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 companys accountant,
had complete autonomy over the companys 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 departments profitability. It was kept
very secretive by Sarah Arthur, the accountant. As a result, managers
didnt 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 wasnt very involved and was absent most of the time. He was
only there strategically. It lacked a lot of the controls. There wasnt a
motivation to perform.
* Departments dont 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 wasnt 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 didnt 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 wasnt 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
companys 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?
* Teds response was in line with his management style. As long as there
wasnt a severe opposition against growing a beard, he was correct in his
response
* The question is a sign that Ted doesnt have a proper code of conduct or
HR policy in place. Ted and Frank should work on drafting documents,
which specify the companys objectives and what they expect from its
employees.
* Department managers might feel like they dont 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