Case Summary: Abrams Company Glenda Larinka and Gulardi Lukman

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Abrams Company manufactured a wide variety of automobile parts, such as trucks,

busses, and farm equipment. It has three major groups of parts: ignition parts, transmission
parts, and engine parts. Abrams’ parts were sold both to original equipment manufacturers
(OEMS) and to wholesalers. The wholesaler then resold the parts to retailers and retailers
resold to consumers. This is called the aftermarket (AM). So there are fpur product divisions.
Eache of these product divisions was managed bu a vice president and general manager who
was expected to earn a target return on investment (ROI). In 1992, the four division’s sales
totaled $500 million, which included “inside” sales from the three product divisions to the
AM divisions. The inside sales was $100 million, which was a 10% of total sales in that year.
According t Abrams excecutives, the factors critical to success in the OEM market
were: the ability to design innovative and dependaple parts that met the customer’s quality,
performance and weight specifications; meeting delivery schedule requirements so that the
OEM could minimize its own parts inventories, and controlling cost. The company also have
set up a good incentive compensation plan. In general, top management was satisfied with the
present management systems.
However, top management mentioned three areas of concern. First, there always
seemed to be a few disputes over transfer price of parts sold by product divisions to the AM
division. The standard corporate policy was internal sales of parts were nade at outside OEM
market prices. But, problems occured wgen the part being transferred was strictly an AM
dicision part. So there is no market price for that specified product. Occasionally the vice
president of finance was asked to arbitrate the dispute. It is important ti take into
consideration about this dispute because they could have a negative impact on the company
performance. Second, top management felt that the product divisions too often tended to treat
the AM division as a captive customer. The plant often favored the OEM customer rather that
AM division. And third, top management felt that both the AM division and the three
product divisions carried excessive inventories most of the year.