Another problem that we have to solve to implement the most effective organisational structure is the difficult integration across product lines that the divisional structure causes. The actual structure presents only one Sales Director for all the product lines. In my opinion there should be different Sales Director because the three products are sold in a wide range of market places. To find a solution at this problem we will put three Product Managers, one for each product line that looks after its product along all the factories and works with all the departments involved in its product. In this way we enable also an effective horizontal coordination among departments.
The actual structure presents just one Finance Director. Our structure doesn’t need a Finance Director for every business unit because it could cause a luck in the corporate efficiency, every Finance Director could be too much factory oriented and forget the organisational goals. That is the reason why I think that the actual position of the Finance Director is perfect.
In the present structure there is one Personnel Director that control all the employees of all the factories. Of course one Director is not enough because factories are located in different place around the UK and every factory has many employees. To maintain one of the strengths of the functional structure, we allow in-dept competences and technical specialization using ten Personnel Directors, one for each factory. In this way the control is much more focused and easy.
The Distribution Department in the actual structure is under the Production Director, in my opinion the best improvement could be make is to put the Distribution Department between the factories and the Product Managers, in this way the Distribution can easily communicate with the different factories that produce different products, in the meanwhile the Distribution Department is always informed about the orders, sales and marketing of every product thanks to the close relationship with every product manager.
In the new structure factories are considered Cost centres, Product Managers are seen as Profit centres and the CEO is the Investment centre.
The new organisational structure is illustrated in the next page.
3. System of Costing
Huggenkis Knitwear Ltd uses the standard costing system. The sales department figures out the number of jerseys have to be produced every year of every type. Than they divide the total production amongst all the factories.
The huge mistake that the company makes is to use the same standard cost for each factory and for every product. In this way is very easy over costing or under costing a product and make mistakes of pricing policy and over estimation or under estimation of sales. As we know, the three product styles differs for quality, we assume also that products differ for labour hours they need and overheads costs. Furthermore, standard costs are also the basis for all the overheads costs like maintenance, machine set-up, power and quality control. In the present situation labour hours are also considered standard for all the products not taking into consideration the inefficiencies caused to changeovers and start-ups.
Looking at the actual situation the standard costing system seems really inappropriate for the company, even if we try to find a solution to overcome the problems the standard costs cause. The system of costing has to be changed for many reasons such as the growth in non-volume related overheads, the rapid technological change, the less prominence given to direct labour.
The first change comes by itself from the new organisational structure mentioned above. Thanks to the new structure the costs of the three main product lines can be easily allocated to them. Furthermore the actual allocation of the same standard cost for all the products produced in all the factories has to be changed. Huggenkis Knitwear Ltd needs standards that truly reflect the real costs of every factory considering each product. In this way we can obtain a better evaluation of the performance of the factories and we reduce the problem of inefficiencies.
The new System I suggest is the Activity Based Costing System (ABC). An ABC system involves four main stages:
- Identify the most relevant activities in an organization;
- Create a cost centre or a cost pool for each activity;
- Determine the cost driver for each major activity;
- Trace the cost of activities to products based on the product’s demand for activities (using cost drivers as a measure of demand).
The ABC has many advantages for the company and can solve a lot of problems: ABC gives a more accurate product costs and focuses management attention on activities which consume costs, ABC system allocates set-up costs based on a measure of set-up activity (number of set-ups or set-ups hours). ABC system have more cost drivers than the other systems in an effort to assign as many costs as possible based on direct consumption of resources so it is also possible to better allocate one’s product overheads and better determine the price policy.
4. Budgetary Control
The present budgetary control consist in an Incremental Budgeting. Every month they determine what a factory’s quota should be for that month looking at what past performance has been, adding a little bit every month. They look one year head because the early budgets are updated at the end of each month in the light of the last period’s production. The most evident disadvantage of this approach is that the majority of expenditure remains unchanged. In this way, the cost of non-unit level activities become fixed and past inefficiencies remain.
The new diversified structure inevitably leads to an increase in corporate managers' span of control, exhausting their information processing capacity. Considering also that the suggested costing system involves the ABC, I suggest to adopt also the Activity Based Budgeting (ABB). The aim of the ABB is to authorize the purchase of only those resources that are needed to perform activities required to achieve the budget production volume and sales. The ABB involves five stages:
- estimate the production and sales volume by each product line and customer;
- estimate the demand for organisational activities;
- determine the necessary resources;
- estimate the quantity that must be supplied for every resource to meet the demand;
- take action to make adjustments in the capacity of resources and the project supply.
The ABB provides a framework for understanding the amount of resources required to achieve the budgeted level of activity. Downwards and upwards adjustments can be made during the budget setting phase by comparing the required resources with the resources in place.
5. Performance Evaluation
The factory performance figure is monthly monitored. The company looks at the monthly performance of the managers, if they meet their quotas or their labour and overhead variances they receive a recognition or a reprimand as a feedback.
Talking about the rewarding system, the company uses a direct financial compensation giving yearly bonuses. The company subjectively rates the annual performance of a manager on a scale from 1 to 10. At the end of every year the top management determine the bonus base, that changes obviously every year, to evaluate the profit of the current year and the company performance. To obtain the quantity of the bonus to give to a manager, they multiply the performance rating of each member of the management team for the bonus base. The bonus is based on total corporate performance and tying a business unit manager's bonus to corporate performance may be counterproductive because it makes the bonus dependent on things outside the individual business unit manager's control. This performance evaluation system is not efficient and a proof of that is the fact that staff turnover and absenteeism are really high in the factories. The rewarding policy has to be changed in order to maximize the employees’ motivation. Motivation often depends on the expectation that effort leads to desired performance and on the extent to which behavior is rewarded. Another compensation policy maybe will conduct to better results. A proposal could be the “Employee of the Month” program. This would recognize an employee’s hard work for that time period.
Also many times employees feel distanced from management and the rules and regulations structuring their jobs. Another improvement should allows employees to input ideas into company policy reducing the gap between the company and employer. Implementing such ideas would not only increase employee retention but also employee performance. Employees tend to perform better when there are incentives involved. The cost of any such programs would be offset drastically by the increase in performance resulting in increased profit. Those employees who feel that they personally make a difference tend to work harder and perform better as opposed to an employee who feels lost in the company.
A framework that I suggest to use as a performance evaluation tool is the analytic hierarchy process (AHP) to measuring and comparing the overall performance of the different manufacturing departments using financial and non-financial quantitative and qualitative performance criteria.
The AHP includes four main steps:
- Develop a hierarchical structure of the decision problem (overall objective, criteria, subcriteria and decision alternatives);
- Determine, on pairwise basis, the relative priorities of criteria and sub-criteria;
- Attribute, on pairwise basis, the suitability ratings of the decision alternatives;
- Calculate the overall ratings of the decision alternatives, weighting the suitability ratings with the relative priorities of criteria and sub-criteria.
AHP can be applied to several decision problems such as investments appraisal, projects selection, human resources evaluation, vendor rating.
The AHP can help managers to assess and compare the overall support provided by each department to the achievement of the manufacturing strategy, by linking the competitive priorities to performance measures at every level of the manufacturing organizational structure, and by addressing trade-offs among them.
6. Non-financial Measurement Technique
One technique used as a non-financial performance measurement is the Porter’s Five Forces Model. This technique is mainly focused on the external context within the company operates. It evaluates the attractiveness, and hence sustainable profitability, of an industry.
The five forces described in Porter’s model are as fallows:
- New entrants: New competitors need to be analysed, ignoring them could be really dangerous for the company. They will necessitate some competitive response, which will inevitably use resources.
- Customers: this is assessed by buyer concentration, volume buying power, regulation or incentives to bargain. The bargaining power of customers, if quite strong, will reduce the company’s ability to have high profit margins.
- Substitute products: The threats of substitute products could be pricing, technology changes, product functionality, likelihood of customer substitution. Every sort of viable alternative to one’s product, will limit the price that the company can charge. Considering an extreme case, substitute products can make another product completely redundant.
- Competitors: Competition leads to the need for investments in marketing, R&D, price reduction. The more competitive the prices the lower potential margins.
- Suppliers: Evaluate impact of industry costs and the leverage upstream players can exert, often evaluated by regulatory frameworks, industry concentration or substitutability. The bargaining power of suppliers may limit the ability to gain supplies at a low cost, especially if they increase their prices.
Porter’s Five Forces Model is often used to estimate long-term returns in an industry, to determine profitability. Collective strength determines the ability for a company to earn return. The model is also used for strategic decisions to enter, exit or remain in a business unit or industry segment. This also guides alignment decision with regards to suppliers or buyers.
New Entrants
Substitute Products
