Readings: Higashimaru Shoyu Company, Ltd. (A):
Price Control System
Harvard Business School

Introduction:
The is a case study analysis of Japanese company in food product production, mainly soy sauces. This 70-year-old company created by two firms dating back to 1700’s in origin. We are examining the effectiveness of Price Control System implemented in the 1980’s to control internal business process.

Background:
Higashimaru Shoyu Company, Ltd. In the 1990’s stood as the third largest firm in the industry with 5% market share. Initially, they competed primarily with soy sauce, yielding a 10% profit margin, industry standard in the 1960’s. At this time, demand became flat; profit margins decreased due to labor costs, bulk purchasing and proliferation of products. A steady decline in profit margin from 10% to 8% in 1980.

As with the industry, after 1960 Higashimaru expanded their product line as a growth strategy. They went from 10 products to over 200 products with approximately 650 packaging forms.

Key Problems:
With so many competitors and changes in consumer tastes (ex: increase desire for low-sodium products), Higashimaru’s plant manager, Toshio Okuno, was tasked with revitalizing the system (plant modernization) thereby, increasing profit margin by reducing costs.
The modernization program meant increased automation, increased cost awareness, more modern production control procedures with ‘not sufficiently well-educated group leaders.’

Okuno’s Solution Examined:
In 1980, Okuno developed techniques he implemented through his Price Control System (PCS). This system treated each group as a profit center, buying its resources from the previous group in the production process. As a profit center, each group was expected to make a small profit each month. To keep the PCS simple for the workers’ understanding, specific home-grown rules by Okuno placed the product transfer pricing, employee work re-allocation, cost-per-unit of output, and group profitability recognition.

Purpose:
The ultimate purpose of the PCS was to improve profit margin by driving down costs and improving alignment amongst the different silos within the organization. The PCS system supported the automation initiatives in the plant and changes that come along with modernization as well as improve overall accountability of workers.
To this end, of importance, was to educate the group leaders on specific profit & loss accountability and support their personal growth and understanding of modernization techniques. The PCS, thus, increased the managerial skills of group leaders, who were generally not well educated, and lacked skills to help manage modernization initiatives.
Also, equally of importance, a purpose of the PCS was to instill a profit-making attitude in the groups resulting in tighter cost controls by anticipating problems and working across silos. Okuno devised a simple system to aid learning/understanding and guide behaviors for reducing costs while improving cross-group collaboration to gain an understanding of impacts upon one another.

Strengths & Weaknesses of the PCS:
Okuno’s PCS did effectively turn each of 17 groups into profit centers. Teamwork within groups and collaboration between groups became a value. Each worker was able to contribute to cost reduction innovation and groups collaborated with each other to share overhead and reduce costs and waste. Costs overall were reduced. The PCS forced groups to find ways to increase yield or improve quality. Quality was measured, and groups rewarded for increases in quality, and in turn, penalized for decreases, thus keeping quality consistent and not degraded for higher profit.

Successful engagement of the workers occurred as productions groups were incented to use support services (now its profit center) more judiciously and efficiently. Costs reduced by the group’s problem solving including better clean up and equipment care. Production groups could see and understand the causality of activities and decisions through the real physical exchange of fake money through a fake bank. The groups were primarily incented on pride and modest monetary gains, thus focusing on improvements alone. The meetings between the managers and the workers allowed there to be skip-level meetings and to be sure that ideas for cost reduction spread across silos.

A strong positive aspect of the PCS system was the reduction / minimizing effect of the Principal-Agent Theory as described by group leaders stating that “seeing results of their efforts in lowering costs and increasing profits cause them to work harder.” Seeing that innovation of workers, when allowed, produces results, Okuno shifted criteria for promotions, considering problem-solving idea generation as a path to leadership.

The weaknesses of the PCS appear in that the group leaders could not see the ultimate impact on the company, maybe too micro-focused for the long run. The simplicity of the system may have limited thought and full understanding. With certain revenue and cost pricing fixed for PCS, the accounting did not match expectations or actual. Such items as transfer pricing set based on ‘budgeted’ cost per unit a year ahead and not actual current cost would skew true accountability and understanding.

The production process was highly interdependent, so groups had little ability to increase or decrease outputs. This simple made-up game-like system may have limited thought processes and goals for attaining better profit margin. Workers might seek baseline versus shoot for the stars. A possible entrepreneurial opportunity to increase revenue would not be possible, only to decrease costs. Over a ten-year period, the PCS system could have evolved from essential tactile learning into a more realistic account of production group by the groups themselves.

Signs of Effectiveness: The PCS was useful in that it created awareness of specific cost drivers and a desire by groups to drive down those associated costs. Several groups found ways to cooperate and lower costs (i.e., sharing responsibilities for specific processes when each group had labor with excess utilization capacity). Examples being:

• Koji prep group reduced wastewater charge by cleaning floors before washing them, thus reducing waste costs.
• Safety focuses in bottling group to reduce absenteeism. (reduced cost of borrowing labor)
• Moromi production at night to utilize cheaper electricity rates (refrigerators were big electricity consumers)
• Costs were reduced 7% in the first year alone.

The PCS proved efficient in that it improved maintenance and wear/tear awareness, resulting in fewer unscheduled breakdowns. The system also showed less wear and tear, which meant more efficient operations. For example, monitoring temperature in electric motors used to stir fermenting koji, the operation of conveyor belts and run machinery, using sensors to detect overheating equipment and acting to avoid motor burnout.

Cost savings were identified and worked out between groups such as low time commitment jobs between two groups shared between them to save money. By sharing labor costs, both groups’ profitability increased. Subsequently, alignment within groups and between groups improves by employees proactively looking for ways to lower costs or improve efficiencies.
As that other companies within and out of the industry were interested in learning about Okuno’s PCS techniques, overall effectiveness seen within the company and impact in the broader business community seeking to improve production costs.

Role of monthly meetings: The monthly meeting proved to be a successful vehicle for sharing best practices and how groups achieved results. These meetings helped spread innovations to other groups within the company.
As the groups would present their result in front of the other group leaders many benefits arose:
• Judging performance against pre-established standards, a form of performance evaluation.
• Using accounting data to describe progress and take responsibility, responsibility accounting.
• Could create a desire for change in group leaders which trickled down to employees.
• Public review of targeted profit margin and costs to compare to results.

Okuno’s PCS in broader community: Not only did Okuno shake things up at Higashimaru, but he also made an impact in the production community with methods others wish to understand and follow. The sharing of PCS techniques and best practices allows the company to position itself as an innovator and leader in business. Such details of the system itself, the mechanics of it, would require explanation including the adjustments made through trial and error (such as the bonus effect on profit factor). Key initiatives spawned such as the development of internal leadership and promoting individuals based on innovative ideas and problem-solving.
Educating the community is an extension of Okuno’s value system of bringing forward individuals into modernization. The modernization evolution within the plant to use as an education and inclusion tool throughout the community. The external exposure of successes of the program would boost the morale of employees and validate the internal efforts.
Overall, this is a coup for the Higashimaru brand to the customer and future employees, making it a desirable place to work.

Conclusion:
Appendix A: 2-Stage Diagram of Original Cost System – Make probable allocations across 17 groups, 14 Profit Centers, and 3 Cost Centers. 30% fixed costs; 60% variable costs; 10% profit ratio.
Appendix B: 2-Stage Diagram of Price Control System – 17 Profit Centers, cost allocations described in the case.

NOT IN PAPER:

For the team to complete: Conclusion section; Appendix section

I either thought it didn’t fit or didn’t know if needed or where:
Why tell? Okuno could implement a process consulting group to take advantage of his creation as another profit center outside of the core business.
Why tell? Pride.

Results: From 1985-1991, fixed costs rose approximately 2.5%, resulting in a 5.5% profitability ratio. Lower than 8% in 1980 when started PCS. [note: I checked, 5.5% is accurate…1980 start of PCS for ten years…this case as of 1992]

- Switchover costs (200 products) / Too many packaging forms-650 (align them)
- Impact of the location of the plant
- Impact of changing tastes of consumers
- Details of base budgeting applied
- shared resources by ‘buying’ time from one another
- Irony – group leaders couldn't think with an entrepreneurial mindset, but they ended up thinking outside of the box in several cases (sharing labor).
- A specific example of strength: mold prep yield quality
- Other learnings from this class referenced
- Cultural firings would be frowned upon – assumption not in the case.

Readings: Higashimaru Shoyu Company, Ltd. (A): Price Control Syste...