Tugas Sistem Pengendalian Manajemen

Case 12-2 Crown Point Cbinetry

By Kelompok 1:
1. Agnes Gabriela (2211070232)
2. Devita Elyana Utary (2211070271)
3. Isti Dwi Malihatun (2211070227)
4. Muhammad Ilham (2211070262)
 Chapter 12 Management Compensation 2

Case 12-2
Crown Point Cabinetry
Introduction
It was 2002 and Brian Stowell, CEO of Crown Point Cabinetry, was reflecting on the
incredible change he had seen in his nine years of leadership at the small manufacturing
company. Located in rural Claremont, New Hampshire, Crown Point supplied high-end custom
kitchen cabinets to customers throughout the United States. The company was a respected and
desirable employer in its small community, boasting an inspired and motivated workforce. It
had earned the trust of thousands of customers nationwide. But it wasn’t always that way.

Industry
The U.S. cabinet industry was highly fragmented, with more than 5,000 manufacturers sup-
plying stock, semi-custom, and custom cabinets1 through multiple distribution channels. In
1998 the largest manufacturer held 15 percent of the market, while the second largest held
just 7 percent. Over half the manufacturers employed fewer than 10 people.
Demand for cabinets followed residential construction industry trends. Distributors and
dealers each represented about 30 percent of manufacturers’ cabinet purchases, while home
centers and builders shared the remainder evenly. Less than 1 percent of cabinets were pur-
chased direct from manufacturers. As big-box home improvement retailers emerged in the ’90s,
the trend toward stock cabinets strengthened while the custom share of the market
weakened, from 26 percent in 1989 to less than 15 percent by 1999.2
Crown Point, at 85 employees, was a relatively large manufacturer, although some cabinet-
making firms employed upwards of 1,000 people. Crown Point made custom cabinets and, with
an average sale in 2001 running over $25,000 for a kitchen cabinet set, competed in the high end
of the cabinet-making market.

History
Norm Stowell founded the business in 1979, producing the first cabinets in his garage. Em-
bracing principles of quality and service, by 1992 Norm had grown the business to more than
100 employees, which included all seven of his children. While revenues were growing sub-

This case was written by David Vanderschee (T’02) under the supervision of Professor Vijay Govindarajan and Julie Lang
(T’93) of the Tuck School of Business at Dartmouth College. © Trustees of Dartmouth College.
1
Stock cabinets, typically sold by large home-center retailers, are pre-designed, often unassembled cabinets that come in
specific widths and heights, with minimal optional features. Custom cabinets are “one off,” designed specifically for a
particular customer, with no restrictions on features or sizes. Semi-custom are a hybrid of the two, with standard widths
and heights and variable features and design options.
2
Figures are quoted for unit sales. Dollar market share for custom cabinets has declined from 31 percent in 1990 to 26
per- cent in 1999.
 Chapter 12 Management Compensation 3
stantially, the bottom line was suffering. Brian Stowell, one of the Stowell offspring involved in
the company, managed sales in 1992 but took a special interest in running the business. With
the agreement of his siblings and his father, Brain assumed the lead executive role in 1993.

Crown Point’s Products and Production Process

Crown Point manufactured cabinets in its 33,000 square foot facility (about half the size of a
soccer field). The facility was small by light-manufacturing plant standards, as evidenced by
cramped work-in-process and finished inventory. Each kitchen cabinet, available in a variety
of styles, woods, and finishes, was custom designed to exacting customer specifications. The
design was transferred to the production floor where raw material (mainly maple, oak, pine,
and other woods) was cut to make cabinet frames, doors, and boxes. Work was separated by
task on the floor. Each piece was hand sanded and finished with stains or specialty paints.
The final product was assembled, blanket wrapped, and shipped via furniture truck. Order
to delivery generally took 14 to 20 weeks, with lead time (time to get the sale into production)
consuming most of that period. The actual manufacturing time typically was 10 days. Al-
though investments had been made in new cutting and finishing equipment, the dedication
to handcrafting every part of each cabinet made the workers’ interaction with the wood an
ongoing critical part of making a Crown Point cabinet.

A Change in Philosophy
Crown Point’s environment was similar to that at many small manufacturing shops. Growing
sales, a dedicated management group, and a satisfied dealer network had not translated into
healthy financial performance. Some employees were loyal, but a large number of jobs opened up
four or more times each year, yielding an average annual employee turnover of 300 percent.
Many individuals described management/employee relations as “horrible.” One employee recol-
lects “the managers used to have a real attitude, like they were on a power trip. They would
stand over our shoulders trying to make sure everything was right. And when it wasn’t, they
were sure to tell you about it.”
Absenteeism was rampant. Management’s reaction to this problem, and to many other prob-
lems, was to wield a heavy hand. Administrators enacted a policy of denying holiday pay for
anyone who called in sick before or after a holiday weekend. It seemed to have little effect.
The most significant problem, however, was poor in-process quality control. 3 As Brian recol-
lects, “While our finished quality was great, we were building a cabinet three or four times be-
fore it got out of the shop.” Early in 1993 Brian decided to experiment with a different ap-
proach.

3
In-process quality control is defined as the monitoring and control of quality during the production cycle. Finished qual-
ity refers to the quality of the finished product.
 Chapter 12 Management Compensation 4

A New Attitude
Standing atop a table on the shop floor, Brian called a meeting of the company to lay out his vi-
sion.
“Starting today,” he said, “things are going to change. Right now we are wasting tremendous
money on rework and wasted materials. I don’t want that money going out the door; I would
rather give it to you. People are leaving here with no retirement benefits. It breaks my heart
to see this happening. I want to be able to afford to give people these things. From now on, if
you don’t care about first-time quality, there won’t be a job for you. If you do care, you’ll always
have a job here.”
He continued on a second theme: “Today this place isn’t a particularly desirable place to
work. My vision is that one day people will say to you, ‘You work at Crown Point? Wow, I’d love
to get in there.’”
Employees were skeptical but Brian asked them to trust him. As a goodwill gesture, he de-
cided the company would provide donuts and coffee every morning for breakfast, although it
couldn’t really afford the expense. The announcement of change introduced a period of re-
structuring and painful transition. Management critically evaluated employees based on their
quality of workmanship and cut the payroll from 76 to 53 people by 1994. During that period,
unit and dollar sales increased.

Team-Based Management
Unlike most of the management team at Crown Point, Brian Stowell’s wife, Becky, had
experi- ence in other business settings. As a family member and shareholder, she was privy to
many of the struggles Crown Point faced. Foremost among these struggles were the
restructuring deci- sions management was making. Deciding which employees were the source of
quality problems was challenging and politically charged. Twelve months after Brian’s speech,
Becky offered a simple yet radical solution: get rid of the management layers and let
employees decide who among their peers was worth keeping. She advocated a team-based
management approach that empowered employees with personnel and management
decision-making responsibility. The philosophy was adopted, and eight production line
managers were placed in work teams alongside the employees they formerly supervised.
Some managers quit rather than be “demoted.” Others adapted effortlessly. Still others tried
but were unable to work under the new system.
The production departments were converted into teams consisting of up to 12 people. Meet-
ings were held daily to facilitate communication, air grievances, suggest work improvements,
and schedule production. A pattern quickly developed wherein two or three individuals would
dominate discussion while the rest remained silent. To combat this problem, all employees
were offered communication training and teams were broken into smaller groups.
By 1994 teams had designed co-worker review sheets, or “scorecards.” These were used to
evaluate team member performance and recommend salary increases up to a maximum per-
centage set by management. The scorecard, which has remained unchanged since its inception,
was intentionally subjective in nature. Varying levels of scorecard detail were offered by em-
 Chapter 12 Management Compensation 5
ployees but one thing seemed constant: many employees received repeated criticism, but
very few were denied the maximum salary increase. The result was that almost all employees
re- ceived the same (maximum) percentage increase.
Since their inception, teams have been vested with the power to hire and fire teammates.
The head of human resources first interviews candidates for a team opening. Recommended
candidates are then interviewed by the team. Over 75 percent of candidates that HR passes
have been rejected subsequently by the team.

Gainsharing
In 1997 Crown Point instituted an incentive system designed to reduce labor costs. Labor typ-
ically constitutes 25 percent of costs for a cabinet manufacturer. Brian and Becky 4 proposed
sharing labor cost savings with employees through a program termed gainsharing. The system
worked as follows:
1. Brian multiplied sales figures for each month by a set percentage, based on a reason-
able estimate of what the company could afford to pay for labor. This figure was used
to determine a maximum bonus pool.
2. From this figure, actual labor costs for regular hours, overtime labor costs, and a holi-
days/vacation budget were subtracted.
3. The remaining funds were distributed evenly each month as a percentage among em-
ployees, based on wages earned.
4. Each month was started anew regardless of the previous month’s performance. Every
Monday afternoon, a meeting was held to go over, among other things, the results to
date for gainsharing bonuses. Over 95 percent of the time since their inception, gain-
sharing bonuses have been paid out, averaging 11–20 percent of annual
compensation from 1997 to 2001.
An undesired result of the gainsharing system was animosity toward individuals who
worked overtime. Since gainsharing was based on total company performance and payout was
tied to wages earned, individuals who worked overtime received a disproportionate share of
the gainsharing bonus. Attrition seemed to take care of the problem as individuals who needed
to work overtime (due to consistently unfinished work) were eventually counseled out by
other members of their team.

Backorder Penalty/Reward System

Crown Point prided itself on on-time and complete delivery. Orders that left the shop incom-
plete were identified as “backorders.” A backorder required further shipment of missing parts
and field installation of those parts. As gainsharing bonuses were paid, the number of backo-
rders seemed to increase. Brian repeatedly pointed out the long-term impact backorders had
on the business. He explained that because the business was so dependent on satisfied cus-
tomers and word-of-mouth advertising, it was critical that every order be received complete
and on time. The speeches didn’t seem to help.

4
Becky Stowell, Brian’s wife, became a full-time employee in 1994 and vice president of Crown Point in 2001.
 Chapter 12 Management Compensation 6
Beginning in 1998, a $250 penalty was applied to the gainsharing pool for every backorder
experienced. No impact was noticed, so the penalty was increased to $500. Again there was no
measurable impact. Finally, in 1999 the penalty was increased to $1,000 and a lunch was
promised for every employee for every week in which no backorders occurred. The frequency of
backorders declined noticeably. Workers cheered when a week passed without a backorder, and
lunches were soon being served nearly every Thursday. Not everyone was happy, though,
par- ticularly front office personnel who had the added task of arranging lunch for 85 people
every week. And some people wondered whether the $500 weekly lunch bill was justifiable.

Wage Increases
Gainsharing bonuses approached 20 percent in the first year of implementation. The follow-
ing year, 1998, Brian and Becky decided to raise wages. They rationalized that employees
were better able to secure loans and plan/pay for items when they could count on a secure
salary. Wages were raised again 14 months later—in 2000—and again in 2001. These wage
increases had the effect of keeping gainsharing bonuses contained at less than 25 percent on
an annual basis. Employees, predictably, were delighted at the increases although some
feared the increased labor rates would ultimately result in job losses. Brian assured them
that the extra money was a direct result of continued labor savings due to increased produc-
tivity and that job security was still a priority.

Safety
A safety program was instituted under Norm Stowell’s stewardship. In 1994 a safety team
was established under the direction of Becky Stowell and Jeff Stowell, Brian’s brother. The
team wrote rules and guidelines for work, and employees were empowered to remove others from
the shop floor for safety violations. The safety team determined penalties, including dismissal,
for violators. Everyone was subject to the same rules; even the founder and president
was“retrained” on safety standards. Serving on the safety team became a necessary but
sometimes unenviable part of working at Crown Point as team members sometimes agonized
over decisions to fire friends who violated safety rules.
Crown Point has long been a part of a self-funded, self-managed workers compensation trust
made up of a select groups of small manufacturers. The group administers workers compensa-
tion insurance with the state of New Hampshire. Inclusion in the group requires an impecca-
ble safety record and commitment to safe work practices. As a tribute to Crown Point’s safety
record, the company today enjoys the lowest experience mods 5 within this group. As late as
1992, Crown Point’s experience mod was 40 percent above state average. By 2001 it had
dropped to 32 percent below state average.

5
An “experience mod” is a number indicating the multiple at which a firm is above or below the state average for workers
compensation insurance. Experience mods are based on both frequency and severity of worker injury claims. The state
average firm has an experience mod of 1.
 Chapter 12 Management Compensation 7

Community Citizenship
Crown Point considers community citizenship an important part of doing business. In 2001
Crown Point won the Claremont Chamber of Commerce’s first annual Company of the Year
award. This award was based on quality and quantity of nominations received from community
citizens. Many of the nominations for Crown Point received by the chamber reportedly were
from Crown Point employees.
In 2002 a committee of Crown Point employees was formed to collect funds from employees,
matched by the company, for distribution to community initiatives. The company receives nu-
merous requests to receive awards or recognition for community sponsorships. Employees
on the citizenship committee take turns accepting these awards on behalf of the company.

Communication
Largely as a result of the team-based structure, communication in the company has flourished.
Brian introduced an open-door policy, toured the shop regularly, came to know all employees by
name, and participated in many of the daily production team meetings. (Production teams met
three times a day to review production and quality progress.) Employees have used their
free- dom to approach Brian with their concerns. The weekly shop-wide meetings are used to
com- municate financial performance, safety information, and general company
announcements. Some of Brian’s community business colleagues marvel at the openness of
information shared, much of which they consider proprietary, noting they would “never let
[their] employees know how much money [they’re] making or spending on labor.”
Crown point has not been plagued by many of the disputes common among family-owned
businesses. Communication among family members has always been good. Brian notes that
even though many of the changes he instituted were not supported by his father, Norm chose
to take a hands-off approach and gave Brian and Becky the freedom to succeed or fail.

Other
Crown Point has added numerous other benefits for employees since 1993. A 401K retirement
plan was implemented in 1996. Initially, the company paid the plan’s administrative costs
but did not match employee donations. By 2001 it was matching contributions to 50 percent of
em- ployee donations, up to a maximum of 10 percent of a worker’s salary. Ninety-five
percent of employees participate in the retirement plan—about 20 percent greater than
average for plans of its type. Annual company picnics, a box suite at a nearby urban sports
arena, a company- sponsored downhill skiing program, a soft ice cream maker and popcorn
popper in the lunch- room, and continued and expanded daily breakfasts are examples of the
some of the perquisites reserved exclusively for employees.
 Chapter 12 Management Compensation 8

Sales and Marketing

Until 1993 Crown Point, like most other custom cabinet manufacturers, used an extensive
dealer network (76 in total) to sell its cabinets. Direct sales accounted for less than 25 percent
of sales in 1994, rose to 50 percent in 1998, and reached 95 percent in 2001. The reason for the
transition was simple. Brian felt the 30 percent margin captured by dealers could be better
used internally to fund an in-house design/sales team and increased advertising. The design
team received calls from potential customers, solicited business from design professionals and
contractors, prepared quotations, and closed sales. The team grew from 1 to 13 people and was
compensated one-third base pay and two-thirds commission. Crown Point’s marketing budget
grew more than fourfold from 1994 to 2001, with much of the increased expenditure
allocated to trade journal advertising. A 2002 show of the nationally syndicated home
improvement tele-
vision program Bob Vila’s Home Again highlighted Crown Point’s factory and quality work-
manship as part of a Vermont home renovation project, bringing invaluable attention to the
company.

Results
It would appear that the goals Brian laid out in his 1993 speech have been achieved. In-process
quality has improved dramatically, allowing for significant productivity gains and materials
savings. The attitude at the plant is telling. One of the employees echoed the feeling of many
there: “I do quality work because that’s what the customer wants,” he said. “The Stowell fam-
ily has done so much for me, I want to do more for them.” A local Claremont resident confided
that many in the town wish they could work at Crown Point because, as he noted, “they treat
their help real well.” Another employee stated, “People are impressed when they find out I
work for Crown Point.”
The financial results have been solid. Sales more than tripled between 1993 and 2001. Gross
margin as a percent of sales increased 6 percent and is over 15 percent better than the U.S.
av- erage for cabinetwork plants. Net margin moved from breakeven to over 10 percent. And
all this occurred while base wage rates (including gainsharing) increased 2.5 fold.
Even more remarkable, employee turnover has been reduced to near zero, absenteeism is
negligible, and management employee relations are at an all-time high. As praise poured in
from customers, the community, and the employees, Brian wondered what it was that turned
it all around. Could something have been done differently? Were there other ways to get
these results? Could the Crown Point experience be transferred to other business settings?
Finally, noting that increasing competition from local cabinetmakers was a threat to the
business, he wondered how Crown Point could extract further productivity gains from an
already inspired workforce.

Questions
1. What is the strategy of Crown Point Cabinetry?
2. What is responsible for the company’s turnaround?
3. Is the Crown Point experience transferable to other business settings?
 Chapter 12 Management Compensation 9
Answer :

A. The strategy of Crown Point Cabinetry under Brian Stowell’s leadership encompassed
several key elements aimed at improving product quality, employee satisfaction, and
financial performance. Here are the main components of their strategy:

1. Quality Improvement: First-Time Quality Focus: Emphasized the importance of first-

time quality in production to reduce rework and waste. This involved stricter quality control
measures during the manufacturing process.
2. Employee Empowerment and Team-Based Management: Team-Based Approach:
Transitioned from a traditional hierarchical structure to a team-based management system.
This involved employees working in teams, with significant decision-making authority
regarding personnel and management issues.
3. Incentive Programs: Gainsharing: Implemented a gainsharing program to share labor
cost savings with employees. This created a direct financial incentive for employees to
improve productivity and efficiency.
4. Direct Sales and Marketing: Reduced Reliance on Dealers: Moved away from using
an extensive dealer network to direct sales. By 2001, 95% of sales were direct, up from
25% in 1994. This allowed the company to capture the dealer margin internally and invest
in an in-house design and sales team.
5. Community and Employee Relations: Community Engagement: Actively engaged in
community initiatives, earning the Claremont Chamber of Commerce’s Company of the
Year award in 2001.
6. Safety and Work Environment: Safety Programs: Established a safety team to enforce
workplace safety standards and reduce the frequency and severity of worker injuries,
resulting in a significantly improved safety record.

B. The turnaround of Crown Point Cabinetry under Brian Stowell's leadership can be
attributed to several strategic changes and management practices that significantly
improved the company's performance. Here are the key factors responsible for the
company's turnaround:

1. Improved Management Philosophy: Brian Stowell shifted the company's management

philosophy to focus on improving first-time quality and creating a better workplace
environment. This change in mindset laid the foundation for all subsequent improvements.
2. Team-Based Management Approach: The implementation of a team-based
management structure empowered employees by giving them significant decision-making
authority. This included personnel decisions and management issues, fostering a sense of
ownership and responsibility among the workforce.
3. Enhanced Communication and Collaboration: Daily team meetings were instituted to
discuss production schedules, quality issues, and other important matters. This regular
communication facilitated better coordination and problem-solving, leading to more
efficient operations.
4. Employee Accountability and Performance Evaluation: Co-worker review sheets
were introduced, allowing team members to evaluate each other's performance. This peer
evaluation system promoted accountability and ensured that performance reviews were
comprehensive and fair.
 Chapter 12 Management Compensation
5. Incentive Programs: The gainsharing program created a direct financial incentive for
employees to improve productivity and efficiency. By sharing labor cost savings with
employees, the program aligned their interests with those of the company.
6. Direct Sales Strategy: By moving away from reliance on a dealer network and
increasing direct sales, Crown Point Cabinetry captured the dealer margin internally. This
strategy also allowed for better control over customer relationships and the sales process.
7. Marketing and Brand Exposure: Increased marketing efforts, including advertising in
trade journals and gaining media exposure, helped to raise the company's profile and attract
more customers. Notably, the feature on Bob Vila's Home Again provided significant
visibility.
8. Employee Benefits and Work Environment: The introduction of numerous employee
benefits, such as a 401K retirement plan, company picnics, sports arena box suite, skiing
programs, and daily breakfasts, contributed to a more positive and motivating work
environment.
9. Community Engagement: Active engagement in community initiatives and earning the
Claremont Chamber of Commerce’s Company of the Year award in 2001 enhanced the
company's reputation and fostered goodwill among employees and the local community.
10. Leadership and Vision: Brian Stowell's leadership and vision were crucial in driving
the company's turnaround. His commitment to quality, employee empowerment, and
strategic growth initiatives set the direction for the company's successful transformation.

These factors combined to significantly improve Crown Point Cabinetry's operational

efficiency, product quality, employee satisfaction, and financial performance, resulting in a
successful turnaround for the company.

C. The Crown Point Cabinetry experience offers several valuable lessons that can be
transferred to other business settings, although the specific implementation may need to be
tailored to fit different industries and organizational cultures. Here are the key elements of
Crown Point's strategy that are broadly applicable and potentially transferable:

1. Employee Empowerment and Team-Based Management:

Transferable Principle: Empowering employees by giving them decision-making

authority and promoting a team-based management approach can enhance motivation,
accountability, and collaboration in any business setting.

Implementation: Establish cross-functional teams, encourage participative

management, and facilitate regular team meetings to discuss goals, progress, and
challenges.

2. Improved Communication and Collaboration:

Transferable Principle: Regular, open communication fosters a collaborative

environment where issues can be addressed promptly, and innovative solutions can be
developed.

Implementation: Introduce daily or weekly team meetings, use collaborative tools

and platforms, and create open channels for feedback and ideas.
 Chapter 12 Management Compensation 11
3. Incentive Programs:

Transferable Principle: Aligning employee incentives with company performance

can drive productivity and engagement.

Implementation: Develop gainsharing or profit-sharing programs, set clear

performance targets, and reward employees for meeting or exceeding these targets.