A company was broken up into well defined business centers. Top management encou

Question

A company was broken up into well defined business centers. Top management encouraged all divisions to take over more decentralized decision making and mandated that the service groups provide value to the firm over outstide contractors or be shut down. Dennis Flynn, manager of the building services department (BSD's), was asked by Jim Corrado, general manager, to describe how he would take his unit from its the dismal position vis a vis outside cleaning contractors to being the cleaning service of choice for its customers. An agressive five year plan was developed (see attached photo), with break even to be achieved in the third year. This was not an easy task considering that BSD's costs exceeded competitors by 53%.

The majority of Rochco properties are cleaned daily by BSD, which runs as a cost center allocating its expenses at full cost based on the hours of service consumed by site customers. Over 80% of BSDs cost is labor. however, BSDs wage rates have historically been higher than competitors due to Rochco's policy of paying in the upper bracket of local industry to attract good people. Flynn's operating 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 few departments to hire labor from outside the company. The manufacturing depat temd t recruit personelle from BSD before looking externally, for two reasons: BSD provides basic saftery training and Rochco culture orientation to its people, and BSD people have been screened, inspiring confidence from hiring dept that they are good, reliable employees. The manufacturing departments also use BSD employees to fill in when normal production 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 are now $15 million annually. There is more pressure than ever on all Rochco managers to reduce costs. In June, williams, a manufactuirng manager and one of BSD's largest customers, told Flynn tat he was seriously considering going outside for cleaning services based on price. Williams manages another cost center with challenging cost reduction goals and represents 50% of BSD's customer base. Flynn is concerned that the loss of Williams will irreparably damage BSD's progress toward its five year break even goal and raise cost to other departments to such an extenet that most of his customers will switch to contract cleaners. Although BSD is still uncompetitive at full cost, it is almost comptetitive on a direct cost basis.
a. Describe the cost accoutning and control issues that are driving Williams , Carrodo, and WIlliams.
b. Denniss Flynn is confident that his cost-cutting program will succedd 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 units continue to use BSD's services? What are the pros and cons of such an order.
Also answer the following:

(Building Services Department) Short Answer. Part A: Focus on what the various people are accountable for, if they have control over it and what they may do differently.
Part B: Look at the possibility that may exist with price discrimination and some arguments that Dennis Flynn could use to promote the value of in house cleaning.
Part C: What should Jim Corrado do with the business plan and what should be pointed out and changed if anything.

Explanation / Answer

a The major control issues that are driving the three managers are labor cost, labor turnover and breaking even. Also the costs seem significantly higher than the Industry averages. b Already BSD reduced its fully absorbed Costs to less than 29%.So further discounting services might retain Flynn, however it might delay the 5 year break even Goal. c No JC should not insisit that the operating services use BSD's services . The major disadvantage of this is BSD won't be able to meet its outside commitments on time although it would reduce the operating Departmental costs. BSD Services Department a Even though BSD is hiring the creamy layer for its operations, most of the staff are whisked away by the other manufacturing departments . This is a serious issue which needs looking into. b Price discrimination can be used for top customers for retaining them.However the cost implication of such a price discrimination should be carefully weighed. c If anything needs to be changed, it’s the Labor turnover.

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