Berkshire Case Study

3.      Evaluate KCC’s new performance measurement and incentive system. Assuming that KCC will retain its new divisionalized organization structure, what changes would you recommend, if any? Why?

Under the functional organization (EXISTING) VPs of sales, supply chain and finance and administration, staff managers responsible for advertising and research and development reported to cofounders Krantz and Wentworth. Essentially, the main decisions were still made by the cofounders.

After the divisionalization (NEW), the main responsibilities are split between:

1. top management and corporate staff and
2. (ii) divisions’ management (i.e. Retail Product division and Custom Product division).

The main goal is to give the Divisions’ management more responsibilities and focus over the control of costs and sale organization of specific line of products and strictly to follow the gross margin. These profit centers, strictly speaking, are incomplete profit centers since they are responsible for only several lines of costs in the income statement such as COGS, advertising and promotion, but not responsible for other lines of cost such as R&D, supply chain, etc.

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With the transition to Product Division Structure the authority for making some decisions will be pushed down to divisions. Some of the key decisions worth analyzing are:

1. Investment decisions: - What investments to make? How to finance the investments? What criteria the proposed investments will have to meet in order to be approved? The Product Divisions will function as profit centers with no authority on making decisions regarding the investments. Taking into account the considerable resources needed for investments it is wise for KCC top management to keep it under tight control.

2. Production decisions: What products to manufacture/develop? Under the new organizational structure the Divisions Managers have the authority to decide what products to manufacture. As stated in the case out of the 1500 SKU produced only 40SKU make up 85%-to 90% of sales. The divisions can concentrate on quality of sales and decide to produce the SKU that are best sold (great margins and big volume). What inventory level to maintain? Product Division will decide on inventory levels needed based on production cycles and forecasted sales. Division will decide on the minimum inventory level for a purchase order to be initiated and a minimum level of available for sale products. This is applicable more for retail division. Custom division works with specific quantities and delivery terms.   

3. Staffing Decisions: Divisions will have the authority to decide on staffing. How many employees needed and if on division advantage – services less costly or of superior quality the divisions have the authority to outsource.

4. Purchasing decisions: What vendors to use? Supply Chain function under new organizational structure will still be a corporate function that will be shared be divisions. Supply Chain is responsible for obtaining and maintaining an adequate vendor group. The divisions had responsibility only for placing orders with the agreed vendors.

5. How to advertise? The product specific advertising will be decided at division level. The advertising of KCC brand “Fold-it!” and brand image creation will fall under the corporate responsibility.

6. Engineering Design and R&D: Decisions related to Engineering Design and R&D will be made at corporate level. “Although most ideas for new products come from division managers and their sales peoples in the field” nothing can be done without Ken Simons “blessing”. Divisions will share the function and expenses will be allocated based on some relevant cost drivers like number of hours of service.