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

"Nearly a hundred years ago, Scientific Management was an appropriate strategy for designing how work was done. Many hard-working, poorly educated people were available. When work was organized into specific tasks, workers could be trained quickly and easily in the 'One Best Way' to do that task. Companies could hire, train, and then lay off workers as needed. Departments were developed for each set of related tasks (such as welding, painting, sawing, etc.). For example, production foremen trained workers how to shovel coal into a furnace. That worker was not responsible for the resulting heat, for cleaning up, or for keeping the furnace working right. His job was to keep busy shoveling coal.

"The Scientific Management theory's 'Keep Busy All the Time' strategy maximized each department's output. The resulting inventories allowed each department to keep busy all the time even though they worked at different paces."

Bob continued: "This was the time of the first Industrial Revolution. Relatively expensive investments in plants and equipment were being made. By maximizing output, each department minimized its average product cost. The goal was to spread fixed costs over more products, thus reducing the average product cost. Cost accounting systems were created to support management's need to know the average product cost within each department. Cost variances were then developed to identify where costs deviated from the plan. "For our purposes, it's Purchasing's responsibility to buy materials, so Purchasing is responsible for purchase price variances. Production departments are responsible for using resources, so each foreman is responsible for his or her usage variances.

"The old concept that each department is independent of the others isn't true. Quality problems hide in inventories, waiting to create unfavorable cost variances from the nonvalue-adding activities that poor quality causes down the line. From a competitive point of view, we can no longer continue to stockpile large inventories just to avoid quality problems with materials and subassemblies and keep everyone busy. Large inventories and bad quality cost us dearly. That's why we're trying to eliminate all the excess inventory."

Bob then commented, "As the weather changes, I change my clothes accordingly. As we change our management strategy, perhaps our management accounting system should also be changed to better support the new strategy. Julie, as a CMA, do you have any suggestions?"

IDENTIFYING SUPPLIER PROBLEMS

"Let's start by summarizing the problems and causes we've identified," said Julie. She wrote the following bullet points on the white board:

* Deliveries often are not on time, causing unfavorable cost variances in the Shipping and Receiving Department.

* Deliveries often are incomplete, causing more unfavorable cost variances in Shipping and Receiving.

* Quality problems cause unfavorable cost variances in Assembly and the Warehouse.

* We can't get adequate customer support because we don't order enough lumber on a continuous basis.