Harvard Case - Codman & Shurtleff, Inc.: Planning and Control System
"Codman & Shurtleff, Inc.: Planning and Control System" Harvard business case study is written by Robert Simons. It deals with the challenges in the field of Accounting. The case study is 17 page(s) long and it was first published on : May 1, 1987
At Fern Fort University, we recommend Codman & Shurtleff, Inc. (C&S) implement a comprehensive planning and control system that leverages activity-based costing (ABC) to improve cost allocation, enhance decision-making, and drive profitability. This system should be integrated with a robust performance management framework, encompassing financial and non-financial metrics, to ensure alignment with strategic goals and foster a culture of accountability.
2. Background
Codman & Shurtleff, Inc. (C&S) is a leading manufacturer of surgical instruments and implants, facing challenges in managing its diverse product portfolio and complex manufacturing processes. The company's existing cost accounting system, based on traditional volume-based allocation, fails to accurately capture the true cost of its products, hindering effective pricing decisions and profitability analysis. This situation is further exacerbated by the company's decentralized organizational structure, which creates inconsistencies in data collection and reporting.
The case study focuses on C&S's need to develop a more sophisticated planning and control system that can address these challenges. The company's leadership recognizes the importance of accurate cost information for strategic decision-making, performance measurement, and resource allocation.
3. Analysis of the Case Study
The case study highlights several key issues:
- Inaccurate Cost Allocation: The traditional cost accounting system, based on direct labor hours, does not accurately reflect the true cost of products, particularly those with high complexity and low volume. This leads to mispricing, suboptimal resource allocation, and difficulty in identifying profitable product lines.
- Limited Performance Measurement: The company's performance metrics are primarily financial, lacking non-financial indicators such as customer satisfaction, product quality, and employee engagement. This limits the ability to assess overall business performance and drive continuous improvement.
- Decentralized Structure: The decentralized organizational structure, while fostering innovation, creates challenges in data consistency and reporting, making it difficult to track performance across different divisions and product lines.
- Lack of Strategic Planning: The company lacks a formal strategic planning process, leading to inconsistent resource allocation and difficulty in aligning operational activities with long-term goals.
To address these issues, we propose a framework based on the following principles:
- Activity-Based Costing (ABC): This approach allocates costs based on activities performed, providing a more accurate picture of product costs and enabling better pricing decisions.
- Performance Management Framework: This framework integrates financial and non-financial metrics to provide a comprehensive view of business performance, fostering accountability and driving continuous improvement.
- Centralized Data Management: Implementing a centralized data management system will ensure data consistency and accuracy, facilitating effective decision-making and performance reporting.
- Strategic Planning Process: Developing a formal strategic planning process will ensure alignment between operational activities and long-term goals, driving resource allocation and investment decisions.
4. Recommendations
1. Implement Activity-Based Costing (ABC):
- Identify Key Activities: Conduct a thorough analysis of all activities involved in manufacturing and selling products, including design, engineering, production, marketing, and customer service.
- Allocate Costs to Activities: Assign costs to specific activities based on their resource consumption.
- Calculate Product Costs: Determine the cost of each product by allocating activity costs based on the resources consumed by each product.
- Develop Cost Drivers: Identify key cost drivers for each activity, such as machine hours, engineering hours, or customer service calls.
- Develop a Costing System: Implement a robust costing system that captures and tracks activity costs, enabling accurate product cost calculations.
2. Establish a Comprehensive Performance Management Framework:
- Define Key Performance Indicators (KPIs): Develop a set of KPIs that measure financial performance, customer satisfaction, product quality, employee engagement, and operational efficiency.
- Set Targets and Benchmarks: Establish clear targets and benchmarks for each KPI, based on industry best practices and internal goals.
- Track and Monitor Performance: Regularly track and monitor performance against KPIs, identifying areas for improvement and celebrating successes.
- Develop Performance Reports: Generate regular performance reports that provide insights into key performance areas and highlight areas requiring attention.
- Implement Incentive Programs: Align employee incentives with performance targets, motivating employees to achieve desired outcomes.
3. Centralize Data Management:
- Develop a Centralized Database: Implement a centralized data management system that integrates data from all divisions and departments.
- Standardize Data Collection and Reporting: Establish standardized data collection and reporting procedures to ensure consistency and accuracy.
- Invest in Data Analytics: Utilize data analytics tools to identify trends, patterns, and insights from collected data.
- Implement Data Security Measures: Ensure data security and confidentiality through appropriate access controls and encryption.
4. Develop a Strategic Planning Process:
- Define Vision and Mission: Clearly articulate the company's vision and mission, providing a framework for strategic decision-making.
- Conduct SWOT Analysis: Analyze the company's strengths, weaknesses, opportunities, and threats to identify strategic priorities.
- Set Strategic Goals: Develop specific, measurable, achievable, relevant, and time-bound (SMART) strategic goals aligned with the company's vision and mission.
- Develop Action Plans: Create detailed action plans for achieving each strategic goal, outlining key initiatives, responsibilities, and timelines.
- Monitor Progress and Adjust Plans: Regularly monitor progress against strategic goals and adjust plans as needed based on changing market conditions and internal performance.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The proposed planning and control system aligns with C&S's core competency in manufacturing high-quality surgical instruments and implants, while supporting its mission to improve patient outcomes.
- External Customers and Internal Clients: By improving cost accuracy and product pricing, the system will benefit both external customers and internal stakeholders, fostering stronger relationships and driving customer loyalty.
- Competitors: The proposed system will enable C&S to compete effectively in the highly competitive medical device industry by providing a clear understanding of product costs, facilitating optimal pricing strategies, and enhancing operational efficiency.
- Attractiveness: The proposed system is expected to generate significant financial benefits, including increased profitability, improved resource allocation, and better decision-making. The implementation of ABC will provide a more accurate picture of product costs, enabling C&S to optimize pricing strategies and identify profitable product lines.
- Assumptions: The success of these recommendations relies on the commitment of C&S's leadership to implement the proposed system, invest in necessary resources, and foster a culture of data-driven decision-making.
6. Conclusion
By implementing a comprehensive planning and control system that leverages ABC, enhances performance management, centralizes data management, and establishes a strategic planning process, Codman & Shurtleff, Inc. can achieve significant improvements in cost allocation, decision-making, and overall profitability. This will enable the company to compete effectively in the medical device market, drive innovation, and achieve sustainable growth.
7. Discussion
Other alternatives not selected include:
- Maintaining the existing cost accounting system: This option would be less costly to implement but would continue to provide inaccurate cost information, hindering effective decision-making and profitability analysis.
- Implementing a simpler cost accounting system: While less complex than ABC, this option may not provide the same level of accuracy and detail, limiting the benefits of improved cost allocation and decision-making.
The key risks associated with the proposed recommendations include:
- Resistance to change: Employees may resist the implementation of a new planning and control system, particularly if it involves changes to existing processes and procedures.
- Cost of implementation: Implementing a comprehensive system will require significant investment in technology, training, and ongoing maintenance.
- Data quality: Achieving accurate and consistent data is crucial for the success of the system.
The key assumptions underlying the recommendations are:
- Leadership commitment: The success of the implementation depends on the commitment of C&S's leadership to provide the necessary resources, support, and guidance.
- Employee buy-in: Employees must be willing to embrace the new system and participate in its implementation.
- Availability of data: Accurate and reliable data is essential for the effective functioning of the system.
8. Next Steps
The implementation of the proposed planning and control system should be phased in over a period of 12-18 months, with the following key milestones:
- Phase 1 (Months 1-6): Conduct a detailed analysis of current cost accounting practices and identify key activities. Develop a pilot ABC system for a select group of products.
- Phase 2 (Months 7-12): Roll out the ABC system to the entire product portfolio. Develop and implement a comprehensive performance management framework. Centralize data management and establish standardized reporting procedures.
- Phase 3 (Months 13-18): Integrate the new planning and control system with existing business processes. Develop a formal strategic planning process and align operational activities with long-term goals.
By following these steps, Codman & Shurtleff, Inc. can successfully implement a robust planning and control system that will drive profitability, enhance decision-making, and foster a culture of accountability.
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Case Description
Detailed description of the planning and control systems in use at Johnson & Johnson. Focuses on the actions of managers in one subsidiary in revising budget targets. Illustrates intensive strategic planning and financial planning process in a large, decentralized company. Includes interviews with the president and senior executives concerning benefits of the system. Raises issue of the role of formal control systems in decentralized organizations.
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