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CASE 14 Dennison Manufacturing International Growth opportunities are always accompanied by challenges, exclaimed the CEO of Dennison. She then went on to explain why you, a consultant, were hired. Dennison started business in the city of Waterloo in 1951 as a manufac- turer of televisions and electrical products. Television manufacturing was discontinued in the 1970s. Dennison remained in the electrical products business, which over time required it to enter many new markets. New products had to be constantly developed to maintain growth. The life of many of those products was short, and thus many products were exited after a few years. In addition, competition and the need to be cost effec- tive obliged Dennison to locate new plants in China and India, and to enter into outsourcing arrangements. Along the way, Dennison also acquired about 30 small manufacturing plants. The result has been that Dennison now has 36 plants worldwide. Systems integration attempts were a constant challenge because of acquisi- tions, outsourcing arrangements, and new product implementations. If there had been a uniform enterprise resource planning (ERP) system, the CEO said, there would have been fewer problems for you to resolve. Sung, one of the older, larger divisions, has been subject to a series of problems, which the division's general manager and his controller have not been able to resolve. The CEO introduced you to the general manager and the controller. They explained that the sales have been lagging behind expectations, with the recently completed year being typical of the last three. A bigger prob- lem has been that for the first year in decades, actual profits have become neg- ative. You are shown the operating statement in Exhibit 1. After a quick review of the operating statements, you asked if there have been any changes to the manufacturing process. You were told that the only change has been the use of a new supplier for the major components. The new supplier, EL Manufacturing, was an acquisition by Dennison that occurred late in the previous year. The acquisition was premised largely on EL being able to replace most of Sung's existing suppliers. The components from EL have defects, whereas the previous suppliers provided defect free components. Con- sequently, more materials and labour were needed, and rework and spoilage were charged to overhead. You ask for information on the cost of quality and customer satisfac- tion, and you receive the information shown in Exhibits 2 and 3. You are also informed by the divisional general manager that EL wants a higher price for the components being supplied to Sung. The general manager at Sung is opposed to any increase in price paid to EL because the market price is less than what EL currently charges. (You confirm with an inde- pendent source that EL is presently charging Sung five percent over the market price for the components.) Two days later, the CEO introduces you to the general manager of EL. The financial statements for EL are contained in Exhibit 4. You learn that all of EL's production goes to Sung at a markup over costs sufficient to yield a 20 percent ROI, which is Dennison's markup for setting transfer CASE 14: DENNISON MANUFACTURING INTERNATIONAL Exhibit 1 SUNG ELECTRONICS DIVISION Operating Statement For the Year Ending December 31 (millions of dollars) Budget 842.0 Actual 823.8 Sales Variable cost Direct materials, components Direct labour Manufacturing overhead Selling 270.2 34.8 78.0 38.4 421.4 420.6 281.0 47.8 110.6 38.2 477.6 346.2 Contribution margin Fixed expenses Manufacturing overhead Selling Administration 196.4 42.4 74.4 313.2 264.4 42.2 74.6 381.2 Net operating income 107.4 (35.0) SUNG ELECTRONICS DIVISION Modified Balance Sheet As at December 31 (millions of dollars) Working capital Net fixed assets Investment Actual 57.3 153.2 210.5 ROI, % (16.7) CASE 14: DENNISON MANUFACTURING INTERNATIONAL Exhibit 2 SUNG ELECTRONICS DIVISION Cost of Quality Report For Years Ending December 31 (millions of dollars) T-1 T-2 T-3 1.1 Prevention Appraisal Internal failure External failure Total quality costs 1.2 2.3 2.4 1.8 7.7 1.1 2.2 2.3 2.1 3.2 8.8 15.2 1.2 2.0 2.1 1.6 6.9 1.7 7.3 Exhibit 3 SUNG ELECTRONICS DIVISION Customer Satisfaction Survey For Years T-3 to T (percent satisfied or highly satisfied) T T-1 T-2 T-3 Product quality Durability Good value Features 60.5 57.3 47.2 61.0 84.5 90.4 76.1 69.3 84.6 93.7 77.5 70.4 85.8 93.0 78.4 70.7 CASE 14 Dennison Manufacturing International Growth opportunities are always accompanied by challenges, exclaimed the CEO of Dennison. She then went on to explain why you, a consultant, were hired. Dennison started business in the city of Waterloo in 1951 as a manufac- turer of televisions and electrical products. Television manufacturing was discontinued in the 1970s. Dennison remained in the electrical products business, which over time required it to enter many new markets. New products had to be constantly developed to maintain growth. The life of many of those products was short, and thus many products were exited after a few years. In addition, competition and the need to be cost effec- tive obliged Dennison to locate new plants in China and India, and to enter into outsourcing arrangements. Along the way, Dennison also acquired about 30 small manufacturing plants. The result has been that Dennison now has 36 plants worldwide. Systems integration attempts were a constant challenge because of acquisi- tions, outsourcing arrangements, and new product implementations. If there had been a uniform enterprise resource planning (ERP) system, the CEO said, there would have been fewer problems for you to resolve. Sung, one of the older, larger divisions, has been subject to a series of problems, which the division's general manager and his controller have not been able to resolve. The CEO introduced you to the general manager and the controller. They explained that the sales have been lagging behind expectations, with the recently completed year being typical of the last three. A bigger prob- lem has been that for the first year in decades, actual profits have become neg- ative. You are shown the operating statement in Exhibit 1. After a quick review of the operating statements, you asked if there have been any changes to the manufacturing process. You were told that the only change has been the use of a new supplier for the major components. The new supplier, EL Manufacturing, was an acquisition by Dennison that occurred late in the previous year. The acquisition was premised largely on EL being able to replace most of Sung's existing suppliers. The components from EL have defects, whereas the previous suppliers provided defect free components. Con- sequently, more materials and labour were needed, and rework and spoilage were charged to overhead. You ask for information on the cost of quality and customer satisfac- tion, and you receive the information shown in Exhibits 2 and 3. You are also informed by the divisional general manager that EL wants a higher price for the components being supplied to Sung. The general manager at Sung is opposed to any increase in price paid to EL because the market price is less than what EL currently charges. (You confirm with an inde- pendent source that EL is presently charging Sung five percent over the market price for the components.) Two days later, the CEO introduces you to the general manager of EL. The financial statements for EL are contained in Exhibit 4. You learn that all of EL's production goes to Sung at a markup over costs sufficient to yield a 20 percent ROI, which is Dennison's markup for setting transfer CASE 14: DENNISON MANUFACTURING INTERNATIONAL Exhibit 1 SUNG ELECTRONICS DIVISION Operating Statement For the Year Ending December 31 (millions of dollars) Budget 842.0 Actual 823.8 Sales Variable cost Direct materials, components Direct labour Manufacturing overhead Selling 270.2 34.8 78.0 38.4 421.4 420.6 281.0 47.8 110.6 38.2 477.6 346.2 Contribution margin Fixed expenses Manufacturing overhead Selling Administration 196.4 42.4 74.4 313.2 264.4 42.2 74.6 381.2 Net operating income 107.4 (35.0) SUNG ELECTRONICS DIVISION Modified Balance Sheet As at December 31 (millions of dollars) Working capital Net fixed assets Investment Actual 57.3 153.2 210.5 ROI, % (16.7) CASE 14: DENNISON MANUFACTURING INTERNATIONAL Exhibit 2 SUNG ELECTRONICS DIVISION Cost of Quality Report For Years Ending December 31 (millions of dollars) T-1 T-2 T-3 1.1 Prevention Appraisal Internal failure External failure Total quality costs 1.2 2.3 2.4 1.8 7.7 1.1 2.2 2.3 2.1 3.2 8.8 15.2 1.2 2.0 2.1 1.6 6.9 1.7 7.3 Exhibit 3 SUNG ELECTRONICS DIVISION Customer Satisfaction Survey For Years T-3 to T (percent satisfied or highly satisfied) T T-1 T-2 T-3 Product quality Durability Good value Features 60.5 57.3 47.2 61.0 84.5 90.4 76.1 69.3 84.6 93.7 77.5 70.4 85.8 93.0 78.4 70.7