chef marcos case PDF

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This is the case analysis which we did in our class and it consisted of team work and also it is worth reading and understanding how to write a report...

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Mari Morlyan, Kevin Yoo, Shweta Patel, Danny Espinoza, Sol Min, Langston Ennin DATE: March 14, 2018 TO: Upper Management of Chef Marco’s Choice Inc FROM: Team 4 RE: Analysis of new Premium Grade product line incident Upon your request, team four has prepared an analysis for the top management of Chef Maro’s Choice, Inc to show strict product liability against Premium Grade Ovenware about the defective product. We used budgeted analysis, concepts of law, ethical, and strategic analysis to make our decision. Please reach out to us if you have any additional questions.

Executive Summary The reason for the report is to show the top management what happened to the ovenware product line and explain the causes of the defect in the product. Chef Marco’s Choice, Inc. produces and sells a line of ovenware and their sales were plummeting due to an economic downturn. To increase sales they redesigned their product, but a defect had occurred in the ovenware, which can cause severe injuries to customers. To establish what went wrong in production, we first we constructed three budgeted income statements for 2007 regarding three different scenarios. The different budgeted income statement shows that depending on the company’s decision, its return on sales will change. If the original plan works the company gets 33% return on sales, but due to the defect in the product, if they choose to bring the product back, then their return will be 2%. Lastly if they decided to continue selling the defective product their return will be 31%. Once we covered the budgeted analysis of the company’s budgeted income statement, we then analyzed whether Mrs. Nelson would prevail in a cause of action against Chef Marco’s Choice, Inc. under strict product liabilities and whether she is likely to recover from punitive damages. In our analysis, we proved that Mrs. Nelson would prevail against Chef Marco’s Choice, and she is indeed likely to recover from punitive damages. We have also concluded that the managers of the company were acting unethically because they intentionally sold defective products to customers to increase the return on sales for the company. The company used two out of the five strategic elements and failed to use the other three. As a result, the company’s reputation was affected and they lost their customers trust. We strongly recommend the company to make the customer’s safety a number one priority to maintain long run customer relationship.

Introduction The purpose of the report is to explain what happened in the Premium Grade Ovenware product line, provide an explanation of the decision made by Chef Marcos Choice Inc, and the basis of their decision. Chef Marcos Choice, Inc improved the design of their ovenware product in order to increase their sales. However, in doing so there were serious problems discovered in the product during routine quality testing. If the ovenware was used in temperatures between 450-500 degrees and placed on cold surfaces or in a refrigerator, it would exploded causing severe injuries. By being aware with this defect, the company still shipped out the orders to customers without notifying them the risks that can occur while using this product. They thought it would be rare for an incident such as this to occur, but in fact it did to Mrs. Nelson in which she experienced third degree burns. We will be using budgeting analysis, concepts of law, ethical, and strategic analysis in order to distinguish what may have caused the defect in the product. Budgeting Analysis Below we made multiple budgeted income statements showing the various options available to the company and explaining the decision they made. The first budgeted income statement shown below is made to showcase what would have happened if the redesign had worked originally in which the company wanted to increase their sales volume by reducing the cost and improving the quality of the product.

Budgeted Income statement for the year ended 31-Dec-07 Sales Sales in unit Cost of goods sold Variable Fixed Gross Profit Attributable Cost Marketing cost Other (primarily fixed) Product line profit before G & A allocation Return on sales

$ 81,000,000.00 6,000,000*(15-10%) 6,000,000.00 1,500,000*4 $ 21,645,000.00 (5.55-35%)*6,000,000 $ 24,033,769.16 4,000,000+(23,221,033+3.5%) $ 35,321,230.85 $ 5,670,000.00 6,000,000*7% 2580475.425 2,517,537(1+0.025)

$ 27,070,755.42 Gross profit - attributable cost 33% 27,070,755.42/81,000,000

As shown above the product manager would have met his profit target of 25% return on sales in 2007 for the product line with the redesign. In fact, they would have made 33% return on sales when they came up with the redesign for the ovenware product. Due to the economic downturn the company’s sales were falling so they came up with the modified design for the ovenware where they could cut the cost for the company. Thereby, reducing the selling price in order to attract more customers. The reduction in the selling price would increase the sales volume for the company. The redesign order for the first quarter was acquired by the company. The second budgeted income statement below shows what would have happened if the problem in the ovenware was detected, and the company decided to bring back the product in order to recycle it, modify it, and resell it instead of selling the product in the market while it being defected.

Budgeted Income Statement for the year ended 31-Dec-07 Option 1 Sales $ 54,000,000.00 4,000,000*13.5 Sales in unit 4,000,000.00 6,000,000-(6,000,000/3) Cost of goods sold Variable 1st 6 months $ 11,100,000.00 5.55*2,000,000 Next 6 months $ 7,215,000.00 (5.55-35%)*2,000,000 Fixed 1st 6 months $ 26,033,769.16 2,000,000+24,033,769.16 Next 6 months $ 500,000.00 Additional cost Gross profit $ 9,151,230.84 Attributable cost Marketing cost $ 5,670,000.00 Same as 2006 Other( Primarily Fixed) $ 2,580,475.43 Same as 2006 replacement cost Product line profit before G and A Allocation $ 900,755.42 Gross profit - Attributable costs Return on sales 2% 900,755.42/54,000,000

As shown above the product manager would have made a profit of $900,755.42 if they would have brought back the product and used the old design structure for 6 months. They would have had the time to solve the problem in the product. During routine quality testing in production, personnel discovered a serious problem with the product. The ovenware, under a small range of extremely high cooking temperatures (450-500 degrees), would explode if set on a cold trivet or placed in the refrigerator. The explosion could potentially cause the person holding the ovenware to suffer serious cuts and substantial, permanent burns. When bringing the product back they would have lost the one-third sales of the company for the year and also would incur some additional variable and fixed costs. However, if they did that, the company’s

return on sales would fall to 2% from the 33% of the return on sales, which they could have gotten if there was no defect in the product. The last budgeted income statement shows the company’s decision on selling the defective product as it is and hope for the best. They predicted that the chance of someone getting hurt would be low, and if a problem did occur they would only have to pay for broken ovenware replacement. Budgeted Income Statement for the year ended 31-Dec-07 Option 2 Sales $ 81,000,000.00 6,000,000*13.5 Sales in unit 6,000,000.00 1,500,000*4 Cost of goods sold Variable 1st 6 months $ 10,822,500.00 3.0675*3,000,000 Next 6 months $ 10,822,500.00 3.0675*3,000,000 Fixed 1st 6 months $ 14,000,000.00 Additional cost + Fixed cost Next 6 months $ 12,033,769.16 Gross profit $ 33,321,230.84 Attributable cost Marketing cost $ 5,670,000.00 Same as 2006 Other( Primarily Fixed) $ 2,580,475.43 Same as 2006 Replacement costs $ 90,000.00 12*(3,000,000*0.0025) Product line profit $ 24,980,755.42 Gross profit - Attributable cost before G and A Allocation Return on sales 31% 24,980,755.42/81,000,000

As shown above the product manager would have made a profit of $24,980,755.42 if they would have sold the product in the defective state and paid the replacement costs. With only a .25 percent (.0025) failure rate and only under a small range of temperatures, the risk of the flaw seemed quite small to them. Rather than bringing back the product and jeopardizing the sales volume for the company and bringing down the return on sales rate. If they did follow this option

they would have earned 31% return on sales, which is close to the one they decided earlier while redesigning the product. They would have to alter the quality testing report in order to settle any claims brought up on them, which they thought would not be too many. Strict Liability Analysis In the Chef Marco’s Choice case we are trying to distinguish whether Mrs. Nelson would prevail in a cause of action against Chef Marco’s Choice, Inc. under strict product liability. “Strict liability in tort is the concept that in certain situations a defendant is liable for plaintiff's damages without any requirement that the plaintiff prove that the defendant was negligent. The plaintiff's injury must have been caused by a "defect" in the product. Thus, the manufacturer is not deemed responsible when injury results from an unforeseeable use of its product” (West.net). In order to prove that the case of Chef Marco’s Choice falls under strict liability, Mrs. Nelson must prove the following elements: (1) The defendant is a merchant selling the underlying product for use or consumption, (2) The product was defective because use of a manufacturing defect, (3) actual and proximate causation between the breach and the injury (Coaching Slides). 1. Was the defendant a merchant selling the underlying product for use or consumption? Yes, Chef Marco’s Choice Inc. produces and sells a line of ovenware, making them a merchant. 2. Was the product defective because of a manufacturing defect? Yes, the ovenware, if used between temperatures of 450-500 degrees, would explode if set on a cold surface. The company was aware of the defect, but they still decided to ship and sell the goods without disclosing the potential hazards. Making this a defective product due to manufacturing defects.

3. Was the ovenware the actual causation for Mrs. Nelson injuries? Yes, Mrs. Nelson used the product at a temperature of 475 degrees and placed it in the refrigerator, which distinguished by the company is the defect of the product. They stated that this can be the cause of severe injuries for a customer. Due to the company’s negligence, Mrs. Nelson suffered multiple third degree burns, as the company knew might happen to a customer. There was no other cause to her injuries besides the manufacturing defect of the ovenware. If there had not been a defect on the product, then Mrs. Nelson would have not been injured. Since Mrs. Nelson has filed under the theory of strict liability, it is safe to say that Mrs. Nelson would prevail in a cause of action against the defendant, because it meets all the elements shown above and the defendant is liable for any damages even if it wasn’t the defendant’s intention to cause harm. Now the next question is if she is likely to recover punitive damages? “A plaintiff who wins a tort suit usually recovers the actual damages or compensatory damages that she suffered because of the tort. Depending on the facts of the case, these damages may be for direct and immediate harms, such as physical injuries, medical expenses, and lost pay and benefits, or for harms as intangible as loss of privacy, injury to reputation, and emotional distress. In cases where the defendant’s behavior is particularly bad, injured victims may also be able to recover punitive damages. Punitive damages are not intended to compensate tort victims for their losses. Instead, they are designed to punish flagrant wrongdoers and to deter them and others from engaging in similar conduct in the future” (Key Concept 9). Mrs. Nelson can recover from compensatory damages, but to recover from punitive damages it is only granted in exceptional and egregious instances. Egregious means that there is a deliberate act or omission with

knowledge of a high degree of probability of harm and reckless indifference to consequences. In this case the manufacturer; Chef Marco’s Choice, Inc. was aware that the product had a defect and posed a risk of safety towards its customers. Aware of this risk, they still decided to ship and sell the goods without disclosing the potential hazards, so Mrs. Nelson is likely to recover from punitive damages. Ethical Analysis Ethics is the difference of the person knowing between what is right and wrong. In the case of Chef Marco’s Choice, an abundance of ethical issues come into play when considering the overall decision. Chef Marco’s Choice did not act ethically when they shipped out the defective ovenware. The reason is because Chef Marco’s Choice Inc. had the knowledge that the ovenware had a defect when shipping it out to their customers. The engineer who reported that the test results have been altered, initially did not act ethically because he was a part of the group that presented the false results. When he later reported that the initial results have been altered, he then acted in an ethical manner. The Santa Clara University website states that the rights approach is about how the individual person has the right to choose for herself or himself. That is only one of the many rights that are due to the individual. Some other rights that are stated under the ethics resources section on the website are “the right to the truth” and “the right not to be injured.” The customers of the ovenware have the right to be told the truth, especially if the truth will affect the customer's decision on whether to buy the product or not. Also, the customers have the right not to be harmed or injured unless they are aware of the situation and still choose to put themselves in a situation that may cause the harm or injury. In this case, the managers had the right to make

a decision on whether to ship the defective items or to delay the shipping to the customers. The manager's decision to ship out the defective ovenware to the customers was unethical because the customers have the right to be told the truth about the defect. Also, the managers acted unethically by being aware that there can be a risk of harm to some of the customers while using the ovenware and still shipping out the product. We can weigh the cost and benefits of the engineer reporting that the test results have been altered. One benefit of reporting the company’s false representations would be the engineer’s self satisfaction of being ethical by telling the truth. Another benefit would be for the customers because this would inform them of the defectiveness of the ovenware and prevent any harm or injuries that may have occurred if it wasn’t revealed that the test results were altered. The cost of telling the truth can outweigh the benefits in this situation. The cost for the engineer would be that he will probably be working for a company that will go out of business or be in debt. He can not be fired for reporting the truth, but he may be disliked by the upper management for exploiting the company. Another major cost would be for Chef Marco’s Choice Inc. because they would have to recall all the products that they have initially sold and stop all production of the ovenware. Not only that, Chef Marco’s Choice will have a bad reputation with its customers. One of the most important stakeholders affected were the customers, by the decision of Chef Marco’s Choice Inc. to ship out the defective ovenware. Although it wasn’t a large number, the defective ovenware caused harm and injury to some of the customers due to the company’s unethical decision to ship out the defective ovenware. With the engineer reporting that the test results have been altered, the managers and employees of Chef Marco’s Choice were affected dramatically. Many of the employees won't have jobs because all productions have been stopped

and the managers will have to find a way to prevent the company from going out of business. Also, the stakeholders such as investors (if any) are also affected by the unethical decision made by the company as the reputation and the goodwill of the company is in jeopardy. Strategic Analysis Strategic thinking is a big factor when it comes to making decision which is why there is a need to analysis the five characteristics of strategic thinking in order to see what mistakes were made by the managers of Chef Marcos Choice Inc, that led to the problems in this case. The first element of strategic thinking is systems perspective, which is the ability to see the whole picture in understanding the entire problem and finding all the necessary solutions possible from beginning to end. Instead, the company’s main concern was the profit and not the reputation of the company which will come to stake in the future. No doubt they did the statistical analysis and came to know that the damage will be minimal as compared to profit, but they did not realize that the customers would not trust the company’s products anymore. As far as intent-focused, Chef Marco’s Choice lacked that element because they could have looked at the long term market, but did not. Since they put out a defective product and 1.5 million of them, they are now in a situation where they are positioned and viewed negatively by the rest of the market. Chef Marco’s Choice failed to use the strategic thinking element thinking in time. Thinking in time could have prevented the company from sending out 1.5 million defective units. By thinking in time they would have thought out the plan from beginning to end and then in the case that a defective unit did come about, they would already have a plan B to keep production going. Instead, the company decided to think short term and continue with selling units in hopes

to increase sales. Also the decision to act negligently shows that the company did not take all the necessary steps to ensure the safety of the customers. Intelligent opportunism was not used well in this situation either, it is to let the lower level employees and the innovative employees contribute in the decision making of the company. If they had consulted innovative employees before completing production, they might have noticed the flaw in the ovenware product and given the company a better idea on how to finish it more safely and more efficiently. Another element of strategic thinking is hypothesis-driven, which poses the question of “If...then” which in this question would be if the product is dysfunctional, then the team would use different hypotheses in a cycle to create the best solution, which they failed to do. They stated that it would take six months to fix the error in the product, but if they had tested the product early on or had a back up plan they would have been able to fix the defect in time and prevent the worry of delays in delivery. The company didn’t take critical thinking into account as they just saw the short term gains and not the long term consequences. As both strategic and critical thinking is about looking at both the short term and long term consequences. To prevent such situations to arise in the future, the company should do the testing of the product completely at all the temperatures and test the product before collecting orders. The number one recommendation that can be given to Chef Marco’s Choice, Inc. is to keep a very close eye on production at all levels, ensuring that all products are safe and ready for the public. By implementing this, the company could save a lot of money and make a lot more as well. Chef Marco needs to value their customers, as they are the end users of the product. The ultimate satisfaction of the customers is really important for the company’s goodwill. The

company should not put their interest first at the cost of the customer’s life. Also they should not purposely alter test results and then act negligently. The company’s goal was to increase the sales volume of their product and for that they played wi...