R & D Electronics Company
Introduction:
The report presents a case about R & D Electronics, which was facing a reduction in net profit margin due to increased cost and the company was facing difficulty in identifying profitable and unprofitable customers. Further, the report also contains an evaluation of the current reward scheme, which raised conflicts between the employees and long-term objectives of the company.
Case Analysis
The report contains a detailed analysis of the issues that are currently faced by the company and the strategies, which could be adopted by the company in order to overcome such issues. The report contains areas, which include the following:
- Quantitative and qualitative analysis of the current situation
- Evaluation of the company’s current strategy, which incurs substantial costs
- Evaluation of the current reward scheme and recommendation for new scheme
- Analysis of Initial Customer Profitability System
- New profitability of each customer
- Implications of dropping unprofitable customers
- Strategies in order to improve profits
Quantitative and qualitative analysis of the current situation
As determined in Appendix 1, the sales had been increased over the years but the cost of goods sold did not increase with an increase in sales. The company reported cost of goods sold as a percentage of sales as 65% in 2009, which has been increased to 69% in 2013. It suggests that the company failed to control the cost of goods sold which resulted in a decrease in gross profit margin from 35% in 2009 to 31% in 2013. The increased cost of goods sold is a result of increased labor charges where the labor charged high rates for rush orders that had unrealistic delivery time.
Further, the reward scheme is linked with sales revenue, which creates a conflict between the staff and long-term objectives of the company. Staff bonus is based on the sales revenue, so marketing personnel agreed to unusual terms with the customer in order to grasp sale, which may require additional cost of product modification. However, adopting this strategy will increase the chances to be eligible for the bonus but at the cost of the company.
Current strategy enables the company to suffer additional warehousing and admin cost which reduces the overall net profit margin from 9% in 2009 to 5% in 2013.
Evaluation of the company’s current strategy, which incurs substantial costs
The team of R & D Electronics was concerned about increasing the cost of the products, which threatened the long terms profits of the company. R & D Electronics was suffering increased cost because the marketing department promised unrealistic delivery time to customers, which disturbed the overall production planning and scheduling system for which the labor demanded increased charges, hence this increased the overall labor cost.
The company was suffering from growing costs in warehousing because the inventory for most large customers was stored in mini-warehouses, which required instant shipment. Further, the company also incurred substantial costs to re-pack the material as per the requirements of the customer which required substantial cost and time in order to satisfy the customers’ need.
Evaluation of the current reward scheme and recommendation for new scheme
The current incentive scheme is primarily based on sales and market growth. The marketing personnel are paid basic salaries plus commission based on the dollar of sale, so the marketing team in order to enhance the chances of increased bonus agreed to unusual delivery and product specification terms with the customers to encourage them and enhance the possibility of increased sales. However, the company suffered increased cost for product re-packing or instant delivery, which ultimately threatened the profits of the company.
However, in order to avoid conflicts of interest between staff and long-term objectives of the company, the management shall consider linking the reward scheme with both the financial and non-financial key performance indicators.
R & D Electronics can adopt a Building Block Model to link its reward scheme. Building Block Model is based on three blocks: dimension, measures and standards. Further, the company can use different dimensions in order to measure the performance of their employees. The employees will only be held responsible for the activities to which they have control and finally the employees will be rewarded on fair grounds.
Analysis of Initial Customer Profitability System
R & D Electronics adopts a practice of charging warehousing & shipping as well as general & administration service to customers as a user fee. The service rate for W & A and G & A expenses are based on cost of goods sold and sales revenue respectively. The cost driver adopted by the company in order to determine the customer profitability is inappropriate because the warehousing and shipping costs are linked with cost of goods sold whereas the appropriate cost driver for this activity will be units stored or shipped. Further, the general and admin expenses..........................
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