MANAGEMENT CONTROL SYSTEM

ASSIGNMENT NO. – 2

Case Study – Grand Jean Company

SUBMITTED TO : SUBMITTED BY :

Ms. SHONALI GUPTA RAJAT SINGLA

MBA 3RD SEM

UNIVERSITY BUSINESS SCHOOL,

PANJAB UNIVERSITY, CHANDIGARH

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1. How would you describe the goal(s) of the company as a whole? Is this, or are these,

the same as the goal(s) of the company’s marketing organization and the company’s

25 managers of manufacturing plants? Explain.

Ans. The main objective of the company is to increase profitability and achieve high growth.

The company is striving hard to achieve cost effectiveness and achieve high level of

quality.

Now, the goals of the company’s marketing organization and company’s 25 managers of

manufacturing plant are different.

The marketing division is treated as a “Revenue Centre” so the goal of the company’s

marketing organization is to maximize revenue and sell what is produced. They are

evaluated on the basis of meeting the set sale unit and sales dollar targets. Also, they are

responsible for making demand forecasts which are used to decide the production levels

of each plant.

Whereas, the manufacturing plant have the goal to just meet the budget figure and fulfill

the quota allocated to each plant. Since they are considered as an expense center and

there is no immediate monetary reward to compensate for increase in responsibilities or

requirements, they are not concerned to achieve higher efficiency and thus, want to

exceed the targets.

2. Evaluate the current management planning and control system for the

manufacturing plants and the marketing departments. What are the strengths and

weaknesses?

Ans. By 1989, the company was one of the world’s largest cloth manufacturer.

Following are the Strengths:

a) The company has been profitable for a long time.

b) The company has 25 manufacturing units of its own and 20 independent contractors

producing efficiently and reliably for them.

c) They have developed a learning curve to develop the production’s standard hour.

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d) 1-to-5 scale reward system can motivate employees work harder.

e) Use budgeting to set the quota, which can evaluate the performance easily.

Following are the Weaknesses:

a) There is no incentive to the manufacturing plants to exceed production. Rather, it makes

the things difficult for them as they have to meet increased quota and have thus resorted

to “Hoarding” of stock even if there is enough demand.

b) Standard hour’s calculations are done on same scale for new and old machines, which

hence produces inaccurate results.

c) They are highly dependent on the outside independent contractors who provide for

approximately one-third of the total pants sold by them.

d) The reward system is not fair. The people who work at the headquarters are awarded

higher rating than the plant managers.

e) There is lack of staff for some departments as they continue to maintain 11:1 supervision

ratio to achieve leadership excellence. Thus, the immediate and significant information

requirements cannot be met on time. Also, the production cannot be increased because of

lack of personnel.

3. One plant manager recommended that plants be operated as profit centers because

it would overcome some of the problems discovered by Mia Packard and the case

writer. This plant manager commented, “[My] competitor is the nearby

independent manufacturer that makes the same pants for Grand Jean as my plant

makes. And this outsider might also make pants for Grand Jean’s competitors.

Because of the competitive market, only the best managed plants survive in this

business. Therefore, like the outside company’s manager I should have bottom line

responsibility and be rewarded accordingly.” Do you agree or disagree with the

profit center concept for Grand Jean’s 25 manufacturing plants? How would this

approach affect the plant manager’s decisions, performance, etc.?

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Ans. The manufacturing plants have the goal to just meet the budget figure and fulfill the

quota allocated to each plant. There is no incentive to the manufacturing plants to exceed

production. Rather, it makes the things difficult for them as they have to meet increased

quota and have thus resorted to “Hoarding” of stock even if there is enough demand.

Since they are considered as an expense center and there is no immediate monetary

reward to compensate for increase in responsibilities or requirements, they are not

motivated to achieve higher efficiency.

But the manufacturing plants are considered as a Profit Centre, the plant manager will be

able to earn incentives through higher efficiency. He will be motivated to work efficiently

and produce at peak levels. Also they’ll not restrict themselves to the plant quota and

would not hoard the excess production; rather they’ll make full use of this extra

production and gain maximum monetary rewards. A change in the reward system would

encourage the plant managers to push to maximum production and also to minimize the

cost, time and effort to produce efficiently.

Also due to intense competition from independent contractors, only the best plants will

survive. Hence the plants need to be competitive. Also increase in production will help

the company to be self-sufficient and will reduce their dependence on external

contractors.

4. If Grand Jean’s manufacturing plants were treated as profit centers, three

alternatives were suggested for recording revenues for each plant

i) Use the selling price recorded by Grand Jean’s sales personnel for pants sold to

retailers and distributors.

ii) Use full standard manufacturing cost per unit plus a “fair” fixed percentage

markup for gross profit.

iii) Use the average contract price Grand Jean paid outside companies for making

similar pant types.

Evaluate these three alternatives. Which one would you recommend? Why is your

selection the best one?

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Ans.

i) Using selling price recorded by Grand Jeans sales personnel for pants sold to retailer and

distributer will not leave the sales department with any margin. The Sales department

would not earn any profits. Hence it is not a feasible option. Every department needs to

generate revenue for its sustenance.

Also, the sales department is already getting their products manufactured from 20 other

outside suppliers for almost 5 years now. If the manufacturing plants would charge them

at the price at which they are selling to retailers and distributors, then the sales

department would switch to the external suppliers for supply at a lower cost and will not

continue with this system.

Also, if the manufacturing department thinks of selling their products to the outside

market even then they will have to reduce their price to the market price.

So, considering both the points that are mentioned above using selling price recorded by

Grand Jean’s sales personnel for pants sold to retailers and distributors, it will not do any

good either to the manufacturing or to company as a whole.

ii) Using full standard manufacturing cost per unit plus a fair fixed percentage markup for

gross profit means manufacturing unit calculates the per unit cost of manufacturing and

add a predefined “ Fair” Profit percentage to it to arrive at the transfer price.

This method has the advantage that there is incentive for the manufacturing

department to do well and to increase efficiency. There is a fixed percentage of the cost

that the manufacturing unit will charge over and above the cost and that will be its gross

profit. So, for every unit they produce and sell they get profit for it. This profit will make

them work harder and attain more efficiency. Also as a profit center even if they produce

more than what is their own companies requirement they may sell it to the market as

contracted manufacturers and earn further profit as a “Fair” percentage of cost.

But in this case there is nothing motivating for the employees to focus on keeping

on cost of production as low as possible. The employees should try their level best to

keep the cost as low as possible and competitive. Hence, this alternative has several

advantages of motivation, but cost factor needs to be taken care of.

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iii) If we consider the option of the average contract price that Grand Jeans is paying to

outside companies to get its product made that would give them the price range with very

little margin to work with as the bargaining power of Grand Jeans is pretty high. Hence,

this may lead to reduction in the quality so as to maintain a fair margin for themselves.

This may in turn lead to increased number of rejections at the customer end and may lead

to reduction in brand value and loss of market share to the company.

Considering the three alternatives given to us the best one would be the cost plus fixed

margin (Alternative 2).

All other options don’t fit well in the situation of Grand Jeans. Moreover, the manager of

manufacturing and sales may sit down and negotiate and reach at a consensus. This price

could be between the cost plus margin price and selling price of the sales department.

At this price the sales department will have sufficient margin as well as manufacturing

department will have good incentives to do well.

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