Control: The Management Control Process

Control: The Management Control Process

The Management Control Process Case Study

Establishing transfer prices represents a difficult task performed by companies. Given the fact that companies' transfer prices strategy affects several stakeholders, top managers must identify the most suitable strategy that is in accordance with government's regulations and with the levels expected by the stakeholders in case.

Transfer prices have other indirect effects that companies should pay attention to. For example, transfer prices help companies identify which units or profit centers of the company are productive in comparison with those that are unable to perform at the levels established by the company's managers (Neighbour, 2010).

Regarding the transfer prices, it is obvious that the company's strategy in this direction has not properly assessed the needs and requirements of each unit. This further leads to dissensions between these units.

The transfer prices established by the manufacturing divisions are not in the favor of AM Marketing in all situations. The fact that these manufacturing divisions adjust the price upward for inflation is considered to be satisfactory in situation where these prices refer to parts sold as OEM parts in previous years. In cases where such a transfer pricing strategy refers to parts that are strictly sold as AM parts.

Given the fact that the company's divisions are organized as profit centers, there is little that the top management can do in order to address the issue regarding transfer prices. This is because since these divisions follow government's regulations and their strategy is aligned with the general strategy of the company, the top management should not interfere with these divisions' functioning and transfer price strategy.

However, the company's top managers can develop and implement a different strategy regarding management control of such issues between divisions. For example, top managers can establish a lowest and highest transfer price level and the conditions in which these values can be applied. These levels should be established in accordance with the financial objectives of the company.

The same situation applies to the fact that AM Marketing is considered by manufacturing divisions as a captive customer. The company cannot really interfere with these units' preference of OEM customers. Their strategy is somewhat justified in this situation. This is because OEM customers can address other suppliers, in comparison with AM Marketing.

The company's manufacturing divisions are practically obliged to make OEM customers their priority. This is because these customers ca address other suppliers in case Tru-Fit Parts manufacturing divisions are unable to provide suitable products at price levels that are in accordance with their possibilities.

When such a situation occurs, product differentiation is taken into consideration. In other words, when price differentiation is high, it means that customers are more likely to pay higher prices for the products they intend to purchase. This is useful for suppliers because they can create and maintain a balance regarding high prices.

However, this does not help AM Marketing. This is because AM Marketing is not allowed to sell competitors' products. Therefore, there is little coercion that AM Marketing can exert on the manufacturing divisions.

The company's top managers cannot change the situation of AM Marketing, since the division can only sell the company's products. Also, manufacturing divisions are not applying the wrong strategy when focusing their activity around OEM customers. This is because their profitability and financial performance relies on these customers.

Given the competition in the field, the manufacturing divisions must create competitive advantage in order to develop and maintain a significant customer base. In order to reach such a status, manufacturing divisions must meet a series of requirements of OEM customers.

This means that manufacturing divisions must provide high quality products and services, the prices must be established in accordance with the products' quality, with customers' possibilities, and with the prices practiced by the company's competitors.

The manufacturing divisions are organized as profit centers, which means they are allowed to develop and implemented their own customer and sales strategy, with the condition of aligning these strategies with the general strategy of the company. It is more profitable for them to address the needs of OEM customers sometimes in the detriment of AM Manufacturing.

It is the top management's decision to not allow AM Marketing to sell other companies' products. Therefore, if the top management decides that the manufacturing divisions are discriminating AM Manufacturing, the managers can change the situation by allowing the division to sell certain products of other companies, based on a series of conditions agreed by the company and by AM Manufacturing.

Another issue that the company's top management must address is represented by the inventory situation. Given the fact that inventories within the company are considered to be excessive by the controller, it seems that the company is not able to develop and implement a suitable inventory strategy.

It is not defective inventory management if the divisions conduct excessive inventory. This is because this way, the divisions guarantee that their stocks are in accordance with customers' demands. Even so, the fact that these divisions conduct inventories that often, denotes inefficiency regarding inventory management.

In order to increase the efficiency of inventory management, it is recommended that the top managers address the principle of inventory proportionality when developing and implementing the inventory system. Such an inventory managements is based on demand.

This principle is represented by the fact that the amount of time spent on conducting the inventory on a category of products is used for the inventory of all other goods produced by the company. This means that products run outs will take place at the same time. This helps reduce excess inventory. The financial resources resulted from this cost reduction can be reallocated in other areas.