpaIrtial' cost.

centers, the data to support cost'Imana'g'ement-Isystems IwIere not
available, and the breweries had not developed s'opl1i'sItiI1Ii2Iated cost
management systems The ConverSio'n of. Kirins Kyoto brewery
into a prot center increalicd the nancial information available
to brewery persOnnel and led directly to_ the'Ierner'gerVicIe. of the,
Kyoto brewery system. I l 5I I 'I I

, SUMMARY

,A
Operational controlis achieved in two ways: rst,byV~ensuring that
, individuals are held responsible only for the 'costs'~t_l1IC_y Icontrolg'
second, by using variance analysis to "evaluate h'oIVv'VIwell those
individuals control theirIcostsII. To ensIureth'h'at individuals .areIhVeVld I.
responsible only, for the costs they control, it IisV.necefssary~to
establish responsibility centers. For responsibilityrenters-Ito be

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