Par t
The Manag
nt Control Proce
Case 10-3
Galvor Company When M. Barsac replaced M. Chambertin as Galvor's controller in 1974, at th ag of 31, he became th first of ne group of senior ge_: resulting from th acquisition by Universal Electric. accepted fa wa that, in th large and sprawling Universal organization, th controller de skilled accoun partment represented ke function. M. Barsac, who wa had had 10 years' experience large French subsidiary of Universal. He recalled his early days with Galvor vividly an admitted they we e. sa the least hectic.
Galvor in early April 1974, a few days after arrived Chambertin ha left. I wa th first Universal an here in Bordeaux an became quickly immersed in all th problems surrounding the change of ownership. Fo example, there were no really workable financial statements for th previou two years. This made preparation of th Business Plan which Mr. Hennes sy an began in June, extremely difficult. This plan covers every aspect of th Galvo business, bu th great secrecy which ha always been maintained about th company's financial affairs made almost impossible for anyone help us
M. Barsac's duties cou could ld be roughly divided into tw major areas: firs >preparation of numerous reports required by Universal, and, second, su \'e:- :- sion of Galvor's internal accounting function. While these tw areas \'e closely related, is useful to separate them in describing th accountin ar.._ control function as developed after Universal acquisi tion of Galvo Galvor. r. exte To control it operating units, Universal relied primarily on - system of financial reporting. Universal attributed much of it success i cent years to this system. The system wa viewed by Universal's European heck up" on th ope ra troller, M. Boudry, as much more than a device to "c "check units. According to M. Boudry: conventional ional sense of sales rn In addition to measuring ou progress in the convent ings, an et ur on investment, we believe th reporting system causes ou operating people to focus their attention on critical areas which might no otherwise receive their major attention. An example would be th level of investment in inventory. Th system also forces people to think about th future and to commit themselves to specific future goals. Most operating people are understandably involved in today's problems. We believe some device is required to force them to look beyond th problems hand an to consider longer-range objectives an strategy. Yo could sa we view th reporting system as an effective training an educational device.
This case was prepared by Professor L. E. Morrissey as basis for class discussion rather than t trate eit er effective or ineffective handling of an administrat ve itu at on. Copyright 1967 IMEDE, Lausanne, Switzerland. MD-International Institute I nstitute for Management Development and reta in all rights No to be used or reproduced without wr itten permission directly from Lausanne, Switzerland.
Chapter 10
lyzing Financ al
erforma nce
eports
Background been founded in 1946 by M. George atour. who Th Galvor Company continued as owner president until 1974. Throughout it story. he company em into acted as a fabricator, buying parts assembling high-quality, moderate-cost electric electronic measuring and equip ment. electronics industry measuring instrum ents ts own sector of Galvor wa one of th major French firms; however, there were el ectr on ics firms th more sophisticated sectors of industry that were vastly larger than Galvor. Galvor's period of greatest growth began around 1960. Between 1960 an after ta 1971 sales grew from 2 million 1971 ne francs to 12 million, profits from 120,000 1971 ne francs to 1,062 000. Assets as of December 1. 1971, totaled 8.8 million ne francs. (One 1971 new franc $0 20. he firm's prosperity resulted firm, bu number of offers to purchase equity in complete own Latour remained steadfast in hi belief that only ifhe affairs with a free hand. As owner president ership of Galvor coul direct every detail of continued over Latour years to be personally involved firm's operations, including signing of all of he company's important checks. As of early 1972, Latour as concerned about th development of ade quate successor management for Galvor January 1972 Latour hired "tech nical director November hi special assistant, this person resigned 1972. Following 1973 unionization of Galvor s workforce, whic Latour opposed, Latour (then 54 years old began to entertain seriously idea of general so selling firm devoting himself "to family, philanthropic, cial interests On April 1 1974, Galvor wa sold to Universal Electric Com s stock. M. Latour became chairman of th pany for $4 million worth of board of Galvor David Hennessy as appointed as Galvor's managing di been with Universal that time was 38 years old rector. Hennessy Electric for nine years.
The Business Plan control system wa extremely com Th heart of Universal's reporting prehensive document-the Business Plan which wa prepared annually by each of th operating units. The Business Plan as th primary standard for everything possible as evaluating th performance of unit managers done by Universal's to management to give authority to the plan Each January, th Geneva headquarters of Universal set tentative objec tives fo following two years for each of it European operating units. This "first look as attempt to provide a broad statement of objectives that would permit th operating units to develop their detailed Busines Plans or operating units that produced more than a single product line objectives were established for both th unit as whole an for each product line Primary responsibility for establishing these tentative objectives rested with eight Geneva each whom was responsible for product-line managers located basis of hi knowledge of th product lines group of product lines. On is best judgment of market potential each product-line manager tentative objectives for is lines.
Part Two
Th
ge
Ma
nt
Con rol Process
Fo
presente e. reporting purpose Universal single product line even though Galvor s own executives iewed th comp n:- products as falling into three distinct lines ltimeters panel meter ar..
electronic instruments.
Fo each of over 300 Universal product lines in Europe, objective established for five ke measures 1.
e_
Sales. Ne income.
Total assets. 4.
Total employees Capital expenditures.
From January to April, these tentative objectives were "negotiated" be t, -E-?"' Geneva headquarters and the operating managements. Formal meeting wc held in Geneva to resolve differences between th operating unit manager a:c.. product-line managers or other headquarters personnel. Negotiations also took place th same time on products to be disc oll ued. "sophisticated exercise \\ 1::..:: Hennessy described this process as includes careful analysis of th effect on overhead costs of discontin uiJ:.:i' also recognizes cost of holding is gc item in stock. product analysis an one method Universal uses to keep th squeeze on us." During May, th negotiated objectives were reviewed an approved b versal's European headquarters in Geneva an by corporate headquarter iI United States. These final reviews focused primarily on th five ke a s ~ noted above. In 1976, th objectives for total capital expenditures an or total number of employees received particularly close surveillance. T Eproved objectives provided th foundation for preparation of Business In June an July, Galvor prepared its Business Plan. Th plan, contai to 100 pages, described in detail how Ga lvo intended to achieve it ob for th following two years. Th plan also contained forecast, in less d et ai th fifth year hence (e.g., for 1981 in th case ofthe plan prepared in 19"'
Summary Report de sc r-;; Th broad scope of th Business Plan ca best be understood by of th type of information contained. began with brief one-page an operating summary containing comparative data for: Preceding year (actual data)
Current year (budget) Next year (forecast).
Two years hence (forecast). Five years hence (forecast). This one-page summary contained condensed data dealing with in measures for each of th five years:
Ne income. Sales
Chapter
10
Analyzing Finan ia
Total assets. Total capital employed (sum of long-term debt Receivables.
erformance
eponE
worth ).
Inventories
Plant, property,
equipment.
Capital expenditures.
Provision for depreciation. Percent return on sales Percent return on total assets. Percent return on total capital employed. Percent total assets to sales. Percent receivables to sales. Percent inventories to sales. Orders received. Orders on hand. Average number of full-time employees. Total cost of employee compensation. Sales employee. income employee Sales er $1,000 of employee compensation. income er $1,000 of employee compensation. Sales er thousand square feet of floor space. income per thousand square feet of floor space Anticipated changes in net income for th current year next tw years were summarized according to their cause,
for each of follows:
Volume of sales. Product mix. Sales prices. Ra
material purchase prices.
Cost reduction programs. Accounting changes all other causes. income forced operating man This analysis of th causes of changes agements to appraise carefully th profit implications of all management ac tions affecting prices, costs, volume, or product mix
Financial Statements These condensed summary reports were followed by a complete of projected financial statements income statement, balance sheet, statement of cash flow-for current year and for each of the next two years. Each major detail in separat item on these financial statements wa then analyzed reports, which covered such matters as transactions with headquarters pr posed outside financing, inve tment receivables inventory number of
45
Part T
Th
Management Control Process
employees
mployee compensation,
ring write offs of assets.
cuc
Management Actions Th Business Plan contained escription of th major management ac oL= o::- for th next two years, with stimate of th favorable or plann able effect ea income se- action would have on total sales, total Among some of he major management actions described in Galvor 's Business Plan (prepared in mid-1975 were th following
Implement standard cost syst
Revise prices oldest low-margin items from line.
Standa dize an
simplify product design. development plan.
Create forward research Implement product planning
Separate plans were presented for each ofthe functional areas mark ir:.= development, financial control an pe so IE. manufacturing, research statem n an employee relations These functional plans began with th function's mission analysis of it present problems opportun iri i':- an specific actions it intended to take in the next tw ye ar statement of Among th objectives et for th control area in th 1976 Business Barsac stated that he hoped to Better distribute tasks. Make more intensive us
of IB
equipment.
Replace nonqualified employees with better-trained an more dynamic peo;: The Business Plan closed with series of comparative financial statem e::: which depicted th estimated item-b -item effect if sales fell to 60 percen 0::80 percent of forecast or increased to 120 percent of forecast. Fo each t. levels of possible sales, costs were divided into three categories: fixed co management discretionary costs Manag mE avoidable variable costs, described th specific actions it would take to control employment, total s= _an capital expenditures in case of reduction in sales, an when these ac into effect. In it 1976 Business Plan, Galvor indicated would be a: into effect if incoming orders drop program for contraction would be below 60 percent of budget for two weeks, 75 percent for four weeks, or 85 noted that assets would be cu only 80 perce :;..:: cent for eight weeks. 60 percent year and to 90 percent in an 80 percent year, because re odE: ization of ou business is too essential for survival to slow down much ore
Approval
Plan
By midsummer, th completed Business Plan as submitted to Univers al hE quarters; an beginning in th early fall meetings were held in Geneva (j ew each company's Business Plan. Each plan to be justified an fe
Chapter 10
An alyzing
inanc ial
er forman ce
eports
45
at these meetings, which were attended by senior executives from both Univer sal's European and American headquarters and by th general managers and functional managers of many of th operating units. Universal viewed these meetings as important element in it constant effort to encourage operating managements to share their experiences in resolving common problems. Before final approval of a company's Business Plan at Geneva review meeting, changes were often proposed by Universal's to management. For example, in September 1976 th 1977 forecasts of sa es income in Galvor's Business Plan were accepted; bu th year en forecasts of total em ployees an total assets were reduced about percent an 1 percent, respec tively. Galvor's proposed capital expend iture for th year were cu 34 percent, a reduction primarily attributable to limitations imposed by Universal on al operating units throughout th corporation. Th approved Business Plan became th foundation of th budget for th fol lowing year, which was du in Geneva by mid-November. Th general design of th budget resembled that of th Business Plan, except that th vario dollar annual basi s, were amounts, which were presented in th Business Plan on broken down by months. Minor changes between th overall ke results fore cast in th Business Plan and those reflected in greater detail in th budget were not permitted. Requests for major changes to be submitted to Geneva no later than mid-October.
Reporting to Universal to submit periodic reports to Geneva ac cording to fixed schedule of dates. Al units in Universal, whether based in th United States or elsewhere, adhered to essentially th same reporting sys tem. Identical forms an account numbers were used throughout th Universal organization. Since th reporting system made no distinction between units of different size Galvor submitted th same reports as unit with many times it sales. Computer processing of these reports facilitated combining th results of Universal's European operations for prompt review in Geneva an transmission to corporate headquarters in the United States. Th main focus in most of th reports submitted to Universal wa on th variance between actual results an budgeted results. Sales an expense data were presented for both th latest month an for th year to date. Differences between th current year and th prior year also were reported because these were th figures submitted quarterly to Universal's shareholders to news papers an other financial reporting services Every Universal unit in Europe
Descri ption
Reports
Thirteen different reports were submitted by th controller on a monthly basis ranging from a statement of preliminary income which was due during th first week following th close of each month to report on th status of capital projects du on the last da of each month. The monthly reports included: Statement of preliminary
Statement of income. Balance sheet.
income.
45
Part Two
The Management Control Process
Statement
in retained
Statement of cash flow. Employment statistics
Status of orders received, canceled, an
outstanding.
Statement of intercompany transactions. Statement oftransactions with headquarters. Analysis of inventories. Analysis of receivables.
Status of capital projects. Controller's monthly operating an
financial review
E::' final item, controller's monthly operating an financial review, explanation ofthe significant vari an c to 20 pages or more. contained from budget, as well as general commentary on financial affairs ofthe un :. addition to th reports submitted on monthly basis, approxim u,: 12 other reports were required less often, either quarterly, semiannuall
Th
annually
Cost
the System
Th control an reporting system, including preparation of the annual in:: Plan, imposed heavy burden in both time an money on the managemen operating unit. Barsac commented on this aspect of system in the se c_ of Galvor's 1976 Business Plan dealing with the control functional area. Galvor's previous administrative man ager [controller], who wa
above all, ha
ta
specia lis
to prepare
balance sheet an statement of income once a ye Cost accounting, perpetual inventory va luation, inventory control, productio ot xis :. control customer accounts receivable control, budgeting, et cetera di No information was given to other department heads concerning sales resul
costs, an expenses. Th change to formal monthly reporting system as e:: sk very difficult to realize Du to th low level of employee training, such as consolidation, monthly an quarterly reports budgets, th Busine Plan implementation of th ew cost system various analyses, restatemen of prior years accounts, et cetera must be fully performed by th controller an time in spite of percent of their J : ~ chief accountant, thus spending 55-60 hours per week. Th number of employees in th controller's depar tm er. in subsequent years will no depend on Galvor's volume of activity, but ra er Universal's requirements. Implementation of th complete Universal Cost an System in company where nothing existed before is
involves establishing 00 machining an codifying 15 000 piece parts
When interviewed early in 1977,
Production Control
enormous task wh e::: 3,000 assembly standard time an:.
Barsac stated:
Getting th data to Universal on time continues to be a problem. We simpl d have th necessary people who understand th reporting system an it -p-::: Th reports ar al in English an few of my people ar conversant in En lis
Also, American accounting methods ar
different from procedures used in rEAnother less serious problem concern th need to convert all of ou inter al
records, which are kept in francs to dollars when reporting to Universal.
Chapter 10
Analyzin
Fi
ncia
erformance
eporcs
53
especially concerned t h a t few of th reports we prepare or Un ersal ar useful to ou operating people here in Bordeaux. Mr. Henne ss f course uses th reports, as do on or tw others. am doing all t h a t an to enc ou ag greater us of these reports. My job is no on y to provide facts to help th managers understand nd utilize he figures available. We have recently i issuing monthly cost an expense reports for each department showing th ances from budget. These have been well received.
Mr. Hennessy also commented on meeting
demands imposed by Univer-
sal's reporting system.
less for need to report to Universal we would do some things way or different times. Universal decides that th entire organization must move to a certain basis by specified date. There are extra costs involved meeting these deadlines. should be noted, also, that demands made on he controller's department ar passed on to other areas, such as marketing, engi
Without th
neering,
production.
M. Boudry, Universal's European controller, acknowledged that cost planning reporting system was high, especially for smaller units. Th system is design ed for large business. We think that th absolute minimum annual sales volume for individual unit to support th system is about $15 mil lion; howev er we would prefer least $30 million. By this standard Galvor is barely acceptable. really don't know if he cost of th system is unnecessarily th sense that requires information which is not worth ts cost burdensome reasonable estimate might be that about 50 percent of th information would be required an smartly managed independent business of comparable size, another 25 percent is required for Universal particular needs, an 25 percent is probably "dead underbrush" which should be cleaned ou Ideally, every five years start again with th essentials. we should throw th system out the window
As indication of some of department's routine activity, M. Barsac noted t h a t of 1976 Galvor was preparing about 200 invoices each working day. company t h a t time approximately 12,000 active
customers. Early 1977, 42 people were employed in the controller's department. The organization of the department described Exhibit 1.
Headquarters Performance Review Galvor's periodic financial reports were forwarded to
Boudry
Geneva.
reports were first reviewed by four fiassistant to M. Boudry, one nancial analysts wh together reviewed ll reports received from Universal's operating units in Europe. Boudry described purpose of these reviews: early 1977 Th reviews focus on comparison of performance against budget for ke measures sales, income, total assets, total employees nd capital expendi tures. These ar stated as unambiguous numbers. We tr to detect an trouble spots or trends which seem to be developing. Of course, th written portions of the reports are also carefully reviewed particularly th explanations of variances from budget. everything is moving as planned we do nothing. Th reports ay contain month-by-month revision of forecasts to year en he planning objectives for the year are no to be et we consider th situation serious.
Part Two EX H
T
The Management Control Process
Controller's Depa tment (January 1977)*
Organizat
Controller Barsac
Age 34 Trained and skilled accountant Good ability in English Joined Galvor in April 1974 Employed by Universal since 1964 Formerly assistant treasurer of Universal subsidiary ",
Internal Control Systems and Procedures Blanc
Data Processing Perrier S people
Age 32
IJ Secondary school No ability in English Joined Galvor early in 1974 13 years systems' experience Worked in local IB Service Bureau
Chief Accountant Dussex
Age 32
Age 32
Secondary school Fair ability in English an Spanish At Galvor since October 1975 Previous experience with Unilever subsidiary
--
",
,,"-
'"
Trained and skilled accountant Reads English, little writing or speaking ability Joined Galvor fall 1975 Previously worked years in Universal subsidiary e"",
",7",
Cost Accounting
Billing and Customer
General Accounting Parel 6 people
M a t h e z - 1 2 people
Account
Mm
Age 21 Limited education No ability in English At Galvor years Joined Galvor as a boy, formerly payroll clerk Bordeaux native
ega: a::-
C a r d i n a u x - 1 2 people
Age 25 No ability in En li At Galvor since f ll :;
No ability in English At Galvor S years Good clerical employee
*Immediately prior to Galvor's takeover by Universal Electric, there had
been
Formerly teache accounting in
fewer than 20 people
in
the controller's dep
!:
=_
rtr"':
te!' unit manager has problem an calls for help, then it becomes a of common concern. He ca probably expect ba da in explaining ho it happened bu he ca expect help, too. Depending on th nature of th pr bl e::::.. either Mr. Forrester Galvor's product-line manager, or one of ou staff sp ec ists would go down to Bordeaux. In addition to th financial analysts, on whom closely follow Galvor repo ts, we have specialists on cost system ar::. analysis, inventory control, credit, and industrial engineering. i n ~ We have no given Galvor th help it needs an deserves in data p r o c bu we have limited staff here in Geneva an we cannot meet al need \Y hope to increase this staff during 1977
With reference to Galvor Galvor is small an
recent performance, M. Boudry stat es:
we don t give it much time or help unless its varia nc ::
appear to be off. This happened in the second half of 1976 when we ec affi== increasingly concerned about th level of Galvor's inventories. serie of Poulet, our dire ct or telexes on this matter between Mr Hennessy an manufacturing here in Geneva illustrate ho Exhibits through
th
reports ar
d. Se
Chapter 10
BIT
vi:
:
Analyzing
Telex from Poulet to Hennessy, Concerning Level
nancia
fo ma
eport
55
Inventory
HENNESSY-GALVOR POULET-UE SEPTEMBER 26, 1976
OWING ARE THE JULY AND AUGUST INVENTORY AND SALES FIGURES WITH THEIR RESPECTIVE NCES FROM BUDGET ($0005). AUGUST
JULY
'E "'-..
TORY . . . . . TO DATE
.........
.............
ACTUAL
BUDGET
VARIANCE
ACTUAL
BUDGET
VARIANCE
2,010 3,850
1,580 3,900
(430) (50)
2,060 4,090
1,600 4,150
(460) (60)
.\TEST AUGUST SALES FORECAST REFLECTS DECREASE IN YEAR-END SALES OF 227 VERSUS INCREASE 68 IN YEAR-END INVENTORIES OVER BUDGET. :: QUEST TELEX LATEST MONTH-BY-MONTH INVENTORY AND SALES FORECAST FROM SEPTEMBER DECEMBER, EXPLANATION OF VARIANCE IN INVENTORY FROM BUDGET AND CORRECTIVE ACTION () PLAN IN ORDER TO ACHIEVE YEAR-END GOAL. INCLUDE PERSONNEL REDUCTIONS, PURCHASE TERIAL CANCELLATIONS, ETC. POULET
We feel th situation is under control an th outlook for Galvor i OK despite th flat performance between 1973-75 and the downturn in 1976 Th company as been turned about an 1977 looks promising
Although th comprehensive reporting an control system made it appear that Universal wa highly centralized organization, th managements of th considerable autonomy. Fo examp le, Mr Hennessy, various operating units who wa judged only on Galvor's performance, wa free to purchase components from other Universal units or from outside sources. There were no preferred "in-house" prices. A slight incentive wa offered by Universal to encourage such transactions by no levying certain headquarters fees amounting to about 2 per cent of sales, against th selling unit. Similarly Universal made no attempt to shift it taxable income to low-tax countries. Each unit wa viewed as though were independent company subject to local taxation an regulation. Universal believed that this goal of maximizing profits for th individual units would in turn maximize Universal profits. Forcing every unit to maximize it profits precluded th us of arbi trary transfer prices for "in-house" transactions.
Recent Developments
Galvor
tooling costs as well tandard cost system, which included development been in effect since March 1976. manufacturing an assembly, According to Mr Hennessy nuar y, bu t we we e as of la ed. On th hoped to t a r t in xperienc in 1976 all stand ds er viewed nd re nec es th er vi ed in no have histor of deve lopment nd oo li cember ha
The Management Control Proc ss
Part Two
Telex from Hennessy to Poulet Concerning Level
EXHIBIT 3 TO:
POULET-UE
FROM:
HENNESSY-GALVOR
DATE:
SEPTEMBER 27, 1976
Inventory
YOUR 26.9 76 MONTHLY INVENTORY FORECAST SEPTEMBER TO DECEMBER BY CATEGORY AS FOLLOWS SEPT.
...... ....
PURCHASED PARTS
MANUFACTURED PARTS WORK-IN-PROCESS
......... . . . . .
INDICA
TOTAL
.. .. ..
. . . . .... .... .. . . . . . . .. PROCESS .. . . . . ..........
TORIES
ENGINEERING IN RESERVE
53
......... ...... ...... ....
FINISHED GOODS OTHER NV
...........
....
RAW MATERIALS
.....
......
.... ....
.............
.. . . . . . . . . . . .
........
.......
....
OCT. 31
($0005):
NOV.
DEC.
50
51
180
185
19
9-
95 83
93 725
632
694 84
93 70 68 82
05 8e
58
48
?-:.
(14)
84 55 (14) 50
52
(14) 55
1,973
1,928
1,896
, 7 9 ~
THE MAIN EXPLANATIONS OF PRESENT VARIANCE ARE THREE POLICIES ADOPTED END OF 1975 AN DISCUSSED IN MONTHLY LETIERS BUT WHICH LEFT DECEMBER 1976 BUDGET OPTIMISTICALLY LOW.
IR
TO HAVE REASONABLE AMOUNTS OF SELLING MODELS IN STOCK WITHOUT WHICH WE COULD
HA E ACHIEVED 19 PERCENT INCREASE IN SALES WE ARE MAKING WITH OUTMODED PRODUCT. SECOND POLICY WAS TO MANUFACTURE LONGER SERIES OF EACH MODEL BY DOUBLE WHEREVER WOULD ABSORB IT, OTHERWISE MANY OF OUR COST REDUCTIONS WERE NEARLY ZERO THIS MEANS MANUFACTURING PROGRAM ANY MONTH MA
CONTAIN FIVE MONTHS' WORTH OF 15 MODELS INS TE.-
OF 10 WEEKS' WORTH OF 30 MODELS (OUT OF 70) THIRD WAS NE
POLICY OF REDUCING NUMBER
PURCHASE ORDERS BY MAINTAINING
M I N I M U M STOCK OF MANY THOUSANDS OF LOW-VALUE ITE MS
WHICH YOU AGREED WOULD AN
INCREASE STOCK UPON FIRST PROCUREMENT BUT WE ARE AL RE.-':
DI
GETIING SLIGHT REDUCTION CORRECTIVE ACTIONS NUMEROUS INCLUDING RUNNING 55 PEOPLE
BUDGET AN
ABOUT
:.
63 BY YEAR END PLUS REVIEWING ALL PURCHASE ORDERS MYSELF PLUS SLIDING ,!
FEW SERIES OF MODELS WHICH WOULD HAVE GIVEN SMALL BILLING IN 1976 INTO 1977 PLUS THOSE
POSTPONED BY CUSTOMERS THIS WILL NO PROCURED AN
HAVE TO BE MADE FO
HAVE DRAMATIC EFFECT AS NEARLY ALL THESE SERIES
RELATIVELY SURE MARKETS BUT SOME CA
RE
BE HELD IN PIECE P,..:-
UNTIL JANUARY. WE ARE WATCHING CAREFULLY STOCKS OF SLOW MOVING MODELS AN
HAVE MU CI'"
CLEANER FINISHED STOCK THAN END 1975 FINAL
GRAVE CONCERN IS ACCURACY OF PARTS, WORK-IN-PROCESS,
FINISHED
S
VALUATION SINCE WE BEGAN STANDARD COST SYSTEM. INTERIM INVENTORY COUNT PLUS VARIAN CE VALUED ON PUNCH CARDS STILL DOESN'T CHECK WITH MONTHLY BALANCE USING CONSERVATI MARGINS BUT NEARLY ALL GAPS OCCURRED FIRST FOUR MONTHS OF SYSTEM WHEN ERRORS NU AN
r: ...
LAST 4 MONTHS NEARLY CHECK AS WE CONTINUE REFINING. EXTENSIVE RECHECKS UNDERWA
PARTS WORK-IN-PROCESS, AN
FINISHED GOODS AN
CORRECTIONS BEING FOUND DAILY
UR INVENTORY STAFF SPECIALISTS ARE AWARE OF PROBLEM AN
PROMISED TO HELP WHEN
PRIORITIES PERMIT. WILL KEEP THEM INFORMED OF EXPOSURE WHICH STARTED WITH RECORDING AL PARTS AN ERRORS
BEGINNING NE
BALANCES WITH NE
THESE OPERATIONS WE CA
STANDARDS AN
APPEARS CLOSELY RELATED
ONLY PURGE PROGRESSIVELY WITHOUT HIRING SUBSTANTI AL
DIRECT WORKER HENNESSY
.=. ..
Chapter 10
Anal zing Financial
Telex from Poulet to Hennessy Concerning Level
erforman ce
port
Inventory
HENNESSY-GALVOR
POULET-UE
NOV. 10 1976 ='T"" EM BER INVENTORY INCREASE
HILE SEPTEMBER HICH ERE 145,000 UNDER BUDGET REFERRING TO YOUR LATEST TELEX OF SEPTEMBER 27 IN E A B REAKDOWN OF THE SEPTEMBER FORECAST. REQUEST DETAILED EXPLANA IO FO NO THIS FORECAST IN SPITE OF YOUR CURRENT CORRECTIVE ACTIONS.
:-
AGAIN BY 64,000 COMPARED TO AUGUST
YOUR FORECAST
ERIALS :- .... SED PARTS CTURED PARTS -PROCESS
53
_=-7
ENTORIES ::tRI NG IN PROCESS
(43)
25
10
(13)
83
91
(79)
63
72
(91 )
95
- : : 0 GOODS
96
VARIANCE
15
18
....
ACTUAL
84
87
55
52
(14)
(14)
50
51
1,973
2,175
(3
(1 (202)
MEET YOUR DECEMBER FORECAST OF 1,799 YOUR WORK-IN-PROCESS HAS TO BE REDUCED :: -HIS MEANS A REDUCTION OF ABOUT 10 PER MONTH FROM SEPTEMBER 30 TO DECEMBER 31. :C::OR ALSO WOULD LIKE ACTUAL ACHIEVEMENTS AN FURTHER REDUCTION PLANS DURING NO EMBER, AN DECEMBER CONCERNING THE POINTS MENTIONED IN YOUR SAME TELEX OF ER 27. CONSIDER AGGRESSIVE ACTIONS IN THE FOLLOWING SPECIFIC AREAS: D E R TO
ST IC MASTER PRODUCTION SCHEDULES. -::: ::I -TE RM PHYSICAL SHORTAGE CONTROL TO ENSURE SHIPMENTS
:: ::
N- PROCESS ANALYSIS OF ALL ORDERS TO ACHIEVE MAXIMUM SALABLE OUTPUT. ?O
ER REDUCTION.
ATION OF ALL UNSCHEDULED VENDOR RECEIPTS HAVE YOU ADVISED OTHER UNIVERSAL HOUSES SHI IN ADVANCE OF YOUR SCHEDULE UNLESS AUTHORIZED? f. FU LL DETAILS ON ALL CURRENT SHORTAGES FROM OTHER UNIVERSAL HOUSES WHICH ARE :: .SIB LE FOR IN VENTORY BUILD-UP.
POULET
experience, which we have been accumulating since 1975. This
proved extremely useful in se tt cost standards. Simultaneously we have integrated market an sa es for ecasts more effectively into ou pricing decisions.
Before Universal acquired Galvor, a single companywide rate was used to allocate factory overhead to th costs of products. Fo many years this rate discussion of hi pricing policies in 1972 wa 31 percent of direct labor. In Mr. Latour said: have been using this 310 percent for many years an it seems to work ou pretty well, so I se no reason to change
Part wo EXHIBIT 5
Manageme nt Control
Th
roces
Telex from Hennessy to Poulet Concerning Level
Inventory
TO
FROM:
HENNESSY-GALVOR
DATE:
NOV. 15 1976 YOUR 10.11.76
WE NO
HAVE OCTOBER 31 FIGURES. OUR ACTUAL ACHIEVEMENTS FOLLOW: RAW MATERIALS 54
VARIANCE PLUS 3, PURCHASED PARTS 17 PLUS 17 WORK-IN-PROCESS 94
VARIANCE MINUS 12, MANUFACTURED PARTS 11
VARIANCE PLUS 224, FINISHED GOODS 71
VARIANCE
VARIANCE PLUS 18, OTHER
82 VARIANCE MINUS 2, ENGINEERING 54 VARIANCE MINUS 4, RESERVE MINUS 14 VARIANCE NIL, INDICA 55
VARIANCE PLUS 3, TOTAL 2,175 VARIANCE PLUS 247. EACH ITEM BEING CONTROLLED AN SIGNIFICANT VARIANCES 22
THE ONLY
WORK-IN-PROCESS AND 18 FINISHED GOODS ARE MY DECISION UPON
SALES DECLINE OF SEPTEMBER AN
OCTOBER OF 311 TO DELAY COMPLETION OF SEVERAL SERIES IN
MANUFACTURE IN FAVOR OF ANOTHER GROUP OF SERIES, MOSTLY GOVERNMENT, WHICH ARE LARGELY BILLABLE IN 1 9 7 6 IN ORDER TO PARTLY REGAIN SALES. LAST EIGHT DAYS' ORDERS AN ARE SHARPLY UP AN
THEREFORE SALES
NONE OF THIS WORK-IN-PROCESS WILL BE ON HAND MORE THAN
TO
WEEKS
LONGER THAN WE PLANNED. NEVERTHELESS YOU SHOULD BE AWARE WE MANUFACTURE 4 TO VOLUME MODELS. AN EXAMPLE OF HO
MONTHS WORTH OF MANY LOW
WE DETERMINE ECONOMIC SERIES WAS FURNISHED YOUR STAFF
SPECIALIST THIS WEEK. WE CANNOT MAKE SIGNIFICA NT COST REDUCTIONS IN A BUSINESS WHERE AT LEAST 70 OF 20
MODELS HAVE TO BE ON SHELF TO
REGARDING YOUR 5 SUGGESTIONS AN AGGRESSIVELY AN
TW
AN
TYPICAL MODEL
QUESTIONS ARE CARRYING OU
15 UNITS MONTHL
ALL 5 POINTS
HAVE NO INTERHOUSE SHORTAGES OR OVERSHIPMENTS HENNESSY
M. Chambertin
long argued that th
less-complex products were single overhead rate, while electronic
unfairly burdened by th use of ucts should bear more. Mr. Latour's response to this argument was: have suspected that ou electric products ar
too high priced an
I"(
ou electr ni
too low priced So what does this mean? Wh should we lower o prices for multimeters an galvanos? At ou current prices, we ca easily sell oW' entire production of electric products. products ar
Chambertin remained convinced that eventually Galvor would b fo::,_ by competitive pressures to allocate it costs more realistically. In 1976, as part ofthe ne standard cost system, Galvor did indeed efin procedure for allocatin overhead costs to products. Fifteen different cost e::separate burden rate. These rates wh were established, each with bined direct labor cost overhead ranged from 13.19 francs to 38.6 pe direct labor hour. Concluding his comments about recent developments Mr. Henne sy A formal inventory control system went into effect in January 1977. This together with th standard cost system, allows for th first time to reall th relative profitability of various products an to place a pr op er determine valuation on ou inventory. We ar installing new computer in February, which we will us initi all :customer billing an for marketing analysis. We hope this will reduce th be of people required in ou customer billing an accounts receivable from 12 to 6 or 7.
Chapter 10
Analyzing Financia
forman ce
epur.
Questions 1. What is your overall assessment of effectiveness (UE's) planning system as is applied to Galvor?
Univer al El ectlic'"
2. Identify,
much detail as possible, al ew management ystem" techniques that cular. required Galvor to establish. In trace th various steps Galvor goes through in preparing its long-ran ge a" well as annual plans.
3. What
your evaluation ofthe effectiveness ofthe working relationship s be tween Hennessy executives Geneva? What do you infer fr om managing director ? (N e: ou telexes about Hennessy's autonomy as
might want to give
telexes
careful
critical read ng.)
4. Look
system from Galvor viewpoint Suppose Galvor were in pendent company (i.e., part of Universal Electric). yo were a con tant control practi es Galvor, how would the management planning company differ from those that have been imyo would recommend for posed specifically yo ca completely UE? (Please answer this response "they would be less detailed less formal fo going beyond example.)
5. Look
system from UE's viewpoint. How (i all) an UE's impo indep en planning control practices different from those required by dent Galvor be justified? (Again, please to be specific.)
6. To what extent should large international organization, such as el on comprehensive system of financial reporting control to achiev strategic objectives? What specific changes, an would you make in planning systems? other management systems? the management processes need improvin g. how would yo change them?
