ARMCO INC. CASE CHAPTER 2

Armco Inc. is a producer of a variety of steel products such as stainless, electrical, and carbon, and many more. Armco was a leading steel manufacturer in the United Stated, being ranked sixth in 1990. Within Armco Inc., their Midwest division, Kansas City Works, was the largest. In 1990, Kansas City Works division approximately accounted for $250 million in sales, but within the last decade, sales declined.
Two products were primarily produced in Kansas City Works, grinding media and carbon wire rod. Kansas City Works’ manufacturing areas were divided into five centers which were: melting, casting, the 19” mill, the mod mill department, and the grinding media department. Kansas City Works was however not a low cost manufacturer. Each center consisted on one or more cost centers. The cost performance measurement used mainly was a summary measure called “Cost Above”. By using Cost Above measurement, manufacturing managers received an Operating Statistics Report. The Operating Statistics Report’s out gave managers five-year history, monthly and year-to-date actuals, monthly and year-to-date objectives, and variances. This report provided the same information that was used for financial reporting and inventory valuations purposes so when the manager’s familiar report was eliminated they became upset.
The Director of Finance, Bob Nenni, implemented a new system in 1991 which he believed would create two major improvements. He believed the new system would help the managers focus to be on few key objectives and improve the basis for evaluation of managers. One of the main change for managers was the elimination of the Cost Above measure, this meant that the production managers were no longer accountable for the costs incurred in their areas. With the new system, the Operating Statistics Report was eliminated. The new reports that were provided did not satisfaction the managers. But, even though the managers were not completely satisfied with the new system, Bob Nenni believed they were now more useful to Armco Inc.