ISEN 663 Engineering Management Control Systems - Midterm Exam sp2024
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ISEN 663 Engineering MCS 14 March 2024 ISEN 663 Engineering MCS - Mid-term Exam General Instructions 1.
This take-home mid-term exam is due on MON 25MAR by 11:59p to the designated Canvas assignment drop. 2.
To be done completely on your own; no assistance of any type from another person regardless of whether they are in the class or not; this condition applies during the entire exam open period. 3.
Answer using your own *paper* or electronically; create and upload your submission to the associated midterm exam (assignment) drop. 4.
By acceptance and submission of this exam you acknowledge that have you adhered completely to the Aggie Honor Code during the conduct of this exam. ANY attempt to corrupt the conduct of this exam will be sent to the Honor Council for adjudication. Do not initiate nor accept communication regarding any aspect of this course during the exam period. 5.
The exam concludes at 11:59p CDT on 25MAR2024. Nothing will be accepted after that time.
6.
All questions and concerns should be directed to me. 7.
Grading will be based on your command of the method or technique coupled with the relevance of your rationale to the assigned case. NB: I do not want reproductions of the REFMODs –
I am looking for well-designed artifacts engineered for the case. [100pts] ORG SYS analysis and design: form, fit, function, and control The exam will utilize the Kranworth case study (see the appendix) for context. The Kranworth Chair Corporation (KCC) is a “purposeful organization” with a variety of issues and concerns –
but at its core the owners simply wish to remain economically viable. In fact, like Mainfreight, they seek to be a “100
-
year” company. You have been called into Kranworth as an organizational engineering consultant due to your knowledge, skills, and abilities related to organizational system analysis and design. More specifically, you have been hired, in a consulting role, to answer several vexing questions that the owners of Kranworth have regarding the current state and future state of their firm. [NB: KCC stakeholders have heard from the MBAs –
they now want to hear from the engineers.] To guide your consulting efforts, an outline has been developed (see the table below) of their “vexing” questions, your *required* task, and the format that you will deliver your responses in. NB: the case study will require some sanctioned inferences on your part. This is realistic. The point of the exam is to exercise your competence in the use of industry standard principles and practices (in the form of models and frameworks) to support the analysis and design of organizational systems –
especially the purposeful organizations that reside at the heart of the free market economy. KCC needs your help.
ISEN 663 Engineering MCS 14 March 2024 KCC concern (vexing questions) Your task Format for the deliverable A few notes from me A (10pts): “The functional and divisional ORG charts are useful, but what would a matrixed approach look like? What would be the pros and cons of a matrixed-
based approach for KCC?” Design a matrixed based ORG chart for KCC Matrixed based ORG chart with an appropriate level of detail (similar to what was provided in the case). A short discussion of the pros and cons of employing such a structure at KCC (a well-developed table
is in order). I suggest using templates from Powerpoint, Visio, or word itself to improve the clarity of your ORG chart design. The pro/con discussion is intended to be a concise, cogent, but salient response to the KCC concern. We discussed many details in lecture. B (30pts): “We need some clarity into the division of responsibilities. Please provide us with a clear characterization of these functions and how they relate to one another.” Develop an IDEF0 model of the core activities performed by top management and the divisional management. IDEF0 model Critical: context, viewpoint, purpose; 3-6 rule; use of action verbs; etc. Full glossary! I highly suggest using a tool to develop the model. C (10pts): “We are concerned that the custom division needs clear congruence with our mission, vision, and values. We need a clear strategy and set of objectives … something on a single page will suffice.” Develop a 1-page theme based SM-BSC; Support with 1-page for BSC rationale SM-BSC
(theme: custom division –
customization viability) Discussion of BSC rationale Strategy map for vertical congruence; balanced scorecard with a minimum of three objectives, measures, targets, actions for each horizontal perspective. Discuss your rationale. D (10pts): “We have a major concern with our relevance in the future –
the customer environment is changing. What should we be concerned with?” Use Porter’s Five For
ces (PFF) Use LOC REFMOD –
focus on the Interactive control lever PFF analysis diagram LOC, Interactive control lever analysis Use a PFF framework for representation. For the interactive control lever –
use the REFMOD specification that we discussed in class. E (20pts): “Viability! –
what will a divisional based VSM look like? We are especially concerned with the coordination between the divisions –
how do we maintain balance?”
Develop a VSM: SIF is KCC; Specify a plausible variety engineered channel between the S1s and S2. With a SIF: Custom division →
develop the VSM diagram for that division. Identify and label the channels VSM diagrams
including the requisite functions, Channels A-I, and for the required channel: VE
(a depiction of the functions, the variety, and the requisite attenuators and amplifiers to ensure the LORV is achieved) Leverage the REFMOD; note that I am asking for two VSM diagrams. The second is a level of recursion inside the S1 related to the custom division. Only one channel needs to be engineered. VE should identify the variety and the eigen-variety for each function. F (20pts): Your recommendations –
you spent a week on the KCC nickel. KCC want’s ORG viability;
it’s show time. Develop a set of final recommendations to KCC for enhancing their desire for viability. 1-page, numbered list of recommendations and associative rationale discussion (should refer to artifacts from A-E by name) The analysis and design performed in A-E should provide a set of salient insights for KCC; summarize your findings and recommendations.
ISEN 663 Engineering MCS 14 March 2024 Appendix: Kranworth Case for Mid-term Exam Case Study for ISEN 663 Midterm Exam sp2024 Kranworth Chair Corporation In July 2003, Kevin Wentworth, CEO of Kranworth Chair Corporation (KCC), was considering a major reorganization –
a divisionalization –
of his company’s organization structure:
Like many entrepreneurs, I have always been focused on top-line sales growth, and I have constantly been impressing on my managers to drive sales. My belief was that if you do that, everything else takes care of itself. Up until recently, I think our approach made sense. We had very little competition, and our margins were huge. Now things are changing. We’ve got some major competitors who are making headway. I think we needed to take a fresh management approach to find opportunities to do things better. Our new divisionalized organization structure should help us serve our customers better and maybe force us to eliminate certain markets or products that are not producing results. But I’m not sure it’s working very well. We’re seeing some finger pointing between the managers of the newly created divisions and the managers in charge of corporate departments. There is a lot of politics involved in defining the roles, responsibilities, … and rights, of each of the responsibility centers, and it’s not clear to me yet exactly where to draw the lines.
The company In the early 1980s, Weston Krantz, an avid outdoors person, developed a new design for a lightweight, portable chair that could be stored in a bag and carried anywhere. Convinced that his design had commercial value, in 1987 Weston cofounded Kranworth Chair Corporation (KCC) with his longtime friend, Kevin Wentworth, who had an MBA degree and financial expertise. (The corporation’s name was a contraction of the founders’ names: Krantz and Wentworth.) KCC was headquartered in Denver, Colorado, in the foothills of the Rocky Mountains. KCC produced a broad line of high-quality and fashionable portable, folding chairs, which were branded as various models of the Fold-it! brand. In its early years, KCC sold its products exclusively to distributors. Since its inception, KCC had been organized functionally. In 2003, reporting to the cofounders were vice presidents in charge of sales, supply chain, and finance and administration, plus staff managers responsible for advertising and research and development (
Exhibit 1
).
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ISEN 663 Engineering MCS 14 March 2024 Exhibit 1 Kranworth Chair Corporation: 2003 organization structure Over the years, KCC expanded its product offerings. In 2003, it offered an extensive line of folding chairs. The chairs were produced in various sizes and models, including both adult and child chairs, single chairs and loveseats, and full- and beach-height chairs. Some chairs had additional features, such as cup holders, storage pockets, and trays. The chairs were produced at several price points, with varying fabrics, designs (e.g. single vs. double layer), and frame materials. KCC also offered some related products, such as folding tripod stools, ottomans, cots, and stadium seats. KCC also produced custom-designed products. It employed screen-printing artists and seamstresses who applied custom logos, graphics, and lettering to the nylon. KCC products were often seen at corporate trade shows and tailgate parties at sporting events. The company kept track of approximately 1,500 stock keeping units (SKUs) –
finished products and various piece parts that the company sold –
although about 85
–
90% of the sales stemmed from only about 40 of the SKUs. Gradually, KCC built sales by investing in more advertising and by adding other distribution channels. By 2003, it sold some products directly to major retail chains (Wal-Mart, K-Mart, Target), as well as other retailers (e.g. sporting goods stores) of various sizes. It sold to retailers using the KCC sales force, outside reps, and distributors. It also sold custom products directly to corporations and high school or university bookstores and athletic departments. The retail channels provided the highest sales volumes, but those sales were made at lower margins. In the 1990s, KCC moved its core manufacturing facilities to Mexico and China to take advantage of lower labor rates. Only some assembly (“kitting”) and customizing facilities were retained in the Denver location. In the company’s first decade of existence, KCC had little competition. Its chair designs were protected by more than 20 patents. Sales grew rapidly, and average margins were high, in the
ISEN 663 Engineering MCS 14 March 2024 range of 40
–
50%, although some margins were sacrificed in later years in order to generate sales from large retail chains. In 1999, KCC borrowed $30 million because the founders, particularly Kevin, wanted to take a significant amount of cash out of the company. Kevin had become interested in ranching, and he wanted to buy a significantly larger ranch. Ranching had become his passion, and he was spending less and less time at KCC. (For years Weston had spent only a small portion of his time at KCC as he traveled and pursued his various avocations.) The debt service on the loan reduced KCC managers’ margin for error. Cash flow w
as tight, particularly at the slow time of the year –
October to January. Starting in the late 1990s, some significant competitors, mostly from Asian countries, entered the market with comparable chair designs. Despite the fact that most customers perceived KCC as having superior designs and higher quality, and customer satisfaction was high, the higher competition and the worldwide recession of the early 2000s caused sales to flatten and profits to drop. The company’s management incentive plan did not pay out in either 2001 or 2002. In 2003, performance was slightly improved. KC
C’s total revenues were projected to be approximately $70 million, up from $68 million in 2002, and profits were expected to be slightly positive. Motivation for divisionalization In 2002, Kevin began to think about changes that might stem from a change in organization structure. He thought that the KCC managers needed to focus more on the quality, and not just the quantity, of sales. To illustrate the point, he described an example in which KCC personnel had aggressively sought business from Target, the large retail chain. In order to develop this retail account, KCC designed a special chair model for Target and offered a special price with a lower gross margin. While Target did sell some Fold-it! chairs, they did not sell many. Part of the reason for the po
or sales was that many of Target’s outlets did not display the Fold
-it! chairs effectively. Instead of displaying them in the sporting goods department, they shelved them wherever they had room. Kevin explained, “I walked into a Target store in a suburb of
Denver and found that our products were sitting on the bottom shelf horizontally in the back corner of the Automotive Department, where nobody could ever see them!” Because of the “growth at all costs” philosophy, KCC incurred significant product developm
ent and marketing costs and ended up carrying a large amount of inventory; so, overall, the Target account, and some others like it, were very unprofitable. But to develop more focus on the quality of sales, KCC had to develop a stronger customer focus, to understand better customers’ needs and wants, and to improve customer service levels. Kevin also thought that divisionalization, if implemented properly, could help KCC improve its efficiency and asset utilization. He thought that with an improved customer focus, it was almost inevitable that the company could reduce its SKUs, possibly outsource more functions, and generally learn to serve customer needs better while tying up less capital.
ISEN 663 Engineering MCS 14 March 2024 Divisionalization alternatives What kind of divisionalization would be best? Kevin thought first about the relatively conservative approach of merely making the sales function a profit center. This approach would involve charging Sales for the full costs (or, perhaps, full costs plus a markup) of the products they sold. Sales would have to pay for the costs of customizing products and holding inventory. This approach would make Sales more aware of the cost implications of their decisions and, hence, more motivated to generate profitable sales. But Kevin concluded that KCC should probably go further to create true product divisions. The KCC managers had frequent debates about what products and sales channels were most profitable, but those debates were not informed with hard data. A divisionalization would require some disaggregation of total costs and would facilitate profitability analyses. If this was done, however, the KCC managers would have to consider how self-contained the new operating entities should be. Kevin wondered, “Should [the product divisions] each have their own supply chain management, sales force, R&D, and human resources functions, or should those resources be shared?”
The obvious product split in KCC was between Retail Products and Custom Products. The Retail Division would focus on the higher volume, standard product sales to retail outlets. The Custom Products Division would focus on the smaller-volume custom sales. In the approach that Kevin was planning to present to his management team, the two product divisions were to become profit centers. Each entity would be dedicated to its focused core business, but their managers would be free to choose how they did business and what they incorporated into their business model. Reporting to each of the division managers would be managers responsible for sales and marketing, purchasing and inventory control, and finance and accounting. Supply chain, R&D, human resources, and advertising would still be centralized, although these functions would clearly have to work closely with division managers. Kevin hoped that this new structure would allow the Retail and Custom Products divisions to make some bold, new decisions. The new company focus would also be on creating value, rather than merely growing. For the divisions, creating value could easily mean contracting sales to eliminate unprofitable or marginally profitable products and customers. The best customers, for example, were probably those that bought the most profitable products, placed inventory requirements on KCC that were reasonable and predictable, had a strong credit standing and payment history, and were relatively easy to serve. The divisions might also decide that they should outsource some functions, such as warehousing, which might allow KCC to provide better customer service during the busy seasons and to employ fewer people and assets in the low seasons. On July 28, 2003, Kevin presented his divisionalization ideas to his management team. Figure 1 shows an excerpt from the presentation he gave.
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ISEN 663 Engineering MCS 14 March 2024 Figure 1 Excerpt from presentation given by Kevin Wentworth The new product divisions will be lean, mean fighting machines with a direct purpose and the vision to carry that purpose out. With our [corporate managers’] help, they will look at how they do business now and what they can do better. They will have the opportunity to dream. If we were to start a new product-line business, think of the questions that would have to be answered: 1.
How should we staff? 2.
How should we source? 3.
How should we warehouse? 4.
How should we sell? 5.
How should we ship? 6.
How should we finance? These are just some of the many questions that a new company has to address. We have a certain advantage since we already have a baseline. But we also carry along a disadvantage. We have become entrenched in our ways and are the costliest product in the market. If we forced ourselves to completely reevaluate the business, could we significantly reduce costs, provide better customer service, and yield higher operating profits? That answer must be “yes” in order to stay in business in the future. Think of the fabulous business opportunity in front of us! Some of the KCC managers were enthusiastic about the proposed change. Others thought that the ideas were radical. A few managers were bewildered, as they had never worked in an organization with a divisional structure and had trouble visualizing how it would work. In the ensuing discussion, many questions arose, such as relating to the specifics as to who would be responsible for what and how performance would be measured and rewarded. It was decided that the idea needed more specifics. A follow-up meeting was held two weeks later. By then most of the managers realized that top management had already made this decision; the company was going to be divisionalized. They then became highly interested in shaping the details of the change. The focus of the second meeting was on defining division management responsibilities. After considerable discussion, there was general agreement regarding the following general division of responsibilities: Responsibilities of top management and corporate staff: 1.
Overall vision and strategy for the company 2.
Financing and other high-level financial matters 3.
Engineering, design, and R&D
ISEN 663 Engineering MCS 14 March 2024 4.
Facilities 5.
Legal and intellectual property 6.
Supply chain and quality 7.
Corporate identity (e.g. public relations, some general advertising) 8.
Human resources 9.
Information technology 10.
Acquisitions and joint ventures Responsibilities of division management: 1.
Overall vision and strategy for their respective markets 2.
Development and implementation of divisional annual budgets 3.
Staffing 4.
Operations, including purchasing of parts and materials specific to respective markets, receiving, warehousing, shipping, and inventory management 5.
Controllership and accounting 6.
Product-specific advertising and collateral material 7.
Information technology support With this general understanding of the distribution of responsibilities in the company in place, the next task was the development of ideas regarding performance measurement and incentives. This task was assigned to Robert Chang, VP –
Finance and Administration. Performance measurement and incentives Robert developed a measure that he called controllable returns
, which was defined as operating income (before tax) divided by controllable assets. To get to operating income, all the division direct expenses were subtracted from division revenues, as were as many of the corporate expenses that could be reasonably allocated to the divisions. The assets deemed controllable by the divisions included their receivables, inventories, and an assigned cost of facilities they used. Robert proposed an incentive plan that provided 22 managers, down to the director level (one level below division manager), with a cash award based on achievement of annual targets set for controllable return at the divisional and corporate levels. For corporate managers, the bonuses would be based solely on corporate performance. For managers assigned to a division, the bonuses would be based 75% on division performance and 25% on corporate performance. Robert proposed that the expected payouts be set initially at relatively modest levels. If the annual performance targets were achieved, Kevin and Weston would be paid an award of 40% of salary, division managers would be paid 30%, and managers lower in the hierarchy would be paid 15
–
20%. No payouts would be made if actual performance was below plan.
1
If actual performance exceeded plan, the payouts could be increased by up to 50%, at the discretion of top management and the company’s board of directors.
ISEN 663 Engineering MCS 14 March 2024 1
If the division (corporate) plan was met, but the corporate (division) plan was not, division management would still receive the divisional (corporate) portion of the bonus. Robert explained that he proposed the relatively modest awards because the costs of this plan would probably be in excess of $500,000, a significant additional expense for the company. Maintaining competitive total compensation levels was not an issue because KCC managers were currently not accustomed to earning a bonus, since the old sales growth-based incentive plan had not paid out anything in either 2001 or 2002. Plus, Robert thought the company needed to get some experience with setting division-level performance targets and measuring and evaluating performance in a new way before ratcheting the performance-dependent rewards upward while probably reducing the proportion of total compensation paid as fixed base salaries. These suggestions were discussed in a staff meeting held on October 13, 2003.
2
The major point of dissension was regarding the proposed assignment of some of the corporate expenses to the divisions. Some of the personnel who were slated for assignment to a division complained that they could not control the terms of deals that corporate staff negotiated for them, such as for insurance. Kevin headed off this discussion by explaining that these cost assignments would be built into the performance targets, so they would not affect the actual vs. targeted return comparison. Further, division managers would have near complete freedom of sourcing. If they did not like the services provided to them by corporate staffs, they were free to purchase those services from outside the company. 2
Sales personnel were still included in a sales-based commission plan. At this meeting the idea came up that the sales commissions should be weighted based on product profitability, but detailed discussion of this idea was deferred. A follow-up meeting was scheduled for October 27, 2003. That meeting was intended to be used primarily to design the new organization –
who would be assigned to what division and in what role (see Exhibit 2
). It was hoped that the new divisionalized structure would be completely in place by January 1, 2004, and the first incentives based on controllable return would be paid based on 2004-performance.
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ISEN 663 Engineering MCS 14 March 2024 Exhibit 2 Kranworth Chair Corporation: 2004 organization structure Hopes and concerns for the future Kevin was convinced that the new divisionalized organization structure would give KCC its best chance for future success: Most of us are now convinced that this is a good idea. Although it creates a more complex organization, it will make most of our managers feel more empowered. It will also force us to be more focused on returns, rather than revenues and cost control. Privately, however, Kevin expressed concern that this major turning point in the company’s history was quite risky. I’m delegating considerable decision
-making power to the division managers. If they make mistakes, our business can go down the tubes. The managers will make out all right; they can go find another job. But the fortunes of my family and those of the other major owners would be devastated.
ISEN 663 Engineering MCS 14 March 2024 He had a specific concern about one manager, Joe Yarmouth, the current VP-Sales who would be appointed as general manager of the Retail Division. Joe is in his early 50s, and he has a lot of experience. But most of the experience is in sales, rather than marketing and other functions, and all of his experience before KCC was in big companies –
Clorox, Hershey’s. Culturally he does not have the small
company mindset. He has no experience in understanding costs, cash flows, and returns. I think he should have been able to set up more deals that don’t require any working capital investment, but he just doesn’t think that way. So Kevin, and indeed most of the KCC managers, looked to the future with both eager anticipation and trepidation. Early experiences KCC’s early experiences with the divisionalized structure created more concern. The first major initiative of Ed Sanchez, the manager of the new Custom Division, was to propose the procurement of a more sophisticated fabric-cutting machine. This machine would allow the fabric to be cut more efficiently and lower both material and labor costs slightly. A discounted cash flow analysis suggested that this machine was a worthwhile investment. But, Kevin explained: In my opinion, this investment does not address the real issue in the Custom Division. Our real issue is turnaround time. We have plenty of margin in custom work, but we need to reduce our turnaround time to serve our customers better. I think Ed is turning the wrong dials. Kevin also knew that in Retail, the newly installed division manager Joe Yarmouth, who had good contacts in the advertising world through his prior jobs, was talking with a new advertising agency about the possibility of a new campaign to advertise retail products more aggressively. Kevin wondered whether this was in the best interest of the company. He commented: I’m worried about losing economies of scale from dealing with different ad agencies and about what this “go
-it-
alone” advertising will do to our corporate identity. And in any case, lack of advertising was not the problem we faced at Target; it was product placement! Joe, in turn, had already been grumbling to Robert about late deliveries and missed sales as well as product returns due to quality problems, which were caused, in his opinion, by vendor problems that were under the purview of Carrie Jennings, the corporate head of Supply Chain and Quality. In the new organization structure, Supply Chain was responsible for obtaining and maintaining an adequate vendor group, primarily in Asia and Mexico, to secure both high-quality subassemblies and on-time delivery, while reducing dependency on any given vendor. The divisions had responsibility only for placing the day-to-day purchasing orders (POs) with these vendors. Joe complained: If I keep having delivery and quality issues due to problems with our overseas vendors, over which I have no control, I’m sure going to miss my performance target for the year.
I
am the one –
not Carrie
–
who feels the pain of lower sales and higher costs due to product returns, because
ISEN 663 Engineering MCS 14 March 2024 it directly affects the numerator of my controllable returns measure, and thus, my
bonus that is totally based on it. I have already lobbied corporate to let me have control over vendor negotiations. If they won’t do that, they should at least adjust my targets so that my evaluations aren’t affected by others’ failures. But so far they don’t seem to want to listen to me.
Robert estimated that the divisions had about 85% control over their own P&L results. He believed that was significant enough: Joe’s arguments have some merit, but no manager ever controls everything. Our managers need to work with others in the organization within the constraints in which they are placed, to react to a lot of changing conditions, and to deliver the needed results
. If Joe can’t do this, then we’ll find someone else who can. Robert did not think that corporate managers should make any changes either to the assigned responsibilities or the bonus plan. Joe had also proposed some other ideas for a leaner Retail business that could potentially affect the design of the Supply Chain function. He wanted to enter into arrangements with large retailers that would provide favorable pricing in return for commitments to take delivery of full containers of finished products right at the port of entry (from either Asia or Mexico). This would eliminate further kitting in the Denver plant and reduce inventory significantly. Kevin thought this could be a good idea, but he was not sure who should take responsibility for working out the details. He was also worried about the politics involved in redrawing the lines of responsibility so early into the new divisionalization. Another issue that had arisen involved the R&D function. Corporate R&D was responsible for new product designs and refinements. Even though most ideas for new products or product improvements came from the division managers and their sales people in the field, division management did not have much control over which R&D initiatives received priority. Joe Yarmouth commented:
There is too much filtering by corporate R&D of the ideas that we feed them. We can’t get anything done without Ken Simmons’ [R&D manager] blessing, and Ken really takes his orders from Weston [Krantz]. We ought to have more influence. We know our markets better than anyone else in the company, and we are paying for the function. We [the divisions] each fund 50% of the corporate R&D budget. I’m about to take a $150,000 hit for corporate R&D in my 2004 P&L, and what do I get for that? And why do we [the divisions] each have to share the burden equally? I’m also annoyed that Custom is getting a lot more R&D support than I do. Certainly Retail is much larger than Custom, but we’re not getting much support from R&D. All they’re doing for us are a few twe
aks on our standard products. Ed Sanchez (Custom), in turn, was complaining that R&D was much too “reactive” to new product features already introduced by competitors, despite the fact that he and his sales people has proposed many ideas for more radical changes.
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ISEN 663 Engineering MCS 14 March 2024 Under this pressure from the division managers, Kevin was considering whether KCC should allow the divisions to do their own R&D. He knew doing so would solve the problems the divisions managers were complaining about, but he wasn’t sure which new problems
it might create. Kevin did not like the whining. But he also did not want to undercut the local initiative that the new organization promised to bring to KCC. And in any case, there were pressing issues to attend to on his new ranch. This case was prepared by Professors Kenneth A. Merchant, Wim A. Van der Stede, and research assistant Clara (Xiaoling) Chen. Copyright © by Kenneth A. Merchant and Wim A. Van der Stede.