Standard Soap Corp. (SSC) is a $ 30-35 million company producing 5,000 different varieties of bar soap. SSC has four broad production processes– transformation of raw materials, drying of bulk soap, production of soap batches and packaging. However, there are underlying complexities involving up to 5000 different paths during these production processes. This poses a potential challenge for the management to efficiently handle the underlying information base.
In addition, SSC has faced major changes in its customer base and their product expectations. There is a greater emphasis on inspections and quality control, reinforcing the need for an elaborate information management system. It appears that the full potential of SSC profitability is not being realised due to reliance on an outdated information and cost accounting model.
The objective of this report is to elucidate the method of integrating SSC operational processes, information and cost accounting aspects through ABC, thus aligning them with their competitive strategy. We will identify potential issues and recommend viable solutions.
SSC has reached a position of business eminence through a process of adaptation and evolution. The transformation of the company’s focus from being a broad product player into the niche sector has been well founded. The use of a pilot information project in the eighties and the ACMS in the nineties, though beneficial, is now in an urgent need for refinement. The contemporary business environment calls for more reliable management information tools to serve SSC’s planning and decision support systems. By addressing these pressing challenges, SSC can leverage its position for growth and competitive edge.
Adoption of the ABC system can generate quality information and link improved operational efficiency with efficient strategic planning. It can assist SSC to produce better quality products and effective costing to gain higher profitability. ABC is proposed to be implemented in four phases for SSC. We appreciate that the implementation of ABC will be a complex and expensive project, and there may be other cheaper alternatives. However it must be noted that to retain competitive edge, SSC requires an accurate and powerful costing system. The initial expensive investment is more than likely to reap strong anticipated gains.
1.Implementation of an effective risk management (RM) structure. The existing RM structure needs to be made more effective with representation from the ‘right levels’. It should include the business unit management vested with a holistic view of the business, supplemented with effective control and communication structure to stub risk vulnerabilities in time. Roles and responsibilities must be well defined to ensure accountability and control policy breaches.
2.Knowledge of failure modes with operational monitoring and response system. The risk identification and assessment mechanism must be aligned to Hamilton’s strategy and sensitivity to safeguard its reputation. It should be able to detect the failure modes in time, with compensating controls and pre-emptive actions in place to ensure damage control.
3.Mapping legal and regulation compliancy requirements.
It is critical for Hamilton to have internal control systems compliant to legal regulations. Validations and reviews in accordance with the Sarbanes Oxley Act must be incorporated.
4. IT systems and security risks.
Due to its heavy reliance on IT systems, Hamilton must have an elaborate systems RM policy aligned to address relevant security threats and growing list of regulatory requirements. Safeguards for information access and use, system security, fiduciary and privacy breaches need special attention.