Presented By Group 6 :

1. Disha Gupta (20)2. Trimurti Gupta (21)3. Ishant Kathuria (26)

4. Aditya Sharma (46)5. Utsav Sanghavi (41)6. Vikas Sonwane (53)

Chairman and Chief executive

officer

Vice president Legal

Vice president Planning

COO

VP and GM AM Marketing

VP and GM Ignition parts

VP and GM Transmission

parts

VP and GM Engine parts

Vice president Industrial Relations

Vice president Finance

Abrams Company

• Manufacturer of variety ofparts for use inautomobiles, trucks, busesand farm equipment

• Three major group of parts-Ignition, transmission andengine parts

• These parts sold to OEMsand wholesalers who in turnsell these parts asreplacement parts toconsumers

Organizational Structure*Each division is managed by a VP and a general

manager

Marketing Strategy

Product Division• A separate OEM department• Major sales to OEMs• Remaining parts sold to AM

marketing division

Success factors• Ability to design innovative and

dependable parts meeting customers quality, performance, and weight specifications

• Meeting delivery schedule requirements to minimize parts inventories

• Controlling costs

AM Marketing division• Sold manufactured parts to

wholesalers

• Operated several company owned parts distribution warehouses in the US and foreign markets

• Measured on annual ROI

Success Factors• Availability of parts

• Quality

• price

Sal

80%

20%

Inside and Outside Sales

OutsideSales

Inside Sales

Sales break up

0%

20%

40%

60%

80%

100%

1992 Sales

180

130

100

90

Sales break up*Data In Millions

EngineParts

Transmission parts

Ignitionparts

AMDivision

Incentive compensation plan

• Corporate wide bonus pool• Bonus appropriated through

bonus points via a fixed formula

• Bonus award based on profit variance

• Bonus adjusted in case of sales to AM division considering favorable and unfavorable gross margin variance

Control and Performance Management System

ROI calculation

• Profit-overheads-imputed taxes

• Totals assets -current liabilities

• For each plant, a target ROI was calculated. Each product divisions OEM sales were traced to the plants that made the parts

• Book value was used to value property, plant, and equipment

Net Assets :

$98300

(Beginning of year)

Profits :

$11259

(1992 actual profit)

ROI :

11.5%

(Profit/Net assets)

Ignition GM & VP

Transmission GM & VP

Engine parts GM & VP

AM division GM & VP

Examples

If Profit > budgeted profit by 4%• Then

bonus would be 110% of standard

• The company’s management’s goalwas to increase the sales of AMdivision to 50% of the Abrams’s totaloutside sales

Alignment to company goals

0%

20%

40%

60%

80%

100%

Currentbreakup

TargetBreakup

80%66%

20%34%

Inside Sales

OutsideSales

Maximize OEM revenue and achieve ROI

• For individual OEM sales team,the goal was to maximize therevenue from the OEM sales

• For plant managers, the OEMsales improved the bonus andalso the OEM sales contributed tothe ROI calculations also

Concern - 1

• Disputes related to transfer prices to AM division

– Corporate policy with virtually no disputes

• Current parts sold at Price at which it is sold to OEM

• Old parts sold at price adjusted for inflation

– Strictly a AM division part

• These prices were resolved by two divisions involved

• Vice president of finance was an arbitrator for the dispute

• Treated AM division as a captive division with nowhere to go

– Resulted in preference to OEM customers against AM when there are competing demands

• The AM division could not purchase parts outside owing to company’s belief that it would adversely affect the company’s image

– Resulted in not fulfilling market needs

Concern - 2

• Excessive Inventories in all the divisions including AM

– Inventories get down when production volume is low during employee holidays

• While availability is success factor for AM division, it is not for other divisions

Concern - 3

Recommendations

Transfer pricing issue

• For a strict AM division part firm profit should be calculated through cost plus pricing

• Divisional margins should be appropriated by:

– Profit Split method: Profits are split formulary based on econometric analysis

0%

50%

100%

Revenue

75

25

Firm Profit

Firm Cost

0%

50%

100%

50

152510

Revenue

AM profit

AM cost

Division profit

Division Cost

Recom

Top management’s priority:

Inside sales = at least 50% of outside sales

• It should reflect in KRA and incentive plans – VP’s KRA

• E.g. 25% of sales should be to AM

– Plant managers SLA• E.g. Plant utilization of 25% for AM

• AM should consult COO for big opportunity when buying from others

• Outcomes :– Achieve the firm goal

– Resolves the captive situations

Recommendations

66%

34%

80%

20%

Current Sales

Target Sales

For inventory management• Just in time production

system should be adopted– CHASE strategy of

forecasting and demand matching

– It will be easier for 3 divisions as they work in sync with customers

• AM division can maintain higher inventory levels because of availability success factor

Recommendations

Just in time strategy

Strengths and Weaknesses

S W

Strengths• Clear management

structure• Strong engineering

capability– Innovative and

dependable products meeting clients requirements

• A vast product lineup• Strong relationships

with OEMs• Management’s deep

understanding of markets

Weaknesses• Strong

dependence on auto ancillary market

• Goal incongruence with AM of other divisions

• Redundant sales team for each divisions

Overall Evaluation :Strong Control System for effectiveimplementation of topmanagement priorities but with alot of inefficiencies and inherentinflexibility due to hierarchicalorganizational structure, also allstakeholders interests are notquantified.

Suggestions

• The sales team of all divisions can be consolidated in one, which would result and AM division should be turned to revenue centre :-– Efficiency– Goal congruence– Cost effectiveness

• The plant managers’ SLA should include capacity utilization parameters also

• Just-in-time Production system should be implemented

• A strong recommendation of using a Balance Scorecard Balanced Scorecard

THANK YOU

Any questions ?