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Case Facts: Founded in the 19th century, the Grand Jean Company survived a large economy crisis in 1929

. It became one of the largest clothing companies in the world in the year 1989. Its main products are pants for men and boys. With the “wash-and-wear”, bell-bottom and flare jeans and modern casual pants, the company became a market leader. The company owns 25 plants for manufacturing with an average output capacity of 20,000 pants per week. However, this production is not enough to satisfy the demand on the market. As a result of that, the company decided to employ independent manufacturers. These contractors have produced one third of the total sales. Grand Jean is a functional organization. The plant divisions are considered as expense centers. The plants are budgeted to produce amount of pants, which is given by the marketing staff, every year. The quotas depends on the result, the plant has reached in the previous month. Because there are 5 different products, the company has introduced 5 marketing centers considered as revenue centers. At the end of each year, all plant managers are evaluated on a scale from 1 to 5. The bonus they get in addition to their normal wage, depends on the grade, they were given by the Vice President of Production Operations and his two chief assistants. The received grade is multiplied with a bonus base determined by the top management based on the firm’s overall performance and profits for the year. Bonus base had been as high as $ 10,000. The main objective of the company is to increase profitability and high growth at the same time to be cost effective and maintain quality. However, the goals of the marketing and that of the manufacturing divisions were misaligned. The marketing division was treated as a revenue center with the aim of maximizing revenues and sell what have been produced. This department was evaluated based on unit and dollar sales based on the forecasted demand which were used as a deciding factor in the production level at the manufacturing plants. These manufacturing plants in turn were treated as expense centers, with the goal of meeting the forecasted demand and fulfilling the allocated quota. These plants were evaluated based on meeting their targeted production level.

Below is the Process of Plant Production Operations at Grand Jean: • Yearly plant budgeting begins with Mr. Wicks and his staff determining the plant’s quota (in pairs of pants) for each month, one year ahead of time. Basis of the budget are as follows: • • • • • • • Estimate of quantity of pants to be produced each year by the marketing staff Plant’s past performance

These yearly budgets are updated at the end of each month in light of the previous month’s production. When quota for the month has not been reached, they would search for the problem and would correct them as quickly as they can. Standard labor hours allowed for the month is compared with actual labor hours to determine how the plant manager performed as an expense center. Every month, Mr. Wicks gives feedback on the plant manager’s satisfactory or unsatisfactory performance. Mr. Wicks and his two chief assistants rate each plant manager’s performance on a 1-to-5 scale, where 5 were the highest rate based on the following:

which leads to inaccurate results The company has been highly dependent on their outside contractors. The company has developed a learning curve that helped enhance the production’s standard hours The company has used the budgeted figures to determine the quota for the period. Problems in the plant are identified during the review process and are corrected immediately The corporate head office has a regular monthly performance monitoring and gives immediate feedback enabling the managers to be aware of their standing and performance Non financial measures such as community relations and employee satisfaction are included in evaluating a manager’s performance The current 1 to 5 scale reward system has helped boost employees’ motivation to work better WEAKNESSES: • • • • There were no clear incentives given to the manufacturing plants to exceed production.• • • • Comparison between standard and actual labor hours Community relations Employee satisfaction At year-end. If their partners failed. And yet. thus enabling them to evaluate the performances more easy. . The strengths and weaknesses have been outlined to analyze the current system of the company: STRENGTHS: • • • • • • • • The company has been operating profitably for over 30 years. The current system also put the company at a grand status by becoming a market leader The company has been effectively and efficiently manufacturing their products due to their existing system. This includes outsourcing their production to efficiently manage their cost. The plants have to meet increased quota which results in stocks hoarding Standard hour’s calculation was done on the same scale for new and old machines. Problem Identification: Is the current responsibility center structure appropriate for Grand Jean? What are the alternatives for the company to improve its management control? Analysis of the Control System: Grand Jean has a functional organization and it causes several advantages and disadvantages in its management control. top management determines a bonus base by evaluating the firm’s overall performance and profits for the year. This bonus base multiplied by the performance rating would be the manager’s bonus for the year. the company is affected since these contractors provide one-third of the pants sold by the company There is no real way to determine the effectiveness of the separate functional divisions (production and marketing). there are real inequalities in these organizations because the marketing division is higher awarded than the plants managers.

Only the best plants will survive therefore. A change in the basis for reward will encourage the managers to push their optimum production while minimizing cost Plant Managers will not be restricted in producing the plant quota thus. Set-up the production plants as Profit Centers The advantages and disadvantages of making the production plants as profit centers were listed below: STRENGTHS: • • • • The company was operating with an intense competition from its independent contractors. • Three revenue recording options for the manufacturing plants were identified in line with the alternative of changing the plants as profit centers: . the immediate and significant information requirements cannot be met on time. Managers may skimp on training programs and maintenance in their desire to report high current profits. With this. entailing some loss of control Friction may increase because of arguments over the assignment of common costs and the appropriate credit for revenues that were formerly generated by the marketing department Divisionalization may impose additional costs because of the additional management. the production cannot be increased because of lack of personnel.• There is a staff shortage in some departments as they continue to maintain 11:1 supervision ratio to achieve leadership excellence. the plant managers will be able to earn incentives through higher efficiency thus motivating the managers to produce at peak levels • WEAKNESSES • • • • Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation. Standard hours determined are the same for all plants without taking into consideration the difference in efficiency of old and new equipment used • Alternatives for the Company: The current control system of Grand Jean has advantages and disadvantages. the company needs to be competitive An increased production will be able to help the company to be self-sufficient. plants would minimize cost and might affect the quality of their product. Also. the following alternative courses of action were derived • • Continue with the current system Change the current responsibility centers in place. staff personnel and record keeping required. and may lead to task redundancies at each plant There may be too much emphasis on short-run profitability at the expense of long-run profitability. This can help the managers to make use of the extra production By becoming a profit center. This might reduce their dependence on their external contractors Plant Managers will be evaluated based on profit (revenues less costs). Thus. In generating maximum profit. eliminating the reason for these managers to practice “hoarding”.

Overall. This will make the Production plants to compete with that of their outside contractors in terms of cost. the marketing department will not be left with any margin. The marketing and manufacturing departments together with the President should agree on the mark-up percentage that will be beneficial for Grand Jean as a whole. the next thing that Grand Jean needs to do is to determine which revenue recording should the manufacturing plants implement. Under option 2. Charging with a fixed mark-up makes both departments to be evaluated fairly. the plants will be motivated to perform efficiently in order to make their production at an optimum level and at the same time manage cost effectively. For the marketing department. this will not benefit the company. No change in the current set-up. Changing the current reward system and its basis will enable these plants to ensure that this objective is met. it is recommended that the department should be treated as a revenue center. Option 3: Use of the contract price that Grand Jean pays the outside companies for making similar pants. These plants should be empowered to ensure that they are operating at a profit. Under this option.• • • The use of the selling price recorded by Grand Jean’s sales personnel for plants sold to retailers and distributors The use of standard manufacturing cost per unit plus a fair fixed percentage mark-up for gross profit The use of the contract price that Grand Jean pays the outside companies for making similar pants The three options are evaluated below: Option 1: Selling price to be recorded based on sales personnel’s price to retailers and distributors. . If this option will be selected. Option 2: Standard manufacturing cost per unit plus a fair fixed percentage mark-up for gross profit. This option will also benefit Grand Jean as a whole if managed well. this will benefit Grand Jean. Recommendation and Execution: It is recommended that Grand Jean Company change the manufacturing plants as profit centers. Once shifted into a profit center. This limits the manufacturing plant’s bargaining power considering that the company is a market leader. In the end. this option might affect quality in order to maintain at a minimum cost of production. The advantages of shifting into this type of responsibility center have been fully discussed above. Under this option. In a competitive market that the company plays in. the plants will be forced to operate at a cost enough to cover the price that they can charge. this department will need to switch to the external supplier’s if offered with a lower cost. the operational efficiency of its plants will be very vital for the success of the company. Under this option. standard manufacturing cost per unit plus a fair fixed percentage mark-up for gross profit will be beneficial for the company in terms on its financial position as well as its product quality. This will not benefit the company as a whole.