Reference no: EM132438335

INDOBOX COMPANY LIMITED

"If I were to price these boxes any lower than Rp 480.000,- a thousand," said Mike, General Manager of Indobox Company Limited's Beta division, "i'd be countermanding my order of last month for our salesmen to stop shaving their bids and to bid full cost quotations. I've been trying for weeks to improve the quality of our business, and if I turn around now and accept this job at Rp 430.000,- or Rp 450.000,- or something less than Rp 480.000,-, I'll be tearing down this program I've been working so hard to build up. The division can't very well show a profit by putting in bids which don't even cover a fair share of overhead cpsts, let along give us a profit."

Indobox Company was a medium sized, partly integrated paper company, producing white and kraft papers and paperboard. A portion of its paperboard output was converted into corrugated boxes by the Beta division, which also printed and colored the outside surface of the boxes. Including, Beta, the company had four producing divisions and a timberland division, which supplied part of the company's pulp requirements.

For several years each division had been judged independentlyon the basis of its profit and ROI. Top management had been working to gain effective results from a policy of decentralizing responsibilty and authority for all decisions except those relating to overall company policy. The company's top officials believed that in the pastfew years the concept of decentralization had been successfully applied and the company's profits and competitive position had definitely improved.

Early in 2009, the Gamma division,in conjuction with the Beta division, which was equipped to make the box, designed a special display box for one of its papers. Beta's staff for package design and development spent several months perfecting the design, production mrthods and materials to be used; because of the unusual color and shape, these were far from standard, According to an aggrement between the two division, the Beta division was reimbursed by the Gamma division for the cost of its design and development work.

When the specifications were all prepared, the Gamma divison asked for bids on the box from the Beta division and from two outside companies. Each division manager was normally free to buy from whatever supplier he wished, and even on sales within the company, divisions were expected to meet the going market price if they wanted the business.

In 2009, the profit margins of converters such as the Beta division were being squeezed. Beta, like many other similar converters, bought its paperboard; its function was to print, cut, and shape the paperboard into boxes. Though it bought most of its materials from other Indobox division, most of Beta's sales were made to outside customers. If Beta got the order from Gamma, it probably would buy its linerboard and corrugating medium from the Alpha divison of Indobox Company.

The walls of a corrugated box consist of outside and inside sheets of linerboard sandwiching the fluted corrugating medium. About 70% of the Beta's out of pocket cost of Rp 400.000,-for the order represented the cost of linerboard and corrugating medium. Though Alpha division had been running below capacity and had excess inventory, it quoted the marketprice, which had not noticeably weakened as a result of the oversupply. Its out of pocketcosts on both liner and corrugating medium were about 60% of its seling price.

The Gamma division received bids on the boxes of Rp 480.000 a thousand from the Beta division, Rp 430.000 a thousand from Nike Paper Company and Rp 432.000 a thousand from Fox Paper Company. Fox Paper Company offered to buy from Indobox the outside linerboard and special printing already on it, but would supply its own inside liner and corrugating medium. The outside liner would be supplied by the Aplha division at a price equivalent of Rp 90.000 a thousand boxes, and would be printed for Rp 30.000 a thousand by the Beta division. Of the Rp 30.000. about Rp 25.000 would be out of pocket costs.

Since this situation appreared to be a little unusual, Mr Kent, GM of the Gamma division, discussed the wide discrepancy of nids with Indobox's commercial Vice President. He told the vice president. " We sell in a very competitive market, where higher costs cannot be passed on. How can we be expected to show a decent profit and ROI if we have to buy our supplies at more than 10% over the going market?"

Knowing that Mr Mike had, in the past few months, been unable to operate the Beta division at capacity, it seemed odd to the vice president that Mr Mike would add the full 20% overhead and profit charge to his out of pocket costs. When asked about this, Mr Mike's answer was the statement that appears at he beginning of the case. He went on to say that having done the developmental work on the box, and having received no profit on that, he felt entitled to a good mark-up on the production of the box itself.

The vice president explored futher the cost structure of various divisions. He remembered a comment that the controller had made at a meeting the week before to the effect that costs that wre variable for one division could be largely fixed for the company as a whole. He knew that in the absence of spesific orders from top management, Mr Kent would accept the lowest possible bid, the one from Nike paper company for Rp 430.000. However, it would be possible for top management to order the acceptance of another bid if the situation warranted such action. And though the volume represented by the transactions in question was less than 5% of the volume of any of the divisions involved. Other transactions could conceivably raise similar problems later.

Questions:

1. Make a chart of the root cause analysis of the relationship between costs and prices between divisions in the Indobox Paper Company!

2. Based on your analysis, what strategic problems or root causes exist in the above case? Explain the reason!

3. Based on the existing cost structure situation, how do you feel about pricing done by the Alpha Division?

4. Based on the existing cost structure situation, how do you feel about pricing done by the Beta Division?

5. What actions should the Alpha Division Chief take?

6. What actions should be taken by the Beta Division Leader?

7. What actions should the Gamma Division Chief take?

8. What strategic actions should the Chief of the Indobox Paper Company take to resolve this problem?

Note: Use the assumptions that you feel are necessary and write the assumptions that you use