Team 3 Summary of 7-3 for rebuttal Quality Metal Service Center is a metal distributor, who sells to smaller users

of metal products. To be competitive they have to have a shorter lead time and better customer service to cover their costs and make their products a good investment for the customers. They have 3 main objectives: first is to focus sales efforts on markets of specialty users. Quality focuses sales on specialty high tech metals. The second objective is to find geographic markets where these metals are used. They are using database technologies so they have an accurate, up to date sales forecast, which helps them prepare for orders before they occur, which will shorten lead time and improve services. The third objective is to develop techniques and marketing programs that will increase their market share. Their fast lead allows customers to use a JIT (just in time) inventory that avoids high carrying cost. Quality has saved costs using their own JIT system, and can help customers achieve these savings as well. Quality also offers a wide range of processing services which reduces the need for customers to have their own specialty tools and saves time. Management control systems should support implementation of the 3 goals and influence managers to work toward these goals while maintaining superior quality service to the consumers. Each of the 4 regions has a manager who is evaluated based on ROA and wants to exceed the set goal of 90% projected profit. A set of functional managers report to Ken Richards, the district manager, who reports to the VP of the Midwest division. Any capital expenditure of more than $10,000 has to be approved by central management; this makes divisions dependent on central management for investment decisions. The district managers are evaluated based on ROA, and the allocation is split 75% weighted on district and 25% region. This split may cause a manager to act in the best interest of the district rather than the region or company. Issues: 1. The $10,000 upper limit on capital expenditures without approval 2. Evaluation based on ROA and bonus program: ROA motivates managers to invest in positive NPV projects that will increase future cash flows, and The bonus plan is not motivating managers to make those investment decisions, but not investing may be of more benefit to them. 3. Assets over-employed will reduce adjusted profits and the payout rate charged to base salary. 4. Evaluation scheme is counterproductive towards organizational goals, and managers motivation 5. Bonus plan incentive deters managers from making investments that require large asset usage and may have a positive ROA or EVA result.

6. ROA as an evaluation is counterintuitive, as in the Columbus division, which shows a high profit, but is hesitant to invest in opportunities with a lower ROA than their target, that would otherwise benefit from cash flows for the company. Recommendations: 1. Management control systems should improve upon their decision making process for capital investments: Not consistent, Managers do not have full authority over investment decisions ROA and bonus plan are inconsistent with goals If continue to be evaluated in this way, investment decisions should be made by division with less input from central offices 2. EVA could be used for investment decisions: EVA on proposal will increase EVA supports the third goal of finding and increasing market value; since EVA has a strong correlation with changes in the company market value, and EVA as an evaluation on investments could help managers analyze if it will grow and enhance shareholder value. 3. If continuing to use ROA as basis for bonuses for managers it should be consistent with how they are evaluated. For example, remove assets over-employed from equation or add flexibility, so managers bonuses are not penalized on investment opportunities