___________________ Groupe HEC _________________

Original author : H. JORDAN

English version : M. LEBAS
C-1153-k-93 (96 version)
_______________________________________________________
Ce document ne peut tre utilis, cd ou reproduit sans l'autorisation du Groupe HEC
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Socit des lments prfabriqus (S.E.P.)

Socit des Elments Prfabriqus (SEP) was established in 1970 in Beauvais, 80 km north of
Paris. SEP manufactures two types of aluminium based products: prefabricated partitions and
windows and window and door frames.

SEP products are available in all standard sizes (about 30 sizes for each product) but can be
manufactured to customers' specifications if the order is sufficiently large.

The products are sold to building contractors, large and small, operating in almost every part
of continental France. SEP's partitions and windows and door frames are used for single
family units, apartment complexes and for public buildings such as hospitals, schools and
offices.

In 1982 a decentralized regional organisation was introduced with 6 independent plants and 8
regions for sales and physical distribution.

The headquarters, located in a modern building next to the Beauvais factory contains the
office of the President and those of the various functional Vice Presidents :

Technical Vice President, in charge of the R & D activities, new products, new plants and
production facilities, purchasing and quality control;

Personnel Vice President;

Marketing Vice President in charge of the economic analysis unit, the market research
department, and public relations;

Finance Vice President heading the Administrative department as well as the Treasurer's
office, the Management Control department and the Accounting and EDP department.

Each Vice President is in continual contact with all plants and regional managers. These,
however, report directly to the President. Over the years several conflicts have arisen between
the Technical Vice President and plant managers, and between the Marketing Vice President
and regional managers.

Each time the President has ruled in favor of the plant or sales managers in order to reinforce
the decentralization policy introduced in 1982.

MANUFACTURING

Prefabricated partitions are manufactured in plants located in Beauvais, Dijon and Toulouse.
Partitions are made of panels of compressed rockwool sandwiched between plaster-board and
framed by U-shaped aluminium stripping.

Windows and window and door frames are manufactured in plants located in Beauvais,
Valenciennes and Fos-sur-Mer (see exhibit 1).
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Each plant can supply any regional sales office. Costs of transportation have tended to limit
deliveries, except in a crunch, to the two or three sales offices closest to each plant.

Each plant prepares a monthly production schedule in November for the next year. Output
levels are based on seasonality of demand and forecasted demand formulated by each regional
sales office and the Marketing Vice President's office. Since demand is difficult to forecast,
each plant uses inventory build-up to smooth production.

Inventories are included in the plant performance evaluation. Plant managers have complained
often about that fact. They feel the existence of the inventory really originates in the inability
of the sales managers to accurately forecast demand. Plant managers feel inventories could be
reduced greatly if the sales staff were doing their job properly. On the other hand the President
has continuously maintained that sufficient inventories should be carried in order to meet the
tight delivery schedules required by customers, and to compete effectively.

The corporate purchasing department negotiates directly with suppliers the annual conditions
for providing the raw materials to the plants. Each plant manager draws the raw materials
needed from the suppliers with two weeks lead time and certain minimum quantities per
delivery. The corporate purchasing department continuously seeks new materials and new
suppliers to reduce costs.

New equipment or modifications to the manufacturing processes generally originate from the
Technical Vice President's office, but managers often make suggestions which are
implemented whenever appropriate.

REGIONAL ORGANIZATION

Since 1982 the French Territory has been partitioned into 8 regions (see exhibit 1). Each
region sells both types of products. Each regional office has a sales department which
transports the products from the plants to the delivery points. The region "acquires" the
products from the plant where they are available and delivers them to the appropriate
building-site according to the schedule provided by the customer. The region purchases the
production from each plant at a predetermined "transfer price" aimed at giving a small
positive margin to the plant.

PHYSICAL DISTRIBUTION

Each Physical Distribution department operates its own fleet of trucks. The regional logistics
departments organize the planning of all movements of their fleet.

Several times, studies have been conducted to evaluate the economics of subcontracting
physical distribution. Each time, even though it appeared to be less costly, this activity had not
been subcontracted because of the Marketing Vice President's vigorously argued view of the
importance of extremely flexible delivery schedules to meet customers' specific needs and the
importance of careful handling of the products at the delivery site.
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Each Physical Distribution Department operates its own garage where all fleet maintenance
operations are performed.

When required, such as in peak demand periods or in case of equipment failure, the
Department can hire outside carriers. Despite the cost, these short term contracts are quite
common and cause tension between the distribution manager and the sales manager.

The distribution manager complains about the inability of Sales to forecast delivery dates
beyond a fortnight, thus not allowing for optimal sizing of the fleet.

Capital investment in the fleet is under the authority of the Regional manager.

The Physical Distribution Department bills the Sales Department for transportation cost at a
predetermined rate per km, regardless of whether the transport was subcontracted or not. This
predetermined rate is supposed to provide the Physical Distribution Department a small
positive margin over its budgeted direct costs.

SALES DEPARTMENT

This department handles all commercial activities within the regional territory.

Salespersons have a standard schedule specifying minimum and maximum sales prices. It is
each salesperson's responsibility to negotiate the actual sales price as long as he/she does not
go below the minimum price. Each salesperson negotiates his/her sales objective each year
with the regional manager. This sales objective is expressed in terms of quantities valued at
the minimum sales price plus 5%. The sales target must be met both in physical quantities and
in value. Salespersons receive the indirect support of the Marketing Department which
organizes the marketing and promotional campaigns, both regionally and nationally.
Salespersons can also request that targeted market research projects be carried out by
headquarters.

In order to meet their objectives, salespersons use rebates and credit extensions. The Finance
Vice President constantly argues with the regions not to go beyond the 60 days credit period
which is customary in the trade. Salespersons complain that such a rule is an infringement of
the decentralization philosophy and actual average credit-periods vary between 56 and 92
days.

Salespersons transmit the orders taken to the regional office where they are compiled by
delivery dates. The regional office then assigns orders to each plant according to location of
the delivery point, availability of goods, or production capacity, and informs the Physical
Distribution Department of the tentative delivery schedule.

The final delivery schedule is not established more than two weeks before the actual delivery
dates because of possible order modifications requested by customers in order to meet the
actual progress of work on their building-site.
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The transfer price paid by the region to the plants is always a source of conflicts. The sales
people resent having to generate all the margin that will cover headquarters costs as well as
profit.

All transfer prices are negotiated when the budget is established in November each year. The
Controller complains about the lack of understanding of accounting by most parties and feels
there is little real negotiation in that he is the one who finally determines the transfer prices.

QUESTIONS

1. Draw the formal and informal organization chart of the SEP, as you perceive it from
the above description.

2. Identify the effective responsibilities of the various line executives: Regional Manager,
Sales Manager, Physical Distribution Manager, Plant Manager.

a) What variables (assets, cost elements or revenue elements) are under their control?

b) What are the dependency relationship which connect these executives? How can
each manager affect the results of the others?

3. What are the key variables of success for SEP? Is the current organization chart
coherent with these key-variables?

4. Using the analysis in the questions above, what are the benefits and problems of the
existing performance measurement and reward system.

5. Using the information in the case and in exhibits 2, 3 and 4, what kind of performance
measures do you feel would be most appropriate for each manager?
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EXHIBIT 1

LOCATION OF PLANTS AND REGIONS

Regional headquarters
1 Beauvais 5 Lyon
2 Lille 6 Marseille
3 Dijon 7 Toulouse
4 Nancy 8 Bourges
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EXHIBIT 2

PREFABRICATED PARTITIONS
250 x 400 model
DIJON Plant

ACTUAL "INCOME STATEMENT" FOR FISCAL YEAR 1995 (all figures in Euros)

Sales to regions 3, 4 and 5 Euros 5 520 000 (92 000 pieces x 60 Euros)

Increase in inventory + 222 800 (4 000 pieces x 55.7 Euros)

(at full manufacturing cost)
Raw materials consumed - 2 300 000

Labor costs (for 96 000 pieces) - 1 800 000

Energy - 400 000

Plant overhead - 700 000 (applied on the basis of labor hours)

Plant depreciation overhead - 150 000 (applied on the basis of machine hours)

Product manufacturing margin Euros 392 800

- Average inventory of raw materials and components for all models of prefabricated
partitions: Euros 900 000 (about 1 month of production)

- Average inventory of the 250 x 400 model partition (at full manufacturing cost):
8 000 pieces at 55.7 = Euros 445 600

- Gross value of plant and equipment: Euros 7 500 000

- Annual allowance for depreciation: Euros 750 000

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EXHIBIT 3

NANCY REGION
PHYSICAL DISTRIBUTION DEPARTMENT
ACTUAL "INCOME STATEMENT" FOR FISCAL YEAR 1995
(all figures in Euros)

For 250 x 400 model partition

Sales (to Sales Dept) Euros 2 450 000 (35 000 pieces at Euros 70 each)

Cost of goods sold - 2 100 000 (535 000 pieces at Euros 60 each)

Product gross distribution margin 350 000

For all partition models and all window and door frames

Sum of Product gross distrib margins Euros 2 500 000

Labor (Drivers and dock hands) - 1 125 000

Fuel and tires - 600 000

Maintenance (labor, parts, OH, etc.) - 250 000

Allowance for depreciation of the fleet - 300 000

Distribution margin Euros 225 000

Gross value of the truck fleet Euros 1 500 000

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EXHIBIT 4

NANCY REGION
SALES DEPARTMENT
ACTUAL "INCOME STATEMENT" FOR FISCAL YEAR 1995
(all figures are in Euros)

For the 250 x 400 model partition

Sales Euros 2 625 000 (35 000 pieces at Euros 75 each)

Cost of goods sold - 2 450 000

Discount granted - 82 500

Sales commissions (2%) - 50 850

Product gross margin Euros 41 650

For all partition models and all window and door frames

Sum of Product gross margins 300 000

Salespersons fixed costs 140 000

Sales administration labor cost 100 000

Local promotional expenses 50 000

Net sales margin 10 000

Average credit collection period 78 days

Average receivables Euros 3 900 000