Question

Jack is the purchaser of raw materials for GKS, a contract manufacturer. GKS prides itself in supplying quality component parts to its customers for the electronic industry. As a result, spoilage costs at GKS is often as high as 20% for raw material.

Jack often purchases raw material in bulk as he believes it lower the overall costs. He is paid a bonus if the actual material costs is within 5% of budgeted amounts. GKS practices participative budgeting. Jack recommends the price for the purchase of raw materials and the quantities to purchase after consulting with the production and sales managers. For the last two years, Jack has been receiving a bonus as the actual materials purchases costs have been within 5% of the budget for each year.

Kosh, who is the newly appointed CEO, wants to cut and maintain GKS's reputation for quality. He wants to adjust or reorganise the organisation architecture (OA) to achieve his goals - reduce material spoilage by 50% front he current levels and cutting operational costs by 5% across all units in the firm.

Required:

(a) Using your knowledge of OA, explain if the current OA is balanced for Jack and whether there is any downside to the current situation for GKS. (9m)

(b) Give two(2) suggestions for changes to the OA in order for Kosh's goals for GKS to be achieved. (6m)

Answer 1

Answer to question (a) = Regarding the current organization architecture of Jack , it is well balanced. He purchases materials in bulk which helps him to save costs. Also he ensures that total cost of materials is less than 5 % of budgeted amount and as he has been consistent in cost control he has been receiving bonus as per the agreement. He has achieved this by organizations built environment .He is an efficient manager indeed.

When it comes to GKS the downside to the current situation, it is noted that the spoilage cost of raw materials is as high as 20% which need to be addressed and controlled on priority. No action has been taken to control spoilage of materials. Also no action has been taken to use the spoilage raw materials for further production process or to use it to manufacture any other products if possible and thus it becomes a total waste.

Answer to question (b) :

Suggestion 1 : Need to control Abnormal spoilage

Spoilage can be of two types namely normal spoilage and abnormal spoilage. Normal spoilage arises under efficient operating conditions. It is an inherent result of the particular process and thus uncontrollable. Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions. It is not an inherent part of the selected production process. Abnormal spoilage can be controlled because it arises as a result of inefficient operating conditions. Abnormal spoilage can be controlled by first-line supervision which can exert influence over inefficiency.

Suggestion 2 : How to cut operational cost by 5% across all units:

The firm has to take below mentioned corrective actions so as to cut operational cost by 5% across all units

1. To have correct data for analysis

2. To reduce Direct material cost

3. To reduce carrying cost of inventory

4. To reduce labor cost

5. To increase workers' efficiency

6. To control manufacturing overheads

7. To optimize the production output level

8. To eliminate non-value-adding processes

9. To leverage automation