Case $1$ : CHALLENGING ASSUMPTIONS: WHAT CAN WE TAKE FOR GRANTED?

A well$-$known international firm started losing money for the first time in many years. A new chief executive took over the running of the company and set about trying to remedy the situation. He had learned in the past that good control over costs could reverse the fortunes of an ailing firm. His main assumptions were:

$1$ If it seemed cheaper to buy components than to produce them, the firm should buy them.

$2$ Making a resource work more is synonymous with more effective utilisation and hence should improve profitability.

$3$ Inventory should always be viewed as an asset.

$4$ Product cost is the main base for determining selling price.

His first job was getting cost estimates for each of the many thousands of parts made by the firm, along with the alternative cost of buying them. Every part that cost more to produce than to buy from outside was then outsourced. This was done, and the result was that total costs increased. A further review of the situation showed that many more parts could now be bought from outside more cheaply than they could be produced. So the decision was then made to outsource all component parts and not to produce any parts at all.

KARNAVATI

UNIVERSITY

The financial results still proved to be poor, so the chief executive decided to look at the operation of the assembly plants. He found that plants were only operating five days a week and for two shifts. His next ploy was to get them to operate for seven days a week and for three shifts, thereby making full utilisation of capacity. The result was that the inventory of stocks built up and the firm seemed to be making a larger net profit. After twelve months in the job, he seemed to have turned around the ailing firm. The directors of the company were pleased with his performance, and he received a bonus. His very next step, however, was to resign and leave the company

Questions

$1$ Can you explain why he left the company?