Controllership case analysis – Grand Jean Company (Case 4-6)

Controllership case analysis – Grand Jean Company (Case 4-6).

Introduction.

            Grand Jean Company is a company which has been in operation for several decades and it manufactures jeans.  It is a global market leader in the production of flare and bell-bottom jeans.  In fact, Grand Jean became the world’s largest clothing manufacturer in 1989.  Its products include jeans for boys and men, as well as those for women.  This company sells all its end products, and in certain instances, there are shortages in supply, due to the high consumer demand.  This firm uses an outsourcing strategy in production where contractors manufacture its products independently.  Managers of different plants are compensated through a predetermined price per unit produced.  The managers are also expected to improve upon the previous month’s sales, according to the targets set.  At the end of the year, the managers are ranked according to performance and awarded bonuses depending on the same.  This strategy is seen by some people to be a poor one due to the pressure that it impacts on managers, and the paper aims at analyzing this view amongst other features of Grand Jean Company.

Goals of the company in relation to those of the marketing department and managers.

            The overall goal of the company is to maintain its leadership in the market as a manufacturer of jeans.  The management does this through analyzing the monthly performance of the different manufacturing plants and seeking explanations on any unfavorable performance from the manager.  The management also develops new targets each month, which it views to be reasonably realistic.  The inability to attain the goals, demands explanation from the managers concerned, with a view of rectifying any inherent problems.  Generally, the goal of the company is to improve overall performance in order to stay ahead of its competitors.

            However, the goals of the managers are slightly different from those of the company.  The managers are under a lot of pressure to perform, with monthly assessments being done on their plants.  In addition to this, they are required to improve productivity by a predetermined margin, which goes up each month.  Due to this pressure, the personal goal of the managers shifts from looking up for the welfare of the company at large, to that of survival and personal welfare.  The managers are aware that they can be fired if they do not meet these demands.  This sometimes makes them engage in activities which are contrary to the company policy.  For instance, according to Horngren (2006), some managers hoard some manufactured products in a bid to reduce the following month’s expectation regarding targets.  They also do this to have stocks of pants which they can use whenever there is underproduction.

            The marketing department faces similar challenges to the one faced by managers.  It also has difficult targets to meet, which are regularly adjusted upward.  Since half of the compensation in the marketing department comes from commissions, employees in this department struggle to generate personal income, as opposed to the organizational income at large.

Management planning and control in marketing and manufacturing departments.

            Planning in the manufacturing departments has already been discussed.  In summary, these departments are given targets which are too met each month.  The targets are calculated according to the market forecast.  The management also uses graphs and curves, which have been developed using past performance, for budgetary planning.  Controls in this department include analyzing the performance of different contractors over a period in order to determine if they are reliable, before giving them the highest allowable amount for each produced unit.  In the marketing department, there is a regular change in product mix, and this is done to meet the dynamic market changes.  The sales employees are paid a large percentage of their overall salary through commissions, which is aimed at motivating them to sell more.

            One advantage of using this approach is that tools to forecast the market performance are not only useful in preparing budgets, but can also be very useful when predicting future profits and overall performance by the company (Camillus, 2000).  This is important when making long term decisions affecting the company.  Another strength which can be attributed to monitoring contractors before awarding them the price ceiling is that it increases efficiency through preventing wastage of funds.  Awarding price ceilings to reliable contractors is motivators which will enable them improve performance.  A disadvantage of using this approach is that too much emphasis is placed on meeting targets as opposed to motivating employees.  This has a danger of decreasing performance in the long run.  This factor is also inherent in the marketing strategy of the company.

Profit center concept.

            This is a new approach which may be used to solve some of the problems being experienced in the company.  When the various plants compete against each other, this will raise the efficiency and effectiveness.  The managers will also be challenged to adapt new and radical innovative changes in order to perform better than the other plants.  Instead of receiving targets from a central authority, the plant managers will direct activities without outside pressures or influence.  This is bound to improve performance from the current levels.

            In relation to rewards, I also share similar views with the plant manager.  The current global business environment is very challenging, and only the strongest companies survive.  According to Horngren (2006), the failure rate in this industry is high, due to intense competition.  All managers should be rewarded equally and should not be graded according to performance.  Competition between the plants and profits should be the sole comparison of performance between the managers.

Alternatives for recording revenue.

            The first option involves using the selling price to distributors and retailers, according to sales employee recordings.  This option involves using the actual prices which have been recorded in the financial books of account.  It represents the most accurate figures, since they are the ones which have been used and recorded during the transactions.  Any changes in the pricing policy are captured through this method.

            The second option involves the use of manufacturing cost, plus a fair markup for each unit.  This is a viable option under the circumstances, since the company decides the mark up it wants and sets prices according to it.  However, this approach assumes that the prices reached through this approach will always be the ones which are used.  There are unique circumstances which may make the company to either increase or lower the price issued to contractors.  For instance, an unforeseen meltdown of the economy may make the firm reduce this price.  In such a situation, the prices calculated using a mark up will be inaccurate.

            The third involves the use of average price paid for contracts previously used when manufacturing similar pants.  In this case, the previous prices which are paid to contractors are averaged in order to get the average price.  This is not a very effective approach, since certain factors which may have contributed to paying such prices previously, may not be present.  For instance, it is reasonable to assume that during the world war or the Great depression, Grand Jean Company paid its contractors lower prices due to low performance by the firm.  However, in the absence of these factors, the contractors may have received higher prices.  Taking the average price under different circumstances or economic conditions may not achieve fair prices.  It is therefore wrong to compare different economic situations, and each accounting period should be taken individually.

            In my view, the first option is the best, since it represents the most accurate prices.  Unlike the other approaches, any unforeseeable changes are captured in the recordings, which make them the most accurate prices.  Accuracy is very important when calculating revenues in any firm, which makes it my best choice.

Conclusion and recommendation.

            Grand Jean Company has been seen to have grown to be one of the biggest clothing manufacturers globally.  This can be attributed to a planning and control system which emphasizes on the need to meet performance targets.  However, this approach puts too much pressure on managers, and some of them are forced to engage in unethical practices in order to meet the set targets.  It is important to give the managers independence in running their plants through converting them to profit centers.  It is also important to reward all managers equally so that they may be motivated to achieve the goals and objectives of the company.

References.

Camillus, J. C. (2000). Strategic Planning and Management Control: Systems for Survival          and Success. Washington: Lexington Books.

Horngren, C. T. (2006). Cost Accounting fifth edition. New York: Prentice Hall.

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