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Case 10:

17 August 2013

PCL: A Breakdown in the Enforcement of Management Control Analysis Prepared by Group 5: Espinosa, Melissa Katherine Francisco, Marvin Importante, Marlyn

Magtibay, Roxanne Nito, Orenz Rosapapan, Jennifer

Synthesis PCL is a Europe-based multinational company involved in consumer electronics, lifestyle, and healthcare products. The company was established in the late 19 th century, and begun expanding in China in 1985. Early on, PCL enjoyed tremendous growth in China, with its consumer electronics business growing 30% annually. However, in 2008 PCL has discovered that the cost of returned goods in its TV division is equal to 5% of its sales and that 37% of the returned products were reportedly of no fault found (NFF). Overall, this equated to a loss of US$22 million. To address the problem, PCL decided to set up task forces that will study and remedy the situation. The company uncovered serious problems within the organization -control measures designed to handle returned products have not been implemented by its staff and third-party after-sales service centers (ASCs). PCL then came up with actions based on their assessment of the situation. Upon successfully accomplishing target efficiency ratios, the company faces the challenges of sustaining its decreased rate of returns. Point of View The group decided to take the point of view of the general manager of PCL. Statement of the Problem What other strategies should PCL implement to ensure that internal control measures in place will be enforced properly and continuously to allow the company to achieve its organizational objectives and goals? Statement of Objectives 1. To devise and implement internal control measures and strategies to regulate the acceptance of returned TV units. 2. To continuously reduce the return and exchange rate especially the NFF return rate. 3. To continuously review the existing incentives and penalties scheme to ensure that it is relevant and aligned to the company’s existing goals. 4. To review the annual sales target and revise it according to actual market growth and company figures.

Areas for Considerations and Assumptions - SWOT Analysis of PCL Strengths ● ● ● ●

Global player in digital and electronic devices with diversified interest in lifestyle and health care industry. Has been operating in China for more than two decades already. Management has the ability to make corrective actions in any gaps in their processes. Each member in the taskforce targets a specific area in improving the return rate and NFF, which made the crossfunctional team effective.

Weaknesses ● ● ● ● ●

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Opportunities ●

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China has become the world’s second largest market for consumer electronic products and is continually growing. Existing government incentive programs offer rebates will continue to encourage more people to buy new LCD TV sets. Implementation of the exchange rate policy can increase company savings and reduce the product exchange and NFF. New strategies used for the LCD products can be applied as well to other PCL product lines.

Theoretical / Conceptual Framework

High volume of returned sets categorized as NFF. After-sales service is handled by a third-party contractor, making control measures difficult to implement. Retailers and ASCs are not trained to educate customers about product performance and limitations. Failure to properly execute returned policy criteria. ASCs are not directly reporting to TV division, instead they are reporting to the general manager. This line of reporting reduced the incentive for the after-sales team to control TV returns. Has no punishment policy for fraud or noncompliance of ASCs. Due to hefty sales targets, sales people strive to maintain good relationship with retailers and customers, even at the expense of the company.

Threats ● ● ● ●

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Price wars between international and local brands. High bargaining power of consumers. Low product differentiation versus the products being offered by local manufacturers. China’s consumer law can be abused further as consumers continue to return products that are not defective or already phased out. Rising labor cost in China can inflate cost of doing business for PCL.

Total Quality Management (TQM) is a management method used to enhance quality and continuously improve productivity in organizations. It focuses on identifying root causes of problems and identifying corrective measures based on this. It is comprehensive in such a way that it works across the whole organization. It also focuses on the customer satisfaction, while at the same time, it promotes involvement of all the members of the organization. One type of approach to achieve continuous improvement is the PDCA Cycle, which is also known as the Deming Wheel. The four categories of the Deming Wheel are Plan, Do, Check, and Act.

The PDCA Cycle1 Under the Planning phase, the problem is defined and data is collected to determine the root cause. In the Doing phase, a solution is developed and a specific solution is implemented. This is followed by the Checking phase, which entails collection and review of results and data before and after the implementation is compared. Lastly, in the Acting phase, the results are documented and standards will be established for the optimization of processes. Kaizen is an approach that introduces small changes in an organization to improve quality and efficiency. Under this approach, employees are encouraged to identify the areas for improvement. The culture that this approach can establish improves motivation on the part of the employees since they can take ownership for the work that is being done. The cycle of kaizen activity can be defined as: ● Standardize an operation and activities ● Measure the operation (find cycle time and amount of in-process inventory) ● Gauge measurements against requirements ● Innovate to meet requirements and increase productivity ● Standardize the new, improved operations ● Continue cycle ad infinitum

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http://en.wikipedia.org/wiki/PDCA, last accessed 8/15/2013

Alternative Courses of Action (ACA) ACA 1: Settle on existing strategies devised by the taskforce that address and manage the high return rate and NFF through a reward and punishment system. Pros

Cons

-Employees will be motivated to follow the standards because of the incentives. -Employees will be motivated to improve their performance to avoid incurring penalties.

-Employees will eventually become passive and lenient in maintaining the standard processes. -There would be no significant changes in the existing rates of returns and exchanges. -Improvement in the return rates may not be sustained if the root causes are not addressed.

ACA2: Minimize sales returns rate by promoting process ownership and involving employees in the continuous improvement across all functions in the company. Pros

Cons

-Employees will be empowered since they are involved in the entire process. -Employees can address specific issues since they are more familiar with the process. -PCL will be able to increase its annual savings since sales return rate is minimized. -Implementation of the process improvements are likely to be easier.

-Process is time-consuming since input of each employee will have to be gathered and analyzed. -Clashes between management team and employees are possible to occur since they are coming from different perspectives.

ACA3: Management to implement control measures through regular review of company sales targets and employee performance, as well as enforcement of penalties and incentive schemes. Pros

Cons

-Employee fraud and noncompliance will be minimized since the management takes an active role in implementing control measures. -Employees will be encouraged to inform and educate customers about the products so as to minimize, if not avoid, NFF returns. -Improvement in control measures will translate to sustainable bottomline since wastes will be minimized.

-Employees will feel powerless since the management takes an active role in setting the direction of the company and monitoring employees. -Some employee might be forced to leave the company because of the active role of the management in implementing control measures. -Sales may decrease since dealers will no longer be able to return old models and NFFs.

Recommendation Given that the taskforce was able to achieve the targets set by the general manager, the group recommends ACAs 2 and 3 to implement internal control measures and incentive schemes to ensure that improvements are sustained by the company in the long run. The group believes that employees must be actively involved by the management as they are the process owners. By having employees’ suggestions, best practices can be collected and shared across divisions. As propagated by the Kaizen philosophy, employees must continuously seek ways by which their tasks can be performed efficiently. This bottom-up approach encourages employees to be aware of the control measures and also contribute to the strengthening of said controls. Although management encourages and promotes employee participation, a regular evaluation of performance should be made. This will allow management to: 1. facilitate communication to avoid employee resistance, 2. enhance employee focus to determine their performance stand against organizational expectations, 3. set goals and determine desired performance reinforcement, and 4. improve performance and productivity to determine training needs. Implementation Plan Implementation will both be top-down and bottom-up as the team believes that all members of the organization must be involved in the process. The general manager will improve internal control measures by proposing the following to PCL’s management:

(i) Training - Informative selling and after-sales concern handling should be standardized across all customer-facing functions in the company. This is to ensure that customers are fully aware of the features and limitations of the unit, while agents attending to after-sales issues are able to do comprehensive probing before accepting a returned item. To equip them with the capability and know-how to do such, employees should be properly trained. Needless to say, training should be the same across all branches. (ii) Audit - A standardized internal audit of practices, policies and procedures must be done on a regular basis. This is to further standardize the procedures, detect fraud, and discourage employees from committing violations. Moving forward, external audit may also be done for stricter control and unbiased findings. (iii) Review of sales targets - Since it has been identified that sales targets are one of the root causes of NFF returns, management must review the sales quotas and ensure that they are based on current market statistics and correct company data. Targets must be SMART (Specific, Measurable, Achievable, Realistic, Time-bound). Key Performance Indicators should be made clear to employees so that they may manage themselves according to their own goals. (iv) Incentives and Punishment - Since ongoing schemes are already in place, the challenge is to keep these relevant and effective. Aside from quarterly bonus, monthly bonus may also be given to performing teams. Individual recognition should also be given to employees who have met their targets (sales) or have introduced process improvement techniques (operations). As for policy violators, sanctions must also be updated and reviewed to deter other similar or graver acts. (v) Monitoring and evaluation - Monitoring the progress and quality of work of employees in a given period will ensure that there will be no surprises during the midyear and full year performance review. Lapses and/or weak performance will be addressed at the soonest possible time. On a wider scope, the task force created by the service director can spearhead monitoring and evaluation of sales/process outputs according to their workstreams. The employees will also have an active role to play in securing the sustainability of the measures deployed by the taskforce. All employees will be involved in activities/company-wide drives (eg.g. focus groups, team brainstorming, among others) for process improvement suggestions. Since the Kaizen philosophy focuses on continuous improvement by tapping employees’ ability to provide their own feedback on their processes and produce inputs for standardization, automation, and other best practices. Aside from minimizing waste of resources, employee empowerment will also be achieved because they will sense that their insights are heard and management is interested in making their work easier without sacrificing profitability. Learning Insights

The group learned that by reviewing the current procedures of the PCL, it would serve as a blueprint in filling weaknesses, which will eventually strengthen the company’s internal control systems that are for sure beneficial to the company’s overall performance. The group strongly believed that by doing so, organization will then be able to evaluate and consider other potential strong strategies to achieve target objectives, will be able to manage risk accordingly, and will analyze the overall success of the PCL company. Managers should keep an eye on the important points at which an organization is linked to the environment (both the organization’s inputs and outputs) and to understand completely how tasks within different departments are carried out. In controlling, managers should also oversee the entire range of activities that are important for an organization and ensuring that all the members of the organization work together to meet organizational goal.