Fizzy Cola Bottling Company

REGIONAL DISTRIBUTOR OF SOFT DRINK PRODUCTS Industry and Company Background Fizzy Cola Bottling Company of Georgia, Inc. (FCBCG), a regional distributor of nonalcoholic beverage products, serves most of Georgia and the eastern part of Alabama. The company began operations in 1961, with an exclusive franchise from the rapidly expanding Fizzy Cola Company (FCC) of Fort Worth, Texas. The Texas Company, in keeping with industry practice in the 1930s and 1940s, originally supplied a relatively small local market. However, with the growing popularity of these products following World War II, FCC began to expand its horizons and set its sights on national-and later international-operation. The strategy for achieving this goal was for the company to focus its energies on the production of beverage concentrates and syrups, leaving franchisees to handle the packaging and distribution responsibilities. The Coca-Cola Company and PepsiCo, Inc., moved toward consolidation of their bottling firms into larger and larger units that were either partially or completely owned by the parent companies, but FCC allowed its bottlers to remain small and independent, and many of them are still family-run operations. FCC always envisioned possible vertical integration of the beverage production and distribution functions, but such steps have not yet been taken and the relationships between FCC and its franchisee-distributors have grown progressively stronger. Fizzy Cola Bottling Company of Georgia, Inc., was founded by Alfred J. Johnson II and Bob K. Geronimo. Johnson had experience in the soft drink industry through various positions in production and management at the Coca-Cola headquarters in Atlanta. Geronimo had general administrative experience and substantial personal wealth (essential for the success of the new company) from a family textile business in West Georgia. The two men decided to go into business together, with Johnson as president and Geronimo as vice-president. Twenty employees were hired to perform all the functions of marketing, production, delivery, and administration. The fledgling company rented a warehouse in Columbus, Georgia, to serve as its production plant, leased the necessary bottling equipment, and bought three delivery trucks. From these modest beginnings, FCBCG has grown to be Fizzy Cola Company's largest bottling franchisee in the Southeastern United States. Its corporate headquarters and main bottling plant are still in downtown Columbus, but distribution centers are located in Albany, Atlanta, Milledgeville, and Rome, Georgia, as well as Huntsville, Alabama. The total payroll, down somewhat from its peak in 1982 as a result of increasing automation of the packaging and handling processes, numbers 750 people, including about 150 drivers who deliver beverage products to the customers. Fizzy Cola Company's original product was a cola drink that competed directly with Pepsi-Cola and Coke. It is still the company's cash cow, generating 30 percent of total revenue and 45 percent of operating income, but the product line has been expanded over the years to

include diet and decaffeinated colas and orange and lime sodas. Ten years ago, FCC bought out a small Tennessee firm that produced a chocolate cola, similar to the beverages sold in neighborhood drug stores before World War II. The chocolate cola has made a surprising comeback and now sells well among teenagers and young adults, as well as among older people who remember the beverage from their childhood. FCBCG distributes the whole line of FCC's eight products. The term "bottling company" persists in the beverage industry. However, a large percentage of the total worldwide output of soft drinks is now packaged in aluminum cans. FCBCG currently sells roughly 40 percent of its output in 8- and 12-oz. cans, 20 percent in 10-oz. glass bottles, and most of the remainder in 16-oz., one-liter, or two-liter plastic bottles. The company is currently experimenting with 3-liter plastic bottles, but the associated volume is still small. In addition, the company sells about 5 percent of its total beverage output in bulk, mostly in fountain cans and 55-gallon drums. The company's traditional customer base consists of supermarkets, convenience stores, restaurants, bars, and transportation companies, including two of the major airlines. However, since the early 1980s, vending machines have provided a substantial and growing segment of the market. FCBCG's vending machines now operate in shopping malls, service stations, schools, and other businesses, alongside machines dispensing products of the "Big Two" soft drink firms. Most of the vending machines are rented, and FCBCG is liable for servicing the machines as well as for replenishing them. Fizzy Cola Bottling Company of Georgia's franchise agreement requires it to buy all its cola syrup, fruit concentrate, labels, and promotional material from FCC. However, the company is free to purchase bottles, cans, carbon dioxide (C02) gas, and miscellaneous supplies from other vendors. The franchiser takes the responsibility for all institutional advertising and much product advertising, particularly the expensive commercials on national television. FCBCG pays for product promotion throughout its own sales territory, mostly in the form of local television commercials and billboard advertising. It also sets prices in its territory. Price competition is fierce in the beverage bottling industry. Although an 8-oz. drink that once sold for 5 cents now sells for about 50 cents, prices have not kept pace with general inflation. In fact, average wholesale soft-drink prices declined by 6 percent between 1986 and 1989, largely because of price wars. Price wars have erupted every few years among the competing bottling companies in an attempt to gain market share. Lately, however, the bottling companies have realized that the deep discounts may have been self-defeating. Profits have been squeezed and a few outdated production plants have been closed in an industry shakeout, but consumer preferences for the various brands have not materially shifted. Particularly worrisome for the bottling companies, the market has become increasingly resistant to the regular prices. Customers who have been able to buy a six-pack of soft drinks on special for $1.25 resent having to pay the regular price of more than twice that much. Some industry analysts believe that the companies have learned their lesson and that greater price stability can now be anticipated.

Management Style Fizzy Cola Bottling Company of Georgia is organized on functional lines, and management is highly centralized. Geronimo is now retired and Johnson deceased, but the company is still run by a small management team, consisting mostly of long-term employees who worked under the founders. The current president is Johnson's daughter Molly, affectionately known throughout the company as "Miss Molly." Johnson's son Stephen and two of Geronimo's relatives serve on the Board of Directors. Three vice-presidents report to Miss Molly: the Vice-President for Operations, Rod L. Bunion; the Vice-President for Marketing, Alice T. Hayes; and the Vice-President for Finance, Alan C. Williams. Johnson and her three vice-presidents make all of the larger decisions and many of the smaller ones that, in other companies, might be delegated to middle management. The managers at the Columbus headquarters who are in charge of purchasing, production, sales, and shipping, and the managers of the local distribution centers nominally have autonomy in their areas of responsibility. However, their autonomy is largely ceremonial and upper management keeps them on a short leash. The previous Sales Manager quit his job after a dispute with upper management in which he complained about bearing all the responsibility for sales, but having no authority to back it up. Production and Distribution Fizzy Cola Bottling Company of Georgia and its competitors have responded to the pressure on profits by trying to reduce raw materials costs, cut inventories, and automate production. The trend toward plastic containers was an important effort to reduce materials costs. While glass and aluminum prices have steadily risen over the last several years, the cost of the resin used to make plastic containers has fallen. Unfortunately, any savings in this area may be more than offset by a recently announced 4 percent increase in the price FCC charges for its syrup and concentrates. This increase is expected to hurt FCBCG and its sibling franchisees, at least in the short run. The company has never achieved the ideal "just-in-time" inventory system, but over a ten-year period it has managed to reduce its inventories or syrup concentrate, carbon dioxide, containers, and labels from ten days' to every day's supply. To accomplish this feat, the company entered into long-term relationships with a small number of loyal vendors, guaranteeing demand for delivery goods and sharing with them its long-run purchasing expectations. The vendors in return, guarantee consistent quality and on-schedule delivery. Fast-moving items are delivered daily, or in some instances even more than once per day. To meet production needs. Although restricting purchases to just a few vendors reduced competition and may have resulted in somewhat higher raw-materials prices, FCBCG has benefited from the relationship with its vendors through lower inventories and fewer rejects. For example, ten years ago, nearly one percent of the cans received from vendors were rejected; today, the rejection rate is less than one-hundredth of one percent. Efforts have also been made to reduce finished-product inventories. No more than one day's output normally is kept on hand at the Columbus production plant, and no more than two days' sales are retained at the

local distribution centers. Whenever possible, the trucks are loaded as production is completed and they leave either the same day or early the following day. Reducing finished goods inventory to such low levels is relatively easy if demand can be predicted accurately or, better still, controlled. Demand for soft drink products is seasonal. However, fifty years' data are available, both from industry and company sources, documenting demand fluctuations from month to month, and even from week to week. To help smooth out seasonal and random week-by-week demand fluctuations, FCBCG offers incentives to customers to contract for the delivery of soft drinks at a steady rate over an extended time period. Most of the larger customers are willing to do this. A supermarket chain may contract for the delivery of 5,000 cases of Fizzy Cola each week for the next six months. Although most of the smaller customers could not make such a commitment, the large number of customers ensures good overall uniformity of demand. In turn, uniform demand permits the production and prompt distribution of large batches of each beverage product. In addition, FCBCG has tried to find ways of minimizing finished-good inventory, even with small production batches. The two keys to success are a "demand-pull" strategy, in which production is geared closely to current orders, and flexible, efficient production methods. Over the last ten years, FCBCG has invested over $50 million in automated processing, bottling, and handling equipment. Production of each beverage product consists of mixing the syrup or concentrate with water, pumping in carbon dioxide to create the effervescence, filling the can or bottle, affixing the appropriate label, and packing the cans or bottles into cases or crates. Eight separate production lines are maintained, one for each product. However, in an emergency, the equipment producing the regular, diet, and decaffeinated colas can be used interchangeably. Each production line can handle all sizes of cans or glass or plastic bottles, and switching from one type of container to another requires no more than ten minutes of set-up time. The equipment can run continuously, and product quality is monitored in real time by electronic and chemical sensors. Typically, however, the equipment is stopped every fifteen hours for cleaning and further inspection. Company inspectors try to detect any processing problems and verify compliance with government hygiene standards. They maintain an inspection log that is examined by state health inspectors who visit the plant on a monthly basis. Old-time employees remember the back-breaking tasks of moving raw materials from inventory storage to the production plant and transporting cases or crates of bottles to the loading bays. Now virtually all of these tasks are performed by automated handling equipment. Containers of syrup and concentrate and cases of empty cans or bottles are loaded directly from incoming trucks onto gantries that run into the production building. Carbon dioxide tankers remain outside the building and simply hook up to hoses that transfer the gas into large holding tanks. Cases of finished product are moved on conveyer belts directly to the loading bays and onto the trucks. Only if there is a snag in the availability of trucks-which typically happens about once per week-is it necessary to offload the cases onto the floor of the loading sheds and subsequently loads the trucks by hand.

Existing Accounting System The present accounting system was instituted in the early 1970s. It was designed by a project team composed largely of personnel from the CPA firm that performed FCBCG's external audit. The system was implemented on a mainframe computer installed at the Columbus headquarters, but was intended to serve the needs of the whole organization. The computer system supports multitasking, operating in a batch mode. A printer terminal serves as the system console, and eight interactive terminals provide for on-line data entry and file maintenance. Two 60-MB hard disk drives and a 1,600 b.p.i. (bits per inch) tape drive provide for secondary and tertiary data storage. Communication between the distribution centers and Columbus is restricted to remote job entry and very limited remote output that can be accommodated on teletype machines. Each distribution center has two teletype machines which communicate with the mainframe through multiplexing modems and the telephone lines. Initially, the purchasing, production, sales order processing, and related inventory control functions were computerized. The cost accounting, billing and collections, general ledger, and payroll applications were added two years later. All the applications software was written in COBOL. Sales are solicited both from Columbus and also from the local distribution centers, each of which has a small sales force. Sales orders originating from the distribution centers are keyed into teletype machines and transmitted to headquarters. Upon arrival, these sales orders and others originating at Columbus are initially written to a scratch file. Twice per day, a batch program is run that automatically assigns order numbers and writes the sales records to the master sales file. The term master file reflects the terminology used at FCBCG. The reader will note that some of esc files should more accurately be referred to as transaction files. When a single sales order calls for multiple deliveries, it is broken up into multiple orders, each with a different sales order number. Thus, each sales order number corresponds to a single delivery to the particular customer; however, a cross reference is made to related sales order numbers. The records in the master sales file are divided into two sub records, designated as types A and B. Each record includes one A sub record, containing data relating to the order as a whole, and one or more B sub records, containing data on the individual products ordered (Exhibit 1). Here, a product refers both to a soft drink product line for example, cola or orange soda-and to the size and type of container. A beverage sold in 8-oz. cans has a different product number than the same beverage sold in 12-oz. cans. Every day, clerks in the production control office run a second batch program that accesses the sales file, identifies sales orders due for delivery within three working days, and copies the records in question into a temporary sales order file. Daily sales order reports are printed in the same operation. The temporary files are edited from on-line video display terminals to make any necessary changes. The clerks scan through the records in the temporary order files and can manually deselect any orders that are to

be excluded from the following day's production. Deselection of order records, which may be done for a variety of reasons such as a customer credit-hold, requires written authorization by the production supervisor. After editing, the temporary files are run through another batch program that sorts the orders by product line. When a sales order is written for several product lines, it is divided into several related production orders. Production order numbers are assigned and records are automatically written to a master production file. The type B sub records in this file are similar in content and forma to those in the master sales file; however, the type A sub records contain only data relating to production (Exhibit 2). The edited temporary order files are run through a fourth batch program that identifies raw materials requirements: syrup or concentrate, water, carbon dioxide, bottles or cans, and labels. The formula for each product, which specifies the proportion of syrup or concentrate, water, and carbon dioxide to be used, is stored in a formula master file that is accessed by this program (Exhibit 3). A materials requirements report that lists the materials needed for the next three days' production is prepared for use by the inventory control and purchasing clerks. The clerks review the report and check that the materials are either on hand or are due for delivery in time for production. Reference is made to the master purchases file in which are recorded all purchase orders that have been placed, together with the target delivery dates. The company makes a considerable effort to preserve uniform rates of production, in turn guaranteeing uniform rates of materials deliveries. However, a "glitch" sometimes occurs, and the clerks must make an urgent telephone call to the vendor requesting an adjustment in the quantities to be delivered either the next day or for the next several days. One of the major accounting applications is a standard process costing system. The consulting firm that designed the accounting system stressed the attractiveness of standard costing because of the continuous production of standardized products. The per-unit standards for each product are stored in a standard cost master file. This file contains the materials' quantity and price, the labor hour allowance and rate, and the overhead rate based on direct labor costs. Unfortunately, the documentation on the formula master file and standard cost master files has been lost. Production cost reports are prepared on a monthly basis for the mixing bottling, and packing operations. For each operation and product, the reports show the number of equivalent units of production with respect to:

costs transferred in from the previous operation; costs of the major materials categories (syrup, concentrate,

bottles, cans, labels, and miscellaneous items such as packing materials); and

conversion costs (labor and overhead). Costs are assigned to the actual equivalent units on the basis of standard costs per equivalent unit. The layout of the production cost report is reproduced from the original design documentation in Exhibit 4. Along with the production cost reports, monthly standard cost variance reports are prepared for the materials categories, labor, and

overhead (see Exhibit 5). Both sets of reports are available by the tenth of the month following the end of the reporting period. The master sales file provides the basis for preparing Loading Reports that list both the products to be loaded onto each truck and the customers that have ordered them. Each Loading Report then serves as a driver's manifest, indicating the goods for which the driver is responsible until delivery is completed. The master sales file also provides the basis for customer billing. High-volume customers, particularly those placing ongoing orders, are billed from the corporate headquarters, typically on thirty-day terms. However, smaller customers often are expected to pay for beverages upon delivery, and the drivers have the responsibility of collecting the cash. Accordingly, drivers must not only account for the cases of soft drinks on their trucks but also provide a proper accounting of cash received. A Driver's Daily Report (Exhibit 6) must be turned in by each driver upon his or her return to the distribution point. The front side of the report lists the deliveries made, cash collected, and expenses incurred. Drivers carry company credit cards with which to buy fuel for the trucks, and they are reimbursed for incidental cash expenses. The back side of the report reconciles the number of units of each product loaded and delivered. Any remaining units stay on the trucks until the following day and are recorded by the driver on that day's Daily Report, along with the number of new units loaded. Possible New Accounting System The present accounting system works reasonably well, although there is increasing concern that it has not kept pace with the advances made in production and materials-handling technology. The batch processing system based on conventional files is cumbersome and slow, and communication with the distribution" centers is primitive. The manager of the computer center has recommended that a new computer system be installed and that new software be acquired that could interface with a data base management system. There is another concern with regard to the standard cost system. With the large-scale automation of the company's production plant, the continued relevance of the standard cost system has been called into question more than once. The Vice-President for Operations attended a Rotary Club meeting at which an expert on computer-integrated manufacturing expressed the opinion that standard costing is now as dead as a dodo. Control is required on a minute-by-minute basis, and variance reports, which may not be available until several weeks after something goes wrong, are obviously useless. The vice-president returned that afternoon and posed some penetrating questions to the controller, which she was hard put to answer. Later the same month, one of the external auditors inform the controller that many firms had abandoned standard costing systems after their factories had been automated. Last month, the controller suggested that a consulting firm be called in to perform a systems analysis. The firm would be asked to develop an overall plan for the accounting system that would address the various concerns mentioned earlier; to evaluate the existing system; and to make appropriate recommend actions for an improved system. Some

improvements might be relatively minor, such as providing additional management reports. Others might be more radical, such as replacing the present computer hardware and software with more modern technologies. Upper management was receptive to the idea and has retained a consulting firm to perform the study. You are the senior consultant, in charge of the engagement. Required Determination of System Objectives 1. Prepare a statement of objectives for an accounting information system relevant to FCBCG's requirements. 2. Does FCBCG's strongly centralized management style affect the type of accounting system the company needs? Would it make any difference if (a) middle managers at the Columbus headquarters? (b) distribution-center managers, had more autonomy? 3. What are the accounting implications, if any, of the just-in-time inventory and flexible-manufacturing concepts? Evaluation of the Existing System 4. Prepare an organization chart showing the management structure of Fizzy Cola Bottling Company of Georgia. Make up names for any individuals who are not referred to by name in the case and include other positions that you feel would be needed either at the corporate headquarters or at a sample distribution center. There is no need to include all of the distribution centers. 5. Prepare in good form flowchart of the sales order processing, production, and cost accounting systems used by FCBCG. Be sure to properly represent the various types of paperwork, file media, processing operations, and reports involved. 6. Evaluate the adequacy of the existing computer system and processing technology. 7. Comment on the extent to which the accounting information system (aside from its computer technology already discussed in Exercise 5) has kept pace with improvements in the production and materials handling systems. Is the accounting system seriously deficient? Recommendations for an Improved System 8. Prepare an overall strategy for making FCBCG's accounting information system more responsive to the company's needs. 9. Exhibits 4 and 5 show detailed reports-for each product and process-of standard production costs and variances from standard. These reports would be suitable for routine distribution to first-level management. Design summary reports, showing the corresponding totals for each process and for the company as a whole, that would be distributed to a higher level of management.

10. You agree with the computer-center manager that the present conventional file system should be replaced with a relational data base management system. In order to implement such a system, the present files are replaced by suitable tables. These tables must be concise, properly keyed, and free from redundancy. Take the file specifications presented in Exhibits 1-3 draw E-R Model (diagram) and design a set of relational data base tables. 11. In order to further reduce inventory levels and improve the timing of deliveries, an electronic data interchange (EDI) system could be implemented, providing on-line communications with suppliers. To order a raw material, a designated employee would key in the supplier's code number and the catalog number and quantity of the material needed. An electronic purchase order would then be transmitted to the supplier. Rod Bunion has read about this concept in a trade journal, but is not sure whether it would be worthwhile for FCBCG. Investigate the feasibility of an EDI system and write a memo to Mr. Bunion, detailing both its positive and negative features. Conclude with a recommendation to proceed or not to proceed with the design of such a system.