Wk 5 Discussion (Review the Findings) - Post 1

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5 Development of Review Findings

This chapter reviews the attributes of a well-developed, convincing operational review

finding and how the operational review team can put the relevant principles into practice.

This chapter will:

• Increase understanding of the importance of the proper development of an operational

review finding.

• Familiarize the reviewer with the five operational review attributes—statement of

condition, criteria, cause, effect, and recommendation—and their significance in the

development of review findings.

• Increase knowledge as to how to use proper review finding presentation as an effective

reporting tool.

• Provide hands-on experience in the development of operational review findings.

The most important single element of the operational review is the development of specific

findings—this is the heart of the operational review. Furthermore, the acceptance and

implementation of these findings by management is the yardstick for operational review

success. A good rule of thumb is that if the review team can persuade management to accept

at least 50 percent of its findings and recommendations, the team has been successful.

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All Review Findings Have Common Structure

OPERATIONAL REVIEW FINDING ATTRIBUTES

To develop a specific operational review finding, the reviewer should be aware of, and use

effectively, the following attributes or building blocks:

• Statement of Condition

• Criteria

• Cause

• Effect

• Recommendations

These attributes are summarized below:

Statement of Condition

• What did you find?

• What did you observe?

• What is defective, deficient, or in error?

• This is the what-when-where-how step.

Criteria

• What should they be?

• What do you measure against?

• What is the standard procedure or practice?

• This is the comparing what is with what should be step.

Cause

• Why did it happen?

• What is the underlying cause of the deficiency?

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• Why have operations become inefficient or uneconomical?

• This is the identification of the cause and not the symptom step.

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Effect

• So what?

• What is the effect of the finding?

• What is the end result of the condition?

• This is the present or potential impact on the operations step.

Recommendations

• What is recommended to correct the condition?

• What recommendation is practical and reasonable for acceptance?

• Who should implement the recommendation?

• This is the what needs to be done to correct the situation step.

OPERATIONAL REVIEW CRITERIA STANDARDS

Operational review criteria standards include:

Internal to the Organization

• Organizational policy statements

• Legislation, laws, and regulations

• Contractual arrangements

• Funding arrangements

• Organizational and departmental plans: goals and objectives

• Budgets, schedules, and detail plans

Developed by the Operational Reviewer

• Performance of similar individuals or functions (internal benchmarking)

• Performance of similar organizations (competitive benchmarking)

• Industry or functionally related statistics (industry benchmarking)

• Performance of functions outside the company (best-in-class benchmarking)

• Past and present performance of the organization

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• Engineered standards

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• Special analysis or studies

• Reviewer's judgment

• Sound business practices

• Good common business sense

Example

Objective: To provide meaningful, accurate, and timely financial information

Criteria

• Information provided is relevant to management's needs

• Information supplied is accurate

• Information is received in sufficient time after the reporting period to be useful for its

intended purpose

• Information is easily understood

Reader: Check off those criteria in the preceding list that pertain to your organization. Are

there other criteria used in your organization? What are they? Are these criteria effective in

appraising and evaluating your organization's operating results?

SOME POSSIBLE TYPES OF CAUSES

Possible types of causes include:

• Ineffective or lack of adequate planning systems and procedures

• Confusing, ineffective, or faulty organizational structure

• Superfluous or unwieldy organizational hierarchy

• Lack of effective delegation of authority, commensurate with related responsibilities

• Inability or unwillingness to change, as exemplified by resistant attitudes: “We've

always done it that way”; “It's industry practice”

• Lack of effective or sufficient management or supervision

• Inadequate, misleading, or obsolete policies, procedures, directives, or standards

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• Lack of effective personnel procedures relative to hiring, orientation, training,

evaluation, promotion, and firing

• Ineffective use of computerization

• Inadequate management and/or operational reporting systems

• Lack of effective communication

• Personal inadequacies such as negligence, carelessness, unfamiliarity with expected

requirements, failure to use good sense or judgment, dishonesty, and lack of effort or

interest

• Inadequate resources, including people, equipment, materials and supplies, and

facilities

• Ineffective operating systems and procedures

• Deviation from expected standards or criteria

• Lack of knowledge that a problem or condition exists

Reader: Which of the preceding causes exist in your organization? How do they create

operational problems? Are there other causes in your organization? What are they?

EFFECTS OF OPERATIONAL REVIEW FINDINGS: POSSIBLE INDICATORS

Possible indicators of the effects of operational review findings include:

Management and Organization

• Poor planning and decision making

• Too broad span of control and/or poor channels of communication

• Badly designed systems and procedures

• Excessive crisis management

• Excessive organizational changes and/or inadequate delegation of authority

Personnel Relations

• Inadequate hiring, orientation, training, evaluation, and promotion procedures

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• Lack of clearly communicated job expectations

• Idle, excessive, or not enough personnel

• Poor employee morale

• Excessive overtime and/or absenteeism

• Unclear responsibility/authority relationships

Manufacturing and Operations

• Poor manufacturing methods (e.g., excessive rework, scrap, or salvage)

• Inefficient plant layout and/or poor housekeeping

• Idle equipment and/or operations personnel

• Insufficient or excessive equipment

• Excessive production or operating costs

• Lack of effective production scheduling procedures

Purchasing

• Not achieving best prices, timeliness, and quality

• Favoritism to certain vendors

• Lack of effective competitive bidding procedures

• Not using most effective systems such as blanket purchase orders, traveling

requisitions, and electronic and telephone ordering

• Excessive emergency purchases

• Purchase of unnecessary expensive items

• Unmet delivery schedules

• Excessive returns to vendors

Financial Indicators

• Poor profit/loss ratios

• Poor return on investment

• Unfavorable cost ratios

• Unfavorable or unexpected cost/budget variances

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Complaints

• Customers: bad products or poor service

• Employees: grievances, gripes, or exit interview comments

• Vendors: poor quality or untimely deliveries

• Production: schedules not met, material not available, deliveries not on time, quality

poor, and so on

Reader: Which of the effects in the preceding lists exist in your organization? Check them

off. What other effects can you identify in your organization? What are they?

REVIEW FINDINGS DEVELOPMENT CHECKLIST

Are any of the finding attributes—statement of condition, criteria, cause, effect,

recommendation—missing? Why? What can or should we do about it?

• Is it a presentation defect or a symptom of an incomplete review?

Are attributes mixed up with one another in a way that impedes clarity?

• Are facts distinguishable from opinions?

Is the condition statement valid?

• Have we indicated that it is a fact or that it was told to us?

Are the criteria unclear or unconvincing?

• Are they weak or unsound from a professional standpoint?

• Do they contain subjective bias?

Have we explained the cause? Have we given the real cause, or is it a symptom?

• Is the information on the cause incomplete? Superficial?

• Does it get to the heart of the matter?

Has effect been understated? Exaggerated? Quantified when possible?

Is the recommendation unnecessarily vague? Too rigid?

• Does it take care of the past but not the future?

• Is it punitive rather than constructive? Is it out of harmony with cause?

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Reader: Evaluate the preceding review finding development checklist. Is it sufficiently

complete to ensure the correct inclusion of all attributes? Are there other items or questions

that should be added to the checklist? What are they?

CASE STUDY: JOE SORRY INC., DEVELOPMENT OF FINDINGS

The review team, in the field work phase for the Joe Sorry Company, identified areas for the

development of findings in the following functional activities:

• Manufacturing personnel

• Manufacturing systems

• Manufacturing facility

• Inventory control

• Product line operations

• Four business concepts

Manufacturing Personnel

Based on the completion of the review team's work steps in the field work phase relative to

manufacturing personnel, the review team identified the following areas for the

development of findings and recommendations:

• The present Vice President of Production position is unnecessary. As plant operations

are presently controlled by Joe, based on his priorities, using a manual system, all that

is needed is a plant manager or overseer. Ed Harrison, the Vice President of Production,

should be used to get the MRP II system operational and improve operations per our

review.

• The six foreperson positions are superfluous at present. All of these positions could be

eliminated with minimal impact on plant operations. These personnel could be used to

assist in implementing the MRP II system, and then at least three retained to function as

database operators and analysts.

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• The production team leaders (six) are really functioning as chief workers. Their

emphasis is on controlling production and workers rather than being helpers. With

increased backlog and the need to increase productivity and satisfy customer demands,

these personnel (probably three) could be better used as roving trainers, coaches, and

work facilitators. The other three could be better used as production workers to

improve productivity and meet production and delivery schedules.

• The production teams (six teams of six members each) are currently divided by product

type (one specialty, one custom, two defense, and two basic teams). This team concept

needs to be reevaluated, as the present methods of production are contrary to this

concept. By developing more efficient production methods that are flexible and relate

better to the product being produced, the company should be able to increase

productivity with fewer employees and less cost, reduce backlogs, better control

inventories, conserve production capacity, and increase profits.

• The entire five-employee repairs and maintenance unit could be disbanded, with the

possible exception of one person for regular tool maintenance and emergency repairs

and auxiliary facility maintenance duties. Other tool repairs should be done on an

outside vendor basis, or the faulty tool should be replaced. Ongoing maintenance of the

work areas should be the responsibility of the work crews, with morning and evening

maintenance jobbed to the outside.

• The packing operation should be moved online with production, so that goods are

counted and packed as they are produced and ready for shipment.

• The packing/shipping and receiving areas need to be unclogged and cleaned up so that

materials and finished goods can be separated cleanly and the two operations can

function properly.

• Consideration should be given to controlling production by product rather than by

customer order. This should work cleanly for basic boards and, to some extent,

specialty boards. For custom boards, where there is a greater likelihood that another

order for exactly the same product is not in the system, production by customer order

may have to continue. The defense (government) business needs to be reevaluated as to

whether the company should remain in this business.

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• For those customers requiring an exact quantity or more, there should be an integration

with inventory and other customer orders to determine whether this quantity is in-

house or needs to be produced. If it needs to be produced, a small work crew of two

individuals should be set up, which would be more effective than holding the order in a

wait state.

• Receiving needs to be recoordinated with the production system. Once this is done and

conditions have been cleaned up, there is no need for more than one of the three

receivers.

• Inventory control has become uncontrollable, with the inventory control manager

becoming a chaser rather than a controller. The inventory control portion of the MRP II

system has to be reimplemented to minimize the amount of raw materials and finished

goods on hand. The present chaotic condition of these inventories must be cleaned up

and the system put back in place and kept that way.

• Quality Control work stations should be brought inline with production by moving the

six QC inspectors into the production area. This would create the maximum efficiency

for work in process and finished goods inspections. Quality control personnel should be

used based on work requirements per job rather than the present assignment by

production team. Work-in-process inspections should eventually become the

responsibility of each worker.

Raw material inspections should be set up close to the receiving area so that only

acceptable raw materials are moved into production or temporary storage. Defective

materials can be controlled and returned as soon as possible. Such receiving

inspections should be looked at for elimination as vendor reliability increases.

The results of these two findings should enable the company to reduce the number of

QC inspectors from six to no more than four immediately, with ultimate reduction to

two—for only necessary work-in-process and finished goods inspections.

• The QC manager's job at present is unnecessary. Each QC inspector is managing his or

her own area, and the MRP II system for QC is inoperable, leaving very little for the QC

manager to do. This function could be handled by the recommended plant manager.

• The two clerical staff assigned to QC have very little to do. They were hired for data

entry, update, and inquiry of the MRP II system, which is not implemented. Present QC

clerical requirements could be handled by a clerical pool operation. This whole area of

clerical

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personnel assigned to all operating areas should be reviewed, as this appears to be a

companywide, costly problem.

Development of Review Finding

Condition. Our review of manufacturing personnel levels and use disclosed the following:

• Vice President of Production is unnecessary at present.

• Foreperson positions (six) are superfluous at present.

• Production team leaders (six) are functioning as chief workers.

• Production teams (six teams of six members each) divided by product type are

ineffective as to productivity.

• Repairs and maintenance unit (five employees) could be disbanded.

• Receiving can be accomplished by one employee rather than three, as at present.

• Quality control inspectors can be reduced from six to four, ultimately to two.

• The QC manager's job could be eliminated and handled by a plant manager.

• Quality control clerical staff of two can be eliminated.

Criteria. An efficient business operates with the fewest possible number of employees.

Additional employees are not hired unless they are absolutely necessary.

Cause. The present levels of manufacturing personnel were established based on Joe Sorry's

criteria to emulate his former employer, to control operations based on levels of

management/supervision, and the requirements of an implemented MRP II system. These

levels of personnel have never been reviewed as to their necessity, and have built up as the

business has been monetarily successful.

Effect. The overuse of personnel in manufacturing operations has resulted in less efficiency

and causing a number of functions and personnel to get in each other's way. In addition, the

excess number of personnel is costing the company more than $500,000, as follows:

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Recommendations. Eight recommendations were made in regard to manufacturing

personnel:

1. Eliminate Vice President of Production and six foreperson positions immediately, or use

these personnel to assist in implementing the MRP II system and procedures. You could

also consider retaining at least three of the forepersons as data base operators and

analysts, or hire less expensive personnel once the MRP II system is operational. Hire a

plant manager or use the present forepersons in this capacity.

2. Use present production team leaders (probably three) as roving trainers, coaches, and

work facilitators. Use the other three as production workers to improve productivity,

reduce the use of overtime, and meet production and delivery schedules.

3. Reevaluate the production team concept of assigning a six-member work team by

product type. Consider a more flexible method based on the product being produced.

4. Eliminate the repair and maintenance unit by using outside vendors for tool repairs or

replacing tools, and using an outside vendor for morning and evening maintenance.

One individual might be considered for retention for regular tool maintenance,

emergency repairs, and auxiliary maintenance.

5. Recoordinate receiving with the production system and clean up present conditions,

necessitating only one receiver.

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6. Bring QC work stations inline with production, and use QC inspectors based on work

requirements; set up raw material inspections close to the receiving area. This will

enable the company to reduce present staff form six to four. By developing programs

for vendor reliability (reducing incoming inspections) and placing in-process QC

responsibility directly on the workers, QC staff can be reduced to two.

7. Eliminate the QC manager's position and have this function handled by the plant

manager.

8. Eliminate the two QC clerical positions by using a clerical pool concept for this and

other areas.

Manufacturing Systems

Based on the review team's completion of work steps in the field work phase relative to

manufacturing systems, the review team identified the following areas for the development

of a review finding:

JOBEASY MRP II software package is not presently being used. However, although this

package is relatively complete for what it is intended to do, it is not compatible with this

company's needs.

• The company must define its systems specifications for what it requires in a

manufacturing control system, and then locate the software package that best fits its

needs.

• The major elements to be considered in such a package include:

• Sales forecasting

• Production scheduling and control

• Material requirements planning

• Capacity requirements planning

• Inventory control

• Cost control

• Integration with other systems modules (e.g., billing)

• Operating reporting

• Manufacturing systems and procedures need to be modified to fit the various product

lines: specialty, custom, defense, and basic. Consideration should be given to customer

order control, work center by product line, QC procedures, packing and shipping

concepts, use of

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personnel (forepersons, production team leaders, six member production teams), and

inventory storage and control.

• There should be concentration on main product strengths—specialty and custom

boards—with manufacturing systems based on these product lines. Sales and

engineering efforts should be directed toward more standardization among various

customer needs, increasing the ability to more accurately forecast these sales.

• It should be determined whether the company should remain in the defense

(government) business. It takes up an unequal amount of production space for its

limited contribution to profits (if any).

• The basic board business, which is really that of a distributor, should become a business

of buying and reselling (bypassing inventory and manufacturing processes).

• Production capacity is being overextended while customer order backlogs are

increasing. Manufacturing systems and methods need to be streamlined so that

productivity can be increased. Emphasis on specialty and custom boards,

standardization, and manufacturing processes geared to individual products needs to

be addressed.

Development of Review Finding

Condition. The defense (government) business is presently the smallest part of the Joe Sorry

Company. In the current year, this segment of the business contributed $800,000 in sales

and $24,000 in net income (estimated), out of a total of $6,250,000 (or about 13 percent) in

total sales and $1,150,000 in net income (3 percent). However, this segment takes up about

one-third of the total plant capacity (two work centers out of six)—an unequal distribution

of production as compared with its monetary contribution.

Criteria. Production space should be allocated to the product lines that maximize the

contribution to company income. Profit center segments should be analyzed periodically to

determine their contribution relative to resource allocation, and then a determination made

as to the course of action to be taken.

Cause. Joe Sorry decided to get into the defense/government business in the preceding year

to help the company boost its total sales to meet his desire to achieve more than $500,000 in

sales per month. Although

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this segment contributed $300,000 and $800,000 in sales for the last two years, it is not

contributing its share of net income. The government is cutting back spending on contracts

of this type, and those it does allow are expected to be performed at less cost than in the

past. This segment has not been analyzed by the company and should be reconsidered.

Effect. The defense business is taking up one-third of the company's production capacity,

while contributing minimally to company sales and net income. In addition, more profitable

business segments (specialty, custom, and basic boards) are building up customer orders in

backlog.

Based on disbanding the defense business, converting the basic board business to a sales

distribution business, adapting our other manufacturing recommendations, and

concentrating on the two core businesses of specialty and custom boards, we estimate the

company can:

• Increase production by over 50 percent (at less cost).

• Eliminate present specialty and custom backlog ($1,320,000).

• Increase sales of specialty and custom products by at least 20 percent or $860,000 (20

percent of $4,300,000).

• Increase overall annual sales by more than $2,500,000.

• Provide additional net income of at least $625,000 (estimated at 25 percent of

$2,500,000).

These figures do not include additional sales and net income to be generated by converting

the basic board business into a sales distribution business.

Recommendation. The company should determine whether it should remain in the defense

and government contract business. We believe the company would become more efficient

and increase overall productivity and resultant net income by disbanding this segment of

the business and allocating the resulting plant capacity to the other more profitable

segments of the business.

Manufacturing Facility

As a result of the review of manufacturing facilities including present plant layout,

production operations and procedures, product line concerns,

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and proposed plant layout concepts, the review team identified the following for the

development of a review finding:

• Present plant layout and work flow based on six work centers by product line (one for

specialty, one for custom, two for defense, two for basic boards) is causing uneven

distribution of work and misuse of available space.

• Six-member work teams are an inefficient allocation of personnel and a negative factor

in productivity. For almost all jobs, fewer personnel are required, normally two or

three.

• The present plant layout and manufacturing methods have created the following

adverse conditions:

• Packing/shipping and receiving are becoming merged.

• Inventory: raw materials, work-in-process, and finished goods are stored all over

the production area, resulting in a lack of overall inventory control.

• Quality Control performs offline inspection procedures, resulting in production

delays.

• Concept of six forepersons and six team leaders, one each for each work team, is

counterproductive.

• Quality Control is housed in the office area and not readily available to production.

Testing is done offline in a separate room at the back of production.

• The main production facility should be devoted to specialty and custom board

manufacturing. Production should be based on realistic sales forecasts and/or real

customer orders. Standardization of parts and products should be maximized by the

engineering and sales departments working together.

• Manufacturing processes should be analyzed so that each specialty and custom product

uses the most efficient methods of production.

• Production layout and procedures should be set up on a flexible basis, considering the

number of work steps and mix of products at any one time.

• Strong consideration should be given to getting out of the defense (government

contracting) business.

• The basic board business should become a sales distribution business, with vendors

storing and shipping as much of the product as possible.

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Development of Review Finding

Condition. The company recently (lees than six months ago) moved into a new production

facility in a brand-new industrial park. However, it has not taken advantage of the

increased space. Already, production facilities are cramped, with the six work centers

encroaching on one another and inventory (raw materials, work-in-process, and finished

goods) spread all over the production facility. Production space is so overcrowded and

working conditions so cramped that Joe Sorry is already looking for additional plant facility

space.

Criteria. It is management's responsibility to maximize the efficiency and effectiveness of

limited resources such as finite plant capacity—maximizing productivity, minimizing

inventory levels, and producing the best quality product at the least possible cost, resulting

in customers satisfied as to product quality, cost, and on-time deliveries.

Cause. Production processes were established based on a standard work center of six work

stations for the production of specialty products. This concept was implemented by Joe

Sorry based on the methods used by his previous employer. The same manufacturing

procedures were also employed with the other product lines—custom boards, defense

business, and basic boards—as the company started production into these areas. However,

for most of these products, including specialty boards, such a six-step process is

unnecessary.

Effect. As a result of inefficient manufacturing procedures, the company has diminished its

potential productivity, has inventory out of control, has production employees getting in

each other's way, has increased the amount of rejected items and rework, is experiencing

more than 20 percent overtime for production workers, and has a delivery on-time record

of less than 40 percent. In addition, present manufacturing procedures are resulting in

excess personnel and inefficient methods, which is costing the company more than $1

million annually in unnecessary costs. We estimate that the company can conservatively

save more than $900,000 in annual personnel costs alone as shown in Exhibit 5.1 by

implementing our proposed plant layout and related operating procedures.

These estimated savings do not include the additional amount of productivity to be

accomplished through these recommendations,

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estimated to be at least 25 percent of present specialty and custom board production levels.

EXHIBIT 5.1 SCHEDULE OF PRESENT AND PROPOSED PERSONNEL COSTS

Recommendations. Implement our proposed plant layout and manufacturing procedural

change recommendations, as presented to company management together with specific

recommendations, features, and basic assumptions at our final progress meeting.

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Paramount to achieving the economies, efficiencies, and effectiveness of these

recommendations are the implementation of the following 14 specific recommendations:

1. Disband the defense/government contracting business.

2. Develop the basic board business into a sales distribution–type business.

3. Stress specialty and custom boards as your main business.

4. Do production scheduling by product or finished goods part number.

5. Coordinate with materials vendors so that delivery schedules coordinate with your

production schedule.

6. Standardize specialty and custom parts, with the ability to separate out add-on options.

7. Maintain flexibility in production as to the type of processes and the number of work

steps.

8. Promote flexibility and interchangeability of production workers.

9. Effectively use floating trainer/coaches.

10. Integrate QC inspection and packing/shipping into the online production process.

11. Build effectiveness in responding to periods of under- or overcapacity plant conditions

and the ability to make effective decisions.

12. Institute effective control over work-in-process directed toward meeting customer

delivery schedules.

13. Institute effective inventory control procedures, resulting in lowering levels for raw

materials, components, work-in-process, and finished goods inventories.

14. Change manufacturing attitude to one of increased productivity, working together and

helping each other, fixing the problem and not the blame, and customer rather than

crisis orientation.

Inventory Control

The review team's analysis of present and proposed inventory control procedures identified

the following items for the development of review findings:

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• The present JOBEASY computer system is not being properly maintained and kept up-to-

date because of the volume of receipt and issue transactions.

• Raw materials and components and finished goods inventories are not being kept to a

minimum; the present storeroom is filled beyond capacity, and materials are stored all

over production.

• The inventory control manager cannot effectively do his job, resulting in his chasing

rather than controlling inventory.

• Raw materials and components are being ordered based on customer order crises,

rather than integrated with a controlled production schedule.

• Finished goods inventory is not being shipped out as completed in production based on

customer delivery schedules, owing to short quantities, inability to ship, crises taking

priority, and so on. This has resulted in finished goods being stored all over the plant

facility.

• There are at present no adequate storeroom control procedures in place, with the

storeroom capacity overextended, materials sitting all over the production area, and

items located strictly on a search-and-find basis.

• Inventory receiving procedures are chaotic because materials received for a customer

order cannot be placed into production or the overcrowded storeroom, but must be

placed somewhere in the production area.

• When materials are needed to be issued into production, it becomes a search and find

mission to locate the correct materials. Often the materials cannot be found, the

quantity is short, or other different materials have been added.

• Although the computerized JOBEASY inventory control system provides for effective

inventory control reporting, it is not being used. Accordingly, there are no proper

inventory control reporting procedures, which has resulted in an uncontrolled

inventory control environment. All of the desired inventory control reporting features

should be incorporated into the proposed computer system specifications.

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Development of Review Finding

Condition. Total inventory levels and corresponding inventory turnover and average age of

inventory have worsened during the three years the company has been in existence, as

follows:

Inventory levels have also grown over the three years for each of the four product lines, as

follows:

Criteria. Inventory levels and related investment in inventory should be kept to the absolute

minimum as dictated by the demands of the specific type of business. Material inventory

ideally should not be brought on-site until it is needed for production, but should be

available at the appropriate vendor site. Finished goods inventory should be completed for

customer orders and shipped and billed immediately, to the extent possible. Inventory

should be controlled so as to meet these objectives, pushing toward zero inventory levels.

Cause. The present JOBEASY computerized inventory control system is not being

maintained or kept up-to-date. In addition, the present storeroom is filled above capacity,

with additional inventories stored all over the production area. There are no effective

systems at present—computerized or manual—to control inventories.

The company is presently operating on a crisis-oriented production system—the order for

the customer in need gets pushed through production. This is a primary cause of the loss of

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control over these inventories, as materials received cannot get into production and must

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be stored in the production area, and completed jobs are not being shipped on a timely basis

and must also be stored in the production area.

Effect. The result of inadequate inventory control procedures is that raw materials and

components and finished goods are stored all over the plant facility. Frequently, when

materials are needed in production, the materials cannot be found (and may result in

emergency reorders), quantities are short, additional different materials have been mixed

in, and multiple quantities are found. This process of search and seek as materials are

needed is also costly in terms of the time required to locate items, as well as inefficient

production with these materials (and finished goods) in the way.

The related costs of having finished goods sitting in storage and not being shipped include

the lost cost of shipping and collecting from the customer, the cost of carrying this

inventory, the cost of not locating the order in whole or in part and having to redo

production, the lost value of the money tied up in inventory, the cost to the company's cash

position, the cost of customer dissatisfaction and the loss of customers. Although we cannot

quantify many of these costs, such as for the process of locating inventory items or the cost

of customer dissatisfaction and lost sales, and the cost imposed by the uncontrolled

inventory control environment, we can estimate the cost of carrying inventory, based on the

electronics industry standard of 20 percent of inventory value, to be approximately

$536,000 (20 percent of present inventory of $2,680,000).

The present inventory condition will have to be cleaned up, with inventory maintained in a

controllable environment, as it affects all aspects of manufacturing and is costly in dollars

as well as manageable operations.

Recommendations. In the area of inventory control, the following seven recommendations

were made:

1. Develop desired systems specifications for a proposed computerized inventory control

system to include all necessary features to effectively control raw materials and

components and finished goods inventories.

2. Through the disbanding of the defense business, turn the present inventory of $340,000

into cash by using in specialty or custom

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board production, returning it to vendors, selling it to other customers, selling it to

other manufacturers, and selling it for scrap. Finished goods inventory should be

delivered and billed.

3. The basic board inventory of $600,000, which is mostly finished goods, should be

reduced by turning it into sales and then concentrating on making this a sales

distribution business, as previously discussed.

4. Raw materials and components inventories for specialty and custom boards must be

controlled as to what exactly is on-hand and which parts can still be used in production.

This should be coordinated with customer orders in-hand and in backlog so as to use

these materials in production as soon as possible and not reorder them.

5. Raw materials and components that cannot be used (obsolete) or will not be used in

production in the near term (within six months) should be disposed of (converted to

cash) by returns to vendors, sales to others, modifications so that it can be used in

production, sold as scrap, and so forth.

6. The remaining raw materials and components inventory (hoped to be minimum) has to

be physically controlled and integrated with an adequate record keeping system.

7. Finished goods inventory of specialty and custom boards must be analyzed as to what

orders are readily shippable, what orders need to be cleaned up or require additional

production before they can be shipped, and what items are excess inventory. Action

should be taken to convert excess inventory items to cash through special sales efforts

to present customers. However, before this is done, management should determine the

impact these sales will have on other present and future sales.

Product Line Analysis: Four Business Concepts

The review team analyzed present manufacturing operations as to their impact on the

various product lines and identified their findings as follows:

Specialty and Custom Boards

Presently, these products are controlled by customer order. The main difference internally

between a specialty and a custom order is that a

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custom order is normally to solve a specific problem (and the product does not exist), which

requires more customer definition, more internal engineering, and a much longer lead time

in development and manufacturing. A specialty board is also built for a special purpose, but

it is a recurring or repetitive purpose rather than a new product design.

Typically, the company waits for the customer to order, then logs in the order on the

production schedule as backlog awaiting availability. Scheduling of a specific order into

production is done by Joe, based on his relationship with the customer or an impending

customer crisis. There is no consideration as to maximizing production job mix or

completion of orders by expected customer delivery date. We analyzed current customer

order backlog and found almost 20 percent of the total backlog to be three months old or

older. We were unable to determine how many orders customers canceled prior to getting

into production, owing to the lack of adequate record keeping. We observed three different

customer orders being canceled, in the total amount of $420,000.

The sales manager and the two sales staff assigned to specialty products are primarily

responsible for order taking and customer contact (usually initiated by the customer). We

observed minimum sales staff initiated contact with customers. Each order is treated

individually, and unless it is a reorder of a product previously manufactured, the order

write-up is routed to engineering for product design. Engineering looks at each such order

separately, with little if any coordination between previous orders or other customer's

orders.

Once the customer order is set for production, materials are ordered through purchasing,

based on the engineering specifications. Purchasing is mainly processing purchase orders,

with no coordination between customer orders or overall material needs. The company is

paying higher prices for this type of ordering. Although this was not within the scope of our

review, we analyzed four such transactions in which the materials were exactly the same

and found that if the company had combined its requirements, it would have saved more

than $4,000 based on the vendor's quantity discount policy. Purchasing is responsible for

ordering materials for delivery at the time of the planned production start. However, other

than setting up the scheduled delivery date, we found no evidence that purchasing controls

such deliveries or that delivery dates are changed to correspond with changed production

start dates. This has resulted in materials coming in and sitting in inventory all around the

plant facility.

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Once these specialty or custom orders are ready for manufacture, they follow basically the

same path—the six step production process; offline initial, mid, and final QC inspections;

and offline packing and shipping. As the company controls by customer order, we found

many partial orders sitting around the manufacturing floor, some more than two months

old (one order more than six months) from the date of production completion. This

situation is extremely costly and has gotten out of control.

The customer service unit was established to deal with customer problems after the sale,

delivery, and installation of the product. There are so many of these types of postinstallation

problems that the present three-person unit is backed up more than a month. In fact, it has

the two clerical staff dealing with these customer concerns as well. In addition, the

numerous calls from customers (as to where their orders are, are they in production, when

will they be shipped?) are being handled by this unit as well.

Defense Business

The defense/government business is primarily a contract bid business. The company

presently has contracts with the U.S. Department of Defense, the Environmental Protection

Agency, and a subcontract (also Defense Department work) with Northrup Company totaling

$800,000.

Although the company has been able to increase its business in this area from last year (the

first year of government business) from $300,000 to the present $800,000, this is basically a

decreasing market owing to government cutbacks. In addition, bid prices are typically lower

than can be achieved for commercial products, and internal costs for such things as bid

proposing, negotiating, engineering, production specifications, QC testing, and special

packing and shipping are much higher. This segment of the business is operating at

marginal profit (estimated at 3 percent for 20×3) with many of its inherent costs not being

accounted for.

The company presently allocates two each of six-member work stations, QC inspectors, sales

staff, and engineers to this segment. This is not a growth area, and this allocation of plant

facility and personnel can be better used in the main specialty and custom board

businesses. The company should push to complete its current contracts and not pursue any

additional business in this area. The sooner it can get out of this business, the more quickly

it can start achieving the manufacturing efficiencies previously proposed with our plant

facility recommendations.

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Basic Boards

This segment of the business was started last year and has grown from $600,000 in sales and

$76,000 in net income to $1,150,000 in sales and $128,000 in net income this year. The

business is basically a purchase and resale of lower priced boards ($30 to $50 range) to

repetitive customers. The company presently is bringing the completed boards in-house,

using two six-member work stations to put the company identifier data (company name,

logo, etc.) on the product and then repacking and shipping. As mentioned elsewhere, the

company should pursue making this a total sales distribution business, with vendors

shipping directly to the customers. Again, the two workstations can be better used by the

specialty and custom board products.

This is a definite growth area, which should require minimal space and personnel

allocation. Although profit margins are less than those for specialty and custom boards (11

percent as compared with 22 to 24 percent), we believe that this is additional revenue

accruing to the company for each additional dollar in sales. Moreover, with the elimination

of any in-house manufacturing (product identification), overall costs should be reduced

significantly, even with additional vendor costs and possibly increased inventory

investment and storage.

The company should stress sales efforts to increase sales to the many potential customers

that are presently out of the company's customer base. Presently, five major customers

make up close to 75 percent of total sales. As the sales staff is primarily on commission for

sales shipped and collected, this should require minimal up-front, out-of-pocket costs. The

commission (8 percent) is already calculated into the selling prices. This appears to be an

untapped and profitable marketplace for the company. In addition, there is the residual

effect of this part of the business bringing in additional customers for the specialty and

custom product lines and vice versa.

General Findings

The product line analysis yielded five general findings:

1. Sales prices have come down each of the three years the company has been in business.

This is a result of more competition, the customer's push to lower their costs and prices,

and an overall down economy. The company can probably expect further erosion of

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sales prices for its products. While there is still good potential for increased unit sales,

this never makes up for loss of

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selling price. The company needs to become more competitive in engineering,

manufacturing, and cost containment.

2. The total customer order backlog is currently more than 35 percent of last year's sales

($2,200 of $6,250); 33.6 percent for specialty, 31.1 percent for custom, and 46.1 percent

for basic boards. This is entirely too high, particularly in light of the company's current

shaky cash position. This backlog must be converted into sales and collections before it

disappears to the competition.

3. Accounts receivable is at an uncontrollable level; the collection period has gone over

100 days. The situation is mainly due to Joe's push to get sales, create production crises,

and relax credit terms, and to customer complaints and held back payments for less

than quality merchandise.

4. Inventory levels have risen to uncontrollable proportions, with turnover ratios of about

three times per year and the average age of inventory more than 100 days. This

situation is not only contributing to the poor cash position, but is also clogging the plant

facility.

5. The company is dependent on a limited number of customers in each of its primary

businesses (specialty, custom, and basic boards). Although this is advantageous in

working with these customers as to assisting them to define their needs, forecast their

purchases, and more effectively service them, it leaves the company open to possible

quick losses of revenue and income should any one of these customers pull its orders

and start to use one of the competition. This is particularly critical with the company's

current large backlog, inability to meet delivery dates, large amount of customer

complaints, the amount of returned and defective merchandise, and so on. The

company needs to better service these customers as well as look for an additional

customer base.

Product Line Recommendations

Three recommendations were made in regard to product line:

1. Specialty and Custom Boards. Main business: Expand customer base; standardize

materials and products to the extent possible; maximize manufacturing throughput to

meet customer delivery schedules.

2. Defenses Business. Disband: Finish present contracts and get out of the business;

reallocate space to specialty and custom products.

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3. Basic Boards. Expand: Move toward a sales distribution business with vendors shipping

directly to customers; minimize inventories.

Development of Review Finding

Condition. The company's backlog of customer orders has grown in each of the three years

it has been in business, indicating an inability to service customers' needs adequately, as

follows:

The backlog has also grown over the three years for the three main product lines—specialty,

custom, and basic boards—as follows:

Criteria. Customer orders should be put into production, manufactured, shipped, billed, and

collected in the shortest time possible. In effect, the company is not in the customer order

backlog business. Customer order backlog should be kept to a minimum—ideally at zero—

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so as to provide adequate customer service and not take the chance of losing the customer

order.

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Cause. The present policy of putting customer orders into production, based on Joe's

relationship with the customer or a specific customer crisis, has resulted in many other

customer orders not being placed into production and remaining as backlog. In addition,

the inefficient use of plant facilities (such as two work stations for both the defense business

and basic boards) has resulted in specialty and custom customer orders remaining in

backlog. The use of inefficient production methods (such as forepersons, production team

leaders, six-member production teams, and offline quality control and shipping/packing)

has created less production throughput than possible, which has also had an impact on the

amount of customer backlog.

Effect. The result of this buildup of customer backlog has resulted in reduced and canceled

sales from some of the company's major customers. For instance, Apex Electronics

accounted for $440,000 in specialty board sales in 20×2, but only $380,000 in 20×3.

Discussions with this customer's representatives attributed the drop in business to Joe Sorry

Company's inability to produce and deliver on time—otherwise, it would have increased its

business. Other major customers related the same story.

The total of $2.2 million in present customer backlog could be converted to sales, producing

an operating profit of approximately $400,000 (18 percent operating profit margin plus

efficiencies).

Recommendations. Adopt the proposed plant layout and related features and production

method changes, as recommended previously, so as to increase throughput and productivity

of specialty and custom board orders, and at the same time phase out the defense business

and move toward making the basic board business a sales distribution business.

CASE STUDY: FINISHED GOODS SHIPMENTS

You are the supervisor of finished goods warehouse operations for an electrical component

manufacturer. At the end of each day, shipments are set up for effective loading onto

company and private carrier trucks the following morning. Each planned shipment is

palletized and waiting in the correct truck loading dock or position. As the trucks arrive as

scheduled, the corresponding pallets are at the front of the line for efficient

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loading via mechanized fork lift equipment. This system has been in effect for more than a

year and has worked quite effectively. As long as planned shipments are prepared the night

before and the trucks arrive according to schedule, the system will continue to function

properly.

This morning when you arrived, you found that the proper shipments were all in the

correct loading position. It was less than 15 minutes before the arrival of the first trucks,

and the forklifts should have been moving the items from the warehouse onto the loading

docks. You were greatly concerned, as there was no forklift available for any of the 16

loading docks. If the materials were not ready, private carriers would not wait and would

most likely charge the company for the time anyway. Your own company trucks could wait;

however, it would cost the company to pay its drivers for waiting. In addition, the entire

day's schedule would be out of whack, and items out of place or not picked up would have

to be juggled around in the warehouse—and some customer orders would not be delivered.

You immediately went back to the forklift area and found all 16 pieces of equipment with

dead batteries. A new policy had recently been installed to economize on the use of

electricity, whereby all fork-lift equipment was to be recharged overnight, with the

corresponding circuit breaker thrown by Hank, the forklift supervisor, prior to his leaving

each night. However, last night Hank had to leave early, and no one else was directed to

throw the circuit breaker.

Reader: Listed in Exhibit 5.2 are some thoughts you might have related to this situation.

Place an X in the column of the attribute (if it is an attribute) that corresponds to each of

your thoughts. The completed chart is shown in Exhibit 5.3.

OPERATIONAL REVIEW FINDINGS EXERCISE: IDENTIFICATION OF ATTRIBUTES

Reader: Each of the following statements has been excerpted from an actual operational

review finding. Record to the left of each statement the attribute or attributes of a finding

that would be associated with it:

A = Condition, B = Criteria, C = Cause, D = Effect, E = Recommendation

The correct answers follow the exercise.

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EXHIBIT 5.2 RELATING THOUGHTS TO ATTRIBUTES

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EXHIBIT 5.3 RELATING THOUGHTS TO ATTRIBUTES—SUGGESTED RESPONSES

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Note that these excerpts are being used only for identification purposes and are not to be

construed as good or excellent examples.

1. In fact, the total project cost was $16,685 on May 30, 20XX, with the institution sharing

$2,302 of the total cost, which was more than the required 10 percent of the total project

cost.

2. The above conditions existed because the property custodian did not have adequate

control over the receipt of equipment.

3. Furthermore, procedures were not established to make a review of the activities of

these employees.

4. The necessary ledger accounts should be established and maintained on a current basis

to provide control over funds.

5. We believe that these procedures also result in wasted effort and unnecessary costs in

maintaining duplicate records.

6. The Internal Revenue Service, Circular E, Employer's Tax Guide, states that students

working for a school, college, or university are taxable for federal income tax

withholding.

7. We were told that there were only oral contracts between the department manager and

the individual performing the service.

8. In our opinion, timely and accurate final expenditure reports from local offices are

essential to proper management and control of funds.

9. As a result, we estimate that the administrative costs of the department were overstated

by $287,584.

10. The approval of project proposals is one of the Director's most important

responsibilities, and we believe that management should take whatever action is

necessary to improve review procedures.

Suggested Response

A = Condition, B = Criteria, C = Cause, D = Effect, E = Recommendation

A & B     1. In fact, the total project cost was $16,685 on May 30, 20XX, with the institution

sharing $2,302 of the total cost, which was more than the required 10 percent of the

total project cost.

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C     2. The above conditions existed because the property custodian did not have adequate

control over the receipt of equipment.

C     3. Furthermore, procedures were not established to make a review of the activities of

these employees.

E     4. The necessary ledger accounts should be established and maintained on a current

basis to provide control over funds.

D     5. We believe that these procedures also result in wasted effort and unnecessary costs

in maintaining duplicate records.

B     6. The Internal Revenue Service, Circular E, Employer's Tax Guide, states that students

working for a school, college, or university are taxable for federal income tax

withholding.

A     7. We were told that there were only oral contracts between the department manager

and the individual performing the service.

B     8. In our opinion, timely and accurate final expenditure reports from local offices are

essential to proper management and control of funds.

D     9. As a result, we estimate that the administrative costs of the department were

overstated by $287,584.

B & E     10. The approval of project proposals is one of the Director's most important

responsibilities, and we believe that management should take whatever action is

necessary to improve review procedures.

DEVELOPMENT OF REVIEW FINDING: EMPLOYEE LEASED AUTOMOBILES

As part of the operational review of the Purchasing Department, procedures were reviewed

as performed by the Buyer II responsible for administering automobile leasing

arrangements and the use of the cars by assigned staff personnel for the fiscal year 20XX.

Analysis of these 87 leased cars disclosed that 24 cars were being used consistently for only

short distances each day. In addition, 37 employees' personal cars, although not driven on

company business every day, were still driven sufficiently on company business each month

to justify using a leased car as opposed to reimbursing such employees at the rate of

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30 cents per mile. Analysis of the entire situation, along with recommendations as to the

reassignment of leased cars, demonstrated that the Example Company could realize a

savings of more than $44,000 per year.

Reader: Develop an operational review finding for this situation using the five-attribute

format of a finding. The suggested response follows the exercise.

1. Statement of Condition

2. Criteria

3. Cause

4. Effect

5. Recommendation

Suggested Response

The operational review finding in response to this situation was as follows:

1. Statement of Condition. Our analysis of the use of leased cars by your assigned

personnel for the fiscal year 20XX disclosed the following:

a. Of 87 leased cars, we found that 24 of these were not being used sufficiently to

justify the lease payment. It would be more economical to the company to allow

these employees to use their own personal cars and reimburse them at the current

rate of 30 cents per mile.

b. For 37 employees who presently use their personal cars and are reimbursed at 30

cents per mile, the total reimbursement for the fiscal year exceeds the cost of

leasing an automobile.

2. Criteria. It is normal business practice to lease automobiles for employees in situations

where the cost of the lease is expected to be less than the reimbursement for the use of

their own cars.

3. Cause. We found that a procedure does not presently exist whereby the use of leased

cars and personal automobiles on a reimbursement basis is analyzed periodically.

Accordingly, the present situation has evolved over a number of years.

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4. Effect. The present situation has resulted in the company's paying excess costs of more

than $44,000 per year.

5. Recommendation. We recommend that a procedure be implemented to analyze the use

of leased and personal automobiles on an ongoing basis. To correct the present

situation, we recommend the reassignment of leased cars which will result in a present

savings to the company of over $44,000 per year.

DEVELOPMENT OF REVIEW FINDING: LOW-DOLLAR AND LOCAL PURCHASES

As a result of an operational review of the purchasing function at the ABC Pipe Supply

subsidiary, the following findings were uncovered:

Twenty percent of all purchase orders issued were for a value of less than $25.

Thirty-two percent of all purchase orders were for a value between $25 and $50.

Sixty-six percent of all purchase orders were issued to local vendors.

The cost to process a purchase order in the central Purchasing Department has been

calculated at $51. Present Example Company policy states that all outside purchases

(including those from subsidiaries) of more than $50 should be processed through the

central Purchasing Department. Although the Purchasing Department has the authority to

alter this policy, this has not been done for ABC Pipe Supply.

Reader: Develop an operational review finding for this situation using the five-attribute

format of a finding. The suggested response follows the exercise.

1. Statement of Condition (What did you find?)

2. Criteria (What should it be?)

3. Cause (Why did it happen?)

4. Effect (So what? What is the effect of the finding?)

5. Recommendations (What is recommended to correct the situation?)

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Suggested Response

The suggested finding is as follows:

1. Statement of Condition (What did you find?)

a. Twenty percent of all purchase orders were for less than $25.

b. Thirty-two percent of all purchase orders were for $25 to $50.

c. Sixty-six percent of all purchases were issued to local vendors; should be part of

another finding.

2. Criteria (What should it be?). In our opinion, purchase orders should not be issued for

purchases under $50 by ABC Pipe Supply, as it costs $51 to process a purchase order in

the Example Company central Purchasing Department.

3. Cause (Why did it happen?). The discussed conditions exist because present company

policy states that all outside purchases over $50 must be processed through the

Example Company Purchasing Department. The Purchasing Department, however, has

the authority to allow operating departments and subsidiaries to purchase directly for

amounts under a certain limit (i.e., $50). Such delegation of authority has never been

made. Accordingly, the ABC Pipe Supply purchasing function presently processes all

purchases as purchase orders, regardless of the amount.

4. Effect (So what? What is the effect of the finding?). The processing of purchase orders

by ABC Pipe Supply for under $50 results in unnecessary purchasing, overstaffing in the

purchasing function, excessive paperwork, and wasted time in the purchasing/receiving

cycle. As a result, we estimate a realizable savings of approximately $87,000 (less the

costs of alternative procedures) of purchasing function costs by eliminating the need for

purchase orders for purchases under $50. (The reviewer provides the data to show the

actual savings and what can realistically be reduced or eliminated, as well as the cost of

recommended alternative procedures.)

5. Recommendations (What is recommended to correct the situation?) We believe that

such a high proportion of small value purchase orders (52 percent under $50) warrants

consideration of a more economical ordering system. We recommend that you consider

the use of a telephone ordering system for purchases under $50. This system does not

require the processing of a purchase order, but rather, the order is placed directly over

the telephone

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from a copy of the purchase requisition. We estimate that this system will reduce the

cost of processing a purchase order by at least 60 percent of present costs, resulting in

an annual savings of $52,200.

CASE SITUATION: SHIPPING AND RECEIVING PROCEDURES

During the course of an operational review at a plant location, the reviewers reviewed the

shipping and receiving functions. As part of this review, they observed that freight cars at

the plant location siding in shipping and receiving were loaded and unloaded by eight

employees (two four-person teams).

Shipping Procedures

The reviewers observed that products to be shipped were all similarly boxed and stored on

pallets in the storeroom. A forklift operator would pick up the loaded pallets and bring them

to the appropriate shipping area. The eight-employee crew would then unload the pallet

and stack the boxes in the freight cars, returning the pallets for reuse. This was in

accordance with company policy, not to use pallets in shipping, as there had been past

incidences of many lost pallets.

Upon checking with the client's 12 major customers (accounting for over 80 percent of total

sales), the reviewers found that 10 of these customers were reversing the client's procedure

(unloading the rail car onto pallets) and would be willing to provide the client with pallets

so they could use palletized shipments.

Receiving Operations

The review of receiving operations disclosed that the bulk of freight car receipts were for

commodities in 50-pound bags, 55-gallon drums, standard-size boxes, and so on. All of these

were shipped in full railcars and stacked one on top of another. The eight-person crew

would unload the rail car by stacking the items onto pallets. The forklift operator would

then pick up the loaded pallets and take them to the appropriate storage area. The

reviewers checked with the four major suppliers (more than 80 percent of material

purchases) and found that each of them transported the product from storeroom to railcar

on

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pallets and then had the product taken from the pallets and placed on the railcar—similar to

what the client's plant location was doing with shipments as described previously.

Reader: What would you recommend to correct these operating deficiencies? The suggested

responses follow the exercise.

Shipping Procedures

Receiving Procedures

Suggested Responses

The operational review recommendations are as follows:

Shipping Procedures

1. Palletize shipments for the 10 major customers who are willing to provide pallets, and

who wish to have palletized shipments.

2. Conduct further review and study as to palletizing shipments for other customers who

order in sufficient quantities and where palletizing would be appropriate.

Receiving Procedures

1. Provide the four major material suppliers with sufficient pallets to cover those that

would be in transit, so that they can ship product to the client on pallets.

2. Initiate a policy to analyze all other receiving (and shipping) situations for the

possibility of using palletized shipments whenever possible and appropriate.

The net cost savings of these recommendations for the initial year were estimated at $80,000

annually.

CASE SITUATION: ACCOUNTS RECEIVABLE AND COLLECTIONS

The review team performing an operational review of the accounts receivable and

collection functions at a bank credit card operation, found that the policy for sending out

delinquent payment notices was as follows:

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• First notice: 10 days after payment due date

• Second notice: 10 days after first notice

• Third through eighth notices: every 5 business days

• After 60 days: to credit department for further action

Each overdue payment notice was prepared automatically by the computer system as long

as the customer had any amount overdue. The last 60-day notice, prior to credit department

intervention and credit card cancellation, was hand signed by the Accounts Receivable

manager and sent “Certified Mail, Return Receipt” at a cost of $2 each.

The reviewers' analysis disclosed that many overdue accounts, approximately 28 percent,

were of that status as the customer was questioning an item(s) on the bill and Customer

Service was investigating. The client's policy was that the customer did not have to pay for

an item under investigation. However, there was no mechanism to code the customer's

account on the computer system. Generally, customers would phone Customer Service when

they received the overdue letters, and Customer Service would tell them to ignore the letters

until the situation was cleared up.

As part of the review, it was also discovered that another 24 percent of these delinquent

payment accounts were for account balances of less than $20. The primary reason for most

of these (more than 90 percent) was the questioning by the customer of improper computer

recording of finance charges while an account was being investigated by Customer Service.

Bank policy prohibited the waiver of any finance charge without proper approval by

Accounts Receivable management.

Reader: What would you recommend to correct these operating deficiencies? The suggested

responses follow.

Suggested Responses

The operational review recommendations are as follows:

1. Reappraise the philosophy of credit card operations being in the short-term loan

business, thus increased emphasis on customers' paying down bills plus finance charges

rather than on nonpayment of bills. The credit card operation makes more money on

finance charges than on retailers' fees for using the charge card service (which does not

usually cover operating costs). This is an area for further analysis.

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2. Eliminate the practice of sending out delinquent notices for amounts of less than $20

(calculated as the approximate cost to process and follow-up a delinquent notice).

3. Revise the delinquent payment notice schedule to allow customers sufficient time to

remit payments. For example: first notice 30 days after delinquency, second notice after

60 days, third notice after 90 days, fourth notice—termination.

4. Make the necessary changes to computer processing so that accounts under

investigation by Customer Service can be properly identified, so as to eliminate the

preparation of delinquent notices and the calculation of finance charges for these items.

5. Change the existing policy requiring Accounts Receivable management to approve the

waiver of all finance charges. Allow for the delegation of these finance charge waivers

to appropriate Accounts Receivable and Customer Service staff for amounts under a

certain limit (e.g., $20).

The net cost savings of these recommendations were estimated at $140,000 per year.

REVIEW QUESTIONS

1. The most important single element of the operational review is the development of

specific review findings. What are the two major steps involved in the development of a

review finding?

2. What are the five attributes of operational review findings? Discuss each one briefly.

3. What are the six steps mentioned in this chapter in the basic approach to developing an

operational review finding?

SUGGESTED RESPONSES

1. The most important single element of the operational review is the development of

specific review findings. What are the two major steps involved in the development of a

review finding?

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Response

• Data collection, relative to obtaining as much pertinent, significant information

about each finding as is realistic

• Evaluating the finding, in terms of cause, effect, and possible courses of corrective

action

2. What are the five attributes of operational review findings? Discuss each one briefly.

Response

• Statement of Condition:

• What did you find? What did you observe? What, when, where, how step.

• Criteria:

• What should it be? What do you measure against?

• What is the standard procedure or practice?

• Note: In the absence of standards, use alternative approaches:

— Comparative analysis

— The borrowed standard

— The test of reasonableness

• Effect:

• So what? What is the effect of your finding?

• Cause:

• Why did it happen?

• Recommendation:

• What can correct the situation?

3. What are the six steps mentioned in this chapter in the basic approach to developing an

operational review finding?

Response

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• Review and analyze operating policies, systems, and procedures and the practices

actually being followed to determine whether they will produce the desired results,

if performed correctly and adequately.

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• Accumulate valid evidence related to the operational area under review and its

corresponding transactions.

• Compare operational transactions with systems and procedures to determine

whether procedures are being followed correctly and desired results are being

achieved.

• Quantify the effect in dollars lost, ineffectiveness, and so on resulting in the failure

to achieve desired results.

• Determine the cause why desired results are not being achieved, together with

appropriate and sufficient evidence.

• Develop recommendations as to how to improve the situation as to economy,

efficiency, and/or effectiveness.

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