Supply chain management: monitoring strategic partnering contracts with activity-based measures: second-generation ABC systems may be the wave of the future, not just for TQM but now also in supply chain management. In a creative tale of a fictitious small-town business, the authors illustrate why

Management Accounting Quarterly, Fall, 2006 by Michael F. Thomas, James Mackey

"Alice and John, I think I know why your phone calls aren't being returned," Tommy continued. "I have a few friends at Woodsman Lumber. They tell me that if we ordered from them on a more regular basis, we might get better customer support."

"I'm also incurring too many unfavorable labor variances," Barb, the warehouse foreman, added. "It's because of early and late deliveries, the need to order more lumber to protect against bad quality, and the extra forklift moves to Assembly to deliver more lumber as the framers run out of good-quality stock.

"Too much of my forklift driver's time is tied up with moving studs. This also makes him unavailable when he's needed for other pickups and deliveries. The Window-making Department and Cabinet-making Department have been complaining about not being able to get the forklift on a timely basis. Cabinets are piling up, waiting to be moved to the warehouse, and Window-making can't get the stuff they need. I hear the window people are sitting around a lot doing nothing, too. I'll bet they're seeing all sorts of unfavorable cost variances, like the others!"

All eyes turned to Jean, the purchasing agent.

"DON'T BLAME ME"

"Now wait a minute!" Jean jumped in. "Don't blame me for all of these problems. My job is to find the least expensive lumber I can. That's why we switch suppliers so frequently. Our company's late founder, Jim Multree, and the late owner of Woodsman Lumber, Al Boulding, were lifelong friends. We've been doing business with this supplier for years. When we stopped ordering from them a few months ago, they lowered lumber prices for us to get our business back. Lumber prices are volatile. I have to live within my budget, too. I have to do whatever it takes to avoid unfavorable purchase price variances. That's why I'm buying from them again. This is saving us money, as you can see by the favorable purchasing variances I'm creating."

Jackie, the controller, joined the debate: "Well, Jim and Al are no longer with us, and others are running the businesses now. Getting quality materials from Woodsman was never a serious problem as long as we could stockpile enough lumber. This is one reason why we have inventories! Besides, our Raw Materials Inventory is a current asset and doesn't affect our bottom line net income."

"That may be so," Barb interjected, "but all that extra lumber, especially the bad studs I have to store separately--either to return or to scrap--is causing a lot of nonvalue-added activities in Warehousing. These activities are resulting in even more unfavorable cost variances."

"It also creates extra work for me, all of which is nonvalue-adding," said Julie, the CFO and a Certified Management Accountant (CMA[R]). "Most of the Operations people complain about how cost variances in their departments are being caused by activities in other departments, such as Purchasing, from this lumber supplier problem. I spend way too much time investigating these variances after the fact, up to a month later, just to support Tommy's belief that the cost variances cannot be used to evaluate and reward performance. The workers complain to Tommy. Tommy complains to me, and I'm the one who has to explain this to Sid, our CEO."