Analysis of XCO's Policies for Customer Service and Service Technicians

XCO's Intent with the Customer Service and Service Technician Policies

1.Customers who rent copier machines for their office from Company X (“XCO”) are given a customer service number at XCO to call if they have problems with the machine. A customer service employee at XCO may be able to explain how to fix the problem by talking on the phone.  Automation and troubleshooting of the process is accomplished by a computer program that leads XCO customer service employees through a menu to help them understand problems that customers report and then explain to the customer how to solve the problem. 

If the problem cannot be solved over the telephone, then a service technician is sent by XCO, via a referral from the customer service department, to the customer’s office location to fix the machine. 

Customer Service employees get paid by XCO based on the number of calls they take per day. 

The service technicians are paid based on the number of service calls they make to fix machines.

A.What is XCO’s intent with these policies (customer service vs service technician) assuming they want shareholder return as high as possible?

B.Given the arrangements described above, what are the actual incentives X Co has created, Vis a Vis the Rational Actor Paradigm, for customer service employees and service technicians? Describe the behavior(s) you expect to observe when studying the customer service and service technician departments.  

C.Given your answer to B, how is the profit and loss statement affected, in terms of the bottom line, in relation to XCOs stated corporate objective for shareholders. 

D.What do you intend to do about the problem?    Explain how you will end the perverse incentives of the arrangement? 

2.The mechanical guy at your company shows you that there is a new piece of equipment that could be purchased that is more efficient than existing equipment that you own. Excited about the prospect of increase profit, you share this news with your Manager as making the Manager look good is often a key to higher personal compensation.  Your manager calls a meeting to discuss the matter and invites accounting and finance folks to the meeting. 

At the meeting, your pre-meeting excitement is short lived.  The accounting folks say the existing equipment is relatively new.  The equipment has a life expectancy of 10 years and is only two years old.  The accountants believe the firm has not recovered its cost yet.  A finance person at the meeting claims that there is two more years left before the asset pays back the initial investment.  That person claims the firm has to wait at least two years before the asset can be replaced. 

Incentives Created by XCO's Policies for Employees

It is now your turn to speak at the meeting.   What is your answer?   Do these arguments make any economic sense?  How will you proceed?  You begin to think, what have I learned in class that will help me out here . . . ? 

3.A heavy equipment manufacturer purchased a flexible manufacturing system to automate its large Midwestern plant. Unused to the need for close, careful feedback of operational information in order to make adjustments after installation, management never learned to use the equipment effectively. Nor did it allocate funds for simulation studies. Without a fix on volume or on which parts to manufacture, the company finally sold the plant at a loss.

Important Background.

You are a manufacturing consultant with 25 years’ experience in all things cost and cost planning.  In fact, you were asked to read and advise the authors of our textbook on CHAPTER 7: Economies of Scale and Scope.  Because of your reputation, you are called on to render advice to this Company, Acme Company, so they don’t have to close another plant.   

Your engagement letter from Acme Company has the following information from management: 

There are many persuasive arguments for seeking economies of scale in production through ever more capital-intensive processes? However, we at Acme Corp believe that Rapid changes in manufacturing technology, as well as in international competition, have at last begun to call into question the soundness of these familiar arguments.   We are can now see that the assumptions on which such thinking rests come from a time when manufacturing “know how” was captured by building it into special-purpose machines.  We are concerned that our drive for increased efficiency (lower unit costs, greater precision, and higher production volumes) inevitably led to greater specialization even at the cost of increasing rigidity.

Thinking the problem over,  you think back to Chapter 7 in the text book,  particularly the discussion on Economies of Scale and  Economies and Diseconomies of Scope,  and especially   Figure 7.4.  

Further you do some research and this passage catches your eye:  

How, then, has the sophisticated application of computers changed the manufacturing process, and what are the implications of these changes for competitive strategy? No answers to these questions would be complete without mentioning such new or refined capabilities as:

Extreme flexibility in product design and product mix, which allows for an almost unlimited variety of specific designs within a reasonable family of options, including alternative materials.

Impact of the Policies on XCO's Bottom-line

Rapid response to changes in market demand, product design and mix, output rates, and equipment scheduling.

Greater control, accuracy, and repeatability of processes, all of which lead to better quality products and more reliable manufacturing operations.

Reduced waste, lower training and changeover costs, and more predictable maintenance costs.

Greater predictability in all phases of manufacturing operations and more information, both of which make possible more intensive management and control of the system.

Faster throughput due to better use of all machines, less in-process inventory, fewer stoppages for missing parts or materials, or machine breakdowns

Distributed processing capability made possible and economical by the encoding of process information in easily replicable software. 

You begin to think through this passage and issues come up which you think are important for the engagement: 

i.These emerging capabilities directly challenge most current assumptions about manufacturing, in particular, the notion that greater production volumes. 

ii.It is true  that greater volumes allow for the use of expensive special-purpose equipment, which in turn is justified only by large-scale operations; 

However,  

iii.Computer controls, programmed production sequences, and electronic memory make feasible the application of leading-edge processing techniques to small production runs.

Well, with all this in mind your task is: 

A.What is the issue(s) here in these scenario? 

B. Clearly we have inefficiency here, but why and what is the source? What mistake(s) did management make to cause them to shut the plant down? 

C.What would be my advice to solve the matter(s) so this Company does not repeat the same mistakes and have sell another plant at a loss?  

4.Economists are not generally proponents of higher taxes. 

However, a microeconomic case for higher corporate tax rates goes as follows: Entity-level taxes, like the corporate tax, are well suited to target the supersized returns that accrue to capital owners when their companies enjoy market power or other nonreproducible advantages. Hitting these supernormal returns — usually known as “economic rents” — is a sweet spot because taxing them is likely to be both economically efficient and distributionally progressive. 

The keys to this statement are contained in the part underlined above. 

A.Please explain in a straightforward way the relationship between the underlined part and supernormal returns (excess economic profit)? 

B. What nonreproduceable advantages are being referred to here?  

C. Which is more important for nonreproduceable advantage (sustainable competitive advantage) intangible or tangible assets and why? 

D.Given your answers above,  does the statement apply to all Corporations,  or just ones in certain industries?