Case Study Grand Jean Company

1. The company has been profitable for a long time.
2. The company has 25 manufacturing units of its own and 20 independent contractors producing efficiently and reliably for them.
3. They have developed a learning curve to develop the production’s standard hour.
4. 1-to-5 scale reward system can motivate employees work harder.
5. Use budgeting to set the quota, which can evaluate the performance easily.

Following are the Weaknesses:

1. There is no incentive to the manufacturing plants to exceed production. Rather, it makes the things difficult for them as they have to meet increased quota and have thus resorted to “Hoarding” of stock even if there is enough demand.
2. Standard hour’s calculations are done on same scale for new and old machines, which hence produces inaccurate results.
3. They are highly dependent on the outside independent contractors who provide for approximately one-third of the total pants sold by them.
4. The reward system is not fair. The people who work at the headquarters are awarded higher rating than the plant managers.
5. There is lack of staff for some departments as they continue to maintain 11:1 supervision ratio to achieve leadership excellence. Thus, the immediate and significant information requirements cannot be met on time. Also, the production cannot be increased because of lack of personnel.

3. One plant manager recommended that plants be operated as profit centers because it would overcome some of the problems discovered by Mia Packard and the case writer. This plant manager commented, “[My] competitor is the nearby independent manufacturer that makes the same pants for Grand Jean as my plant makes. And this outsider might also make pants for Grand Jean’s competitors. Because of the competitive market, only the best managed plants survive in this business. Therefore, like the outside company’s manager I should have bottom line responsibility and be rewarded accordingly.” Do you agree or disagree with the profit center concept for Grand Jean’s 25 manufacturing plants? How would this approach affect the plant manager’s decisions, performance, etc.?

Ans.    The manufacturing plants have the goal to just meet the budget figure and fulfill the quota allocated to each plant. There is no incentive to the manufacturing plants to exceed production. Rather, it makes the things difficult for them as they have to meet increased quota and have thus resorted to “Hoarding” of stock even if there is enough demand. Since they are considered as an expense center and there is no immediate monetary reward to compensate for increase in responsibilities or requirements, they are not motivated to achieve higher efficiency.

But the manufacturing plants are considered as a Profit Centre, the plant manager will be able to earn incentives through higher efficiency. He will be motivated to work efficiently and produce at peak levels. Also they’ll not restrict themselves to the plant quota and would not hoard the excess production; rather they’ll make full use of this extra production and gain maximum monetary rewards. A change in the reward system would encourage the plant managers to push to maximum production and also to minimize the cost, time and effort to produce efficiently.

Also due to intense competition from independent contractors, only the best plants will survive. Hence the plants need to be competitive. Also increase in production will help the company to be self-sufficient and will reduce their dependence on external contractors.

4. If Grand Jean’s manufacturing plants were treated as profit centers, three alternatives were suggested for recording revenues for each plant
   1. Use the selling price recorded by Grand Jean’s sales personnel for pants sold to retailers and distributors.
   2. Use full standard manufacturing cost per unit plus a “fair” fixed percentage markup for gross profit.

• Use the average contract price Grand Jean paid outside companies for making similar pant types.

Evaluate these three alternatives. Which one would you recommend? Why is your selection the best one?

Ans.   

1. Using selling price recorded by Grand Jeans sales personnel for pants sold to retailer and distributer will not leave the sales department with any margin. The Sales department would not earn any profits. Hence it is not a feasible option. Every department needs to generate revenue for its sustenance.

Also, the sales department is already getting their products manufactured from 20 other outside suppliers for almost 5 years now. If the manufacturing plants would charge them at the price at which they are selling to retailers and distributors, then the sales department would switch to the external suppliers for supply at a lower cost  and will not continue with this system.

Also, if the manufacturing department thinks of selling their products to the outside market even then they will have to reduce their price to the market price.

So, considering both the points that are mentioned above using selling price recorded by Grand Jean’s sales personnel for pants sold to retailers and distributors, it will not do any good either to the manufacturing or to company as a whole.

ii) Using full standard manufacturing cost per unit plus a fair fixed percentage markup for gross profit means manufacturing unit calculates the per unit cost of manufacturing and add a predefined “ Fair” Profit percentage to it to arrive at the transfer price.

This method has the advantage that there is incentive for the manufacturing department to do well and to increase efficiency. There is a fixed percentage of the cost that the manufacturing unit will charge over and above the cost and that will be its gross profit. So, for every unit they produce and sell they get profit for it. This profit will make them work harder and attain more efficiency. Also as a profit center even if they produce more than what is their own companies requirement they may sell it to the market as contracted manufacturers and earn further profit as a “Fair” percentage of cost.

But in this case there is nothing motivating for the employees to focus on keeping on cost of production as low as possible. The employees should try their level best to keep the cost as low as possible and competitive. Hence, this alternative has several advantages of motivation, but cost factor needs to be taken care of.

iii) If we consider the option of the average contract price that Grand Jeans is paying to outside companies to get its product made that would give them the price range with very little margin to work with as the bargaining power of Grand Jeans is pretty high. Hence, this may lead to reduction in the quality so as to maintain a fair margin for themselves. This may in turn lead to increased number of rejections at the customer end and may lead to reduction in brand value and loss of market share to the company.

Considering the three alternatives given to us the best one would be the cost plus fixed margin (Alternative 2).

All other options don’t fit well in the situation of Grand Jeans. Moreover, the manager of manufacturing and sales may sit down and negotiate and reach at a consensus. This price could be between the cost plus margin price and selling price of the sales department.

At this price the sales department will have sufficient margin as well as manufacturing department will have good incentives to do well.