A company was broken up into well defined business centers. Topmanagement encouraged all divisions to take over more decentralizeddecision making and mandated that the service groups provide valueto the firm over outstide contractors or be shut down. DennisFlynn, manager of the building services department (BSD's), wasasked by Jim Corrado, general manager, to describe how he wouldtake his unit from its the dismal position vis a vis outsidecleaning contractors to being the cleaning service of choice forits customers. An agressive five year plan was developed (seeattached photo), with break even to be achieved in the third year.This was not an easy task considering that BSD's costs exceededcompetitors by 53%.
The majority of Rochco properties are cleaned daily by BSD, whichruns as a cost center allocating its expenses at full cost based onthe hours of service consumed by site customers. Over 80% of BSDscost is labor. however, BSDs wage rates have historically beenhigher than competitors due to Rochco's policy of paying in theupper bracket of local industry to attract good people. Flynn'soperating budget two years ago was $17 million.
Labor turnover is higher in BSD than the Rochco average (20% vs 50%annually). The primary reason is that BSD is one of the fewdepartments to hire labor from outside the company. Themanufacturing depat temd t recruit personelle from BSD beforelooking externally, for two reasons: BSD provides basic safterytraining and Rochco culture orientation to its people, and BSDpeople have been screened, inspiring confidence from hiring deptthat they are good, reliable employees. The manufacturingdepartments also use BSD employees to fill in when normalproduction employees are on vacations.
Last year BSD reduced its fully absorbed costs to less than 29%over market prices, ahead of the forecast of 37%. BSD's cost arenow $15 million annually. There is more pressure than ever on allRochco managers to reduce costs. In June, williams, a manufactuirngmanager and one of BSD's largest customers, told Flynn tat he wasseriously considering going outside for cleaning services based onprice. Williams manages another cost center with challenging costreduction goals and represents 50% of BSD's customer base. Flynn isconcerned that the loss of Williams will irreparably damage BSD'sprogress toward its five year break even goal and raise cost toother departments to such an extenet that most of his customerswill switch to contract cleaners. Although BSD is stilluncompetitive at full cost, it is almost comptetitive on a directcost basis.
a. Describe the cost accoutning and control issues that are drivingWilliams , Carrodo, and WIlliams.
b. Denniss Flynn is confident that his cost-cutting program willsuccedd by the target date if BSD keeps its current accoutns.Should he discount BSD's services in order to keep Laurri?
C. Should Jim Carrado insist that managers of the operating unitscontinue to use BSD's services? What are the pros and cons of suchan order.
Also answer the following:
(Building Services Department) Short Answer. Part A: Focus on whatthe various people are accountable for, if they have control overit and what they may do differently.
Part B: Look at the possibility that may exist with pricediscrimination and some arguments that Dennis Flynn could use topromote the value of in house cleaning.
Part C: What should Jim Corrado do with the business plan and whatshould be pointed out and changed if anything.
A company was broken up into well defined business centers. Topmanagement encouraged all divisions to take over more decentralizeddecision making and mandated that the service groups provide valueto the firm over outstide contractors or be shut down. DennisFlynn, manager of the building services department (BSD's), wasasked by Jim Corrado, general manager, to describe how he wouldtake his unit from its the dismal position vis a vis outsidecleaning contractors to being the cleaning service of choice forits customers. An agressive five year plan was developed (seeattached photo), with break even to be achieved in the third year.This was not an easy task considering that BSD's costs exceededcompetitors by 53%.
The majority of Rochco properties are cleaned daily by BSD, whichruns as a cost center allocating its expenses at full cost based onthe hours of service consumed by site customers. Over 80% of BSDscost is labor. however, BSDs wage rates have historically beenhigher than competitors due to Rochco's policy of paying in theupper bracket of local industry to attract good people. Flynn'soperating budget two years ago was $17 million.
Labor turnover is higher in BSD than the Rochco average (20% vs 50%annually). The primary reason is that BSD is one of the fewdepartments to hire labor from outside the company. Themanufacturing depat temd t recruit personelle from BSD beforelooking externally, for two reasons: BSD provides basic safterytraining and Rochco culture orientation to its people, and BSDpeople have been screened, inspiring confidence from hiring deptthat they are good, reliable employees. The manufacturingdepartments also use BSD employees to fill in when normalproduction employees are on vacations.
Last year BSD reduced its fully absorbed costs to less than 29%over market prices, ahead of the forecast of 37%. BSD's cost arenow $15 million annually. There is more pressure than ever on allRochco managers to reduce costs. In June, williams, a manufactuirngmanager and one of BSD's largest customers, told Flynn tat he wasseriously considering going outside for cleaning services based onprice. Williams manages another cost center with challenging costreduction goals and represents 50% of BSD's customer base. Flynn isconcerned that the loss of Williams will irreparably damage BSD'sprogress toward its five year break even goal and raise cost toother departments to such an extenet that most of his customerswill switch to contract cleaners. Although BSD is stilluncompetitive at full cost, it is almost comptetitive on a directcost basis.
a. Describe the cost accoutning and control issues that are drivingWilliams , Carrodo, and WIlliams.
b. Denniss Flynn is confident that his cost-cutting program willsuccedd by the target date if BSD keeps its current accoutns.Should he discount BSD's services in order to keep Laurri?
C. Should Jim Carrado insist that managers of the operating unitscontinue to use BSD's services? What are the pros and cons of suchan order.
Also answer the following:
(Building Services Department) Short Answer. Part A: Focus on whatthe various people are accountable for, if they have control overit and what they may do differently.
Part B: Look at the possibility that may exist with pricediscrimination and some arguments that Dennis Flynn could use topromote the value of in house cleaning.
Part C: What should Jim Corrado do with the business plan and whatshould be pointed out and changed if anything.
