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This document discusses the challenges of decentralization and proposes solutions. It analyzes issues like lack of goal alignment, inconsistent transfer pricing, and mismatched incentives between business units. To address these, it recommends:
1) Restructuring into 5 integrated business units responsible for end-to-end operations rather than separate manufacturing and sales units.
2) Implementing uniform transfer pricing set by finance and incentivizing units based 50% on overall goals, 25% on unit goals, and 25% on individual performance.
3) Forming a business coordination committee of unit heads to collaborate on achieving overall goals.
This document discusses the challenges of decentralization and proposes solutions. It analyzes issues like lack of goal alignment, inconsistent transfer pricing, and mismatched incentives between business units. To address these, it recommends:
1) Restructuring into 5 integrated business units responsible for end-to-end operations rather than separate manufacturing and sales units.
2) Implementing uniform transfer pricing set by finance and incentivizing units based 50% on overall goals, 25% on unit goals, and 25% on individual performance.
3) Forming a business coordination committee of unit heads to collaborate on achieving overall goals.
This document discusses the challenges of decentralization and proposes solutions. It analyzes issues like lack of goal alignment, inconsistent transfer pricing, and mismatched incentives between business units. To address these, it recommends:
1) Restructuring into 5 integrated business units responsible for end-to-end operations rather than separate manufacturing and sales units.
2) Implementing uniform transfer pricing set by finance and incentivizing units based 50% on overall goals, 25% on unit goals, and 25% on individual performance.
3) Forming a business coordination committee of unit heads to collaborate on achieving overall goals.
2. ANALYSIS 3. POSSIBLE SOLUTIONS 4. FINAL RECOMMENDATION
DECENTRALIZATION - CHALLENGES ORGANIZATION STRUCTURE Lack of Goal Congruence between different business units Shareholders interest Alignment of each Business Units goals and objectives to the overall firms common goal Incentivization structure to promote the common goal first and then individual business units goals
TRANSFER PRICING
DECENTRALIZATION - CHALLENGES ORGANISATION STRUCTURE -5 Manufacturing Units -12 Sales and Marketing Units with BUMs. -BUMs of the 5 (MDs) not directly responsible for Manufacturing Units under them. -Remaining 7 Sales & Marketing Unit Heads (MDs) only responsible for Sales.
-CONFLICT : Performance Measurement of the Marketing Units and Manufacturing Units at variance DECENTRALIZATION - CHALLENGES TRANSFER PRICING -Manufacturing Unit : at standard manufacturing for 5 units under direct supervision and for the remaining 7 units at standard costs + 5% Anomaly: -No uniformity in how the costs are allocated across different sales and marketing units -No incentive for the manufacturing units to reduce the manufacturing costs so as to make pricing of the product competitive and increase sales volumes /profits DECENTRALIZATION - CHALLENGES INCENTIVE STRUCTURES -Sales is incentivized on profit generated from sales -Manufacturing is incentivized on manufacturing profit which is difference from sales price and manufacturing cost Challenge: Sales will always blame manufacturing saying costs are high and hence product prices are high impacting sales Manufacturing will always blame that their profit is impacted because sales is not doing their job properly selling less and profits are impacted DECENTRALIZATION - CHALLENGES Other Challenges: a.Purchase of capital equipment decision making not with the Business Unit responsible directly b.Shipping Costs decision made by Sales; costs are attributed to manufacturing units c.Rising obsolete inventory no incentives to Sales to keep low levels of inventory d.Sourcing of raw materials absorption of costs variances resulting in uncertainties impacting the sales profits
DECENTRALIZATION POSSIBLE SOLUTIONS Principle # 1: What one cannot control one cannot manage effectively; Principle # 2: Goal congruence with incentivization metrics balanced between Firms goals, followed by Unitss goals and then individual goals Principle # 3: Transfer Pricing to be used as a tool to further Firms overall goals and business objectives rather than satisfying individual business units performance metrics Principle # 4: Business co-ordination between all units to meet external challenges competition DECENTRALIZATION POSSIBLE SOLUTIONS Organization Structure: - Reduce 12 marketing units to 5 : to exactly match the number of manufacturing units for the products they manufacture - 5 Business Units heads responsible for end-to-end for all activities manufacturing, shipping and logistics, purchases, procurement, sales, marketing with clear goals for profits Uniform Transfer Pricing transfer pricing as determined by the Finance (neutral unit) to be adopted uniformly by all 5 business units Incentivization structure -50% weightage to the achievement of overall firm's goals -25% weightage to the business units goals -25% weightage to the individual performance Key Performance Indicators (KPIs) DECENTRALIZATION POSSIBLE SOLUTIONS Business Co-ordination Committee : all 5 business unit heads with defined plans, goals, objectives and targets to achieve with a singlemost objective of achieving the overall firms business plan and goals. sum of parts is greater than a whole.
Meet at monthly intervals to review sales, manufacturing and financial performances costs, profits, profitability etc and provide support to each other business unit if one unit is falling short of the goals for genuine reasons ( price volatility, competition, increased procurement costs etc) DECENTRALIZATION FINAL RECOMMENDATION Business Unit No. A Stringent control on manufacturing costs (eg: reduce costs by 10% over the previous period) Goals on levels of inventory at any period of time (eg: not to exceed 5% of the total sales); review outstanding inventory and provide special incentives to dispose off the inventory Sales and Marketing strategies