Introduction to Business Process Improvement

Activity Based Management at W.S. Industries

Set in the late 1900s, the case discusses the operations in W.S. Industries, a company manufacturing power equipment based in Chennai. Though the first company to achieve ISO 9001 certification, globalisation had brought a slew of problems for the company due to increased competition and hard to satisfy customer needs. In an ambitious move, the company set itself a target of realising a revenue of Rs. 1 billion by 2001 which was primarily meant to be achieved by Activity-Based Management (ABM). This is in accordance with uses of ABM in justifying the cost, calculating performance and tracking the benefits according to Kaplan and Cooper (1998). To attain this, the company had to do away with its traditional costing and switch to Activity-Based Costing.

What are the main differences between the old cost system at W.S. Industries and the new ABC system?

Before the introduction of ABC, W.S. Industries followed a traditional costing system grouping all the costs in just four categories – raw material, and manufacturing, administrative and selling overhead. The manufacturing centres were also ordered into processing or assembly. This led to the overheads being spread over the complete range of products. The costs were calculated using a uniform rate and allocated on the basis of quantity produced or labour hours required. As the manufacturing processes were complex, this led to under and over costing and lack of cost consciousness.

As a result of this, the real cost structure of the products could not be analysed. It was unable to quantify process improvement’s impact on the cost of different products. The high margin products subsidising the low margin ones resulted in improper cost bases which made tracking change in yields due to continuous improvement processes very difficult.

The new ABC system, on the other hand, was created to address the above-stated issues. As this method solved four basic questions related to cost allocation (Kaplan 1997), employees now could do pertinent cost-activity mapping and were accountable for their costs. These costs were calculated with the help of cost drivers which were a representative of the activities used. In the case of this company, the task force entrusted with transformation also had just one employee from the costing department leading to easy acceptance by non-finance departments.

All the tasks performed in the company were grouped in 409 activities which themselves were a part of four Activity Centres. Using the three types of cost drivers – transaction, duration and intensity, the company was able to effectively allocate the overheads thus calculating the total cost of the products. This exercise also helped them to differentiate value-added activities from the non-value added ones.

W.S. Industries used ABC to drive continuous improvement projects (CIPs). Was it a good idea to link incentives to CIPs? Did W.S. Industries need ABC to execute CIPs? Wouldn’t workers dream up CIPs based on their local knowledge as long as their incentives were linked to savings from CIPs?

Was it a good idea to link incentives to CIPs?

A CIP (or Continuous Improvement Project) has been defined by WS Industries as, “any project taken up by a team of employees either to eliminate NVA or to reduce expenses of VAs”. Hence a CIP is essentially a project that is driven by employees and which benefits the organisation by either eliminating NVAs or by reducing the cost of VAs. For the CIP initiative to be successful, the following are critical prerequisites

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