Birch Paper Company Analysis

ANALYSIS

The Company

Birch Paper Company operates decentralized divisions and the top management has been working to gain effective results by giving each division almost full autonomy in making decisions. And our officials so believe that it has resulted in increased company profits and improved competitive position. However, some of our divisions have been operating more independent than what they should be, as evidenced by the issue of Northern Division on supply bids at present. Though my department actually still supports that the decentralized structure fits the company, we insist that the divisions be reminded of the limitation of their authority and that the executive office still has the better judgment relating to implementation of policies that affect the overall interest of the company.

The four divisions are properly accounted for as profit centers. Each has outside markets for their products, but it should be noted that the divisions are not achieving full capacity utilization at present. They are all evaluated based on profits and return on investments, which led to the issue at hand: Thompson Division now asserts that it is only willing to transfer their products to Northern Division at a price from which they can earn profits, that is actually far greater than the market. And so the Northern Division, concerned about its profitability will obviously accept offers from outside the company, at market price. This system results in goal incongruence when what is good for one division may not be what is best for the company as a whole.

Supplier Bids

Northern Division asked for bids for the production of its newly designed special display boxes for one of its papers from Thompson Division and two outside companies. The offers are $480 a thousand from our own Thompson Division, $432 from Eire Papers, Ltd., and $430 from West Paper Company. So, Northern Division would naturally choose West Paper Company's offer in order to incur the lowest cost and gain the maximum profit. However, reviewing the circumstances tells us that buying from our Thompson Division would actually incur the lowest total cost - and thus the maximum profits