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 MANUFACTURING OF AUTOMOBILES, TRUCKS, BUSES AND ENGINES PARTS

MAJOR DIVISIONS

IGNITION TRANSMISSION ENGINE AFTER MARKET DIVISION

CUSTOMERS

ORIGINAL EQUIPMENT MANUFACTURERS WHOLESALERS CONSUMERS (CALLED AFTERMARKET)

ORGANIZATIONAL HIERARCHY
CHAIRMAN AND CEO

VP PLANNING

VP LEGAL

VP INDUSTRIAL RELATIONS

VP FINANCE

VP AND GM (AM MARKETING DIVISION)

VP AND GM (IGNITION PARTS)

VP AND GM (TRANSMISSION PARTS)

VP AND GM (ENGINE PARTS)

DOMESTIC

FOREIGN

PLANTS

OEM SALES

SALES BREAKUP (1992)

TOTAL SALES: $500 MILLION

IGNITION PARTS DIVISION

$130 MILLION
INSIDE SALES

TRANSMISSION PARTS DIVISION

$100 MILLION

$100 MN

AFTER MARKET DIVISION

$180 MILLION ENGINE PARTS DIVISION $90 MILLION

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 WORK RESOURCES USED, MEASURED BY COST

OUTPUTS GOODS OR SERVICES

PROFIT CENTRE

A responsibility centre whose financial performance is measured in terms of profit and directly add to the organizations 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 companys individual components. Since the output of profit centres can be measured readily, they are responsive to pressures to improve their competitive performance. INPUTS
WORK
IN TERMS OF MONEY IN TERMS OF MONEY

OUTPUTS
BUSINESS UNIT

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 divisions 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 plants 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 customers requirement. This was mainly done by the OEM Sales Department along with the OEMs 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 companys 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 competitors 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 divisions 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