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

Traditional management accounting systems view departments and entities independently (e.g., separate companies like suppliers vs. manufacturers). Thus, current traditional reporting systems are not designed to support strategic value chain management. For example, with traditional management accounting systems, variances are reported within the department in which they occur. Without relating them to the activities causing the variances, such as poor supplier performance, the traditional management accounting system cannot provide information about supplier-caused problems. These problems signal the need for strategic partnerships in the form of long-term supply contracts.

As competitive pressures force organizations to reassess supplier relationships, strategic partnerships will continue to grow in importance. To support these new TQM-based organizational strategies, management accounting systems also must change. Like Multree Homes, other companies must develop activity-based management measures to support their strategic partnerships. These measures include a Vendor Performance Index, on-time delivery and complete order-filling ratios, and a second-generation ABC system to provide the data.

The ABM measures are simple to create and display within a spreadsheet program. More importantly, they report activities in a way that can be easily understood by those who need to use the information.

By changing how we calculate and report cost variances, management accountants can provide more relevant information to better manage supply chain activities. Second-generation ABC systems also can be supported by ABM measures, which can be displayed graphically and incorporated into long-term supplier contracts. Here, we suggest three relevant ABM measures: VPI, on-time delivery ratio, and complete order-filling ratio. We suggest that these management accounting system components better support a TQM strategy and strategic cost management in general than do current reporting systems based on a Scientific Management strategy.

ENDNOTES

(1) IMA, "Improve Your Profits by Fixing Your Supply Chain," www.smartpros.com/x41252.xml, November 12, 2003.

(2) IMA, "CFO's Agree Supply Chain Is Crucial, Yet Strategy and Operations Not Linked," www.smartpros.com/x40383.xml, September 5, 2003.

(3) IMA, "How to Control Rising Commodity Input Costs," www.smartpros.com/x50348.xml, November 4, 2005.

(4) Debra Hofman, "Getting to World-Class Supply Chain Measurement," Supply Chain Management Review, October 1, 2006, pp. 1-9.

(5) Michael Hughes, "The Supply Chain and Business Success," IMA 86th Annual Conference & Exposition, June 2005.

(6) Second-generation ABC systems are illustrated in Michael F. Thomas, James Mackey, "Activity-Based Cost Variances for Just-in-Times," Management Accounting, April 1994, pp. 49-54, and John Strefeler, Michael F. Thomas, "Operational Auditing Using Socio-Technical Systems Analysis," Internal Auditor, April 1994, pp. 40-47. Theoretic model development and empirical tests can be found in Michael F. Thomas, "An Expectancy Model Test of User Support for 2nd Generation ABC Systems," Journal of Accounting and Finance Research, Winter 2003, pp. 119-134, and Michael F. Thomas, "An Empirical Comparison of 2nd Generation ABC and Traditional Cost Variance Reports," Journal of Accounting and Finance Research, Winter 2002, pp. 104-119.