Classic Abram's Case study(auto ancillary manufacturer) to understand, implement and solve a management control system problem

1. 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)

2. Chairman and
Chief executive
officer
Vice president
Legal
Vice president
Planning
COO
VP and GM AM
Marketing
VP and GM
Ignition parts
Vice president
Industrial
VP and GM
Transmission
parts
VP and GM
Engine parts
Relations
Vice president
Finance
Abrams Company
• Manufacturer of variety of
parts for use in
automobiles, trucks, buses
and farm equipment
• Three major group of parts-
Ignition, transmission and
engine parts
• These parts sold to OEMs
and wholesalers who in turn
sell these parts as
replacement parts to
consumers
Organizational Structure
*Each division is managed by a VP and a general
manager

3. 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

4. Sal
Inside and Outside Sales
80%
20%
Outside
Sales
Inside Sales
Sales break up
100%
80%
60%
40%
20%
0%
90
100
130
180
1992 Sales
Sales break up
*Data In Millions
Engine
Parts
Transmissi
on parts
Ignition
parts
AM
Division

5. Control and Performance
Management System
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
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

6. 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

7. Alignment to company goals
• The company’s management’s goal
was to increase the sales of AM
division to 50% of the Abrams’s total
outside sales
100%
80%
60%
40%
20%
0%
Current
breakup
Target
Breakup
80%
66%
20%
34%
Inside Sales
Outside
Sales
Maximize OEM revenue and achieve ROI
• For individual OEM sales team,
the goal was to maximize the
revenue from the OEM sales
• For plant managers, the OEM
sales improved the bonus and
also the OEM sales contributed to
the ROI calculations also

8. 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

9. Concern - 2
• 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

10. Concern - 3
• 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

11. 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
100%
50%
0%
25
75
Revenue
Firm Profit
Firm Cost
100%
50%
0%
10
25
15
50
Revenue
AM profit
AM cost
Division profit
Division Cost

12. Recommendations
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
66%
34%
80%
20%
Current
Sales
Target Sales

13. Recommendations
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
Just in time strategy

14. 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 effective
implementation of top
management priorities but with a
lot of inefficiencies and inherent
inflexibility due to hierarchical
organizational structure, also all
stakeholders interests are not
quantified.

15. 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

16. Any
questions ?
THANK YOU