MBO Clarifies Objectives at Edward Don & Company

At Edward Don & Company, a distributor of sup- plies and equipment for the food service industry, employees in the credit department know what they are supposed to achieve. The reason is that the company’s corporate credit manager, Jeff Ingalls, set up a management by objectives (MBO) program. Ingalls meets with each staff member once a year to evaluate how well he or she met the previous year’s objectives and set objectives for the coming year. He and the employee set five to seven objectives for the year. They may change the next year’s goals based on past performance or new technology that will affect performance. Every three to six months, Ingalls meets again with employees to discuss whe- ther they are making progress toward their goals. Even when employees can meet their objectives without Ingalls’s help, meeting with them reminds the department that the objec- tives are important. Objectives for credit department employees include quality, efficiency, and professional devel- opment. For example, the objectives for a credit analyst might involve keeping bad debt low relative to total loans made, approving at least a minimum number of new accounts, and learning computer skills. For collectors, objectives might include achieving a given increase in the percentage of accounts that are current (payments up-to-date), reducing the percentage for which payments are 90 days past due, and learning a new skill. When an employee is failing to meet an objec- tive, Ingalls and the employee discuss the problem and look for a way to resolve it. For example, an accounts receivable supervisor was having trouble with a goal that involved the accuracy with which the supervisor’s employees recorded information. In an average month, the supervisor’s employees made 40 to 50 errors for a transaction known as cash applications. The supervisor’s objective called for a much lower error rate. Ingalls and the supervisor set up a form on which the supervisor would record every cash application error. The supervisor recorded errors and identified the cause of each error. Most errors involved the employee receiving incorrect information or the employee receiving correct informa- tion but recording it incorrectly. To fix these basic problems, the supervisor met with each employee who made an error, discussed the source of the problem, and asked the employee to be more care- ful. This process demonstrated to the employees that their errors mattered. They responded by recording entries more carefully. Before long, cash application errors dropped to the range of 7 to 10 a month. As the department spent less time cor- recting errors, productivity improved, helping Ingalls meet his own objectives. Ingalls says he prefers working for organiza- tions that use MBO. He says MBO makes manag- ing employees easier. Employees know what they are supposed to achieve, so Ingalls can let them focus on how to reach those objectives while he focuses on broader issues facing the credit department.

Questions –

1. Without MBO, would it have been harder for Ingalls to detect and correct the problem the supervisor was having with cash application errors. Why or why not?

2. The examples of objectives for credit analysts and collectors include objectives for personal development through training. Why do you think Ingalss includes this category of goals? How, if at all, might they help Ingalss achieve his objectives for the credit department or contribute to the company’s overall performance?