Airtex Aviation Case Study AirTex Aviation 1. Did AirTex need a new control system at the time of the takeover? * “The management system that was in place was one woman who magically kept everything in her head. There was limited and almost incomprehensible formal system.” Sarah Arthur, the company’s accountant, had complete autonomy over the company’s information, and she kept this information private. * AirTex was in need of a more formalized accounting system, since accounting was a central department of the company, and profitability was a key measure to ensure the success of the company at the time of the takeover. * Also, Ted and Frank had plans to dispose of Sarah Arthur, who was acting manager upon their arrival. However, given her central role within the company for 20 years, she possessed a plethora of information, which was undocumented and she retained in her head * AirTex should make an effort to document and provide proper procedure for all major processes. It will ensure that knowledge is not lost with the departure of key personnel. However, Ted and Frank should be cautious about “rubbing people the wrong way”, especially their employees who have worked at the company for 10+ years. These individuals will be the most resistant to change and will perceive Ted and Frank as new and disruptive. * Managers were unaware of their department’s profitability. It was kept very secretive by Sarah Arthur, the accountant. As a result, managers didn’t know how big their receivables were and whether their performance was improving. Furthermore, their financial reporting was very basic and catered to Piper Aircraft, their aircraft dealer.
* AirTex needs to provide transparent information to all its stakeholders, such as their employees, their suppliers, and the bank, with whom they had short-term bank notes payable of $300,000. * Old owner wasn’t very involved and was absent most of the time. He was only there strategically. It lacked a lot of the controls. There wasn’t a motivation to perform. * Departments don’t have motivation to do things differently. * Culture is very intimidating; everyone was scared of approaching Sarah. * Although net income is important, in small companies, cash flow is also extremely important * They bought the company more on the potential. They saw aspects of the company that could be managed better. * They had to let Sarah Arthur go because their philosophy was decentralization and Sarah Arthur ran a tight ship and personally oversaw controls 2. Evaluate the control system that Frank and Ted implemented. Should anything have been done differently? * Make the system wear the black hat * Use system to make employees do the “right” thing * Controls Implemented * Personnel/Cultural Controls: Frank and Ted chose to keep the current employees, as they felt there wasn’t enough time to completely turn over the workforce. Furthermore, Frank and Ted provided an environment that was encouraging and supportive. Ted chose to be an “emotional leader” as opposed to a “task leader”. He also set up his office with a blackboard to accommodate teaching. This encouraged managers to seek him for advice when they encountered a problem and he was willing to provide mentoring and training.
* Frank and Ted recognized that their employees were experienced and motivated to succeed in their roles. As a result, Ted decided to take a backseat approach in terms of his management style. He didn’t possess industry knowledge as of yet, and he realized that his value-add to the company was his management skills. * Results Controls: Ted and Frank adopted a decentralized organizational structure. Each operating activity would be its own profit centre, which gave managers a chance to earn 10% of their profit centre profits. * This bonus aligns their employees’ interests with the overall objective of the company to increase profitability. This control is also supplemented by the personnel/cultural control promoting encouragement and support. The success of this control is contingent on the knowledge and motivation of the employees. The 10% bonus probably wasn’t enough to incentivize managers but it was to get information from them * However, Ted should not have immediately given the department heads access to their receivables, since it is one of the key metrics of the company’s profitability. Although he established a procedure for collections and was constantly monitoring the progress, his employees were not well compensated for the additional risk that they had to bear. They might perceive this additional responsibility as frustrating and unfair. It might also reduce their incentive to take value-maximizing actions, such as choosing a profitable customer, in favor for a customer who may not be as profitable, but can pay in cash. Benefit: Ted and Frank seem to think they can more easily chase credit; ensured people are doing it by having an aging receivables charge; if they get too old, the full amount is charged to the department * Allowed managers to purchase items externally * Action Controls: Frank and Ted instituted a Daily Department Report, which recorded operating and accounting information. They also set up a new process for the Parts department, which included unique identifiers for each inventory item, and a system to ensure that Accounting could verify each sale at the end of each month.
* Ted and Frank made a significant improvement to the past Accounting system. The new system documents their revenues and decreases their accounting expenses, which cost them $392,350 in the past. The benefit of improved accountability and the decrease in accounting expenses outweighs the cost of implementing the new system. 3. A short time after Ted and Frank took over AirTex, one of the employees on the fuel line went to Ted and asked if he could grow a beard. Under the former administration, they had been prohibited. Ted said, “Yes, as long as you keep it neat.” Was that a good answer to this question? Is this question relevant to a class focused on control systems? * Ted’s response was in line with his management style. As long as there wasn’t a severe opposition against growing a beard, he was correct in his response * The question is a sign that Ted doesn’t have a proper code of conduct or HR policy in place. Ted and Frank should work on drafting documents, which specify the company’s objectives and what they expect from its employees. * Department managers might feel like they don’t have proper authority if employees always go straight to the top. Takeaways: * Decentralization implies delegation of authority; local managers make many decisions * Results control systems required to align individual and org goals * While major benefits also risks to decentralization * Head office will need to intervene * we should be careful what controls we give managers * results controls should be complimented by personnel/cultural controls
