Birch Paper Company

Birch Paper Company

Birch Paper Company (BPC) operates as a decentralized profit center organization. As profit centers, these four production divisions operate as individual businesses but upper management reserves the right to set sourcing and pricing rules. However, given the nature of the current operational structure, divisional management may lack the incentive to base their decisions around the profits of the company as a whole and may be encouraged to boost only their division’s profits. This is precisely the problem that Birch Paper Company currently faces. Sourcing and pricing decisions are currently being guided by individual department profits rather than being guided by the profits of BPC as a whole.

Sourcing

One of the contributing factors to divisional management’s lack of companywide profit is due to sourcing decisions. Consider BPC’s current dilemma; the Northern division (ND), in conjunction with the Thompson division (TD), has designed a special box (shape design and coloring unique) and has taken 3 bids for its production. Two of the bids are from outside sources and the third bid is from the Thompson division of BPC. The lowest bid is from an outside source ($430 per 1,000) and the ND manager wants to take the lowest bid to maximize profits. On the other hand, TD cannot place a bid for less than they have currently offered ($480 per 1,000) as they are trying to maintain their own profits. Each manager has their own division’s numbers in mind and is not considering the impact this decision will have on the entire profits of BPC.

It is easy to understand from each individual perspective though, the Thompson division has already spent months perfecting the special package design, production methods, and materials to be used for the special box (not standard size, color, & shape due to design). TD has invested time and department money on behalf of Birch Paper Company and if the Northern division outsources the production...