Compagnie Du Froid, S.A.

Compagnie du Froid, S.A.

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CONTENTS

I.        Problem Identification        3

II.        Analysis        3 - 5

III.    Evaluation of Alternatives        5 - 7

IV.    Recommendation        7

1. Problem Identification

Compagine du Froid, S.A needs a new performance evaluation system as well as a new rewarding mechanism.  

1. Analysis

Compagine du Froid, S.A. is an ice-cream manufacturer founded in 1985 and run by Jacques Trumen. Company has grown at a steady pace over the years with expansion of  its operations by penetrating into Italian and Spanish markets beyond their home country of France. It has a decentralized setup in place which segregates the operational duties to regional managers with a significant autonomy in decision making at operational level. The head office based in Paris take care of accounting, financial and business development aspects.

Currently, business measures performance of regional managers on the basis profit plan (Estimate of sales forecast) and is exclusive of each regions performance in light of factors beyond control of regional managers. Also, every manager is rewarded by paying 2% of corporate profits. Current system does not inclusively take into account market dynamics, breakdowns, operational efficiencies and transfer pricing issues. It is required to evaluate the performance of the 3 regional businesses in France, Italy and Spain and decide regarding the compensation of the managers according to that.

However, in 2009 the performance of Spain region was very poor and had affected the overall profit of the company. These issues have emerged while evaluating the regional performances based in the case.

France's regional manager (Jean) had invested in building relationships with the vendors, suppliers and the distributors of the product. There is a emerging rivalry between west coast and east coast distributors that created a little tension for the sales. In continuation of efforts for improving the slipping market share , new machines had been introduced. The start-up issues emerged but with the support of strong technical and a core team of employees to assume responsibility for supervising and maintaining the machinery helped put production targets on track. Jean's keen idea for a new source of revenue through food distribution to supermarkets in lieu of a fee was quite thoughtful. These efforts had been recognized by Jacques and pointed towards a profit potential in the distribution business because of low incremental cost for this service. The imports by Spain from France had the fixed costs distributed by a higher sales volume and that ultimately increased France region's profits.

Pierre Giraux, the manager for Italian region had a clear sense of the market he was assigned to perform in (earlier in France). So, his regional performance had been commendable with matching sales goals, and expanding company's products towards Italy's western coast. But his sub-lime performance had also suffered from higher wages and lower efficiency. These laggard performance had been recognized by Jacques and accounted for in the profit plan.

Andreas Molas, is counted as the innovator and risk taker which is evident from the introduction of new products and marketing ideas like developing of vending machine for selling specialties. There were certain problems in adaptation of new machines which had an adverse effect on the Spanish sales as a result the capacity shortage was fulfilled by importing from France division. This lead to emergence of other issues like transfer pricing, and region specific packaging, unsuitable market conditions, uncertain cold weather conditions ultimately leading to a drop in tourism. But, Andreas came up with analytical views to forecast the temperature change and its effect on sales volume. During these conditions, competitors started charging lower prices to increase their demand. As a risk taker, Andreas did a price cut, boosted the advertisement in hope of building a market share but its performance lagged behind other regional sales numbers. It was beneficial for Andreas to have production from France to meet out short capacity due to its costs being way lower than its own selling price in the Spanish market even after a price cut. But the cost of supervision, energy, and maintenance due to the continuous repair and adjustment work in the machines at Spanish facility was adding to production cost.

 Over the years the company has invested its resources in development of new iterations of current offerings, as well as in new products in ice creams and specialties. Compagine du Froid has increased focus on specialties as there is less competition in premium segment and at the same time specialties offer larger contribution margin in comparison to regular offerings.  

Upon careful evaluation of France & Italy's performance,  it has been seen that the Cost of goods sold and administrative costs have increased. The operating margin of France - 430 is quite favorable in comparison to Italy' 85. France is performing very well in 2009 and their growth was more. It is evident from the contribution margin for France being 4.76 per liter as compared to Italy's 1.73 per liter. The competitive effectiveness for France shows an unfavorable variances for temperature, product price and sales mix indicating as compared to Italy. Looking at Spain's performance Andreas did whatever nest possible under such situation full of uncertainties and lead his team with strong belief to retaliate stronger performance by focusing on his personnel training and knowledge for operations.

1. Evaluation of Alternatives

Profit Plan System

Under this system the fixed budget allocations for costs and technical efficiencies are made with an assumption of improvement in technology and increased efficiency of machines in future. These assumptions may not stand true all the time. This system is backed by a sales forecast that Compagine du Froid deems to be fit in comparison to present performance. This system completely ignores other factors to be considered when forecasting sales and production capacity like impact from market dynamics, transfer pricing criteria, level of production efficiency, etc. As an initial strategy it was good to have all regions start from same point for performance evaluation through fixed budgets. But as regional expansions happen it became important to recognize the efforts of regional managers and their contribution to overall profit of the company.