Select appropriate responsibility centre types and anticipate the likely performance measurement problems arising from their use.

The purpose of the activity is to illustrate:

• how individual responsibility centres may act in a way that maximises their performance, but impacts adversely on the performance of other responsibility centres or the organisation as a whole
• how linkages between the responsibility centres may make it difficult to evaluate the performance of each centre individually.

Spellman Co. Ltd

Spellman Co. Ltd is a medium-sized business that sells new and second-hand pasteurising, homogenising and freezing equipment to ice cream manufacturers. It also provides service and repairs to both its own and external customers. For the new machines market, it acts as a distributor for a single large Japanese-based manufacturer (also providing after-sales service, maintenance and repairs). For the second-hand market it buys all the major manufacturers products on the open market. Spellman allows customers purchasing new equipment to exchange their old equipment in part settlement often giving very good prices, above the market price for the old equipment, to encourage the purchase of new equipment. The old equipment is then serviced, checked and sold on the second-hand market.

The machinery used in the ice cream manufacturing business typically has a life of 2030 years, if properly serviced and maintained. Consequently, there is a large second-hand market, with many firms (especially smaller firms and new firms) willing to buy and use second-hand machines for ice cream manufacture.

As a result of rapid growth and increased complexity (with more customers, transactions and staff to manage), the business is experiencing a number of problems resulting from the centralisation of power, whereby all decisions are currently made by the managing director (MD) and costs and revenues are aggregated at the level of the business as a whole. The MD is finding it impossible to have sufficiently detailed knowledge of each business segment (concerning customer needs, competition, and so on) and this often results in poor quality decision-making. This concentration of decision-making authority also results in slower decisions in a fast moving environment, as everything has to be passed up the chain of command. Competent, knowledgeable staff feel frustrated and demotivated at being unable to use their initiative and apply their specialised knowledge. The lack of separable parts of the organisation, with responsible managers, means the various business segments cannot be evaluated in terms of their financial performance.

Task

Advise the MD how he can restructure Spellman to improve the situation, also making him aware of the problems that might arise if your recommendations are implemented.

Use the Table Below to record your output.

In order to make your recommendations to the MD, you will first need to consider the type of responsibility centre that is appropriate for each of the three main business areas: new equipment sales, second-hand equipment sales and service and repairs. To identify the appropriate responsibility centre type for each activity, you will need to consider whether the responsibility centre manager can significantly influence the revenues, costs and investments associated with his or her area of the business. Once you have identified the appropriate responsibility centre type for each activity, identify possible problems that may arise as a result of the way the centres performance is measured and evaluated. How, for example, might a cost centre manager act in such a way as to keep his/her costs down but potentially have an adverse impact on other responsibility centres or the organisation as a whole?

Table

Problem identification Approx. 50 words
Analysis (investigation) Approx. 100 words
Conclusion to the analysis (results of the investigation)
Approx. 50 words
The solution, listed as a set of SMART recommendations
Approx. 50 words
Strengths and weaknesses of the recommendations Approx. 50 words
The implications of the solution, if implemented Approx. 50 words