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Michigan’s Prison Industries Mismanaged and Unprofitable

by David M. Reutter

A June 2009 report issued by Michigan’s Office of the Auditor General on the performance of the state’s Bureau of Correctional Industries (BCI), which operates under authority of the Department of Corrections, listed several reportable conditions of management and operational failures. The report highlights failures of basic business management.

Under its mission statement, BCI is to “produce products and provide services that meet or exceed customer expectations while providing professional growth opportunities for staff and marketable job skills to prisoners.” It produces a variety of products in its 28 factories in 13 prisons and 1 camp. The products and services are sold to governmental and nonprofit organizations throughout the nation, employing around 1,900 prisoners to fill approximately 1,000 full-time equated work assignments. BCI also employed 176 free-world employees as of September 30, 2008.

In its first finding, the report found that between 2004 and 2008 BCI lost over $7 million. While Michigan law does not require it to maximize profit, BCI is required to be “a total self-supporting system.” In FY 2007-08, BCI had sales of $41.4 million with a net loss of $2.7 million. “The continuance of certain unprofitable activities could potentially threaten the sustainability of the entire organization,” says the report.

Several circumstances attribute to the unprofitability. In the fiscal years between 2004-05 and 2006-07, 13 of BCI’s 28 factories sustained financial losses in at least two fiscal years. Those 13 factories incurred supervisory costs that aver-aged 83% of sales, ranging from 9% to 355%. In contrast, the other 15 factories averaged only 29% of net sales for total supervisory costs.

Close to one-third of total prisoner labor costs was for idle time or for time not attributable to production, totaling $1,051,338 of the $3,364,041 for total prisoner labor expenses. BCI responded to this by saying it does not have flexibility to reduce factory supervision or labor costs during periods of lower production. Additionally, BCI said it provides “intrinsic value” to prisoner labor by providing prisoners life skill development, preparing them for the next planned production cycle, teaching them how to maintain a job, teaching job skills, and reducing the potential for recidivism from these activities.

Amazingly, BCI had not developed and implemented a comprehensive business plan. “A well-developed comprehensive business plan may have helped to prevent or lessen the financial losses during the audit period,” states the report. The failure to have a business plan has kept BCI from identifying its non-State customers’ needs and from ensuring that jobs performed by prisoners provided marketable skills for outside of prison. Rather than assuring its training prisoners for viable employment upon release, BCI monitors “soft skills” such as arriving to work on time, following directions, and putting forth a consistent effort while at work.

Next, the Auditor General found waste in BCI’s scheduling and utilization of its trucks and drivers for delivery of products and services. BCI lease rates for each truck and tractor/trailer combination were $1,370 and $1,722 respectively.

BCI has no coordination or fixed routes for the trucks operating out of its distribution center operations other than agribusiness and laundry, which have fixed routes. This has resulted in employee overtime, excess travel and duplication of delivery points, and idle trucks. The annual cost of the trucks alone was estimated at $69,004.

Another contributor to the financial losses was a basic in business: price setting. Michigan law requires BCI to set its prices to at least recapture all direct and indirect costs. Despite that, of the 92 top dollar sale items in BCI factories as of April 14, 2009, 23 of those products and services were priced below cost without justification for the prices. “The prices for these items ranged from 1% to 92% below cost with an average of 22% below cost,” states the report. “Also, 16 of the 23 items priced below cost were from six factories that reported losses in fiscal year 2005-06 and fiscal year 2006-07.” Most mystifying is the fact that for 19 of those 23 items “BCI had recalculated product costs but had not adjusted the selling prices.”

A missing component of its business is not having in place a Continuous Quality Improvement (CQI) process. A CQI will allow BCI to measure the outputs and outcomes of its operations, evaluate the achieved level of performance, com-pare actual data with desired performance, and provide more useful reporting data to management.

Missing from BCI’s operations was a comprehensive marketing strategy. It had no formal marketing plan, it had in place no measurable and quantifiable goals for its sales division, and sales staff training was not developed. BCI did not monitor its sales staff’s marketing efforts, it had not utilized all available sources to identify potential customers, and it had not surveyed its current and potential customers to identify additional business opportunities.

Finally, BCI failed to actively survey its customers to determine whether its products and services met or exceeded customer expectations. The Auditor’s own surveys found that 66% of customers found quality to be excellent or good. The results found that 38% of potential customers were not familiar with BCI products and services, and many were not even aware they were eligible to purchase BCI products and services.

To its credit, BCI agreed with most findings and agreed to implement the recommendations. Whether it actually does so remains to be seen. The Michigan Office of the Auditor General June 2009 report, Performance Audit of the Bureau of Correctional Industries, Department of Corrections, is available on PLN’s website.

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