The missing inventory at Zenith International Trucks, Inc.

Armandi, Barry ; Sherman, Herbert ; Rowley, Daniel J. 等

CASE DESCRIPTION

This case was primarily developed for undergraduates taking a course in business ethics, although the case does include issues in accounting (inventory control) and the legal environment of business (corporate theft). The case specifically deals with how a firm handles the discovery of possible corporate theft and students should therefore have been exposed to material on white-collar crime. The case also deals with possible conspiracy to commit a crime (the RICO act) since one might wonder why and how the inventory control system did not indicate missing inventory prior to this time period. The case has a difficulty level appropriate for sophomore level or above. The case is designed to be taught in one class period (may vary from fifty to eighty minutes depending upon instructional approach employed, see instructor's note) and is expected to require between two to four hours of outside preparation by students (again, depending upon instructor's choice of class preparation method).

CASE SYNOPSIS

Derived from observation and field interviews, this case centers on Bob Harris, the new Assistant Controller of Zenith's parent company, United Truck Corporation, and Dave Manning, the Service Manager of the Yonkers facility. Bob Harris had been brought into Zenith by United Truck Corporation because the old operation, Magnum International Trucks, was losing money and United wanted the renamed firm (Zenith) attractive enough for a sale to another International dealership. Dave Manning first came to Bob Harris' attention when Dave was paid a bonus incentive for the month yet the Yonkers Service Department only contributed $ 2,484.42 to the firm's profit margin. Bob spoke with Dave and explained that Dave's bonus would in the future be based upon the facility's profits rather than gross sales. This would avoid the impact of heavy sales at the end of the month and returns the following week. Dave remained silent on this topic. The second time Dave Manning was confronted by Bob Harris was when there was a shortfall in inventory at the Yonkers facility based upon a misplaced transmission. Bob confronted Dave in-person with this discrepancy and therein Dave resigned. Students are left wondering what actions should or would Bob Harris take in light of this missing inventory and Dave's obvious attempts to avoid be held accountable for said items.

INTRODUCTION

"You know Bob, I really don't want this job anymore, and so I am giving you my formal resignation. I quit." Dave Manning, Zenith's Yonkers New York Branch Service Manager of the United Truck Corporation (1), spoke these words into his phone which he left off the receiver as he went back to his office to clear out his belongings. Bob Harris was stunned and speechless. As Assistant Controller of Zenith's parent company sitting in Chicago, he actually heard Dave's footsteps through the phone as Dave walked out of his office and out of the building. Bob had just recently asked Dave about some discrepancies concerning invoices and inventory and was expecting a report on Dave's investigation; this was certainly not the reply he was expecting or hoping for.

Bob Harris shook his head as he then closed the door to his office to get some privacy so he could think. He reflected back on everything he had been through the last year, all the events that brought him to this point, every plane flight between Chicago to New York, every encounter he had with his subordinates, every encounter with his superiors, all of it. "What a mess!" he thought to himself. "More importantly, what do I do now?"

ZENITH'S BACKGROUND

United Truck Corporation, headquartered in Chicago, owned and operated a New York subsidiary, Magnum International Trucks. Magnum was a truck dealership in the New York metropolitan area that sold International, UD, and Hino brand name trucks. It had five locations in Maspeth, Yonkers, Brooklyn, the Bronx, and Newark, New Jersey.

In September 2002, Magnum lost its International brand franchise from its major manufacturer due to sales problems. Magnum decided to close its Maspeth and Yonkers locations. It would keep the other three locations and continue with the UD and Hino brands. To prevent being closed out of selling International brand trucks, United Truck Corporation formed Zenith International trucks in October 2002. The sole purpose was to keep a New York market presence to be attractive for another International dealership. Zenith occupied the former magnum locations in Maspeth and Yonkers. Along with them taking these facilities over, they also kept all the employees that worked at the two locations.

The main headquarters of Zenith International was the Maspeth location, which consisted of a corporate accounting department, a sales department, a parts department, and a service department (See Appendix A). The accounting department consisted of an accounts receivables clerk, an accounts payable clerk/payroll administrator, and an office secretary. The Sales Department consisted of a Sales Manager, a truck salesman, and a truck parts salesman. The parts department consisted of a Parts Manager, two parts countermen, a parts deliveryman, and a receiving clerk. The Service Department consisted of a Service manager, an Assistant manager, a warranty administrator and ten mechanics. The Yonkers facility was much smaller with only a parts and service department. The parts department consisted of a parts manager and a parts deliveryman. The Service Department consisted of a Service Manager and five mechanics. International Truck and Engine Corporation sent two of its Operations Managers from their main headquarters in Chicago to oversee all the operations of the two locations. Their names were Sid Wohl and Bob Harris.

Sid Wohl was an older man in his mid-sixties. He had been with United for twenty-one years and was well schooled in United's practices. A proud man, he walked with utmost confidence as he had been in take over situations before with United. Sid indicated that, "This is just another dealership that I have been sent to in the country to look over until the next one. At least I can get some great New York City pizza to eat. And of course there is Peter Luger's Steak House." You could see from Sid's physique his love for great food. "Besides, I will be at this New York dealership very little. This assignment is more for Bob than me."

Bob Harris was a married 32-year-old man from Chicago and considered himself Sid's apprentice. Bob was a very calm, low-keyed individual, with a cautious hesitation with everything he did. Every sentence that came out of his mouth started with, "Ummm," followed by this clicking noise he made with his mouth. Although, he missed his wife back home in Chicago, he was excited about this incredible assignment. "Wow, New York City.. .what a way to make a name for myself as a leader at United Truck Corporation," Bob said. "If I succeed in New York, I can be sent anywhere in the country to help dealerships."

The schedule set up for Bob by his superiors was primarily to fly into New York every Tuesday at around noon. If everything went well at the baggage claim and there was not too much traffic, he would get to the Maspeth location at around 2 PM. Bob would stay at the dealership until about noon on Friday and then return to Chicago for the weekend.

BOB HARRIS' FIRST DAY AT ZENITH

Bob called a meeting with the employees the first day he was there. He advised all the employees at the Maspeth branch and the service and parts manager from the Yonkers facility to attend the meeting at the Maspeth site. The agenda was, first and foremost, to introduce himself to the employees and explain the situation the company was in. He wanted them to know that it was a new company, not an extension of Magnum, and how everyone started with a clean slate. He ensured them of their job security as well as motivated them to succeed in their positions.

The introductory meeting went without a hitch. Although he was nervous and a bit hesitant, he felt all the employees accepted him favorably by smiling at his comments, or laughing at his jokes along the way of his oral presentation. Bob closed his meeting by saying, "I would like to thank all of you for your time. Over the next week, I will be calling each employee privately into my office to get a better feel for your backgrounds and to speak on a more personal level with each of you. I will be listening to your suggestions, problems, and concerns regarding the Company." He figured he would speak to the two employees that were from the Yonkers facility, so they could return to their branch as soon as possible. Then he would meet with the Maspeth employees.

The first employee he met was Dave Manning, the Service Manager of the Yonkers facility. Dave was 28 years old, who was a most likeable sweet-talker. He had great self-confidence, which Bob noticed right away. Bob also knew that Dave's father, Charles Manning, was a former management consultant of Magnum International and was well respected in the industry. Bob knew that Dave was very knowledgeable of the industry having learned much from his father. Bob and Dave spoke for about fifteen minutes laughing and talking about everything from the Yonkers facility to the nightlife that can be enjoyed in New York. Also, that day he was able to speak to the parts manager of the Yonkers facility. Between arriving at around 2:15PM from Chicago, settling in his office, making a few important calls, calling the general meeting, and speaking to the Yonkers employees, it was already the end of his first day. These two employees were the only people he had time to speak with on the first day.

Over the course of his first week, Bob met with every employee at the Maspeth branch. The two employees who made an impression were Dave Manning and June Wyman. June was a forty-eight year old woman, who was crude and brash. She worked at Magnum for fifteen years and she had a 21 year-old son who was the receiving clerk for the Maspeth Parts Department. Bob noticed that when they met she had something to say about every single person in the company. He felt like he knew more about everybody from speaking to June as compared to speaking with each employee. She knew personal information about every employee in the company and had no problem sharing any of that information with Bob, whom she just met.

THE NOVEMBER NUMBERS

November ended, which represented the first full month that Zenith International was in business. Bob was happy with the progress he made with all the employees. Everybody seemed to be getting along with him as well as each other. The environment around the office seemed to be light-hearted and laid back. Bob was pleased with all the employees' eagerness to perform their jobs in the Maspeth office. He felt the same about the Yonkers office, though he hadn't been to the site yet. This feeling was based on phone conversations he had with Dave regarding the flow of operations in Yonkers. At around 5:30 PM one evening in early December, Bob decided to review the November financial numbers. It was quiet enough to read and analyze the figures without interruption since most of the employees had already gone home for the day. He quickly leafed through the figures and, upon reaching the Net Income/Loss line on the income statement, paused for a second. He excitedly commented, "How could we have operated at a net loss of $51,270." He was perplexed! "Wait a minute," Bob said out loud. He started turning the pages with more conviction and attentiveness. The section that really caught his eye was the Yonkers Service Department. Their contribution margin was ($2,484.42). He also noticed that the Service Manager, Dave, was paid a bonus incentive for the month, even with the Department's performance being so poor. Bob said, "My bosses are not going to be happy about this. I better get this turned around fast!"

THE CONVERSATION WITH DAVE

The next day, after getting off the phone and experiencing a less than wonderful conversation with Sid, Bob decided to call Dave about the financials of his department. He spoke with Dave and conveyed to him the disappointment he had with the numbers for November. He tried to get an explanation for such poor performance.

Bob: Hello Dave, its Bob. I just wanted to discuss with you the financial numbers for November.

Dave: Sure Bob, What's up?

Bob: Well Dave, to be honest they are not that good.

Dave: Well how bad could they have been, I received a bonus incentive. Isn't that for good performance?

Bob: Well, I wanted to speak to you about that as well. To be honest, I'm going to have to change the parameters that encompass your bonus incentive. You operated at a loss in your department and received a bonus. That can't happen anymore. From now on bonuses will be paid based on verifiable profits.

Dave remained silent for the rest of the conversation as Bob outlined the new parameters of his bonus incentive, which relied on a gross margin as opposed to just sales figures (Bob had already received approval for this change from Sid). Bob did notice that there were a lot of returns and credits issued at the beginning of each month which perhaps suggested hard sales tactics were employed at the end of the month; this may have resulted in numerous sale returns at the beginning of the month. Once he finished speaking, Bob hung up. He was happy that the conversation went with no resistance, and hoped that Dave would strive to reach his new defined goals. Another Bump in the Road

Over the course of the next eight months the financials did not get any better. As a matter of fact, they got noticeably worse. Zenith International operated at a loss consistently each month, and none of the departments in the Yonkers branch were reaching their goals.

One day June walked into Bob's office with an invoice from a vendor that had to be paid. She informed Bob that there was no record of receiving the part into the Yonkers inventory account. She was able to spot this discrepancy because of the large dollar amount for the part. It wasn't some washer or light bulb; it was a three thousand dollar transmission. Bob decided to investigate the situation himself. He discussed the matter with the Parts Manager and came to the conclusion that they never received the item. Bob decided to call the vendor and dispute the invoice. The vendor told him that the item was delivered and that they would provide a copy of the signed delivery form. Bob had a stack of these types of invoices sitting on his desk, but because of their small amounts, he never really got into the reasons for the discrepancies, until this invoice. He grabbed the invoice from the fax machine and read the signature "Dave Manning" at the bottom. After seeing the signature, he thumbed through the other invoices on his desk and all of them read the same name, "Dave Manning". Dave hoped that this was merely a discrepancy, something that could easily be cleared up in a few minutes. Bob called Dave to discuss the missing inventory and asked him to come down to the Maspeth Office and meet with him at 8AM the following morning.

THE END OF THE LINE

The following morning Dave arrived at the Maspeth facility around 7:45 AM and walked into Bob's office. After exchanging a few pleasantries, Bob went straight to the point of the meeting.

Bob: Dave, the reason why I asked to meet you is we have a situation with some vendors regarding parts bills and I need your help to resolve it. The vendors say we owe them money for parts we seem to have misplaced and/or not accounted for. I verified this with the parts manager. When I gave the vendor this information, they provided me with documentation showing that you signed the invoices as the parts being received. Please look this over and verify the signature .. Perhaps someone in the department signed your name for you? Or worse, perhaps the vendors are trying to scam us? It has happened to our parent firm already and I wouldn't be surprised if your suppliers are trying the same tricks to boost their sales.

Dave sat quietly, and looked at the invoices and the signature. Seconds ticked away slowly and Bob was wondering if he would ever get an answer to his question. It seemed a simple enough question and he expected that Dave would act indignantly about one of his subordinates who goofed up. Bob's silence seemed to stretch on for an eternity as Dave's mind continued to wonder what the possible explanations were. In terms of inventory control, does the branch have a history of parts being mislaid? If so, what percentage of inventory? Is this a "normal" inventory loss for the firm or industry? Or, are parts perhaps being used but not being accounted for and therefore just appear to missing? What is the "checks and balances" that make sure that parts are being recorded when received or used?

Dave shrugged his shoulders several times and did not even try to hazard an explanation. Bob thought that perhaps he was as shocked as himself about these discrepancies and was also examining the possible alternative explanations. This made sense since Bob would hate to see Bob jump to an erroneous conclusion. This stillness gave Dave a chance to think of other alternatives --perhaps accounts payable was not processing suppliers' invoices in a timely fashion and suppliers were therefore trying to pad their bills as a sort of revenge to make up for this lag in payment? Or worse, perhaps the firm had bounced some checks with their suppliers and the suppliers were trying to get back at them? Bob decided that rather than torture himself and Dave any further by sitting in mutual silence, that Dave should investigate this matter and get back to him.

Bob: You know Dave, perhaps some of these invoices you can explain, some of the others you cannot. Why not give yourself some time to investigate the matter and inform me of yoru findings.

Dave nodded in agreement and slowly walked out of Bob's office. Perhaps Dave suspected one of his employees of forging his signature and then stealing from the firm. Or perhaps Dave knew more about the vendors then was saying and wanted to talk with them himself before accusing anyone. In the interim, Bob would check the signatures on the invoices against Dave's previous signatures as well as recent paychecks. If forgery was at work here he would need proof, otherwise he could at least rule out this possibility.

With that, Dave left. A week later Dave resigned without an explanation.

[ILLUSTRATION OMITTED]

ENDNOTE

(1) The names of the characters and the firm have been disguised.

Barry Armandi (deceased), SUNY-Old Westbury

Herbert Sherman, Long Island University-Brooklyn Campus

Daniel J. Rowley, University of Northern Colorado

Advar Dinur, Long Island University-Brooklyn Campur