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    BADM 4280 Case # 5 PDF

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    Judy1928

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    © All Rights Reserved
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    of 8
    Opies Fret Ceten 201 case 5:2 North Country Auto, Inc. ‘George ©. Liddy, part owner of North Country Aut, Ine, was fesing pretty {ood about the new sootoleyetame reenty putin pac Tor his Sve dope ‘ent managor (new and usd cereals, service, body, and parts departments) Exhibit 1 doreribes each department Mr Liddy strongly believed inthe cacept of evaloatng exch deprtmentindividully aaa profit center But he lca rage nnod the challenge of geting his managers “buy ito te aystem by work ‘ng together forthe good of the dealership. Background North Country Auto Inc, was a franchitod dealer and fectory-authorized tervice center for Ford, Saab, and Volkswagen. Multiple fanchies were be Coming more common inthe 1980s. But the value of multiple franchises id fot come without eorts Each ofthe three mamafaturers used « diferent Computerized ayttem for trecking inventory and placing new orders. They ‘lio required their dealerships to maintain an adequate servic flit with 1 re of trained techailans thet, In tua, nesselttod carving an Inve ‘ory of parte to be used in repairs. Exhibit 2 pes balance showt dats with broakout of investment foreach produt lin. Nerth Country also operated a body shop, end in mid-1980 opened a “whle yous” ol change servic for fay make of vehicle "The dealership woe situated in an upttta Now York town wih a population about 20,000, Tt orved bro nearby tows abou 4000 peoples well aa rue reas covering 20 mile radi, North Country began operntlene in 1968, andin 1963 maved one male down the road tots current Sacre lot, 25,000 squere‘cot. fc [ewan owned as eoxpoation by Gsorgo Liddy and Andrew Jonas, who sere both equally active in dsytaeday operations Mi. Liddy purchased an in- {eres in the daslership fom a previous parmor n 1988. Mr Jones had been art owner sings the star of tie burnees Wheres Mir, Lie ocaned hit ener- {Geson ae and use er sales, Mr, Jone eancentated on managing Ue parts, ‘Serie, and body shop departmonts—commony refered toa the “back ent of delet ‘The owners were determined to muitain a pritable back end as « hedge gaint depromed sles and lower margins in veices sees. In an industry ‘Sharncteried by aggreasive discounting fueled bya combination ofhigh inven {orien a more edueated consumer, and a proliferation of new entrants, altcr- hutive sources of cash fow were crucial Industy analysta were eating that fewer than 6 persent of the deters nthe US would make x profit on new tr aus ia 1000, Overall net profit margins wereexpacted tal below 1 per= fat ot calee (Phe Wall Straet Journal, Decor 3, 1600, “scatman Ma oon 50 dere ssperon tes eh Fe, ya's Te hs hon of eas ors Dano clog EXHIBIT 1 matey Auto, ne~The Departmental Skructare ‘New Car Ses nd Used Cr Sales “Thee and ued car depareent eb ses manager. They sare si sespzons. natn, these ‘perma hored a ce mange end ek Themarages wre pl fat sh, ps find san pet ‘ew nd vice idan’ preotage oth deparnents gros pre (eles assess cot ‘Frese 4). When the ona ana the managers agreed onal it oume and margin goa the Gotu wants wer storia each parton apponatay ove ole maage’s expres fo ‘Seana. The owners came Wats pul dul eerve bons vcr lowed the manages ‘ey fn txgetng margin and volume George day malted te mains meow te eh opoge Gn jt fue fap vekenes ne ees arenas pn sy sae ry ope any ‘Getephips ti tvearen were changing ile compenaon toa fat lay puss paral commision on ros pros geet, “The He cases manager na expanse fo recomencing to Uy en mel rer an ventory rn ang th vee proce! nese sla ed the auton) to spprove ming pcesand voce slowancet Grasomer vnsctens Tle the ew cat manage as alowed to Pande! the aden at Bue book oer te er war ob Yovy Below average gully the wsed is Sipura mas ated ft Ue ‘rte vaue The id ear manages vas espa consume ik ol ed ca veto rough [gg ed ling ured whic a ole nto 20s “he sence department copied ove: al of he bung sabi stare otge sd was the mos abor ‘hana operon Sees comprane 11 Bas wh yrs Is ov of hich suede theo change ‘pata, The deparonent employed ¢marage 10teclcan 3 vere machans, 2 counter Ga, Fe Sic dr The marapr vas pls tsa sa bonus on Ue primes rs prof on bo: ‘ies bed (Computed aber dolae bed ins tral wager of abe techies ana meas. Sevice ‘evens Consta of abr ony Ne mrp parts wa feniegby aie purer. The bons porto ‘ns panna to approx 50 perf i San The ean chanics and Cs wer ple tots, eres of ecu Sours ned he etncane aque pel arr to peter cory ‘oredr on eh ofthe specie lnes Seng a tecelian osha ot bout $4,000 vera wo-yar pete. The ones enated his ew Wire coud cor x mucha 1900 bole overané on sro bs where remburerert nts ited standard lows tor hers Of be Tacs 4 were ‘ria for or for Sav, 93 x Vowagen George Uy and fee es coed redchg the cote ine by cotaning, bt were vee to ks of trnoer Tieng high sled abo. ‘Robsing cons cod spe when one peson a “The pray sores sees Geptran enue ware waranty mantranc a ea wok, natant ateranct a ep won Sed ca Fecanatonng, arte ol change operation ‘Maran etwas ised by be faces a ther rescbed Hoo aes wich Were ypc 3 Truc ms 20 pce en the ae charged dnt foxnonwaray werk Lower mains ah ‘ran wot were» pens] olen fo the dae they dsuvced he serve manage row ‘vee pre src te ec buyer Daring tne pear apactywazaon, te maage woud ‘etmobaled 0 rhedle higher magn somwaranty Jobs Bm poe @ warent wo “The pus departent conse ola manage ves tock tegpan and to ces, Th pars anager was pd tly ps bona on paramere gto profs Compe 0 tel pars so les x of par). The pats Iranapr os resprdle fr eacng pars ivenay or tre nes a nig oth caring cos hd “Susescnte” The purer eed absescence 99 pt tock Nat was no soln ove Af ay ested tara 25 perce of Ue parton hassel tots eategoy, Os sel ot Fars Gverery armor) sveraged 10 cpr for the nn. The manage had to eon expr on he eur ately toe eaerens and scanday ara of tree Gent si vealed Ineo rercandi. was (contmeet eS Pf Contre 208 EXHIBIT 1 concluded) ‘the ts managers et se lacy rem ee mos eect and deny aude whee epporunies oa tominimielage wie conn. acl wnoataer WOU py sich or 88 paren of her coa ora pane ‘eran fr parts was derived alos completa rm ther departs. Dlr ies ee pars ‘ole don ok $0 pecnt ough seve, 3 peter veugh the bay shop, 10 pecan whole, {510 prcent ov counter rel. iro sevice Wo, pars eden Warn were mere bud ‘States sch as 2p shan res aged or nonworany work Body shop “Tey sop cons of a manager, ee tecnica and cer The manoge Sethe ots was ade {ately pura bonuton depart pera, To tae Ye shop buses ne ang Noth County A pedo investan ana $50,000 ne sry paling erlpren As Rs, he boy ap ae ‘honing alos afer aeaton hed overhead. Gros magi ar ghar 60 pean cold be iahed bit mort ard hide dag beyond estates area velar Go lt to 40 pcr change Operation ‘The desis’ ol chunge snes opted under henna Fach “Qwic Change ago wing oe tay nthe serve department ana ene lt semble mechan: Vue averaged 68 ange pet week ‘he opwraton was pol evauad as an independent prot contr bt ts rests ling une apelh ‘he service cparenr. The al change ahve pa fora equa: educate leis ove ocean 5900; tur dt ub, tet parse the ranch te delchip ace abut $10.00 on each ol change prced at $21.95, 7he onmer vr wing 0 deve on exes ay Os open Fesime waar EXHIBIT2 Ralasce Sheet NOHTH COUNTRY AUTO INC false het aber 311589 k “tothe a abt nd ey ee nt 332 pecamspabie sn esis BS Netpoei Shape SSceimeroy 2 Ungeemeas z Me Wilmer occ 2» Feramenn) 7 Tool iaies wm Ged oe z Bi Spm 2 Wipe B Podge a yop Sct enity Sleecor ses © Commonsoc. 5 «0 fan ering 2s Proper &eqdpnnt_Ne ss rim em) peer Bata 3 George Liddy’s Challenge ‘afore Gcorge Liddy bought into the deslership al the departments porated a5 part a oe business Depertment managers were pel salaries and yar end bonus determined atthe owners discretion basad on overall els for the ‘year ands eubjective appraisal ofeach manage. (George Liddy belived ths system did nat provide proper motivatioc forthe manager. Ho believed in decentralized proft contre and perfrmancebased ‘impensation as superior models af ctrl. He inttrosted each of his depar mental manager (new, eed servic, body, and parts) tronhisher deparinet asifitwerean independent business. He knew thatthe wuss ofthe pid cn ter cuatro yatem vas dependent upon th support of his manager. Thy mst ‘understand Use rationale for aloeting costs to thei departments and blows ‘hat they hed reasonable control over profitability The managers borases in i 1869 wercalulated on the base of departmental gross profits Expense below i i the gross profitine werent considered nth bone calolation, They wee ealy told na statement cutlning thelr responsibilities, to exerdeejudieuscontal over dserstionary expenses" Implementing a more comprehensive catols- tea ied actual dapertmantal ne praia would require that Liddy bee own ‘costs traditionally regarded as goneral overhead int separate neve sect tad with specifidopartments. His strategy wit the managers involveda gre tal phasing in over he next few years ofa almtfullcat allocation system, ‘where ends department manager woold eventually have respon forall ‘ontolale cots incurred in the dopartment, Fixed expenses, such a neret ‘expense, would be alocatedby Liddy his own dcsions but wouldnothe used {in the managers bonus calculations. ‘The gradual changeover would slow Liddy, who wae new tothe delership, time to bacome more knowledgeable about the incrieacia of North Country ‘Auto's acounting records. He did no: want to lose eedbility because of per- ceived arbieary cost allocations. Exhibit 8 gives breakdown of department ; rofiailiy nan valostfl-cost bast Th addition to fading a way to effectively track departmental performance, ! George Liddy hed to devise sonable system for transfer prising. Though I Mr Liddy believed that each department at North Country theortialy could : operat as an indopendent business, he acknowledged that a complex interre- } lationship existed mong the prof esntea in the course of normal basness transactions. A rcont new vehicle purchase ustrater the potential pobleant that could write ‘Alex Walker, manager of the new car sles department, old a new ear for {$14,180. Tas purchase was fnanced by e cas down payment of 82000, ! {adodn allowance of $400, ands bank Ioan of $7,880. ‘The deler's it wes $1,420, which included factory price plus sales commision, Tho manager af the used cr sales dopartment, Amy Robbins examined the tradein vehi. The tredein hada wholetleguidebeok value of $3,510, The fuldebook, poblishod monthly, was, at best, « near estimate of ligation ‘value Actual values varied daly withthe supply-demand balance at axto ae ons, These varianess ould be we mush ae 10 percent ofthe book vale. Ms. Robbins believed that sho cou sll he trado-dn quickly a 85,000 nd earn good margin, so she chote to carry it in inventory instead of wholesaling Caper Pv Cenere 208 EXHIBIT Financial Statement NORTH COUNTRY AUTO| INE, exober 31,1989 (0 mont) (Dols Aguesin thousane) New Usd Series Bogy fare Sale. cette $6858 SIS 5 62 $28) 1417 rose Suhaen eat eate Siaeh eanihh ase aa Ninbetiiseicecrin ore)! | ame ep 9s de wise Drecrstingemmison Gaeivenhrr $36 $88 ne we “Oy Inet abo = ee ised sy eas) Tes Deparment adverisg os 3 0 8 3 oly Wor pars sens en & owl) Ee era 5 Spee vis

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