Management Decision and Control

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TABLE OF CONTENTS

Executive Summary        

Introduction        

Control Problem 1: Budget Control Problem        3

Identify & Explain        3

Causes Of The Problem        3

Consequences of the Problem        4

Control Problem 2: Administrative Control Problem        

Identify & Explain        

Causes Of The Problem        

Consequences of the Problem        

Control Problem 3: Planning Control Problem        

Identify & Explain        

Causes Of The Problem        

Consequences of the Problem        6

Conclusion        6

Reference List        

Appendices        

Executive Summary

This report aims to analyze three control problems within Lululemon based on management accounting theories, explain the causes and outline consequences of these problems. The three problems in this detailed discussion are measurement controls, administrative controls, and planning controls. These problems relate directly to the management decision control package (Brown, 2005) seen in exhibit 1.

Introduction

Lululemon is a Canadian, yoga-inspired athletic apparel company founded by Chip Wilson. Beginning as a small privately owned shop selling customized athletic wear the brand witnessed extreme popularity and growth. Now Lululemon is running on an international basis, named as one of the fastest growing companies of 2012.

Despite this, the company is facing a crisis according to Christine Day, the new CEO of the company. Although the company continues to grow in market share and size, Lululemon is consistently hit with problems which are detailed below

Control problem 1: Budget Control Problem

Identifying the Problem

Lululemon need to engage in more coordinated operating budgets or better design, particularly the sales and cost budget. A budget is a detailed plan summarising the financial consequences of an organisation’s operating activities for a specific time period in the future. At higher levels of management budgets are tied closely with action and decisions (Nyland and Pettersen 2004). According to Brown (2005) budgets fall under a category in the control system framework or package known as measurement controls. More specifically the sales budget estimates sales units and revenues from products and the cost budget works in synchronisation with this by looking at quantities of goods and production units.

Causes of the Problem

There are a number of potential factors which have been identified as likely causes of Lululemons budget control problem.

External factors:

• High demand of product.
• Rise in market share and exponential growth as the company expands overseas

Internal factors:

• Lack of expertise and experience of senior managers causing errors in planning forecasts for demand and inventory.
• Direction of information gathering and budget preparation is top –down only. This means important statistic s and experience from frontline staff may be overlooked. Communication has been a big problem within the senior staff management as shown by cultural shifts.
• The timing of budget creation may be inefficient. This hinders the functionality and accuracy of budgets.
• Supply-chain management has affected budget creation. The problem is due to difficulty finding overseas suppliers for the merchandise, said the CEO Christine Day.
  

Problems with the Budget

The budget may be lacking planning and facilitating of coordination. The budget has not taken into considerations of the new economic conditions of the international market. 

• Ineffective evaluation and the bad allocation of resources has created major problems in the budget as seen by its consequences. 
• Lululemon may not be effectively evaluating the performance of the budget; this may be a cause of setting inappropriate incentives or remunerations to budget outcomes.

Consequences of the Problem

The problem with budget control has been reflected in the poorly designed supply-chain infrastructure. A major consequence of this control problem is size shortage. Not enough stock reaches stores on time meaning some stores were short of large sizes and some were short of smalls. Products were not reaching shelves to be sold, hence decreasing profitability and sales made by the company. This may be seen in exhibit 8 – (Lululemon retail store data) where a decline in corporate store sales and sales per square foot is witnessed despite the growing number of stores and expansion of the company. 

The result of this causes a domino effect with inaccurate financial forecasting, markdowns, buying and selling of materials. In an attempt to rush products to stores, Lululemon had to rely on expensive air shipping rather than shipping from offshore manufacturing plants. This has an undesirable effect on COGS and gross profit margins.

Control Problem 2: Administrative Control Problem

Identify & Explain

Another distinct control problem that has been identified within Lululemon is an administrative control problem, in particular within the organisational and governance structures of the company. The control problem which needs to be addressed is the necessity to achieve goal congruency and workplace alignment in the company. This control issue is the result of the decentralisation of the company and its flat organisation structure which is believed to have led to several consequences within the company such as non-goal congruent behaviours, misalignment within workers, negative cultural shift, slower decision making and a less specialised team of employees.