Business Structure & Recommendation for Improvement

Catherine J. Tedrick

November 23, 2010

GB519-02: Measurement and Decision Making

Professor Crystal Gifford

Kaplan University

About MC Construction

MC Construction Consultants, Inc. develops, designs and builds custom homes in Western Washington.

The company’s primary market niche is building high-quality, custom built homes in exclusive communities for high-end homebuyers.

Customer Service

MC’s greatest strength is personally taking each homeowner through every phase of their project.

They customize a design to fit their customer’s lifestyle and budget while:

Coordinating with their financial institution to handle financing.

Professionally managing the project.

Offering a complete warranty and priority service plan.

Balanced Scorecard Evaluation

MC’s Balanced Scorecard reflects a healthy company that is financially sound and customer-driven.

The following perspectives were examined:

Financial

Customer

Internal Business

Learning and Growth

MC Perspectives

FinancialInternal monthly and published consolidated quarterly reports are created.

CustomerCustomer satisfaction is a huge factor since MC’s business is largely driven by referral.

MC Perspectives (continued)

Internal BusinessThe company developed an internal business process for addressing factors that have the greatest impact on customer satisfaction.

Learning and GrowthEmployees hired for specific positions are required to have certain experience and education.

Critical Success Factors and Company Performance

Financial

Working together with customers and subcontractors is vital in creating a smooth building process.

They stand behind their work, offering a complete warranty and priority service plan on every project.

Customer

MC’s professional staff are experts in the important areas of design, estimating and customer service.

Communication is vital during the construction of a custom home.

Critical Success Factors and Company Performance (continued)

Internal Business

MC has a successful process for tracking account codes for each project.

The Project Manager develops the budget and all costs then enters all budget codes into the system to be monitored and updated by the accountant as work progresses.

Learning and Growth

Being a relatively small, family owned and operated business, little resources have been put into learning and growth.

Projected Earnings

MC offers complete homebuilder services for projects priced between $350,000 - $500,000.

On average, the company has 10-12 projects going at once.

The annual amount of work completed by the company is nearly $5 million.

Significant Costs

A 12 percent gross profit margin is built into the budget but fluctuates based on how closely supplies and labor cost are in line with the initial budget.

For a typical home built by MC that sold for $425,000, about $106,250 went for construction labor.

If, hypothetically, wage levels rose by a third, that would add around $2,500 to the cost of the typical house.

Nonfinancial Measures

The following nonfinancial measures evaluate the company’s level of productivity and its relation to profitability:

QualityProduction staff maintains a focus on quality in design, selection of suppliers/contractors, supervision of work and warranty care.

EnvironmentalMC has very good systems in place to deliver products and services.

Nonfinancial Measures

Productivity/Efficiency/Timeliness

Critical to the construction industry, this requires management of variables as well as customer expectations

Marketing Effectiveness

Marketing strategies include reliance on word of mouth fostered by maintaining relations with prior customers through extended warranty care and through the typical mediums.

Significant Issues

Though MC has an effective and efficient budgeting, tracking and accounting system, putting effort into growing employees and improving internal business processes must be addressed.

The company needs to invest in knowledge and job growth of key staff that are promoted into management positions, but have very little managerial experience.

Significant Issues

MC discovered through the Balanced Scorecard that their Internal Businessenvironment is directly tied to learning and growth of managers and supervisors.

There is a disconnect between doing the job and understanding processes necessary to be productive, efficient and cost effective.

Managers must understand how the company processes billings, works with clients, markets the product, and achieves its mission.

Decision Alternatives

MC Construction has three options for addressing the issue of inexperienced and untrained supervisors:

1. Status Quo

2. Grooming

3. Manager Training

Decision 1: Status Quo

The company can continue to handle this situation by addressing each incident separately as they arise.

Advantage

o Though the estimated cost per year to the company for site supervisors and managers errors due to lack of training is $6,000, this option could be more cost effective when compared to the other two options.

Disadvantage

o Poor leadership and costly mistakes continue to happen.

o Preventable discipline issues; cost overruns and incorrect paperwork; and employee turnover continue to happen.

Decision 2: Grooming

Develop program that gives all employees a basic foundation for the goals and mission of the business; what each department does; and how each effects the other. Advantage

o More cohesive workforce that feels connected to the company on all levels.

o Better prepared for job growth and larger pool for management to promote from.

Disadvantage

o Estimated total cost to the company would be $15,945.60:

– $7,700 for all 22 employees to attend a two-day training at $350 per employee.

– Time loss cost of $8,245.60 based on an average salary of $187.40 per day.

Decision 2: Grooming (continued)

Offer an additional advanced project management and supervisory skills training for employees showing leadership potential.

o The estimated total cost to the company for this option would be $5,311.

– Estimated total cost of$2,500 for five employees to attend an additional three day training at $500 per employee.

– Time loss cost of $2,811 based on the same salary average.

Decision 3: Manager Training

Provide training to managers by one of these methods:1) Train all managers – new and longtime; or

2) Just train new managers as they promote in.

AdvantageMore professional, knowledgeable managerial staff with a better understanding of their important role in the organization.

DisadvantageThe cost to provide management training is a significant factor in the decision.

o Estimated cost for five-day management training for all seven managers is $7,000.

o Estimated time loss cost based on an average salary of $229.17 for five days is $8,020.95.

Payoff Table

State of Nature

Decision AlternativeStrong

Owner Support, s1

Weak

Owner Support, s1

Do nothing – status quo, d1 6 16

Groom employees for advancement, d2 15 5

Train newly promoted managers, d3 8 3

Expected Value (Cost to Company)

With an initial subjective probability of .8 that support for the option will be strong P(s1) and a corresponding probability of .2 that support will be weak P(s2), the payoff values were used to compute the expected value (cost to company) of the three decision alternatives:

EV(d1) = .8(6) + .2(15) = $7.8 EV(d2) = .8(15) + .2(5) = $13 EV(d3) = .8(8) +.2(3) = $7

Decision Tree

Recommendations

Propose changes in two perspectives:

Internal Business Process perspectiveCost of the project’s direct impact on the level of operating efficiency and reduce unnecessary administrative and labor costs.

Learning and Growth perspectiveInvest in knowledge and job growth of key staff who are promoted into management positions, but have very little managerial experience.

Recommendations

Train all new managers as they promote.

Give new manager tools and knowledge to be successful.

Lower employee turnover.

Offer career development training for all employees interested in job growth within the company.

Have a holistic view of the company.

Better prepared for positions that open in the future.

Resources

Balanced Scorecard Institute. What is the Balanced Scorecard? Retrieved from www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

Kaplan, R., Norton, D. Value Based Management. Retrieved from www.valuebasedmanagement.net/methods_balancedscorecard.html

Jackson, S., Sawyers, R., Sweeney, D., Anderson, David. Managerial Accounting and Statistics. Chapter 2: Performance Evaluation Using the Balanced Scorecard, pp44-46

MC Construction Consultants, Steve Yester, Chief Financial Officer; Leanne Yester, Financial Controller, MC Construction Consultants, Inc., www.mcconstruction.com