Edward Jones started the Jones Company Limited (JCL) as a sole proprietorship. It was later incor- porated;

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Edward Jones started the Jones Company Limited (JCL) as a sole proprietorship. It was later incor- porated; ownership is now 50 percent controlled by Mr. Jones, who is 71 years old, and 25 percent each by his sons, John and Carl.

JCL started 30 years ago with a single lumber- yard in Sleepyside. Edward later expanded into nearby towns and recently two more lumberyards were added — another in Sleepyside. Currently, there are eight lumbeiyards selling Jumber and building materials. Approximately 85 percent of the sales are to retail customers while the remaining sales go to approximately 75 contractors.

John Jones went to work toy his father’s lum- beryard business directly after high school. In 15 years, he worked hard in almost all positions in the business, and became knowledgeable, liked, and respected by essentially all employees. Five years ago, John received the title of general manager of the lumbeiyard division.

Carl Jones, after studying mechanical engineer- ing at a university, worked for four years with a firm of consulting engineers located in another city. Six years ago, Edward established a separate division of JCL that manufactures construction lumber. Because he wanted both of his sons to be involved in the family business, Edward offered to Carl the position of general manager of this newly established manufacturing division. Carl immedi- ately accepted. Initially, this division produced lum- ber only for JCL’s lumberyard; however, after four years, the manufacturing division expanded and started selling to wholesalers and other retailers.

Recent Events

In recent months, Edward Jones has begun to realize that management at JCL requires some changes to improve efficiency and effectiYeness, His first impression is that control needs improvement, but he is aware of his own bias, and thus, admits the problems may be more extensive than he rec- ognizes. Specific recent events have influenced him. For one, suppliers, employees, and customeis have

been complaining that it takes too long for JCL and its divisions to “get things done.” Dissatisfied customers say JCL has become too big for the old way of management.

There have aJso been suggestions that the president’s large workload leads to bottlenecks. Employees have levelled increasing criticism at the organization’s reporting structure. Exhibit 1 shows the president's version of the organization struc- ture.

In the past year, sorrie long-term customers have stopped dealing with the lumberyard division and have taken their contractor requirements to other dealers. The most common explanation given by the customers upon moving their business is that JCL cannot guarantee delivery dates.

There has been substantial and constant dis- agreement on the transfer price at which the manufacturing division sells to the lumberyard divi- sion. It is uncertain whether this is the cause of the lumberyard division's declining profitability or whether geographical expansion is to blame. There is concern about the manufacturing division’s finan- cial profitability. The organization’s profitability is difficult to verify because of the substantial sales made to the lumberyard division at a different price than market.

The manufacturing division is unsure if its pri- mary purpose is to provide lumber to the lumber- yard division, or to operate as an independent profit centre that also sells to a sister division. Similarly, the lumberyard division is unsure if its primary purpose is to provide a retail outlet for the manufacturing division’s output or to maximize its profit potential as a lumber and building mate- rials retailer and contractor supplier.

Unexpectedly, a Sleepyside developer offered to purchase the land that the main Sleepyside lum- beryard occupies, and to relocate the lumbeiyard to another comparable site. In exchange for the present site, the developer has offered to provide a larger lot in another part of town, to build a comparable store, move all shelving, racking and

inventory to the new facility, and pay $5 million. Exhibit 2 shows the estimated net income and amortization for each site. The offer has been out- standing for eight months; the developer wants an acceptance within a month or it will be withdrawn.

Some of these problems have been festering for years. Many have become aggravated to such an extent that something must be done soon to preserve the viability of JCL.

The New Corporate ConttoIlet

To obtain better control, ICL has hired you as the corporate controller, reporting to the president. Your duties include develop›•8. mplementing, and administering financial reporting and budgeting sys- tems. Also, you are the treasurer.

During your first week, you discussed some high priority projects with the president. For one, the president wants an assessment of the financial report ng d budge ng s tems, and recommenda- tions for improvements. As part of his concern

with reporting, the president wonders if the present organization structure is appropriate and where responsibilities for financial reporting and budget- ing should be placed.

You and the president had lunch with one of his friends who had enthusiastically explained the advantages of strategic planning for improving a firm's performance. You had concurred with the opinion that strategic planning would be beneficial to ICL. In private, you told the president that you would later explain the advantages ofstrafec planning for JCL. The president believes strategic planning can help with the current problems.

There are two specific requirements that the president also wants you to address. You have been asked:

To determine whether the developer's offer to swap land is sufficiently attractive to accept. Exhibit 2 describes the offer. (The president said the company’s cost of capital is approximately 15%,)
To determine what the lumbeiyard division would have paid under market conditions for lumber from the manufacturing division. Recom- mend a better method for setting the try nsfer price, if one exists.

You want to address JCL’s current difficulties within your first month at your new job. You decided to spend a week interviewing all persons reporting to the president and reviewing relevant documents. Exhibit 3 shows the guide you used to conduct the interviews. The document review included all relevant studies, statistics, financial statements, and operating reports.

Performance, Reporting and Budgetlng

With your interviews and document reviews, you gained a better appreciation of JCL and its divisions.

Many managers said that the firm does not have a clear understanding of where it is going with its divisions, and consequently, decision mak- ing is difficult.

In recent years, profits .of the divisions have declined, as noted in the tables of Exhibit 4. For the lumbeiyard division, the decline persisted after adjustment for changes in sales mix. That is, the division increased the proportion of its sales going to high profit, non-lumber merchandise after 1997.

There is general agreement among managers that the financial reports are reliable, timely, and accurate in reporting revenue and expense items.

Three reports are prepared monthly: a profit and loss statement for each division and one for JCL The balance sheets and statements of sources and applications of funds are prepared annually by an outside accountant. Financial statements for 2001 are presented in Exhibits 5, 6, and 7.

The commitment accounting system in use by both divisions is particularly useful in keeping expenditures within budget because it recognizes committed expenses when purchase orders are placed. As well, on the profit and loss statement, a separate column records committed amounts. The total of commitments and expenditures deter- mines what is left of a budget. Payment of an invoice cancels its commitment.

The manufacturing division’s direct costing sys- tem is simple and well understood. The mill man- ager has asked whether he should record “down time” and “paid but not worked time” as su8ze S _e by an article he read. Currently, the coding does not separately identify these items.

The annual budgets are concerned with expen- diture control. One manager glibly said “I could stay within the budget and achieve nothing. No one would know or care.” Peformance is mea- sured by salesp Managers were vague when asked about objectives, performance measures and priori- ties. JCL’s managers do not complete their budgets until late March, nearly three months after the start of the new year.

The president approves all purchase orders of more than $200 and the hiring of all employees. This has led to the hoarding of inventory and employees, and has reduced the flexibility with which each division can alter these resources. Moreover, the president often initiates or approves expenditures. He thus bypasses the budgetary pro- cess and the general managers who are responsible for achieving the budgets.

There is a duplication of responsibilities between the president and the general managers. Profitability is the responsibility of the respec- tive general manager. However, many divisional employees report to the president, or in other cases, there is confusion over reporting relation- ships. In addition, the president makes many deci- sions that the general managers think they should make, e.g., vacation schedules. There are personal- ity problems in each division, detracting from smooth operations. A typical example is that three times the manufacturing mill shut down due to a lack of logs; conflict between the manufacturing division’s purchasing manager and its mill manager caused the shutdown.

The president has the heaviest workload of all managers. With JCL’s growth, this workload means that those things that once were done immediately now take days to complete. This lag delays purchase order approvals. Managers below the level of general maRa 8e • tlre unhappy with the limited scope allowed them in carrying out their 'esponsibilities. The result is a higher rate of turn- over among managers in the lumber division than that experienced by competitors; the comparison data comes from the Retail Lumber Dealers Asso- ciation, Moreover, the high rate demands considerable employee and management time devoted to recruitment and training of replacements.

There are frequent quality and quantity dif- ferences between what the lumbeiyard division ordered from the manufacturing division and what it received. Moreover, the timing of shipments is unpredictable. Because of these difficulties, the lumbeiyard divison has at times had to purchase lumber at h(igher pzlcei from competitors in situa- tions in order to meet delivery commitments.

There is a lack of regularly reported informa- tion (e.g., sales per salesperson, deliveries per driver, labour hours per thousand board feet, etc.) pertaining to efficiency and effectiveness.

The manufacturing division sells lumber to the lumbeiyard division for direct cost plus a 25 percent markup. On average, this transfer price is higher than the market, and has become increasingly higher during the last two years. A telephone interview with the executive director of the provincial Retail Lumber Dealers Associa- tion confirmed the lumbeiyard division general mana8e * S il llegation that the pricing of large long- term contracts is at a discount from the spot market, usually 5 percent. The following table shows thèse details:

“Sales turnover” (sales / assets) for the lumber- yard division has changed in recent years. A surrey has shown that competitors have also experienced a change in sales turnover during the same years. The table below shows the patterns:

Tire main lumberyard in Sleepyside had recently entered the contracting business. The prof- itability of these ventures has been minimal. Profits would have been even less had Reg Smith, the main Sleepyside store manager and JCL’s first employee, applied the standard contractor discount of 20 percent to lumber sold to the ventures. Lower costs made some projects profitable.

The sales to contractors by the lumberyard division have decreased as a percent of total sales and in constant dollar terms during the last five years. However, retail sales have been growing at a faster rate than the industry average. Manufac- turing division sales have also been growing at a more rapid rate than experienced by the industry. This is a result of lumber quality and sales pene- tration of new markets.

In the manufacturing division, the sales depart- ment frequently initiates special orders of lumber. The mill manager claims that these oi’ders are more expensive than regular production and has repeatedly asked for recognition of this in pricing.

Required: You, as the corporate controller, must prepare a concise, well-written report to the presi- dent of your investigation in which you highlight and analyse those areas of JCL that need manage- ment attention. Your report should include practi- cal recommendations for management action,