This department had a service enhancement that was not widely used. Even though the enhancement was costed on a marginal cost basis, it was still losing money and this clearly was unsatisfactory. The marketing team was sure that selling twice as many would turn the product into profit.
Presentation of the high-level model initiated debate on reengineering, which we facilitated. The discussion of changes brought out that immediate improvements could be implemented at minimal cost. In fact, many were changes in supply and the suppliers couldn’t understand why the client had not asked for the changes before.
Having knowledge facilitated the creation of a product strategy and immediate improvements
Armed with proper information, the management was able to negotiate with suppliers to provide process enhancements, drive down costs, creating a win-win, while improving the delivery of the service and creating a profitable line.
We reviewed the offering and realised that the management did not understand the true cost base and the contributors to this. A top-level Activity Based Costing model showed the lack of awareness of the product managers of the true drivers of the product cost. The ABC model showed that the current process and sales channel was virtually all variable costs and as such could never make money in its current state. Indeed, the doubling of sales demanded by marketing would merely double the loss.
Accurate data showed that the opportunity for improvement was far greater than anticipated.
Case study
understand the cost of what you do
The accepted truth is often far from true.
Decisions made on false data can often compound the problem
