Case Study #1 - Kanthal A
Swedish company Kanthal is one of the largest company of the Kanthal-Hoganas group. It is mainly producing electrical resistance heating elements. The product range is 15000 items and offering service and products to 10000 customers globally. 95% of sales are contributed by export sales, and its annual return on employed capital is above 20%.
The products are mainly produced by three branches, the market proportion is various between the three divisions.
* Kanthal Heating Technology -25% of market shares;
* Kanthal Furnace Products -40% of market shares;
* Kanthal Bimetals –one of the few companies that producing fully integrated thermo-bimetals at that time.
1. Kanthal allocated the huge amount of SMDA expense equally to each customer. Since the profit generated from each customer is different and each customer is demanding on SMDA resources. The need to attempt linking between SMDA ...view middle of the document...
And it is also very costly to produce small quantities’ order.
In another place, because the sales and market team are compensated based under the gross sales, therefore they only focus on the volume rather than the profit to the company.
New account management system (Kanthal 90)
The new account management system is a form of the activity based cost analysis. It is performed as measuring the nature of each activities and allocating SMDA expense to each categories. The sources of costs were classified into manufacturing cost and SM&A cost. And then categories within the costs are reclassified as either volume related or order related cost diver.
The function derived from the new account management system is generated:
| | Order 1 | Order 2 | Order 3 | Order 4 |
| | 1 order, In stock | 1 order, Non Stock | 3 orders, Non Stock | 28 orders, 22 Non Stock |
| Sales Value | 2,000 | 2,000 | 160,000 | 160,000 |
Less | Volume Cost | 1,000 | 1,000 | 80,000 | 80,000 |
= | Margin on volume-related cost | 1,000 | 1,000 | 80,000 | 80,000 |
Less | Manufacturing Order Cost For Non-Stock Product | 2,000*0 | 2,000*1 | 2,000*3 | 2,000*22 |
Less | S&A Order Cost | 1,000*1 | 1,000*1 | 1,000*3 | 1,000*28 |
= | Operating Profit for Order | 0 | -2,000 | 71,000 | 8,000 |
Similar Example | Customer S001 | Customer NO.33509 | Customer NO.33518 | Customer NO.33537 |
The new system helped to find out the 20-225 rule, which means 20% of the customers are producing 225% of the profits and the rest 80% of customers are unprofitable and in addition with a loss situation of 125% of the profit. The new system can help to distinguish high and low profitability customer. And Kanthal can therefore decide whether to turn those unprofitable customers into profitable ones, or giving up those unprofitable customers.
For short term,
* Changing salesperson’s bonus measurement to profit oriented rather than volume oriented.
* Applying EDI based operating management in the company.
For long term,
* Reassess the profitability of customers and making plans to maintain the customer relationships accurately.
* Applying JIT produce process to reduce non-stock manufacturing cost.