MANAGEMENT CONTROL SYSTEM OF ABRAMS COMPANY

PRESENTED BY:

ADITI MONGIA

AYUSHI HALDAR

DEBARUN HAZRA

DILIP KUMAR

GOURAV DANG

JASDEEP SINGH

KISHNA RAI

KUMAR GAURAV

ABRAMS COMPANY

A BRIEF SNAPSHOT

BUSINESS

MAJOR DIVISIONS

CUSTOMERSORIGINAL EQUIPMENT MANUFACTURERSWHOLESALERS CONSUMERS (CALLED AFTERMARKET)

IGNITIONTRANSMISSIONENGINEAFTER MARKET DIVISION

MANUFACTURING OF AUTOMOBILES, TRUCKS, BUSES AND ENGINES PARTS

ORGANIZATIONAL HIERARCHY

CHAIRMAN AND CEO

OEM SALES

PLANTSFOREIGNDOMESTIC

VP AND GM (AM

MARKETING DIVISION)

VP AND GM (IGNITION

PARTS)

VP AND GM (TRANSMISSION

PARTS)

VP AND GM (ENGINE PARTS)

VP FINANCE

VP INDUSTRIAL RELATIONS

VP LEGALVP

PLANNING

SALES BREAKUP (1992)TOTAL SALES: $500 MILLION

AFTER MARKET DIVISION

IGNITION PARTS

DIVISION

TRANSMISSION PARTS DIVISION

ENGINE PARTS

DIVISION

$130 MILLION

$90 MILLION

$100 MILLION

$180 MILLION

$100 MN

INSIDE SALES

MANAGEMENT CONTROL SYSTEM A management control system (MCS) is a system which gathers and uses

information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies.

MANAGEMENT CONTROL SYSTEM OF ABRAMS COMPANY

The company had a very organized management structure. It maintained an organized way of managing its resources. Some of these are:

Managing responsibility centres (Profit Centres: As given in the case) Measuring the performance of the responsibility centres which includes

Manufacturing units and Marketing units.

Incentive Compensation Plan (Bonus Plan)

RESPONSIBILITY CENTRE A responsibility centre is an organizational unit or department which is

headed by a manager who is responsible for its activities and for the efficient and effective performance of that centre which leads to the achievement of the goals of the company. It exists to accomplish one or more purposes which are termed as objectives.

INPUTS OUTPUTS

RESOURCES USED, GOODS OR SERVICES

MEASURED BY COST

WORK

PROFIT CENTRE A responsibility centre whose financial performance is measured in

terms of profit and directly add to the organization’s profit is called as a profit centre.

Managers are held accountable for both revenues and costs (expenses) and therefore, profits.

Profit centres provide top management with information on the profitability of the company’s individual components.

Since the output of profit centres can be measured readily, they are responsive to pressures to improve their competitive performance.

INPUTS OUTPUTS

WORK BUSINESS UNIT

IN TERMS OF MONEY

IN TERMS OF MONEY

PROFIT CENTRES IN ABRAMS COMPANY

Abrams Company is divided into different business units (Ignition, Transmission, Engine and Aftermarket Divisions); each of which is treated as an independent profit generating unit or profit generating centres.

The different centres which can be considered are: Manufacturing Centre Marketing Centre

The performances of each of the unit is measured on the basis of a particular criteria which is fixed by the management.

MANUFACTURING CENTRE Although the manufacturing plants creates expenses, it can be considered

as a profit centre when the management of the centre is being judged on performance versus standard costs and overhead budget.

Each manufacturing division’s general manager and vice president was expected to earn a target Return on Investment (ROI); the manufacturing centres being Ignition parts, Transmission parts and Engine parts Division.

Each manufacturing plant within the manufacturing centres had an annual ROI Target. The plants were responsible for manufacturing, maintaining the finished inventories and shipping the parts directly to the OEM customers.

ROI CALCULATION TARGET ROI= Budgeted Profit/Actual Beginning Of The Year Net

Assets.

ACTUAL PROFIT= Actual Profit/Actual Beginning Of The Year Net Assets.

Budgeted profit included division expenses and corporate overhead expenses after deducting the taxes imputed.

Beginning Of The Year Net Assets= Total Assets- Current Liabilities.

The Beginning Of The Year Net Assets was considered because investment added a little in the incremental profit of the company in a particular year.

AN EXAMPLE OF ROI CALCULATION OF A PLANT (ROCHESTER PLANT)

MARKETING CENTRE A marketing activity can be turned into a profit centre by charging it

with the costs of the products sold.

The OEM Sales department within each of the divisions worked with the engineers to develop innovative and cost effective new parts to meet customers’ needs.

Each of these OEM divisions was expected to meet an annual sales revenue target.

The customers of OEM divisions were completely different from those of AM division. So, the marketing efforts of these divisions were also separated from each other.

REWARDS AND RECOGNITION

LINE AND STAFF MANAGER: 

About 50 Line and Staff Managers participated in the Incentive Bonus Plan.

  The bonus was based on a fixed formula based on Corporate Earnings per Share.

Each participant in the Bonus Plan received a standard point based on Organizational Hierarchy.

The total bonus amount was divided into the total number of points received by the participants to arrive at an amount per point.

PLANT MANAGER:

In this case, the percent of award was related to the plant’s profit variance i.e., budget vs. Actual profit.

But, if this profit variance was due to a huge amount of sales to the AM Division, there was no increment in the percent of bonus of the manager.

ANALYSIS OF THE MANAGEMENT CONTROL SYSTEM OF ABRAMS COMPANY

STRENGHTS: INSIDE SALES: The AM Marketing division bought the remaining products

(unsold to the OEM Market) form the three product divisions and sold it to domestic and foreign market which helped the company to save cost when it bought the products internally. In the year 1992, the total “Inside Sales” amounted to 1/5th of the total sales of the company.

RECOGNITION OF EMPLOYEES: The company had a well structured bonus plan for the employees. There were separate plans for line and staff managers as well as for plant managers. The line and staff managers were given bonus based on standard points given on the basis of the hierarchy; the plant managers were given incentives depending on their performance. This also motivated the employees to perform well.

CONT.... PRODUCT QUALITY: The management ensured that the products

were innovative and dependable and met customer’s requirement. This was mainly done by the OEM Sales Department along with the OEM’s engineers.

COST CONTROL: Cost control was one of the most important factor which the management focused on due to high competition among the peers.

CONTROL OVER PERFORMANCE: The management also kept a strict control over the performances of the departments by measuring the outputs in terms of profits of the company.

PROFITABILITY MEASUREMENT: These “profit centres” provided the top management with ready- made information of the profitability of the company’s individual components.

CONT....

WEAKNESSES:

INDEPENDENT DIVISIONS: Two of the three product divisions of the company were independent companies before being acquired by Abrams and had their own tradition of working. So, there was a lack of an integrated work culture throughout the divisions of the company.

LACK OF CONNECTION: Abrams Company was a decentralized company. It had four totally independent divisions and the divisions lacked connection and coordination among themselves. For example, the customers of OEM divisions were completely different from those of AM division. So, the marketing efforts of these divisions were also separated from each other.

INCENTIVE POINTS: INCENTIVE POINTS: Only about 50 staff and line managers used to participate in incentive plan which could be a de motivating factor for the employees.  The incentive of plant managers was not linked to the sales to AM division i.e., plant managers were not given extra bonus if the extra sales was to the AM Division.

CONT....

DISPUTES AMONG THE DIVISIONS:

There was a dispute over the transfer prices of parts sold by the product divisions to the AM Division. The dispute occurred when any part was sold solely to the AM division, i.e., when there was no outside price available for sale to the AM Division and neither it could be adjusted.

The product divisions were found to favour the OEM customers instead of the AM Division when both placed competing demands because they had the view that the OEM customers could enhance their business.

  EXCESSIVE INVENTORIES:

The product divisions and the AM Divisions carried extra inventories which affected the cost control of the company.

CONCERNS OF THE MANAGEMENT

TRANSFER PRICING: There was a dispute over the transfer prices of parts sold by the

product divisions to the AM Division.

Internal sales were done at outside OEM Market prices; if any part was sold earlier at OEM Price, the price was adjusted for inflation.

The dispute occurred when any part was sold solely to the AM division, i.e., when there was no outside price available for sale to the AM Division, neither it could be adjusted.

CONT....

AM DIVISION TREATED AS CAPTIVE CUSTOMER: The product divisions were found to favour the OEM customers instead

of the AM Division when both placed competing demands because they had the view that the OEM customers could enhance their business.

The AM division was not allowed to sell a competitor’s product.

They had to convince the plant manager to sell the required parts to them instead of the OEM customers.

EXCESSIVE INVENTORIES: The product divisions and the AM Divisions carried extra inventories

which affected the cost control of the company.

RECOMMENDATIONS TO THE CONCERNS OF THE MANAGEMENT

TRANSFER PRICING PROBLEM: A transfer price can be fixed by the top management in compliance with

the AM division and the other divisions involved which could be revised when it is out of date.

This fixed price could be adjusted due to inflation based on an internal policy.

Therefore, top management should implement a cost-based transfer prices because when competitive prices are not available, transfer prices may be set on the basis of cost plus a profit mark up i.e., COST PLUS PRICING.

COST PLUS PRICING= COST TO MANUFACTURER + PROFIT MARGIN.

CONT....

EXCESSIVE INVENTORIES PROBLEM: The company can develop a proper Demand Forecasting Strategy and

produce only that much quantity which is required by the AM division and OEM customers.

The manufacturing divisions should closely  work with the OEM customers as these are generally long term contracts and could fully understand the demand situation in a better way. So, the problem of excessive inventories should not arise normally.

In such a case, the Manufacturing division needs to have a look at inventory management system.

It can follow the Lean Manufacturing or use Just In Time(JIT) Approach.

It should various other inventory control systems such as Inventory Turnover Ratio to check the accumulation of inventory.

OTHER POSSIBLE MEASURES WHICH CAN BE ADOPTED BY THE MANAGEMENT

RETURN ON INVESTMENT (ROI) MEASUREMENT:

ROI method should not be the sole criterion to judge profitability.

It should be supplemented by other measures like: Profit Margin = Net Profit/Sales Return On Equity= Net Income/Shareholder's Equity  Gross Profit Margin & Operating Margin.

The AM division will have a huge ROI as compared to other divisions as there is no machinery, plant and equipment installed. It is just a trading firm.

CONT....

INCENTIVE SYSTEM: Only about 50 staff and line managers used to participate in incentive

plan which can be changed so that all the managers can participate in the plan.

The incentive of plant managers should be linked to the sales to AM division so that the company can enhance its internal sales to work in a cost effective manner and reduce the disputes within the divisions.

CONT....

OTHERS:

The product division’s OEM sales department should be combined together so that cost can be controlled and for better marketing strategies.

The non-financial performance measurement system should be established. The balanced scorecard is a good choice for company measure performance. With a good performance measurement system, the incentive compensation plan will be improved.

THANK YOU