EXECUTIVE SUMMARY

1. IDENTIFICATION OF THE CHALLENGES
2. ANALYSIS
3. POSSIBLE SOLUTIONS
4. FINAL RECOMMENDATION

DECENTRALIZATION - CHALLENGES
ORGANIZATION STRUCTURE
• Lack of Goal Congruence between different business units –
“Shareholder’s interest”
• Alignment of each Business Unit’s goals and objectives to the overall
firm’s common goal
• Incentivization structure – to promote the common goal first and then
individual business units goals

TRANSFER PRICING



DECENTRALIZATION - CHALLENGES
ORGANISATION STRUCTURE
-5 Manufacturing Units
-12 Sales and Marketing Units with BUMs.
-BUMs of the 5 (MDs) not directly responsible for Manufacturing Units
under them.
-Remaining 7 Sales & Marketing Unit Heads (MDs) only responsible
for Sales.

-CONFLICT :
Performance Measurement of the Marketing Units and Manufacturing
Units at variance
DECENTRALIZATION - CHALLENGES
TRANSFER PRICING
-Manufacturing Unit : at standard manufacturing for 5 units under
direct supervision and for the remaining 7 units at standard costs + 5%
Anomaly:
-No uniformity in how the costs are allocated across different sales
and marketing units
-No incentive for the manufacturing units to reduce the manufacturing
costs so as to make pricing of the product competitive and increase
sales volumes /profits
DECENTRALIZATION - CHALLENGES
INCENTIVE STRUCTURES
-Sales is incentivized on profit generated from sales
-Manufacturing is incentivized on manufacturing profit which is
difference from sales price and manufacturing cost
Challenge: Sales will always blame manufacturing saying costs are
high and hence product prices are high impacting sales
Manufacturing will always blame that their profit is impacted because
sales is not doing their job properly – selling less and profits are
impacted
DECENTRALIZATION - CHALLENGES
Other Challenges:
a.Purchase of capital equipment – decision making not with the
Business Unit responsible directly
b.Shipping Costs – decision made by Sales; costs are attributed to
manufacturing units
c.Rising obsolete inventory – no incentives to Sales to keep low levels
of inventory
d.Sourcing of raw materials – absorption of costs – variances resulting
in uncertainties impacting the sales profits

DECENTRALIZATION – POSSIBLE
SOLUTIONS
Principle # 1: What one cannot control one cannot manage
effectively;
Principle # 2: Goal congruence with incentivization metrics
balanced between Firm’s goals, followed by Units’s goals
and then individual goals
Principle # 3: Transfer Pricing to be used as a tool to further
Firm’s overall goals and business objectives rather than
satisfying individual business units performance metrics
Principle # 4: Business co-ordination between all units to
meet external challenges – competition
DECENTRALIZATION – POSSIBLE
SOLUTIONS
Organization Structure:
- Reduce 12 marketing units to 5 : to exactly match the number of
manufacturing units for the products they manufacture
- 5 Business Units heads responsible for end-to-end for all activities –
manufacturing, shipping and logistics, purchases, procurement, sales,
marketing with clear goals for profits
Uniform Transfer Pricing
– transfer pricing as determined by the Finance (neutral unit) to be
adopted uniformly by all 5 business units
Incentivization structure
-50% weightage to the achievement of overall firm's goals
-25% weightage to the business unit’s goals
-25% weightage to the individual performance Key Performance
Indicators (KPIs)
DECENTRALIZATION – POSSIBLE
SOLUTIONS
Business Co-ordination Committee : all 5 business unit
heads with defined plans, goals, objectives and targets to
achieve with a singlemost objective of achieving the overall
firm’s business plan and goals. “sum of parts is greater than
a whole”.

Meet at monthly intervals to review sales, manufacturing and
financial performances – costs, profits, profitability etc and
provide support to each other business unit – if one unit is
falling short of the goals for genuine reasons ( price volatility,
competition, increased procurement costs etc)
DECENTRALIZATION –
FINAL RECOMMENDATION
Business Unit No. A
Stringent control on manufacturing costs (eg: reduce costs
by 10% over the previous period)
Goals on levels of inventory at any period of time (eg: not to
exceed 5% of the total sales); review outstanding inventory
and provide special incentives to dispose off the inventory
Sales and Marketing strategies –