One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore, the CEO set out to properly distribute costs such as storing, picking and delivery of products over their wide variety of customer orders through the use of time equations. These equations helped management to determine the specific costs associated with the various orders they encountered, and to pass these on to the customer. The executives also made great effort to ensure that any changes made would not negatively impact either productivity or customer relationships. Many updates to the firm’s operations were made as a result of the information acquired from the models, and therein lay the potential downfalls inherent in Kemps’ system. As management soon discovered, important decisions regarding the company could not be made by relying on the data alone. For instance, a model could not be created that would correctly determine which products should be discontinued; instead, these assessments needed to be made on a case by case basis. Similarly, the long-term effects of such decisions can never be known for certain and the potential always exists that what the data seems to show as an obvious choice could actually be harmful. Therefore, it is important to always view the information as just that and for management to use it mainly as a tool in the decision making process.
2. What types of actions are Kemps managers now taking with their new ABC reports?
Once management received early data reports after implementation of the process several changes were made within the corporation that, while seemingly minor, can have a large effect on profits when considered in the aggregate. For example, the current method of delivering orders as they came in was resulting in unnecessary drive and changeover times that were able to be reduced by encouraging customers to follow a more standardized weekly ordering system. Another change was related to the issue of long changeover times on the production lines, which was addressed by updating the labeling process so as to reduce the amount of times new labels would need to be introduced to the line. As illustrated in the case, the reduced costs associated with such changes were not the only benefit realized by Kemps. Because of its implementation of activity-based costing, it now enjoyed strengthened relationships with customers and suppliers that had already been using the system due to the new opportunities for cost savings to all parties involved. The reputation that Kemps’ successful use of ABC earned them also worked to their advantage when looking to acquire new business. By explaining their cost saving methods to potential partners, Kemps is able to demonstrate in empirical terms how they are able to pass the savings on, giving them a distinct advantage in the marketplace.
3. How should Kemps deal with the customer decisions described on page 8 of the case?
a. Unprofitable high-end ice cream retailer
The ice cream retailer is unprofitable mainly due to its relatively low consumption, specialized products and inefficient delivery methods. As pointed out in the case, when Kemps determines that a SKU is not profitable, there are a variety of options available to remedy the situation. First,...