Case 10: 17 August 2013

PCL: A Breakdown in the Enforcement of Management Control

Analysis Prepared by Group 5:
Espinosa, Melissa Katherine Magtibay, Roxanne
Francisco, Marvin Nito, Orenz
Importante, Marlyn 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 companys 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 Weaknesses
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 cross-
functional team effective.

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.

Opportunities Threats
China has become the worlds
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.

Price wars between international and
local brands.
High bargaining power of consumers.
Low product differentiation versus the
products being offered by local
manufacturers.
Chinas 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.



Theoretical / Conceptual Framework

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 Cycle
1


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


1
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 PCLs 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 mid-
year 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 companys
internal control systems that are for sure beneficial to the companys 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 organizations 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.