Question

SHORT-SIGHTED VIEW OF COST CUTTING

Jamie Ericsson, the controller for Handico, has just compiled a cost report for the second quarter. The report is prepared each quarter for corporate headquarters. She has taken particular notice of several major cost categories that show significant reductions in expenditures when compared to the first quarter. She made the following list of the major cost cuts:

Cost Item	Cost Reduction($)	Cost Reduction(%)
General employee training	12,000	25%
Routine machine maintenance	13,500	20%
Process improvement	12,000	12%
Quality training	18,000	8%
Raw-material inspection	6,500	9%

Concerned that there may have been errors in compiling the data, Ericsson scheduled an appointment with her supervisor, Les Winters, the divisional vice president. At the meeting, the conversation went like this.

Ericsson (C): “Les, I'm concerned about these cost cuts. Are these mistakes, or are we really making such substantial cuts in these areas?”

Winters (VP): “Your numbers look right, Jamie. I ordered these cutbacks myself. I think there's a lot of fat in this operation that can be cut, and I'm just getting started.”

Ericsson (C): “But these are all important areas to invest in, Les. I see the invoices for these costs every month, and I don't think it's wasted money at all.”

Winters (VP): “Corporate wants a lean company, Jamie. I'm just trying to give them one.”

Ericsson (C): “Have you thought through the implications, Les? Cutting general employee training will eventually take a toll on our productivity gains. Same thing for the cuts in process improvements. And cutting routine machine maintenance could mean breakdowns later on. Maybe not for a year or so, but eventually it'll take its toll.”

Winters (VP): Becoming annoyed, “Those are my concerns, Ms. Ericsson, not yours.”

Ericsson (C): “Look, Les, we're all on the same team. I'm just concerned, that's all. I feel as though I need to highlight these cost cuts in my report to corporate. They should at least be made aware of these issues. I'll need your authorization for that.”

Winters (VP): “No can do, Jamie. You are instructed to make your usual quarterly report using the standard format.”

After the meeting, Ericsson was commiserating with her close friend, Amy Ling, the chief of engineering.

Ericsson (C): “Amy, I just had a very unsatisfactory meeting with Les Winters. I shouldn't go into the details, but I'm concerned about some things.”

Ling (E): “Well, I have good news for you then. The grapevine has it that Les is on the very short list for taking over as president of our Japanese subsidiary. That would be a huge promotion for him. Word is that all he's got to do is turn in a good performance for the year here. If he does that, the job's his.”

Ericsson (C): “That explains a lot, Amy. Thanks for the heads up. I've got some thinking to do.”

Required:

1. What do you think is going on here?

2. What is the VP, Les Winters, up to? Is he acting ethically?

Answer 1

Answer to 1st -

The company can increase profitability either increase in the sales revenue or through cost cutting tools. It is apparently clear that there is a cost cutting on certain important cost items.
It seems that the Mr. Les, is at the opinion that these can be reduced to such an extent so as to increae the company profitability. Before to have any cost reduction, Mr. Les should have been thought about the long run implications of these cost reduction. Let us take some implications, if cost reduction will proceeds -

IMPLICATION OF COST REDUCTION IN GENERAL EMPLOYEE TRAINING -
The employee will no longer be updated or got unskilled with respect to the new advancements in the machines if,any cost reduction happens which will effect the employee training. The employee training is utmost to compete in the industry.

IMPLICAITON OF COST REDUCTION MACHINE MAINTENANCE -
A regular repair cost of the machinery is comparatively lower than the huge cost that might would have to incurr in case there is breakdown. The breakdown not only results in the huge cost for repair, but also it will create inefficiency amongs the labour and employee.

IMPLICATION OF COST REDUCTION IN QUALITY TRAINING
Quality training is utmost important, because through this the employees always remain updated with the new technology advancement. The maximum usage of the materials available, the proper allocation of the labour over the assignment.

IMPLICATION OF COST REDUCTION IN THE RAW MATERIAL INSPECTION -
If the company will aviod the inspection of raw material inspection, then the company might have to suffer huge rework cost.This reduction even may result in the defective final product, which will ultimately disrepute the company in the industry.

Answer to 2nd

This is unethical.
It looks that the Mr.Les, must have been got the information about his candidature as a president of their Japnese subsidiary and that too, if he does something to boost up the profitability of the company. Accordingly, Les, has devoted his time to reduce some of the cost to increase the company's profit.

In order to avail the opportunity of promotion, Les, should not be allow for any kind of cost reduction. There should be proper measures and calculations for any kind of cost reduction. Useless reduction in the cost would do nothing except long run loss to the organization.

Les, should think about the company reputation and keep in his mind about the long run profitability for the company. Individual promotion nowhere stands before the company's growth and profitability. Les, should think atleast once, some other measures in order to increase company's growth.