ABC in Manufacturing

 

Picture1-CASE 1

The Problem

Accurate Cost Estimation method for a Telecom Equipment Manufacturer selling in a newly deregulated Indian market that witnessed aggressive bids from foreign & domestic players in the late 1990s

The newly setup company produced advanced Telecom transmission equipment for the Indian market that was expected to grow vary rapidly in the coming years due to pent-up demand being released by deregulation.

Key Challenges

  • Newly formed company with no historical data either on costs or shop-floor / production times to extrapolate
  • New production technology introduced –Surface Mount Technology (SMT)
  • Since most business was obtained by way of Tenders / Bids submission in a very competitive market – the required accuracy of cost estimates was very high with very small margins separating the three lowest cost bidders who won the orders – from those who lost out
  • A recently deregulated industry saw aggressive bids from MNCs with deep pockets seeking to gain market share – hence both over-estimation and under-estimation of costs could have serious repercussions

The ABC system for estimated costs

The designed ABC system closely mirrored each stage / activity in the manufacturing process with associated cost drivers capturing the cause-and-effect relation to the costs incurred in that Activity.  Driver-rates set for each Activity could vary depending on 1 shift / 2 shift / 3 shift production – with Production & Testing managers for approximate times in each stage provided by Production managers.

Costs related to technology acquisition & indigenization (including royalties, lump-sum Tech transfer Fees, Vendor development for local manufacturing of parts, Travel & Training expenses of engineers) traced to each Product-Line using appropriate Drivers

Each Activity was categorized into Unit / Batch / Product Facility sustaining – as per the “ABC Hierarchy”. This made management focus on these ActPicture2 - CASE 1ivities had on total costs – leading the way to “Activity-Based-Management” 

Management & Production Teams’ response 

The experienced production  management personnel and the Technical managers were satisfied with the accurate mirroring of the activity-wise costs visibility & also the R&D / indigenization cost absorption in the cost model. The economics of using the new Surface Mount Technology (SMT) – enabled Line was clearly visible to everyone.

Key Benefits Derived

During key meetings prior to the submission of bids for upcom

 

ing Tenders – the activity-wise cost estimation model brought intense focus on the time estimates and available capacities in each Activity in the production process.

Certain high cost activities which were also proving to be bottlenecks in the production line – were identified upfront by the ABC cost model and clear plans to overcome these bottlenecks were put in place even before the production runs actually started.

The Activity-Based cost model showed with remarkable clar

ity the “before-and-after-debottlenecking” costs –enabling the company to submit attainable and realistic cost-bids in the Tendering stage, while the “actual-updated-model” enabled an activity-wise comparison of estimates-vs-actuals – to ensure that what was really achieved was in line with the estimated costs. Variances could be viewed at the level of each Activity  &  Cost Element  combination.

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