Growth opportunities are always accompanied by challenges," exclaimedthe CEO of GeoBab. She then went on to explainwhy you, a consultant, were hired.

GeoBab started business in the city of Waterloo in 1951 as a manufacturer of televisions and electrical products. Television manufacturing was discontinued in the 1970s. GeoBab remained in the electrical products business, which over time required it to enter many new markets. New productshad to be constantly developed to maintain growth.The life of many of those productswas short, and thus many products were exited after a few years. In addition, competition and the need to be cost effective obliged GeoBab to locate new plants in China and India,and to enter into outsourcing arrangements. Along the way, GeoBabalso acquired about 30 small manufacturing plants. The result has been that GeoBab now has 36 plantsworldwide.

Systems integration attemptswere a constant challenge becauseof acquisitions, outsourcing arrangements, and new product implementations. If there had been a uniform enterprise resourceplanning (ERP) System,the CEO said, there wouldhave been fewerproblems for you to resolve.

Sung, one of the older, larger divisions, has been subject to a series of problems, which the division's general manager and his controller have not been able to resolve. The CEO introduced you to the general managerand the controller. They explained that the sales have been lagging behind expectations, with the recently completed year being typical of the last three. A biggerproblem has been that for the first year in decades, actualprofits have becomenegative. You are shown the operating statement in Exhibit I.

After a quick review of the operating statements, you asked if there have beenany changes to the manufacturing process. You were told that the only change has been the use of a new supplier for the majorcomponents. The new supplier, EL Manufacturing, was an acquisition by GeoBab that occurred late in the previous year. The acquisition was premised largely on EL being able to replace most of Sung'sexisting suppliers. The components from EL have defects, whereas the previous suppliers provided defect free components. Consequently, more materials and labour were needed, and rework and spoilage were charged to overhead.

You ask for information on the cost of qualityand customer satisfaction, and

you receive the information shown in Exhibits2 and 3. You are also informedby the divisional general managerthat EL wants a higherprice for the components beingsupplied to Sung.The general manager at Sung is opposed to any increase in price paid to EL because the market priceis less than what EL currently charges.(You confirm with an independent source that EL

is presently charging Sung five percent over the market price for the components.)

Two days later,the CEO introduces you to the generalmanger of EL. The financial statements for EL are containedin Exhibit 4. You learnthat all of EL's production goes to Sung at a markup overcosts sufficient to yield a 20 percentROI, which is GeoBab's markupfor setting transferprices between divisions.

This arrangement started at the beginning of the year that just ended.The general managerof EL wants the markup to be increased in order to earn a 25 percent ROI, which he says is consistent with what is earned by other, independent firms making the same components.(You confirm that those otherfirms were earning25 percent ROIs.)

Required

Using the Case approach shown at the beginning, respondto the CEO's assignment to resolve the outstanding issues.Please make sure to includean executive summary.

MARK ALLOCATION 50 marks

Executive summary 20% (10 marks)

Report- 80% (40 marks)