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Management Control Systems 4-6

Management Control group 1| Main Case Study 4-6| Mini case study 5-2| Tom Breteler – 930228 | Max Leigh Norman – 910904 Hanway Tran – 831226 16/11/2012| | | Main Case Study 4-6: Grand Jean Company Introduction This case study covers case 4-6 of ‘Management Control Systems’, written by Robert N. Anthony and Vijay Govindarajan (2007, 12th edition). The case discusses Grand Jean Company, a jeans manufacturing company, and describes several processes and issues in their organisation and management.

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In this report, we will we review and discuss the main problems that Grand Jean Company faces, analyse and propose solutions to these problems. During the course of this report, we will often refer to theory from the aforementioned literature, as well as external sources where needed. Explanations of concepts, theories and jargon will be given where necessary, but references will be provided in the end of the report easy reference. Lastly, we realise our solutions have their limitations and are unlikely to be implemented easily, or immediately effective.

But we believe that our proposed changes will allow the company to reap the benefits from knowledge sharing and increased efficiency, as both plant managers and contractors can cooperate to find the best practice to accomplish their tasks at hand. Background Grand Jean is a clothing company with a long history, having been founded in the mid 18th century it has survived several great economic crises such as two world wars, the great depression in the late 1920s and the 1970s oil crisis.

Having survived so many economic shocks and still be working as a profitable company, it is possible that this has caused top management in Grand Jean to believe that the business model they are employing is a sturdy model that always works. The scientific management model that was developed in the 1910s where cost efficiency and cost analysis was prevalent then; is something that we perceive is still prevalent now in Grand Jean (Anthony & Govindarajan, 2007). Their usage of key metrics is very old fashioned: * Focus on production quota for the factories. Budget estimating a plant’s future production by looking at historic production and add a little more for the following year * Using historic supervisor:employee ratio There seems to be a lot of territorial mentality between the different departments in that each department focus on their own performance, and are willing to intervene in another department to satisfy their own goal. The company also seemed to treat the management and employees at the headquarters more favourably than management and employees at production plants.

Problems In this section, we shall further discuss the processes and circumstances at Grand Jean Company and lay out the problems, and more importantly we will explain why they are problems. Firstly, we feel that the company in overall is overly traditional and outdated, resulting in a general lack of flexibility. The company’s processes and regulations are often strict and overly simplified, which has a negative effect on the realistic day-to-day operations. One of these regulations is the relationships Grand Jean Company has with its ndependent contractors. Grand Jean has 25 company-owned manufacturing plants, which are responsible for about two thirds of the total production; the rest is done by roughly 20 independent manufacturers. Some of these contractors have long-standing relationships with Grand Jean, whereas some are very new and short-term. Contract agreements are made by the production operations’ vice president, Tom Wicks, and a ceiling price is set for each individual type of pants.

If a contractor complies with Grand Jean’s quality and reliability standards, they get paid the full ceiling price, but if Grand Jean is unsure, a lower price is paid until the contractor has proven himself. This leads to a high turnover rate for contractors, considering the intense domestic and foreign competition in the garment industry. Strict demands combined with lower financial (as well as non-financial) support can be incredibly taxing for new contractors, resulting in them not reaching the desired quotas.

Grand Jean then immediately terminates the relationship, and does not try to aid its contractors in any way that we have noticed. This is a waste of invested time and resources in the relationship, which could be easily avoided by closer collaboration and communication, combined with more a more flexible framework. The existing facilities are not used for a period of time; which is an additional waste of resources. The key metrics that Grand Jean use to evaluate the company’s performance are very outdated.

The main focus throughout the company is to focus on production output and metrics that affect or can be derived from focusing on production quantity e. g. production/year, standard hours/pair. However, there seems to be no consideration of metrics that affect the overall performance of the company. As mentioned before, the contractor’s that failed to meet expectations were usually just replaced by a new contractor in the same existing facility, this is an activity that impacts the company’s overall performance, as time and money has to again be spent re-negotiating terms of agreement, setting up and starting production lines.

Overall the key metrics do not focus on activities that can have a more profound impact on the company’s performance. The heavy focus on production quota causes the company to miss other aspects that could generate improvements e. g. in plant efficiency, gross profit margin, overhead- and back office costs. The heavy focus on production also caused some plant managers to hoard goods to be able to meet production quota. Grand Jean makes use of 5 separate marketing departments, this is motivated with the fact that they sell to different customers.

We consider the department structure of marketing in the current state to be obsolete, because it doesn’t make efficient use of the knowledge that can be obtained by having cross-departmental communication or by unifying the marketing department into one big unit. Having such similar functions in 5 departments creates a lot of overhead when it comes to research and demand forecasting. The 25 company-owned plants are treated as expense centres, implying their only goal is to reach a quota at a price as low as possible. If the focus is purely on getting the lowest cost per product possible, quality is likely to fall behind.

Additionally, the plants are run on a tight regulatory system based on time-and-motion systems resembling Taylor’s scientific method; making it obviously outdated, made worse by the odd use of fixed learning curves: implying learning curves are a system to be applied instead of an ongoing process. Entire budgets are made extrapolating the production time for a single pair of jeans, and mass scale benefits are religiously pursued; resulting in an extreme lack of flexibility which severely harms the collaboration and communication with the marketing department.

A major problem as well is the restrictiveness of the production quotas. Like the budgets, the quotas too are extrapolated from individual production time per pair of jeans, and administered relentlessly: the budgets are pre-made monthly one year ahead of time, and there is no indication of any adaptation being made during that year. This obviously leads to an inability to react to changes, and is overly simplistic to say the least. Additionally, the bar of budgets and quotas is raised monthly (! , because “we expect people to improve around here” (Anthony & Govindarajan, 2007). Shockingly, these decisions are made arbitrarily without regard to external circumstances. If a plant reaches the quota, it is decided to have performed well, regardless of delivered quality, and if not, the plant is considered to have been working at a sub-reasonable level of speed and efficiency. Grand Jean acknowledges worker turnover and absenteeism are big problems in the plants, yet they do not show any awareness of any link from those problems to the strict quotas.

Feedback is given monthly via phone, instead of in person, to see if the plants met the allowed standard labour hours compared to the actual labour hours, which is an accounting related principle that is often unsuited for practical issues such as production. This has negative consequences, the most disturbing being the plant managers retaining a safety stock when they exceed the quota, in order to make sure they can reach the quota again next year. This is done because production over the quota is not rewarded, and production is expected to increase from the year before, no matter how high the figures are.

Considering Grand Jean has to turn down orders every end of the year, this is a shame when it comes to the usage of resources, production and profit potential. Still, Grand Jean claims to look for other things but the quota as well when evaluating plants, such as the quality of the community relations and employee satisfaction. There are no concrete standards shown in the case for these measurements however, making the rating and bonus allocation system very arbitrary and subjective.

This resulted in the finance and marketing departments being rewarded higher ratings than the production plants; which is particularly questionable considering most top-managers are from finance and marketing backgrounds. To us, this smells of favouritism, which is never a basis for a proper rating system, which should of course be objective and fair i. e. have procedural justice. Also, it was issued in the case that offices are often understaffed because Mr. Wicks consistently adheres to the traditional supervisor/worker ratio of 11:1, although the fact simply is that that ratio is insufficient and outdated.

Plant managers feared to deviate from that ratio due to the fact that Mr. Wicks managed a plant with that ratio. This causes the plants to run with a supervisor/work ratio that doesn’t adapt to the changing external environment (Anthony & Govindarajan, 2007). Lastly, the company does not properly acknowledge the differences in technology and equipment and age of the plants, instead Grand Jean demands equal performance from them all. This is obviously not prudent, and results in the older plants having more difficulties in reaching the quota.

Proposed solutions The company needs to improve the communication channels between the marketing and production departments. It seems as though these departments are working completely independently from each other which is concerning as their relationship is one of the most important within the organisation. Production relies on quantity targets set by the marketers, by having much more regular meetings, face to face rather than on the phone, there should be a reduced risk of drastic changes in quantity needed.

It is more likely that a closer relationship between these departments will cause incremental changes in production which is much easier and cheaper to manage. Consequently there will be much less wastage or excess goods being produced. Continuing with the theme of collaboration, the 5 marketing departments need to work as parts of the same unit, rather than individual units with the same name. The text refers to some departments going about their own business in order to meet aims and objectives, even if these actions have negative consequences for other departments.

All departments in the organisation are trying to add value to the end product but this should not be done by trampling on others who are trying to achieve the same goal. The managers or each marketing department need to meet and ensure that no actions taken by their individual units have a negative impact for another. This is not to say there shouldn’t be a competitive nature within the firm but it should be regulated so as not to cause harmful repercussions. At present, the rating system and bonus allocation system seems quite subjective and inexact.

Firstly, the bias that occurs in favour of the financial departments needs to be eradicated. This could be done by outsourcing the task of rating the departments. As long as the external firm knew the industry and had a set of strict guidelines as to how to rate the performance of each department, there would be no bias and ratings between departments should be more evenly spread out. Currently, there is no incentive for plants to produce at maximum efficiency because if they happen to go over quota, they do not get rewarded for doing so.

This ties in nicely with the second aspect of the ratings system. The case provided no exact guidelines to which each department was being assessed. Mr Wicks would call the departments and have a conversation about whether or not they met their production quota and generally ‘how things are’. The managers need to have face to face meetings and joint plant inspections in order to really gauge how production is performing; this will give a much more accurate picture and enable bonuses to be allocated more precisely.

Contractors produce around a third of Grand Jean Company’s stock and as such, are an integral part of the production process. Instead of initially offering a lower price, Grand Jean could reduce uncertainty by allowing their contractors time to move up the learning curve by allowing them a lower quantity to be produced, which would be gradually increased once product quality and production reliability is delivered. Thus building Grand Jean’s relationship with their contractors, and avoiding resource destruction, despite the existing facilities being re-used.

The reduced contractor turnover would increase the utilisation of the plants which will lend itself to increased production in the long term. As has been mentioned previously, some of the plants are up to 30 years old whereas some are as new as only 5 years old, however, there seems to be no allowance for this is the targets set by the company. It stands to reason that 30 years old technology is much more likely to; breakdown, be more costly to maintain, and be less efficient than 5 year old technology.

Therefore, the quotas and maximum output of each plant should be heavily related to how new the plant and the technology is, presuming the staff are of equally skilled between the plants. Therefore, plant managers need to work more closely with market departments because they will be able to work out what targets are suitable for each plant rather than a ‘one size fits all’ quota system which at present, isn’t working particularly effectively. These new targets could be achieved through an initial meeting and assessment of the factory and review meetings every month to make sure the targets are being met.

The current budgeting system is extremely primitive. The departmental managers review figures from the previous year and ‘add on a few’ because they assume the efficiency has increased and the staff ‘should’ have gotten better at their jobs. Whether these sweeping statements have some truth or not, it is obvious Grand Jean need to have a more specific budgeting and planning strategy. Using a more realistic budgeting system with more stretch would create actual learning curves instead of artificial, fixed ones.

Due to more flexible targets and specific information from each individual plant capacities being used, coupled with the prospect of being rewarded for going over quota production, there should no longer be any need to hoard safety stock in order to meet targets later on in the year. Conclusion To conclude, it can be said that current affairs at Grand Jean Company are rigid and outdated, specifically in the areas of contracting relationships, internal communication, budgeting, and reward systems. Our paper has described and explained the main issues at hand, and provided possible solutions to these problems as well.

With these fixes in place, we as a team feel that Grand Jean could greatly improve its way of doing business. Mini Case Study 5-2: North Country Auto, Inc. It is prevalent that in North Country Auto, Inc. (NCA) the separate business units operated more as independent companies than subdivisions within a company. The business units’ managers themselves were aware of the problematic dilemma that the focus on their own profitability caused to the overall result of the company; even being fully aware that there were recurring situations that would have benefited the company had one department accepted a lower profit.

The company lacks goal congruence between its business units, and Mr. Liddy’s endorsement of the current company structure doesn’t do anything to remedy the current friction. Instead of focusing on activities that create true value towards its customers, the company is engaging in accounting activities that do nothing to remedy the lack of goal congruence. We think Mr. Liddy should abandon the current structure for the new car-, used car- and service department, and instead structure it up with main business units, new and used car sales as one and body shop as the second one, with the service- and parts department operating as support.

The new and used car sales and body shop would operate as profit centres with the service- and parts unit operating as an expense centre. To create goal congruence within the company, the department performance dependant bonuses should be removed. Instead NCA should implement a two tiered bonus program, the company’s performance should account for the larger part of the bonus program, to make sure that the department managers aren’t only thinking of their own performance.

A suggestion would be to have a 20% department dependant and 80% company dependant bonus system. This would still allow a department with excellent performance to get a good reward for their above standard performance. This would increase the probability that the now different departments strive to work together to keep overall profits up and overall expenses down. Such a reward system would shift the personnels’ focus on the company’s total performance.

The company should implement on one unified IT-system to make it easier to share information and hence promote inter departmental communications, thereby increasing the possibility of achieving synergy effects from the collective knowledge within the organisation. Restructuring the workflow, IT-systems and organisational structure itself won’t achieve any positive effects, if the employees and managers themselves don’t embrace the new organisational structure, the whole reform will just end up being a new organization on paper.

Hence why Mr. Liddy will have to be prepared to put in considerable effort to show that top management is supporting the new organisation that we propose. While it is possible to estimate a time frame for implementing a new workflow and information system, it is more difficult to estimate a time frame for when peoples’ behaviour will actually change. Without a change in behaviour, there is very a low possibility to gain any synergy effects from the new organisational structure.

To implement this new organisation we propose a parallel multistage process; this requires top management to work on designing a new workflow, information system, organisational structure. And educate and involve department managers and employees to gain support for the new organisation to secure a working implementation. Bibliography Anthony, R. N. ; Govindarajan, V. (2007). MANAGEMENT CONTROL SYSTEMS. 12th Edition. Net MBA website. [Online] Consulted on the 12-11-2012. URL: http://www. netmba. com/mgmt/scientific/ Appendix Proposal for new organisational structure for NCA.