How to Keep the Chips from Falling?
Mr. Potato Chip Company has been a well-respected New England manufacturer for many years. Recently the company has decided to expand into new markets to ensure its competitive advantage. To do this, it will need to attract new investors, and to accomplish that, it will need to show that it is capable of producing a solid return on investment each year.
In keeping with these objectives, a policy has been instigated that reduces the finished products' inventory to a rock-bottom level each June 30, which is the end of the company's fiscal year. Why? The lower the inventory, the less money is tied up. This situation, in turn, tends to put the company in a better cash position at year-end, which means that more money can be passed on to the stockholders as earnings per share.
As the recently hired production manager, Jane realizes that this policy has a downside. Because inventory levels on June 30 are lower than at any other point during the year but demand for potato chips is higher than usual, the net result is an inability to meet the total customer demand for various types of potato chips. In fact, once inventory levels are reduced, it will take more than one month to get the process back to normal and running smoothly again.
The effect, Jane predicts, will be both lost sales at year-end and a number of operations problems associated with low inventory. For Jane, the dilemma is whether or not to confront senior management with these problems. Should she question outright the wisdom of the policy? She knows, on the one hand, that it is right to provide short-term, bottom-line performance for the company's stockholders. After all, they own the company, and there is nothing inherently wrong with reducing inventory levels, particularly given the need to attract new investors. And, is it really her place to question the decisions of senior management, especially being a new manager?
But isn't it also right, she reasons, to protect the longer-term interests of the company by providing customers with what they want when they want it? Perhaps if stockholders were aware of the effects of this policy, they would reconsider being concerned with only the short-term bottom line. If ending the policy will result in more sales, might that not also result in greater earnings per share for stockholders down the road?
Applying the ends-based principle - the greatest good for the greatest number - Jane identifies the "greatest number" as being the customers and the factory workers. The stockholders and senior managers are relatively few in number. So the greatest good would be to change the policy.
As for the rule-based approach, what might the rule be? Do what you need to do - even if it results in some extra costs and customer dissatisfaction - to meet critical strategic plans? Don't play games with numbers at year-end, no matter what? Always have enough products in stock to meet the maximum expected customer demand?
If Jane applies the care-based, or reversibility, principle and puts herself in the position of others, she can readily see that the workers and investors will choose the long-term approach, whereas senior management and the stockholders may well choose the short-term approach. But is a short-term focus really desirable, even from the stockholders' perspective?
Jane decided to quantify the costs associated with the practice of dropping inventory levels at year-end. At the same time, another production location experienced a shortage of more than 16,000 cases of potato chips, which resulted in a severe customer service problem. This shortage, coupled with Jane's figures, convinced senior management to discontinue the policy.
Copyright 1999 Institute for Global Ethics. All rights reserved.
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