Abrams Company Case Study

September 17th, 2016

Muhamad Zakky Alif
Class of International Program 31
Lecturer: Supriyadi, M.Sc., C.M.A., Ph.D.
Master of Business Administration,
Universitas Gadjah Mada

Case Summary
Abrams Company is a manufacturer of parts for use in automobiles, trucks, buses and farm
equipment. They produce three major groups of parts: ignition, transmission and engine parts,
these products are sold to Original Equipment Manufacturers (OEMs) and wholesalers. The
wholesalers in turn resold the parts to aftermarket (AM).

Main Issue
Abrams had a product division for each of its three parts. The general manager of that
particular division was expected to earn a target return on investments (ROI). Each product had
its separate OEM sales department and major portion of the parts were sold to OEMs and the
remaining were sold to AM marketing division.
A plants ROI target was based on budgeted profit divided by actual beginning of the year net
assets. Each of the OEM sales department was expected to meet an annual sales revenue
target. According to Abrams executives , the factors critical to success in the OEM market were
the ability to design innovative and dependable parts, performance and weight specifications
etc. cost control was important because the market was price competitive. In the aftermath
market, availability of parts was most important factor.

Problem Statement
1. Evaluate each of the concerns expressed by top management, and if necessary, make
recommendations appropriate to the circumstances described in the case?
2. What is your overall evaluation of Abrams management control system? Describe any
strengths and weaknesses that you identified but did not include in answering the previous
question. What changes, if any would you recommend to top management?

Analysis of Solution Alternatives

Q1 : Evaluate each of the concerns expressed by top management, and if necessary, make
recommendations appropriate to the circumstances described in the case?

Top management was satisfied with the present management system and performance
measurements schemes but still three points were raised:
There was always a dispute over the transfer prices of parts sold by product divisions to
the AM division. Internal sales of parts were made at outside OEM market prices. So this
was not a problem as the market price was adjusted accordingly. However, problem
occurred when the part was being transferred to the AM division. So there was no market
price which was to be adjusted to calculate the transfer price.
Product division too often tended to treat the AM division as a captive customer. As when
AM division and an outside OEM customer were placing same demand, the plant always
favored OEM customer because OEM customer could take its business elsewhere but AM
division could not.
Both AM division and three product divisions carried excess inventories throughout the
year. All the divisions maintain excess inventory than what is required.
Q2 : What is your overall evaluation of Abrams management control system? Describe any
strengths and weaknesses that you identified but did not include in answering the
previous question. What changes, if any would you recommend to top management?
Abrams control system was very good. It was properly organized. Each division was managed
by the vice president and the general manager who was expected to earn a target return on
investments. They were also responsible for entire line pf parts to the AM wholesalers. It had
an incentive compensation plan. The higher the participants in the organizational hierarchy the
more the standard points he, she received. The market conditions were good which helped them
to face the competition.

Recommendation
1. The transfer price should be maintained for the plant at full cost because then it will
earn a certain profit margin also.
2. There should be proper control over the inventory level. The standards must be fixed
and every worker should produce till that standard only. Proper EOQ level must be
maintained.
3. AM division should not be taken as captive customer because ultimately when their
demand will not be fulfilled, this would be resulting in low performance of the company
itself.
4. The strengths were proper strategies were made, coordination was there. Advance
system was followed. The main factors responsible for the success were innovative
designs, parts that meet the customer quality, performance and the weight
specifications etc.
5. The weaknesses were that incentives should be given on the basis of the performance
not on the basis of the hierarchy.