Wk 3 Walmart Audit (Planning Phase)
mvazquez21
OPERATIONALREVIEWWORKBOOKRobReider9781118373514.pdf
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2 Planning Phase
The proper steps to be taken in the planning phase to ensure successful results from an
operational review are fully discussed in this chapter.
This chapter will:
• Increase understanding of the purpose of the planning phase in an operational review.
• Introduce information that must be obtained during the planning phase and related
sources of information.
• Increase knowledge of how to use planning phase information in the identification of
critical operational areas.
• Increase understanding of planning and budget concepts and their expansion into
operational areas and related principles of good operational controls.
• Introduce a sample operational review planning phase work program.
The starting point for the operational review is management's decision as to which
operational area or areas are to be reviewed, and whether the operational review is to be
preliminary or in-depth. Based on management's decision, the operational reviewer then
starts the planning phase of the operational review. The primary purposes of the planning
phase are to:
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• Gather information about the operational area.
• Identify possible operational problem areas.
• Start to develop the basis for the operational review work program.
Proper Planning and the Planning Phase Pays for Itself
INFORMATION TO BE OBTAINED
The planning phase can be performed efficiently and systematically if the reviewer has a
clear idea of what is needed. The records and information that could be required may
include:
• Laws and regulations that apply to the activities being reviewed
• Material on the organization
• Financial information
• Operating methods and procedures
• Management information and reports
• Problem areas
Chase the Elephants, Not the Mice
Reader: Document the information that you would obtain with regard to an operational
review of your organization. How would you gather such information? What is the
importance of each record and piece of information?
SOURCES OF INFORMATION
What are the sources of the information to be gathered in the planning phase? Such
information could come from various sources; however, the following are the most usual
sources:
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• Effective interviewing
• Organizational data
• Financial data
• Policies and procedures
• Operating and management reports
• Physical inspection
Operational Information Comes from Many Sources
Reader: What are the sources of the records and information with regard to your
operational review? How will you go about acquiring each record and piece of information?
REVIEW OF ORGANIZATIONAL PLANNING AND BUDGET SYSTEMS
A good starting point for the reviewer in the planning phase is to understand the
organization, why it is in existence, and what it is trying to accomplish (i.e., its goals and
objectives). To accomplish this, the reviewer needs to understand the organization's long-
term and short-term planning methods and related budgeting and control processes. The
planning process, if exercised effectively, forces the organization to:
• Review and analyze past accomplishments.
• Determine present and future needs.
• Recognize strengths and weaknesses.
It also enables the organization to:
• Identify future opportunities.
• Define constraints or threats that may get in the way.
• Establish organizational and departmental goals and objectives.
• Develop action plans based on the evaluation of alternatives.
• Prioritize the selection of action plans for implementation based on the most effective
use of limited resources.
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Reader: Document your organization's planning and budget systems. Would you consider it
effective in achieving results—both long and short term—directed toward meeting desired
goals. What are the system's major strengths and major weaknesses? What needs to be done
to make it effective?
ORGANIZATIONAL STRUCTURE AND THE ROLE OF MANAGEMENT
Sample Planning Phase Organizational Work Program
The following are work steps that may be included in a planning phase operational review
work program for the organization:
• Secure or prepare an organization chart with descriptions of each department's and
work unit's specific functions.
• Determine formal and informal reporting relationships from top to bottom, bottom to
top, and across functional lines.
• Analyze actual operations to determine whether such reporting is proper in relation to
how the organization actually functions and whether it results in operational concerns
and problems.
• Analyze each work unit's functions to determine whether they are appropriate.
• Document the duties and responsibilities of each employee. Obtain copies of existing
job descriptions or prepare them through the use of user provided data such as a Job
Responsibility Questionnaire.
• Interview the president, vice presidents, managers and supervisors, and each employee,
to validate their functions.
• Observe actual work being performed to determine the necessity of all duties and
responsibilities.
• Obtain or prepare company policies and procedures relating to each function under
review.
• Determine that authority and responsibility relationships are clearly defined and
understood by all personnel.
• Ascertain that all employees know their delegated authority and responsibilities; ensure
that the responsibilities are proper for the function and do not overlap or duplicate
another area.
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• Look for functions and individuals that either are not providing value-added services or
are not being cost effective. Examples may be isolates, dispatchers, controllers,
unwieldy hierarchies typified by policing and control, and management/supervision
that gets in the way.
• Review hiring, orientation, training, evaluation, promotion, and layoff/firing practices.
• Question inefficient practices such as management policing and controlling, reviewing
and employee redoing, and inappropriate following of policies.
• Ascertain the level of self-motivated disciplined behavior.
Reader: From the sample Organizational Initial Survey Form (Exhibit 2.1) develop similar
tools for your organization's operational review.
EXHIBIT 2.1 ORGANIZATIONAL INITIAL SURVEY FORM
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PLANNING PHASE WORK PROGRAM
Reader: From the sample Planning Phase Work Program (Exhibit 2.2) develop a planning
phase work program for your organization's operational review.
EXHIBIT 2.2 PLANNING PHASE WORK PROGRAM
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CASE STUDY: JOE SORRY, INC.—PLANNING PHASE
The starting point for the operational review of Joe Sorry, Inc. is Joe and Flo's decision as to
which operational area or areas to be reviewed. As was discussed and documented in the
proposal letter, the general areas to be reviewed were agreed to be:
• Personnel: manufacturing, general and administrative
• Manufacturing operations
• Product line analysis
• Profit center concepts
• Operational reporting considerations
• Planning and budget systems
A planning phase work program for Joe Sorry, Inc. is shown in Exhibit 2.3. Note that the
items included in the work program are based the agreed upon areas for review.
EXHIBIT 2.3 PLANNING PHASE WORK PROGRAM
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Organizational Review
The original organization chart for Joe Sorry, Inc. is shown in Exhibit 2.4.
EXHIBIT 2.4 ORIGINAL ORGANIZATION CHART
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The organization structure while simple exemplifies many of the principles of proper
organization such as:
• Clear lines of authority
• Proper division of duties and responsibilities
• Communication between functions, across functions, upward and downward
• Minimal use of personnel and then only as needed
• Proper delegation of responsibility and authority
• Management able to effectively control the sphere of their operations and results
• Management and other personnel clearly understanding what is expected of them and
the results to be achieved
• Organization established based on the principles of the three Es—economy, efficiency,
and effectiveness
• The right size organization for what needs to be accomplished
• Minimal levels of non–value-added employees and management
• Organization no larger than it has to be to accomplish results
The first thing I did upon arriving to conduct the planning phase of the operational review
at Joe's business, which was now located in a fancy new industrial park in an upward
mobile suburban area, was to take a tour of his operations. Joe took me around, proud of
what he had accomplished—over 10,000 square feet of production space with 50 production
employees, and 3,000 feet of office space with over 30 employees. I asked Joe to leave and let
me mosey around the facilities, while he returned to the crisis of the day. This is what I
found out by walking around and talking with the employees on my own:
The 50 production employees were separated into six teams of seven employees each, with
one team member assigned the role of team leader. Although the team leader received a
minimal amount of additional pay, not one of them was comfortable exercising their team
leader responsibility.
Each of the six teams was assigned a foreperson, who was responsible for pushing and
maximizing production. Only one of the foreper-sons was respected by their team, and that
was only because she left them alone to do their jobs.
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The production teams were divided into four groups by type of product. Joe had increased
from strictly a producer of specialty boards to a diversified product line as follows:
• Specialty boards for a constant customer base: 1 team.
• Custom boards as requested by customers: 1 team.
• Defense contractors on a contract basis: 2 teams.
• Basic boards on a competitive basis to any and all customers: 2 teams. These basic
boards were purchased from an off-shore producer, and Joe's employees checked them,
and provided add-ons and Joe's identification materials.
• The other two production employees were a Vice President of Production responsible
for Production Control and Scheduling and an Inventory Control Manager responsible
for ensuring that sufficient materials were on-hand to meet production needs. There
was to never be an idle team due to material stock-outs.
In addition, I found that there were also 12 additional employees which Joe considered
indirect labor or overhead (neither plant nor office). These included:
• Five repair and maintenance employees who were responsible for maintaining
equipment and cleaning the facilities in the plant and office. They appeared to be doing
mainly busy work.
• Four packers and shippers, and three receivers. Both units appeared to work
sporadically and at other times got in the way of the production people.
When I went to find Joe, he was in the midst of his next crisis, so I wandered around the
office area and talked with those personnel I was able to catch in their offices. This is what I
found out on my quick review tour of the office area:
The office and its 30 employees was divided into the following functions:
• Sales: 12 employees, with a sales manager for each product line. In effect Joe was in
four businesses, with 8 salespeople assigned as
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follows: specialty boards: 2 salespeople; custom boards: 1 person; defense business: 2
salespeople; basic boards: 3 salespeople.
• Engineering Department: 9 employees—6 engineers (one head engineer) and 3
draftspeople—with Joe unofficially functioning as Engineering Manager.
• Accounting Department: 5 employees—a CFO/Controller; an employee each assigned to
Accounts Receivable, Accounts Payable, Payroll, and General Ledger.
• Purchasing: 4 employees—a Purchasing Manager and 3 purchasing agents/buyers
Almost every employee in the office seemed to have their own PC networked into a central
file server. Other than the accounting functions, I found three other PCs in the office area
being used—two for word processing and one for a spreadsheet application.
In addition, I found the following functions, not included as production or office, but
occupying office space:
• Quality Control (really a production function, but housed in the office area): 7
employees—a QC Manager and 6 QC inspectors, one assigned to each production team
(whether they needed it or not).
• Customer Service: 3 employees—a manger and two others, who spent their day dealing
with customer calls and complaints—mainly late deliveries and after sale issues.
• Personnel: 2 employees—a Personnel Manager and one assistant.
• Joe's Office: which included himself as President/CFO and 3 Assistants to the President
(who turned out to be trouble-shooters for the crises that Joe couldn't handle).
• Vice President's Office: for Flo (who rarely appeared) and two assistants. Formal title:
Vice President of Operations.
• Clerical Staff: 24 employees—4 each for Sales and Accounting, 3 each for Engineering
and Purchasing, 2 each for Customer Service, Personnel, and Quality Control, 1 each for
Joe and Flo, plus 2 receptionists.
Instead of the 80 or so employees Joe had claimed, there were actually over 130 (not
including Joe and Flo); with many office personnel controlling and supporting production
operations. It was apparent
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that Joe had created a corporate empire; almost rivaling his former employer. I compared
the original organization chart for Joe's initial “garage shop” business to the one I prepared
for the present organization. The differences were not only staggering; but Joe and the
company were out of control. (See Exhibit 2.5.)
Joe's organization chart, after three years in business, now looked like a camel (i.e., a horse
created by a committee). The organization had grown based on immediate crisis rather than
on proper organizational principles. Quick review and analysis of the current organization
showed some possible inefficiencies and organizational roadblocks, such as:
• Instead of Joe and Flo handling all of the major functions, they now had 135 employees.
• Gross payroll was now over $3,010,000 as shown on the summary of personnel
positions (see Exhibit 2.6). Compared to the present level of $6,250,000 in gross sales,
this represents over 48 percent of sales. Even at this relatively high level, the company
was able to earn $830,000 or 13.3 percent of sales.
• Questionable staff personnel such as:
• Three assistants to the president
• Two assistants to the vice president of operations
• Personnel Department: manager, assistant, and two clerical personnel
• Six forepersons and production team leaders
• Purchasing Department: manager, three buyers, and three clerical
• Sales Department: four managers, eight sales staff, four clerical
• Customer Service Department: manager, two staff, two clerical
• Overabundance of clerical personnel; 22 such individuals assigned to the following
functions:
• Secretary—President
• Secretary—Vice President
• Two clerical—Personnel Department
• Two clerical—Quality Control
• Three clerical—Purchasing Department
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EXHIBIT 2.5 ORGANIZATIONAL CHART: PRESENT
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EXHIBIT 2.6 SUMMARY OF PERSONNEL POSITIONS
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• Four clerical—Sales Department
• Three clerical—Engineering Department
• Four clerical—Controller Department
• Two clerical—Customer Services
• A manager assigned to each functional area with undefined responsibilities and
expectations such as personnel, production (vice president), quality control, purchasing,
sales, engineering, controller, and customer services.
• Production, quality control, and sales functionally divided by type of product (specialty,
custom, defense, and basic), which may result in improper division of duties and
responsibilities, and an uneven distribution of work.
• Functions with possible overlapping or duplication, such as both forepersons and
production team leaders, purchasing buyers and clerical staff, and sales managers and
sales staff.
• Functions that seem superfluous with the presence of a computer system such as
engineers and drafting staff, four accounting staff, and numerous clerical staff.
Analysis of Initial Survey Form
One of the first steps in the planning phase is to analyze the organization's responses to an
initial survey form:
Planning and Budgeting. There are no real planning systems in place. The only defined
goal is to be the biggest possible in terms of sales and income, which may create a
conflict. In the absence of effective planning systems, the budget system does not
integrate with the company's plans, but is merely a broad projection for the next year
(based on Joe's wishes rather than any reality) compared on a monthly basis by the
controller.
Personnel and Staffing. The organization is growing out of control. It appears that there
are too many employees in almost every function, with a good possibility that instead of
providing increased efficiency, they often get in everyone else's way. Many employees
do not seem to know exactly what they should be doing; there is possibly more filling of
time than achievement of desired results. Personnel hiring, orientation, training,
supervision, evaluation, promotion, and firing
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practices have to be reviewed and greatly improved; there is too much control by Joe
and the department managers.
Management. Top management is really Joe—not effectively delegating. Flo has almost
disappeared from the operations of the company. Ed Harrison, although given authority
over production, is continually being overridden by Joe. Middle management appears
to be operating under similar conditions (i.e., controlled by Joe). An effective
management and operating reporting system does not exist. There is a need for
delegating down to the lowest possible levels and keeping Joe from interfering with
everyone's operations.
Policies and Procedures. No formal policies or procedures exist. This is causing great
confusion overall within the organization and within most of the departments. There is
too much control by management, with capricious changes by management making it
difficult for employees to sense any consistency.
Computer Processing. There are PCs in every department, one in almost every
employee's workstation. Many are not being used at all; some are used minimally,
others are used for packaged software applications. This area needs to be reviewing
and analyzed to determine how an effective management and operating reporting
system can be implemented.
Manufacturing Systems. Although there is a computerized manufacturing system for
production and inventory control, it appears that it is being used ineffectively, mainly
for routing customer orders through production and reporting inventory reorders
(based on reorder points and reorder quantities) and on-hand inventory balances. The
software is used to support ineffective manufacturing processes.
Responsibility and Authority. Responsibilities have not been clearly defined, so most
employees do not know what they should be doing and what is expected of them.
Although authority has been somewhat delegated to middle managers, Joe through his
continual interference has sabotaged it. Review Exhibit 2.7, Violations of Principles of
Good Business Practice—Summary of Employee Results.
Analysis of Financial Statements
We reviewed and analyzed the Joe Sorry, Inc. financial statements for the first three years of
operations and then compared them with the
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final year of ACE Electronics' operations. As the financial statements were in the company's
computer system, we were able to prepare:
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EXHIBIT 2.7 VIOLATIONS OF PRINCIPLES OF GOOD BUSINESS PRACTICE— SUMMARY OF EMPLOYEE RESULTS
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• Comparative statements for the last three years
• Common-size statements for the last three years
• Comparison with ACE Electronics' last year of operations
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We developed trend percentages and selected financial ratios for critical operational areas
such as:
• Cash liquidity
• Accounts receivable
• Inventory
• Accounts payable
• Sales
• Cost of sales
• Selling expenses
• General and administrative expenses
• Profitability
We were not able to analyze the statements as to type of products (specialty, custom,
defense, and basic), as such information is not available in the computer system. This
analysis should be done in the field work phase.
The financial statements and our developed trends and ratios are shown in Exhibits 2.8
through 2.14.
Identification of Critical Areas for Review
A good method to use in identifying critical areas for review is to have the review team staff
record each possible area as they work through the preliminary survey and the planning
phase. At the end of the planning phase, the review team members critique the list
accumulated and combine like items, eliminate unnecessary or less critical items, and then
prioritize the remaining items. The original list and the final list are shown in Exhibits 2.15
and 2.16.
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EXHIBIT 2.8 COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31
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EXHIBIT 2.9 COMPARATIVE INCOME STATEMENTS FOR YEARS ENDED DECEMBER 31
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EXHIBIT 2.10 COMMON-SIZE BALANCE SHEETS AS OF DECEMBER 31
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EXHIBIT 2.11 COMMON-SIZE INCOME STATEMENTS FOR YEARS ENDED DECEMBER 31
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EXHIBIT 2.12 COMPARATIVE INCOME STATEMENTS FOR YEARS ENDED DECEMBER 31, WITH COMPARISON TO FINAL YEAR OF ACE ELECTRONICS
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EXHIBIT 2.13 SELECTED TREND PERCENTAGES
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EXHIBIT 2.14 SELECTED FINANCIAL RATIOS
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EXHIBIT 2.15 INITIAL LIST OF POSSIBLE CRITICAL AREAS
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EXHIBIT 2.16 REVIEW TEAM FINAL LIST OF CRITICAL AREAS FOR REVIEW
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CASE SITUATION: PURCHASE ORDER QUANTITY TOLERANCES
Reader: Review the case situation below and document your answers to the questions
presented. Then review the suggested responses.
During the planning phase of an operational review, the reviewer found in reviewing the
Purchasing Department's methods and procedures that vendors could be allowed to ship the
ordered quantity plus or minus 10 percent. However, this practice was approved only for
certain commodities such as nuts, bolts, wire, and rope.
During physical inspection of the Purchasing Department and discussions with the manager
of the Purchasing Department as part of the planning phase of the operational review, the
reviewer found that:
The 10 percent quantity tolerance was being used for items that did not require a
tolerance, such as office supplies, maintenance items, and cleaning supplies.
Most vendors took advantage of the tolerance terms and shipped the ordered quantity
plus 10 percent.
Although procedures existed relative to such purchase order tolerances, each buyer was
deciding what was appropriate based on personal knowledge of industry practice.
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Questions for Consideration
1. What additional steps might the reviewer want to perform in the planning phase
relative to this situation?
2. What could the reviewer suggest, if anything, to the Purchasing Department to correct
the situation at this point?
SUGGESTED RESPONSES
1. What additional steps might the reviewer want to perform in the planning phase
relative to this situation?
Response: Time-consuming efforts to show the existence of significant deficiencies
should not be undertaken. Accordingly, this situation should only be documented at this
point, for consideration when deciding on areas for additional work.
2. What could the reviewer suggest, if anything, to the Purchasing Department to correct
the situation at this point?
Response: Written instructions should be prepared for each buyer stating the specific
items that require tolerance and the level of tolerance to be used.
Note that the institution of such written instructions, and exercise of granting such
purchase tolerances only to those items requiring it, resulted in an net annual savings
of approximately $320,000 for the Example Company.
REVIEW QUESTIONS
1. What are the primary purposes of the planning phase?
2. List the type of information that could be gathered during the planning phase.
3. What are some of the sources of information available to the operational reviewer in
the planning phase?
4. What are some techniques by which the operational reviewer can identify critical
problem areas?
5. What areas should be part of the successful operational reviewer's review of
administrative controls?
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SUGGESTED RESPONSES
1. What are the primary purposes of the planning phase?
Response
Gather information.
Identify possible problem areas.
Develop the operational review work program.
2. List the type of information that could be gathered during the planning phase.
Response
• Applicable laws
• Organization
• Reporting relationships
• Division of duties and responsibilities
• Delegation of authority
• Location, size, and nature of operating sites
• Number of employees—by area
• Location of physical assets and records
• Financial information
• Cost of operations by periods
• Revenues: year by year, by product line, product, and so on
• Budget versus actual data: present and past periods
• Cash flow analysis: sources and uses of cash
• Cost accounting data: by product, function, customer, and so on
• General description of operating methods and procedures.
• Management information reports.
• Problem areas: identify and document areas of major deficiency.
3. What are some of the sources of information available to the operational reviewer in
the planning phase?
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Response
• Interviews with management
• Organization charts, functional job descriptions, and so on
• Financial records: statements, budgets, audit reports (internal and external)
• Policies, procedures, directives, relevant memos, and so on
• Reports: internal and external
• Internal audit reports and materials
• Physical inspection and observation
4. What are some techniques by which the operational reviewer can identify critical
problem areas?
Response
• Identification of key activities
• Use of management reports
• Examination of audit reports
• Physical inspection of activities
• Discussion with responsible officials and personnel directly concerned with the
activity
5. What areas should be part of the successful operational reviewer's review of
administrative controls?
Response
• Organization
• Policies and procedures
• Accounting and other financial records
• Performance standards
• Information systems and related internal reports
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