CHUCK’S MAIN PROBLEMS
The following section will describe the problems that Chuck’s faced on 2002. It is important to take into account that many of the following issues inter-related.
- Lack of Data
The key problem and foundation of most of the subsequent problems was the lack of reliable and accurate data necessary for precise decision-making and opportunity assessment (identification and prioritization of opportunities). Without this data it is very hard to:
- Make an accurate costs/profitability analysis of each SKU
- Determine what specific areas of the company are not working efficiently
- Determine which products are difficult to make
- Establish the optimal production capability
- Make more accurate budgets
- Control operations and performance
- Implement an efficient management performance measurement system.
- Know external market conditions
- Draw an action plan for the necessary improvements -> cost efficient-
solutions.
- Lack of Focus
One of the most important issues the firm was facing was its lack of focus, which resulted from the extremely wide variety of SKUs (about 250). This made the production process extremely complex and increased the difficulty of:
- Raw material ordering and handling
- Efficient production line scheduling (which has led to production errors,
resulting in thousands of dollars of obsolete products pilling up).
- Development of separate price lists for each product and category
- Marketing of materials
- Complex Production Process
Another issue was the complicated and confusing production process: Three production lines worked in tandem: one was semi-automated (handling the fastest moving product items and categories); the other two were manual (those handling several recipe configurations on a job-basis, together with the spice products that require unique equipment and handling outside the kitchen area). Moreover, there were constant bottlenecks and products often got damaged. Because most workers were unskilled and lacked activity sharing, the operations manager was often interrupted to assist them and practical capacity was unknown-
The whole complexity derived from:
- The highly diverse product variations (lack of focus).
- The lack of relevant production and operations data, which has made it impossible to spot the reasons for this complicated (and inefficient) system, and the possible solutions.
- Poor Organizational Culture.
Poor organizational culture was an additional problem Chuck’s confronted. To start with, the firm lacked the clear leadership needed to steer the company toward success. Because the CEO (Dennis Turner) was spending most of his time outside the company (working as the local mayor) he wasn’t really in touch, nor engaged with Chuck’s everyday operations and emerging problems. Hence, Turner couldn’t contribute, lead the organization, support the employees and respond to the problems along with the challenges faced by the company. The Sales and Marketing department lacked a leader. Also, there were major communication gaps:
- The departments didn’t really cooperate nor, did they share information with one another.
- The Vice President of Operations was not included in key executive team meetings and decision-making.
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Lack of accountability:
No individual or manager appeared to be accountable for the problems. At the time (2002) Chuck’s didn’t have an adequate management measuring system. Yeager (Chuck’s owner) truly believed that a critical aspect of a firm’s success derived from a firm’s management having a clear, objective measure for its success. Jones (Chuck’s president as of 2002) was challenged to develop a transparent and objective measurement system. This system should help to influence behaviour in desirable ways, so that there is a higher likelihood that Chuck’s objectives will be achieved by its executives.
CONCLUSIONS AND RECOMMENDATIONS
As mentioned above, it is clear that Chuck’s has a lot of interconnected problems. The following action plan, should contribute to Chuck’s turn-around. Because Chuck’s still enjoys a good reputation and still has a loyal customer base, the firm can be turned back into a profitable business again as long as it undertakes the suggested measures. Most of these measures will benefit the company in the long run, but immediate action is required because Jones needs to get the company back on track within one year. In addition, implementing the following recommendations will require major time and economic investments, as well as support from management and particularly from Jaeger.
1. Create and Maintain a Database
Since the lack of relevant and accurate data is the key issue, it should be addressed with the highest priority. Hence, the most important step (and fundamental to the subsequent solutions) would be the meticulous collection of production, operations, and market information on a regular basis. This information will be essential for:
Decision-making purposes
- Planning
- Controlling
- Performance measurement
An adequate software to manage this information (that would allow for the allocation of cost pools) has to be installed. This database should be maintained, with costs appropriately coded and classified, so that relevant cost information can be extracted for periodic profitability analysis.
However, implementing this solution can be time consuming and require additional training of employees in order to familiarize them with the new software. Nonetheless, the significant benefits brought by this system will certainly outweight the disadvantages.
2. Implement Activity-Based Costing (ABC)
Until now, the management doesn’t exactly know what products/ SKUs are costly, difficult to make, or profitable, making it impossible for them to address the second issue: lack of focus. This has happened because the firm still uses a traditional accounting system, which lumps all indirect cost as overhead.
A major disadvantage of this system is that systems are not in place to measure and assign indirect costs to cost SKUs, thus, neglecting non-volume-based cost drivers, understating the cost of low-volume products and ultimately making it hard to accurately determine profitability.
Chuck’s highly diversified product portfolio, together with the fact that the product line profit margins are hard to explain, product cost reports are not accurate, and the marketing department doesn’t employ cost reports for its pricing decisions, indicate that ABC is needed.
By implementing ABC, costs will be allocated properly, allowing the direct assignment of cost (that would otherwise be overhead) to the individual SKUs. Hence, product and line profitability would be clearer, and so allowing management to do a better job calculating contribution margins and contrast product volume with product profitability. However, the main drawback of implementing ABC might be a complex and time consuming task.
3. Implement Activity-Based Management (ABM)
After implementing ABC, more accurate product costs will be defined. The next phase is to analyse and manage those activities in an effort to reduce costs. At this stage it is clear that Chuck’s costs keep on piling up, and that production is not efficient. ABM will allow Chuck’s to spot non-value-added activities in its production process, and help Chuck’s management make better cost-related decisions.
The following are three options CW might profit from:
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Reducing and/or eliminating all non-value added activities (such as the existing storage, waiting and moving time within the production process)
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Just-in-Time Production (JIT), should be applied, for it would help to trim the firm’s costs by getting rid of all unnecessary inventory at all stages of the production process. Hence, helping to reduce bottlenecks, and ultimately increase quality by decreasing errors by purchasing high-quality-materials from reliable suppliers.
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A Flexible Manufacturing System could be of benefit, as it would increase efficiency in production, reduce errors, and thus lessen the inspection and damaged-product costs. It would also increase Chuck’s operating leverage. Even though this seems to be the best and quickest solution to decrease costs in the long run, this option has two major drawbacks: 1) As automation of technical processes would reduce the need for labour, this might lead to lay-offs and might put the firm on sharky ground with the local community ( given the fact that Chuck’s is Salado’s second largest employer) and 2) Would imply a major investment in automated production machinery, and given Chucks past financial losses, it might be difficult to finance/ get a credit.
As we have seen, both ABC and ABM should provide the company with a clear picture of its costs, and highlight what should and could be done in order to guide Chuck’s on where to focus and improve its performance and position.
4. Implement Activity-Based Budgeting (ABB) and Standard Costs
Activity-Based Budgeting (ABB). A proper ABC scheme should enable ABB to be implemented. Under this budgeting method, activities that incur costs in each function of Chuck’s will be established and relationships between activities will be defined. This information will then be used to decide how many resources should be allocated to each activity.
Standard Costs standard costs would allow the firm to compare budgeted amount with the actual figures, thus helping to measure the performance of the departments and control material as well as labour costs. Furthermore, prior budgeting could also benefit chuck by facilitating:
- Planning
- Communication and coordination
- Allocation of resources
- Control of profit and operations
- Evaluation of performance and corresponding incentives (key to
accountability and motivation)
5. Re-design Corporate Policy:
It is important to address the fourth issue (poor organizational culture), for a well functioning organizational culture is a key to a successful implementation of ABC and ABM. The organizational culture could be improved by:
- Applying Balanced Score Card (see next section)
- Requiring additional transparency of operations
- Involving all relevant managers in decision-making
- Promoting and re-enforcing cooperation and interaction between all of the different departments by making data available on a shared corporate server creating cross-functional management teams.
6. Use Balanced Score Card (BSC) System
Balanced Score Card is a good approach to solve the Accountability issue, and it would also help improve many of the aspects of the organizational culture (4th issue). The BSC approach provides a clear prescription as to what Chuck’s should measure in order to 'balance' the financial perspective. BSC would give Chuck’s managers a comprehensive view of the performance of the company.
Additionally, it would be of great benefit to Chucks because BSC:
- Balances a financial perspective with customer, internal process, and learning & growth.
- Provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results, thus allowing the company to track down its developments, and correct damaging incidents on the spot.
- Communicates strategy throughout the company.
- Aligns unit and individual goals with overall company strategy.
- Links strategic objectives to long term targets and annual budgets.
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Conducts periodic performance reviews.
7. Make Cost Volume Profit (CVP) Analysis:
By calculating its break-even, Chuck’s would know exactly the amount of product it would have to sell/ produce in order to meet a desired profit level. Having the necessary cost data, should help company make periodic estimates of its CVP.
