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 Page 533he’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.”

What do you think is going on here? What is the VP, Les Winters, up to? Is he acting ethically? What steps should the controller, Jamie Ericsson, take? (Refer to the “Resolution of Ethical Conflict” section of the IMA Statement of Ethical Professional Practice, printed at the end of Chapter 1.) How could a balanced scorecard help mitigate the problems apparent in this scenario?

Answer 1

Cost cutting always sends a message to customers, employees, or both. The companies with the highest customer loyalty also have the highest employee loyalty. In our Case, Mr. Ericsson, Controller of handico has compiled a Cost report for the second quarter and has found key points adversely affecting the future of the company akthough showing cost reduction in the present. He engages in a heated argument with Mr.Winters (VP) on the same and eventually Mr. Winters declines the suggestion of Mr.Ericcson on unhealthy grounds. This is not purely ethical.

Expense Reduction Analysts work to cut costs in areas where you have significant savings. They strive to obtain the “right” price for the products or services you are buying based upon their research. In most cases, they reduce costs while maintaining the same provider, performing the same services. When you can save money without adversely impacting the customer, you provide improved value all around. Unfortunately, when the finance or accounting department drive savings, often times they do so without seeing the big picture of how cost cutting might impact employee, customer satisfaction as well as loyalty, productivity and efficiency of machine and labor resources engaged. The same point has been put up by Mr.Ericsson to Mr.Winter. Now, Jamie Ericcson must report the impact of the same in terms of the areas that he claim to be adversely affected because of cost reduction by escalating it to Chief Finance officer and Chief Executive Officer or atleast mark a internal mail to them stating the impact. It is not ethical to leave the management unaware of the key decisions affecting productivity of the company. He shall report the below impact.

	COST REDUCTION	%	Q1	Q2
EMPLOYEE TRAINING	12000	25%	48000	36000
ROUTINE M/C MAINTENANCE	13500	20%	67500	54000
PROCESS IMPROVEMENT	12000	12%	100000	88000
QUALITY TRAINING	18000	8%	225000	207000
RAW MATERIAL INSPECTION	6500	9%	72222	65722
Employee Training & Process improvement cost reduction impact on productivity gains
Cutting routine machine maintenance would mean breakdowns later on. Balanced Scorecard is a metric used to measure various internal functions with their resulting outcomes. It is used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results, as the information gathered is interpreted by managers and executives, and used to make better decisions for the organization.By forcing senior managers to consider all the important operational measures together, the balanced scorecard lets them see whether improvement in one area may have been achieved at the expense of another. Even the best objective can be achieved badly. In this case, Mr. Ericcson can prepare a balanced scorecard based on key performance indicators. In this very case, Mr. Winter considers only the financial perspective to a decision, whereas using a balanced scorecard helps to analyse, internal , customer and Innovative perspectives for a healthy decision making in an organization.