Business of Selling Ice-Cream by Compagnie du Froid SA - Case Study Example

Table of Contents 1. Cover Page 2. Table of Contents 3. Executive Summary 4. Main Report 4.1 Introduction 4.2 Italian Region 4.3 Performance of the Manager of the Italian Region 4.4 Performance of the French and Spanish Managers 4.5 The Issue of Ice-cream Transfer from France to Spain 4.6 Recommendations 5. References 3. Executive Summary Jacques Trumen, CEO and major shareholder of Compagnie du Froid, S.A., has been in summer ice-cream business, taken over from his father. He has expanded business in three countries, namely France, Italy and Spain. Performance so far has been excellent but the Spanish region has not performed well due to unfavourable conditions. Jacques, while evaluating the performance of the three regional managers, is in a fix whether to continue the tradition of awarding 2% bonus to all the managers from corporate profits irrespective of the performance of each division. As per the 2009 results for each region, actual profit has exceeded the estimates of the profit plan excluding Spain. Circumstances for better performance or poor performance have been different. Jacques has confidence in the capabilities of all his regional managers. An analysis of each region’s results has been attempted to help Jacques reach a balanced view on why a particular region has performed better; what factors have been responsible other than the able management of his three countries’ managers. Circumstances for each country’s market have been elaborately discussed and analysed with the given data; how each manager copped with the situation not to let it go out of control. The role played by all has been worth appreciation given the circumstances including the data on climate change and considering the historical data in the context of reduced sales by the Spanish division of Compaigne. Individual performance of all the managers has been evaluated as per the case study. Based on the overall analysis, opinion to the CEO, Jacques has been attempted on the problems faced by Compaigne at the end of the report. 4. Main Report 4.1 Introduction This report is made on the summer business of selling ice-cream by Compaigne du Froid S.A., which has expanded in France, Italy and Spain. The purpose of this report is to help the CEO and major shareholder of the company, Jacques Trumen, in taking the decision whether he should continue with the traditional practice of awarding 2% bonus from corporate profit to all the regional managers irrespective of their performance. For this purpose, performance of the three country divisions has been evaluated on the basis of 2009 results and appraisal done by Jacques besides including the issue of ice-cream transfer from France to Spain. 4.2 Italian Region Italian region was managed by Pierre Giraux, a man carrying experience of 10 years down the line of selling the brand, Compagnie du Froid SA. Before taking the reins in Italy, Pierre had managed the company functions in France. The reason for his transfer to Italy was that sales were not rising as expected, therefore, in the better interests of the company he was given the charge of Italy division, which he shouldered responsibly. It is clear that the image of Pierre was very impressive in the mind of Jacques; he had leadership traits and had been a partner of Jacques in new ventures. He had successfully expanded the distribution network in most of the western coast of Italy. Whatever problems he faced in the manufacturing side were related to increase in wages and decrease in efficiency, which had been because of old machines. Profit plan had already included this factor in the Italian region’s 2009 results. The actual profit for the year 2009 in the Italian region was €13,359,000 while it was estimated €13,199,000. Mostly, it could be attributed to higher sales in ice-cream as specialties sales difference was hardly 4,000 in volume. It was somewhat amazing that amidst increased wages and reduced efficiency, the Italian segment could generate more than expected sales and profits. Cost of goods sold was also recorded more than what was estimated. The total difference including dairy ingredients, other ingredients and labour was €98,000. In the matter of specialties cost only, the spending was less than expected with a variation of €13,000, thus, registering a difference in the Contribution Margin of €78,000. It must also be noted that under the head, “Selling and Administrative Expenses”, the major differentiator was selling expenses and central office expenses, totalling €65,000 which was balanced to some extent only by reducing expenses on advertising. As Exhibit 3 shows, profits before interest and taxes was expected €459,000 but actual profits before interest and taxes came to €517,000, showing an increase of €58,000. How could we explain the difference? Before analysing the figures we should not ignore the historical data of temperature and sales volume given in Exhibit 6 for Italy. One crucial aspect of the historical data of temperature and sales volume starting from the year 1999 clearly indicates the fact that once the sales get increased because of high temperature in a particular year, the impact of increased sales remains there irrespective of the fact that the temperature had deceased the following year. It can be attributed to consumers’ developed habit of relishing ice-cream; they become accustomed to it showing no concern to the rise and down in temperature. It can be traced in the year 2002 when the recorded temperature was 31.8 degrees Celsius, less than it was in the year 1999 but volume growth was 25.6%. We can’t find a pattern throughout for the change in temperature impacting the sales volume proportionately. The data provides a clear hint that sales has been increasing and has never dipped down with any decrease in temperature. Other than consumers’ habit, other reasons attributed to increase in sale could be better management of the business functions by Pierre, who made advances into new area of western Italian coast. Being a smart manager having an insight of the market behaviour, he compensated the loss suffered due to inefficiency in manufacturing and increased wages by reducing expenses on advertisement and delivery of products. He also showed his brainpower by controlling supervision, energy and maintenance costs. He was able to manage production of specialties in reduced labour hours. 4.3 Performance of the manager of the Italian region Certainly, the credit goes to Pierre for his management skills, experience of ten years and his risk taking attitude by expanding to new areas, which materialised in increased sales and compensated loss of manufacturing efficiency and increased wages. He also saved funds by reducing investment on advertisement and administrative expenses. These traits of Pierre’s able management explain the difference between the Italian regions’ expected and actual profit. 4.4 Performance of the French and Spanish managers The French Manager, Jean, was promoted to the rank of manager in 2007 because Pierre who was responsibly fulfilling his duties had to be shifted to the Italian region as it was lagging behind. Jean had achieved progress in his career starting as a sales representative, and then moved on to take charge of production before becoming division manager of French region. It shows that Jean was well adept in the business and its complexities. Jacques had complete confidence in the business initiatives taken by Jean; he invested time in expanding to the west coast of France to increase the production and sales volume. For this purpose, he held discussions with new vendors and suppliers to leverage from the new bargain besides arranging distribution. His efforts were quite visible in the results for the year 2009, as shown in Exhibit 2. Profits exceeded the budget by 20% than the previous year. Jacques was sure that profits would have been higher than 20% but for the reason that some efforts take more time to materialise. The traditional market had suffered reduction in sales by 2% in 2009 over the market share of 20% in 2007 as it reached 18% in 2009. Jean attributed this downfall in sales to his random trips to the west coast to capture new market. It affected his relationships with distributors in the east coast. Even if it was a loss of 2%, the bargain was not bad overall as venturing into new area had increased the sales output by around 20% than the planned sales increase. The main contribution was from the introduction of new machines, which did not give any major problem other than start up issues. In comparison to Italian division where old machines installed earlier at French unit were deported to Italy, which highly affected the production efficiency of the Italian plant, no such situation was faced by Jean in France. Jacques gives the credit of smooth functioning of machines to the manufacturing calibre of Jean who had given the responsibility of managing the production and maintenance of new machines to the core group of employees. The major differentiator to the increased sales and profits was realised by a new business opportunity that knocked at in the distribution of packaged meals in supermarkets and food stores in the same region. Jean’s friend running a restaurant in Camargue wanted refrigerated trucks to distribute his packaged foods to which Jean agreed to through the delivery trucks of Compagnie du Froid as the incremental cost to the company was nominal because most of the distribution area was same. Credit must be given to the revenue generating idea that occurred to Jean and he made full use of the opportunity as we see that revenue from distribution for the year 2009 reached €79,000. A glimpse of the 2009 results of the French region shows that reduction was seen only in advertisement expenses and in the cost of specialties while rest of the sales, costs and expenses showed an increase over the estimated figures. Jacques’ concern regarding the distribution business opportunity is understandable as it is not the core business of the company as quoted in the mission statement of Compagnie du Froid, SA. The Spanish manager, Andres, has been with the company since its beginning in 1995. He has proved his mettle as an able manager by standing the company starting from scratch. He was the most admired man for his innovative ideas like he introduced selling of specialties through vending machines, which was liked by one and all. He also pioneered new products to the market, which other managers followed on. Problems started only in the year 2009 when new machines did not perform as per expectations. Going out of stock many times in the year compelled Andres to import the product from the French division; it increased the cost as Jacques set the transfer price at full cost plus 5% extra as profit for the manufacturing unit. Other than these, travel expenses incurred on account of fitting containers and packaging to the French production line had to be absorbed by the Spanish division. A lot of other problems also cropped up the same year. The weather had been cold enough to reduce tourism and sales, affecting volume growth. As per Jacques’ rule of thumb, 1 degree Celsius deviation from the mean summer temperature would affect the volume growth by 3%. So target was lowered to 4.9% than the planned 10%. A major competitor lowered the rates to boost demand and Andres had to follow the same but amidst all these adversities, Andres did not reduce spending on advertisement. Performance by Andres had never been bad except the year 2009 when so many hardships on manufacturing, sales and market front emerged. Andres had to bear the extra burden of travel by his employees to French division for the smooth flow of the product. His past record is a proof of his capabilities in managing the company affairs to the best of his ability. If one is to blame for any thing going wrong, it is the installation of new machines, which created a lot of problems; Andres had to import the product. Weather was also not supportive. Market was highly competitive because of bad weather. A glimpse of the 2009 results for the Spanish region shows downward trend in sales, cost of goods sold and other costs while selling and administrative expenses increased, resulting in the variance in profits to the tune of €1,177,000 before interest and taxes. 4.5 The issue of ice-cream transfer from France to Spain The total cost of ice-cream transfer from France to Spain reached to €3.53 per litre for a volume of 603,000 litres, costing €2,126,000. Accounting of the cost seems exaggerated but no other deal could be possible or better than this because the sales could be delivered for a particular time period. Business went uninterrupted. Earnings were of course far below expectation but it is not always possible to bring things and circumstances under your control. Big thing is that profits were registered; division was not in deficit. Further, there was no better alternative than importing from the French division to remain in the competition and maintain the brand value at any cost. 4.6 Recommendations Jacques should not take a decision on the basis of quantitative data presented in the exhibits. Circumstances had been different to all the managers, so any decision should consider the past record and achievements of his divisions’ managers. He cannot ignore the fact that problems faced in the installation of new machinery cannot be attributed towards lack of performance on the part of managers. The difference between the profit plan and actual performance means nothing beyond collecting crucial data for getting future intelligence on the indicators. The traditional policy of awarding equal bonuses to regional managers seems unfair but no sudden change of policy should be applied, as it could negatively affect the performance and environment. New policy initiatives for the future should be taken by linking bonuses with growth; higher growth, more bonuses. The issue of linking performance with three recommended alternatives seems very complex, as all are significant in the company’s interest. In stead of sticking to the old method of giving each manager a fixed percent of corporate profit, a judicious approach demands considering all the three alternatives to a planned proportion. Regarding Andres discomfort on transfer price of importing the product from France, it should not matter if the traditional formula of distribution of bonus equally from the corporate profits is not implemented and performance is not linked totally to the profit plan. Reference Case Study Simons, Robert & Davila, Antonio., 11Feb. 2010. Compaigne du Froid S.A., Harvard Business School. Read More