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Case 3: The Chaos Company

The company is a leading manufacturer and distributor of a line of packaged

goods which it sells nationally under the Chaotic Products trade name. The companyoperates three factories from which it ships to regional warehouses or directly to large

outlets. Last year, demand for Chaotic Products was 3.2 million “eui!alent" cases,

distributed as follows #in million cases$ according to fi!e sales regions%

  North Luzon Central Luzon South Luzon Visayas Mindanao Total

 &.' &.( &.( ).) &.* 3.2

+neshift production capacity in each of the three plants were as follows

#in million cases$%

Home City Branch No. 1 Branch No. 2 Total).2 &.- ).' 3.(

stimated freight costs #P/case$ from each of the factories to each distribution

center are as follows%

Sales Reion Home City Branch No. 1 Branch No. 2

North Luzon &.0' &.3' &.0&

Central Luzon ).&' ).*& ).*&

South Luzon &.*& ).(& ).1&

Visayas &.)' &.*& &.-&Mindanao ).&& &.3& &.*'

 ot all shipments are routed through regional warehouses, but on a!erage, the

freight cost on direct shipments to outlets was uite close to the cost which would ha!e been incurred if the shipment had been routed through the ser!icing warehouse.

Chaos Company followed a philosophy of decentralied management. Tope4ecuti!es fa!ored this approach for a number of reasons. 5irst, by enriching the

e4perience of subordinate managers, it pro!ided better training for ultimate top

management responsibility. 6econd, it insured that operating decisions were made bythose persons most familiar with the detailed circumstances which would determine the

success or failure of the decisions. 7nder the decentralied approach, subordinate

managers were held responsible for the profitability of operations under their control.

Consistent with the policy of decentraliation, each of the fi!e regional

warehouses was under the direct super!ision of a regional sales manager. The

warehouses were not assigned to a particular plant for ser!icing, since demand shiftsmade a certain amount of fle4ibility necessary. 8ather, the regional sales manager

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decided upon which plant to place an order. The price paid by the warehouse was

P1.2'/case 5+9 the plant. This price was set to reco!er costs plus a reasonable return on

in!estment for the manufacturing di!ision. 6ince the regional warehouse was reuired toabsorb the freight costs, the regional sales managers are e4pected to place their orders so

as to minimie their own freight costs and hence those of the company as a whole.

+!er a period of time, this procedure has led to increasing amounts of

organiational friction, and early this year, some Chaos officials were beginning to

uestion whether the procedure was e!en achie!ing the ob:ecti!e of minimiing freightcosts. 9ecause 9ranch o. 2 was not the closest plant to any of the regional warehouses,

it was ne!er deliberately selected as a source by a regional sales manager. 8ather, the

managers would initially order from the ;ome City or 9ranch o. ), whiche!er was

closer. 6ince those plants had inadeuate capacity to meet all sales demands, it was thennecessary for the plant managers to re:ect some orders. o consistent procedure was

followed in determining which orders would be accepted, but it was largely a matter of

“firstcomefirstser!ed." The regional sales managers whose orders were re:ected were

then usually forced to take them to 9ranch o. 2, typically at a considerable increase infreight cost. This aspect of the situation resulted in much grumbling by the regional sales

managers.

<oreo!er, since the orders placed with 9ranch o. 2 were not placed there in a

conscious effort to minimie freight costs, there appeared to be a strong possibility thatthe resulting o!erall shipping program was not optimal. 5or this reason, some e4ecuti!es

felt that the practice of lea!ing shipping decisions to the decentralied :udgements of

regional sales managers should be discontinued. They proposed instead that all orders be

routed through a central office which could then determine an optimal shipping programfrom an o!erall company point of !iew. The actual uantities shipped o!er each possible

route last year were as follows with total shipping costs that year reaching P2,2-',&&&%

  #in million cases$

Sales Reion Home City Branch No. 1 Branch No. 2 Total

North Luzon &.3 &.2 &.'

Central Luzon &.) &.3 &.(

South Luzon &.2 &.2 &.(

Visayas &.0 &.2 ).)

Mindanao &.2 &.1 &.*

Total ).2 &.- ).3 3.2

+ther e4ecuti!es were concerned about the effect that such a proposal would ha!eon the general effecti!eness of decentralied management. They also obser!ed that one

result of the proposal would be to saddle the regional sales managers with freight costs

o!er which they could e4ercise no control.