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Rein Chemical Company: Specialty Division
Anthony Garrison, CEO of Rein Chemical Company, reflected on his earlier meeting with the board of directors. He had informed the directors about the recent discovery of improper pricing in the specialty chemicals division and the clifficulties that the company faced in trying to rectify the situation. The board voiced concern and instr'ucte·d· Garrison to report back with management's intended actions.
Rein Chemical Company
Rein Chemical Company, with headquarters in White Plains, New York, manufactured inorganic, agricultural, and specialty_ chemicals. Founded in 1907 to produce sulphuric acid, Rein Chemical Company had sales revenue of $502 million and net profit of $19 million in 2001. Exhibit 1 presents the company s financial data.
Specialty Chemicals, located in Nutley, New Jersey, was one of three operating divisions. With sales of $112 million in 2001 split approximately evenly between domestic and international markets, it served a wide range of customers with a variety of organic chemicals. Each operating division functioned as a profit center with its own sales, manufacturing, and R&D organizations. The Inorganic Chemicals division was headquartered in Poughkeepsie, New York; the Agricultural. Chemicals division in Davenport, Iowa.
A Customer Complaint
In the course of reviewing sales files, Charlie Hoffman, recently promoted from regional to divisional sales manager for Specialty Chemicals, uncovered a letter from one of the division's customers inquiring about a possible mix-up in the delivery of a chemical that was supplied on a regular basis. The letter reported a suspicion that a lower grade version of the chemical might have been delivered in place of the item ordered. The response from his predecessor promised to look into the matter. Since Hoffman could find nothing more about the matter, he turned to Garrison for further information. (A new division manager had been recruited from outside the company several months earlier and was currently abroad on an extended trip to meet customers.)
Garrison was ignorant of the incident and asked Hoffman to find out more. The resulting investigation uncovered the following facts. The practice had been widespread, involving hundreds and possibly thousands of accounts. In many cases it was impossible for the company to determine whether the customer had been cheated because prices were typically negotiated informally, with orders often placed by phone and field sales records poorly kept. Projecting from those instances where substitution was detected, Hoffman estimated that the overcharges to customers might have exceeded $1 million. He also concluded that while damage varied among the customers affected, it was relatively small in most ·cases. The substituted product, although cheaper, was thought to have performed as well as and possibly even better than what had been ordered. The substitution was virtually impossible to detect without special laboratory testing. There was evidence that the senior divisional managers, who were no longer with the company, had condoned and even encouraged the practice. The salespeople involved had apparently not gained any direct remuneration from their misdeeds.
Management's Reactions
As soon as Garrison became aware of the full extent of the problem, he met with the senior division and corporate executives, including control, human resources, legal, and public relations. The comments by the following persons were representative of the opinions voiced in the meetings.
Charlie Hoffman, Specialty Chemicals division sales manager: This is not really that big a deal. Only one customer complained, and the division no longer engages in the practice. Besides, the cheaper product worked better anyway.
"I don't know how we can find all the other companies involved. Our old records can probably point tq some of the major users involved, but we would have a hard time discovering the others. If we involve customers in the investigation, the company's reputation would be needlessly tarnished, since most were not involved. Also, the reputation of innocent salespeople could be damaged.
"If you ask me, we should let the past be buried. At the same time, we should guard against it ever happening again."
Bob Lancaster, Rein Chemical Company controller: "The internal controls would normally have alerted us. Unfortunately, we were transitioning from a manual to a computer-based accounting system at the time that was going on. And with the senior division managers actively covering up the switch, it was virtually impossible to catch it. The new control system would now quickly pick this up."
John Wilkinson, VP Human Resources and Chief Ethnics Officer: "I find this whole incident very embarrassing. The firm has a written code of ethics that clearly proscribes this kind of behavior. In my judgment, Rein's employees are generally very good people. And given that employees can report anonymously about possible ethical violations, I am somewhat disappointed that no one brought it to my attention. On the other hand, geographic and organizational distance can interfere with open communications.
"I think that Rein has to do whatever it can to set things right. The trust of our customers and our employees depends on it."
Wendy Simpson, Corporate Public Relations: "I think that it is important that we not blow
this out of proportion. We need to be careful not to trigger unnecessary bad publicity. Right now I
am trying to decide how we can proceed. Rein is well looked on by its customers, by the communities in which it operates, and by its employees. We need to protect this reputation."
Anthony Garrison, Chief Executive Officer: "When Hoffman began to uncover the pricing malpractice, I immediately ordered Bob [Lancaster] and division managers to make sure that it was no longer going on and that it could not be repeated without our knowledge. Restitution of the overcharges would be the right thing to do, except that course of action can injure many innocent parties. As Charlie points out, customers will suspect innocent salespeople of possible wrongdoing. And in the victimized companies, purchasing agents and plant managers might be unfairly punished because they had not detected the product substitution. Also serious is the possibility of creating ill will with many customers that had not been affected.
"On the other hand, this is not the ind of behavior that this company condones. I do not want to undermine the morale of our employees in Specialty Chemicals by conducting a witch hunt and hurting innocent people. Nor do I want to undermine the morale of our employees in the other divisions by appearing to whitewash the whole matter."
REIN CHEMICAL
Post your Rein Chemical answers in the Discussion Board. Read through your classmate's answers and leave appropriate and critical comments. Do their answers align well with your answers and thoughts?
Answer the following questions:
1. Do you believe there is an ethical problem facing Rein Chemical? If there is an ethical problem, describe what that problem is. (be specific)
2. Please list the major players from CEO Anthony Garrison's management team (4). Explain each manager's perspective regarding the problem and what each manager thinks should be done.
3. Why do you believe the managers have different perspectives?
4. What do you believe Mr. Garrison should do to solve this problem? Try to think like a CEO who is responsible to many constituents.