Formosa Plastic Group
Those three major corporations are Formosa Plastics, Nan Ya Plastics, and Formosa Chemical & Fibre Corp, and each corporation were consist of several divisions. Most of the administrative functions of the company were centralized in order to take the economies of scale for granted. FPG had set up a strategy to be the low cost producer in the commodity market since it was the products sold by most of the company’s chemical divisions. The company’s and its division’s performance were measured based on it return on investment (ROI).
There were no corporate assets allocated to the divisions. Moreover, plants and product groups were considered as profit center, distinct production processes and group of machine were cost center, and nonproduction-oriented units were consider expense center within the divisions. The performance of the company was monitored closely by the FPG’s president every month by having a comprehensive meeting with senior managers. THE PROTAGONISTS Based on our discussions and analysis, we have come out with two protagonists in this case.
They are the FPG’s president, whose name was not mentioned, and the Polyolefin Division general manager, Mr. Hsiao Chi-Hsiung. The FPG’s president is the one who is responsible to monitor the performance of the company. Every detail about the business was discussed in particular in a monthly performance review meeting including sales, the competitive situation, future trends, and future products. This is to ensure that the managers will always be alert and be able to bring the company toward success. On the other hand, Mr.
Hsiao Chi-Hsiung, the Polyolefin Divisions general manager, is the one who is responsible in dealing with the situation faced by the division which was the shortage of ethylene supply. He had to come out with plans in order to cope with the unfortunate situation. THE PROBLEMS The total bonus amounts put in the budget are fixed and not varied by the actual profit of the year. So, in case the company earns higher actual profit, the amount of bonus will not be revised and still taken from the budget. This can cause the employee to be demotivated and this can affect the operation of the company and reduced efficiency.
The second problem that the company faced was the conflict between the top management and division manager. It happen when the sales plan and production plan prepared by the division managers was hardly accepted. The top management wanted the division target to have an 80% to 90% probability of achievement. Therefore, the division managers have to review the plan several times before the top management approved. It is because they have different understanding on how to manage the division’s operations.
Next problem that the company confronted was the shortage of ethylene supply. The ethylene was the only raw material used in produce polyethylene. Consequently, the shortage of the ethylene will cause decreasing the production of high density of polyethylene. This will lead to decrease in sales directly, and profit indirectly.The major issue detected in this case is the performances of employees are evaluated subjectively. It will cause the employee to not have clear details about objectives of their task and how will they be evaluated.
For instance, when the company set the division target to have an 80-90% probability of achievement, the employee might not have clear details about the target and what is the benchmark of the targets they have to accomplish because it is too general and broad. Therefore, by not knowing how they will be evaluated, the employees tend to do their work without any purpose and motivation. Another major issue in this case is about the shortage of ethylene. CPC is a government corporation which is the only local supplier of ethylene. CPC faced the problem of shortage of ethylene, therefore it unable to supply it to FPG.
The process of importing of ethylene is expensive and complicated. Because of that, FPG tried to build it own ethylene plant but the government had not given the permission because of worries about overcapacity. The shortage of ethylene not will only affect the production of polyethylene but will also affect FPG’s financial planning. It is because Taiwanese ethylene price fluctuated significantly. However, the price of polyethylene did not fluctuate together. While they are facing the shortage of ethylene, unfortunately there was the Gulf War happened at the largest oil producing countries in the world.
Since the ethylene is petro-chemical, the Gulf War has major effect on the ethylene supply. Regarding the performance evaluation, the company should apply Balanced Scorecard Performance measure to all divisions. By using this system, it can assist all level of employee to have clear vision and strategy into objectives. Other than that, it can measure and monitor the improvement that can be achieved by the company. In Balanced Scorecard, there are many aspects that will be monitored and measured the performance.
To have this to be done, the Balanced Scorecard is using Key Performance Indicator (KPI) which is in line with their objectives. Each KPI has their specific percentage to be achieved. Therefore, all employees will have better understanding about their task of what to be achieved based on the targeted percentage. At the end of the year, all employees will be evaluated based on their specific achievement. In the case of the issue of shortage of ethylene, it is the best way for the company to overcome the problem by building its own ethylene plant.
FPG have two control systems which are management control system and financial control system. The element of management control system is the employees were evaluated subjectively which mean the evaluators are focus on objective performance measure but somehow alter the uncontrollable factors subjectively. A detailed cost accounting and reporting system are the keys element in financial control system. The company set the standard cost for every aspect of manufacturing. The variety of allocation base is being used to allocate the indirect cost to the entities.
Managers used subjectivity to eliminate some of the effects of uncontrollable factors from performance evaluation. In our opinion, the uncontrollable factor cannot be avoided. Therefore, the method used by the managers is yet the appropriate way to the company. It is because the managers should not take into account of the effects of this factor. There is no purpose to evaluate on the uncontrollable factor because it is beyond the control. On the other hand, rather than wasting their time on evaluate the uncontrollable factor, they should try to find better solution to prevent the uncontrollable factor from keep happening.