JMJ Marist

Brothers
Notre Dame of Marbel University
Graduate School
Master in Business Administration (MBA) Program

Case Study 23-

Tru-Fit Parts, Inc.

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Case Analysis 23-1 Tru-Fit Parts, Inc.

I. Brief Summary of the Case

Tru-Fit Parts Inc., is a manufacturer of variety of parts for use in automobiles, trucks, buses and

farm equipment. Tru-Fit parts were sold both to original-equipment manufacturers (OEM

Market) and to wholesalers (the aftermarket or AM). Tru-Fit had manufacturing divisions of it’s

three product groupings (ignition parts, transmission parts and engine parts. Each plant of the

manufacturing division is treated as an investment center and responsible for not only

manufacturing parts but also for selling its parts to OEM market. Each manufacturing division

sold parts to the fourth division, AM Marketing that is solely responsible for marketing all Tru-

Fit Parts to AM wholesalers. The top management identified three areas of concern as follows:

a. Few disputes over transfer prices from the manufacturing division to AM Marketing.
b. AM Marketing is being treated as a “captive customer”.
c. Both AM Marketing and the three manufacturing division carried excessive inventories

most of the year.

II. CASE QUESTIONS

1. What would you recommend to top management regarding the three problems they

have identified?
A. Disputes on Transfer Price
Transfer price disputes usually occurs if the part is an AM part. The company

virtually does not have disputes on OEM products because they normally set the

transfer price based on previous or current OEM market price. The AM part do not

have these to establish the price.

 Recommendation:
  It is very important that transfer prices must be established to prevent disputes. It is

evident in the part of OEM products which rarely encounters this type of disputes

since they are able to establish their transfer price. It is recommended that if there

are no data in the three divisions to set the price, they might want to compare it with

other companies who have the same products as its benchmark. Another option is to

set the price by computing the costs in manufacturing plus a mark up price.

 Depending also on the culture of the organization, such disputes should be resolved 

with open communication like the three major divisions did (arbitration by corporate

controller) if the transfer price is not yet set.

B. Manufacturing divisions tended to treat AM Marketing as a “Captive Market”.

The Tru-Fit Management wanted to protect the overall image of the company by not

allowing the AM marketing to sell a competitor’s product. The three divisions would

tend to favor OEM customers or AM Marketing in times of stiff demand because they

believed that OEM customers can take their business elsewhere.

 Recommendation:
It is mentioned in the case that the sum of four divisions’ sales was about $1 billion

and $360 million is attributed by AM Marketing higher than the other three divisions.

The Tru-Fit Management clearly favors AM Marketing as being profitable increasing

its sales target from 45 percent to 50 percent. The recommendation is to make AM

Marketing be more favorable to the three divisions. They can do these by establishing

a competitive transfer price. The transfer price established can be added also with

other benefits to make it more appealing. The management can also give the decision

on how should the products be allocated to both OEM and AM when demand is very
 stiff and do not let the division favor more the OEM over AM. Although this might

contradict with the management goal of protecting its image by not allowing other

products or materials to be sold in the AM Market, they might want to consider AM

Marketing to buy outside or develop it’s own products to increase its sales. Another

recommendation is to let the other three divisions to cater not only to OEM customers

but be also opened to AM markets instead of only the AM Market division since all

the other three divisions have their own sales department.

C. Both AM Marketing and the three manufacturing division carried excessive

inventories most of the year.

 Recommendation:

I think that the problem is more on the production forecast of the company rather than

their generous Christmas vacations which they claimed brings down the inventory to the

desired level. I would recommend that a more accurate forecasting might be done. They

might want to review previous sales of the company as their basis on production. There

are various ways also to reduce inventory on warehouses like the JIT ordering of 

materials. There should also be good communication with OEM customers as to when

and how much orders are needed.

2. Are there any matters not mentioned by top management that you feel are

problematical?
I think that maybe the company would be open to the suggestion on opening the three

major divisions of the company to be open not only to OEM market but also to AM

Markets. I believed that this will strengthened more the revenue generating capacity of 
the whole company. They can reach out also to more customers with this. Another issue

is the incentive bonus plan. Although others might not agree and deemed that it is unfair

to make it more beneficial to those who are in the higher hierarchy, I do agree on this on

a certain point. Incentive bonus should be given on the basis that the company has

reached its target revenue at the end of the year. The bonus can be based on the salary of 

the employee. I definitely believed that those on the higher hierarchy of organizations

have more responsibilities and have gained experience hence should be rewarded

accordingly. I do agree also on the discretionary part of the Supervisors to accord 25%

upward on the bonus but not downward. This discretion should be given to the superiors

to reward employees who had clearly excelled in performing the job.