Activity Based Costing and Management as a
Strategic Cost Management technique
Author: Ewout A. van der Kley
Title Page
Titel: Activity Based Costing as a Strategic Cost Management technique Author: E.A. van der Kley
Place: Groningen
Date: October 27th, 2003
Rijksuniversiteit Groningen
Faculty of Financial Valuemanagement Landleven 5
P.O. Box 800 9700 AV Groningen Supervisors:
Drs. M.P. van der Steen Mr drs. H.A. Ritsema
Heineken N.V.
Heineken Nederland Supply Financial Planning and Control Burgemeester Smeetsweg 1 2383 PH Zoeterwoude Supervisor:
R.A. van Oppen
Preface
Search and thy will find there is more to search
Unknown
In February of this year I couldn’t oversee where I am standing now. To give the reader an idea about my learning experience I have compiled an overview.
First I’ve learned about the academic road from data to knowledge. In gathering data I’ve learned to appreciate the main works and management journals from a theoretical field as building blocks for a research in general. In structuring the search for knowledge I’ve supported on my guiders from the university, drs. M.P. van der Steen and Mr drs. H.A. Ritsema and my guider at Heineken, R.A. van Oppen. Hereby I thank them all for their continuing support and the way they’ve challenged me.
Second I’ve learned about computers. As a start I mastered the Metify software model for Activity Based Management. Even more valuable to me were my Excel findings. By unravelling a model made by a Polish Trainee that had graduated in Econometrics and Accounting was probably the biggest non-academic eye-opener to me. Vertical and horizontal lookups, pivot tables, filters, what if, sum if, sum if value, sum if value not, count if etc. are no mystery to me anymore. Especially combinations like
IF(ISERROR(VLOOKUP($A3&D$2;'52 - Material codes'!$A$2:H23234;5;0)); IF(E3=0;D3;E3);
VLOOKUP($A3&D$2;'52 - Material codes'!$A$2:$H$23234;5;0))
to fill a single cell were dazzling to me, but now a part of ordinary life. I would like to take this opportunity to thank Marcin Kucharski as a temporary colleague and a lasting friend.
Third I’ve learned a lot from working within a professional organization. Working with people that don’t take anything for granted was new to me. Having the opportunity to learn about diverse subjects as finance, planning, brewing, packaging, logistics and marketing was great in an orienting phase like this in my life. The evening canteen-diners in then Den Bosch with Frans Oudmaijer to finish the project were among the most romantic in my short life.
Fourth I’ve learned about communication. I’ve experienced a turnaround among people who first blamed others that they “throw information over a blind wall and never receive any feedback”. That same people were the first to voluntarily cry out after workshops that they “finally understood the impact of their input and the importance of their contribution”. Besides I’ve seen the importance of giving people ready to hand information on their contribution to gain their acceptance.
Finally I’ve learned the most valuable lessons from everyone that has contributed along the way.
My girlfriend Anne has been my inspiring mirror for 85% of my studying time. My parents have supported me by creating the options for me to choose freely. The boys I lived with made sure I was not studying all the time. At last I have never hesitated to phone my elder brothers for advice.
No wonder I am finishing the same study as they did a few years ago.
In a search for answers, the search for the right questions was an even bigger search. I comforted myself with the thought that if you explain everything, you’ve explained nothing.
Thank you for learning about myself.
Ewout A. van der Kley
Management summary
The Activity Based Costing and Management (ABC/M) system I found at the beginning of the research in February 2003 was neither effective nor efficient in supporting management decisions within Heineken Nederland Supply. It was not effective for the purpose of ABC/M formulated by management to be able to evaluate form different angles and better comparison between Operating Companies (and Breweries). The system itself was not efficient because the relationship between costs and costs objects was not as causal as it could be.
Heineken was not effective in achieving the purpose formulated since ABC/M was mostly used to calculate the fixed part of the Transfer Price. The possibilities of extending the model were not fully explored. The possibilities to fully exploit the benefits ABC/M offers seem to have eroded or are just starting to come to life. Only after ten years of being present as the cost information system within Heineken the first ‘what if analyses’ are carried out that should lead to cost reductions. By researching possible angles from four other Strategic Cost Management techniques this research points out possible extensions for the ABC/M model in the future.
Heineken was not effective in achieving the purpose formulated since the role of unused capacity has not been incorporated in the ABC/M model. The renowned scientists Kooper and Caplan put the issue of unused capacity at the heart of ABC/M. In the past this has lead to non-acceptable fluctuations in the transfer price with no direct relationship to perceived changes in product or service by the four main customers. In this research changes to the model are proposed that offer opportunities for better evaluation and comparison related to unused capacity. These changes have already been implemented. By incorporating unused capacity as a separate cost driver for brewing and packaging based on depreciation it becomes possible to fairly compare breweries and operating companies. This is valuable input for sourcing decisions, gives insight in cost developments of single products and offers the opportunity to manage the cost related to unused capacity in a way that is acceptable to customers and all others involved.
Heineken was not effective in achieving the purpose since there is still resistance towards the ABC/M model within the organisation. This research has pointed out that this resistance is a result of the reluctant interaction between controllers involved with delivering the input for the model and responsible ABC/M managers in the past. Fortunately this resistance is fading due to three actions that have been carried out consequently to increase the participation of controllers and reduce the information asymmetry between parties involved. First the controllers are now involved in functional workshops that were not held before. By visualising the output of the input given by controllers, which has been consolidated on a higher level, they feel more responsible and are more enthusiastic on their part in the whole. Second the new Lotus Notes tile on ABC/M at HNS has lead to increasing transparency and decreasing complexity of the information on ABC/M. Third the change to a sole focus on cost drivers has eliminated double work for the controllers involved, gaining higher acceptance for the remaining usage of their assets. These measures should at least be continued in the next years because they present opportunities for knowledge sharing that can only lead to a rise in quality of the information and higher acceptance of the management decisions resulting from the ABC/M information.
Heineken was not efficient in carrying out its goal since the ABC/M system I found was not meeting the standards that are the prerequisite for good evaluation and comparison. These theoretical standards in relation to the ABC/M model are thoroughly examined within this research and have lead to important new insights. The activity structure and cost drivers for logistics (D&CS) have changed and the cost drivers for brewing (filtration) and packaging (change overs) have been altered. Besides the inefficiencies were partly the cause of the fluctuation of the transfer price and the sustaining resistance towards ABC/M that have been mentioned.
The new cost drivers for brewing and packaging have incorporated the demand that the activities put on the assets. It became clear that not the personnel but the assets were the main driving factor of costs. Besides it appeared there is a causal relation between the type of primary and/ or secondary pack type that is changed on the packaging line and the duration of the change over. By taking the time factor and the amount into account in the new cost drivers they have become more accurate. The cost drivers for brewing have become easier to deliver, the cost drivers for packaging more difficult. A lot of computation regarding packaging could and should be automated. Both changes offer more reliant information to support management decisions.
All measures have contributed to a more effective and efficient ABC/M system at Heineken and Heineken Nederland Supply in particular for the future. The first results have sometimes met doubt but one must not forget that there has been no solid base to compare the new figures with. The controllers involved have more confidence in the ABC/M system that has resulted from the research. At Heineken this should be the dawn for ABC/M as it was said out to be; a strategic cost management technique to gain sustainable competitive advantage.
Table of Content
1 INTRODUCTION... 9
1.1 INTRODUCTION... 9
1.2 ACTIVITY BASED COSTING/MANAGEMENT... 9
1.3 STRATEGIC COST MANAGEMENT... 10
1.4 HEINEKEN N.V. ... 11
1.5 CONCLUSION... 15
2 RESEARCH DESIGN ... 16
2.1 INTRODUCTION... 16
2.2 PROBLEM BACKGROUND... 16
2.3 PROBLEM STATEMENT... 20
2.4 RESEARCH SUB-QUESTIONS... 20
2.5 BORDERING CONDITIONS... 21
2.6 CONCEPTUAL FRAMEWORK... 22
2.7 METHODS &THEORIES USED... 23
2.8 RESEARCH FRAMEWORK... 25
2.9 CONCLUSION... 26
3. MORE EFFECTIVE ABC/M BY EXPLORING ABC/M AND SCM ... 27
3.1 INTRODUCTION... 28
3.2 ACTIVITY BASED COSTING/MANAGEMENT (ABC/M) IN THEORY... 28
3.3 ACTIVITY BASED COSTING/MANAGEMENT (ABC/M) IN PRACTICE... 31
3.4 STRATEGIC COST MANAGEMENT (SCM) IN THEORY... 33
3.5 STRATEGIC COST MANAGEMENT (SCM) IN PRACTICE... 38
3.6 RELATIONSHIP ABC/M AND SCM IN THEORY... 39
3.7 RELATIONSHIP ABC/M AND SCM IN PRACTICE... 42
3.8 CONCLUSION... 44
4 MORE EFFECTIVE ABC/M BY INCORPORATING OVERCAPACITY... 46
4.1 INTRODUCTION... 47
4.2 ABC/M AND OVERCAPACITY IN THEORY... 47
4.3 ABC/M AND OVERCAPACITY IN PRACTICE... 49
4.4 CONCLUSION... 56
5 MORE EFFECTIVE ABC/M BY OVERCOMING RESISTANCE ... 57
5.1 INTRODUCTION... 58
5.2 OVERCOMING RESISTANCE IN THEORY... 58
5.3 OVERCOMING RESISTANCE IN PRACTICE... 61
5.4 CONCLUSION... 63
6 MORE EFFICIENT BY ANALYSING THE ABC/M MODEL ... 64
6.1 INTRODUCTION... 65
6.2 THE ABC/M MODEL IN THEORY... 65
7.2 CONCLUSIONS... 77
7.3 RECOMMENDATIONS... 80
SOURCES... 81
APPENDIX A HEINEKEN NV ... 83
APPENDIX B ABC/M BUDGETING PROCESS ... 85
APPENDIX C FLOWSHEET BREWING PROCESS... 86
APPENDIX D CALCULATION PROPOSED DRIVER PACKAGING ... 87
All men can see the tactics whereby I conquer but what none can see is the strategy out of which victory is evolved.
Sun Tse, 5th century BC
1 Introduction
1.1 Introduction
The ancient words of Sun Tse on the previous page imply there is more to strategy then what appears to us at first glance. Twenty-five centuries later his words have not lost their relevance.
In the highly competitive business world of today companies need a clear and solid strategy to survive. In times that worldwide recession is slowly paralysing business, companies start rethinking their strategy. Now is the time to change their strategy, on average their results stink anyway. Rethinking strategy in bear market conditions often implies a relative shift in focus from creating volume to reducing costs.
Heineken NV, the Dutch worldwide beer brewer, is no exception. The management team of one of their operating companies is looking for ways to make more effective use of the data they get from their Activity Based Costing/ Management model to reduce costs. Because Activity Based Costing is viewed as one of the main management techniques of the theoretical field of Strategic Cost Management, the focus of this research will be strategic as well. But in order to use an Activity Based Costing and Management model more effective, there needs to be complete trust in the correctness of the model as well. The correctness of the model is the prerequisite for efficient decision-making.
In the following three paragraphs a background of the main subjects of this research is given for the general comprehension of the reader. Paragraph 1.2 discusses the origin and definition of Activity Based Costing and Management (ABC/M). Paragraph 1.3 discusses the origin and definition of the theoretical field of Strategic Cost Management (SCM). Paragraph 1.4 gives an overview of the relevant information about Heineken. These paragraphs describe valuable information for the comprehension that is needed to understand the problem context in the next chapter.
1.2 Activity Based Costing/Management
1.2.1 Origin
The initial development of Activity Based Costing and Management (ABC/M) in the 1980’s was centred on the need to improve product cost information (Yoshikawa et al., 1993).
Professors Cooper and Kaplan of Harvard coined the term ABC as a title for this approach and were instrumental in formalizing, developing and publicizing ABC. However they did not came up with the name. It was borrowed from the John Deere Company, an American company who had developed the system under this name (Theunisse, 1992). One of the first areas in which ABC/M gained prominence was the costing of products for manufacturing operations. Traditional manufacturing cost systems typically allocated costs to products using only a few standard cost bases: labour hours; machine ours and/or materials consumed.
However, as firms began to view manufacturing operations as a series of linked activities, it was increasingly recognized that these limited traditional bases did not accurately depict the true costs of production. Firms began to expand the number of costs bases or drivers to include such activities as the number of set-ups, of change- overs, of receipts, of orders and shipments, and so on. Thus many conventional volume-based costing techniques gradually evolved toward Activity Based Costing and Management.
While Activity Based Costing (ABC) focuses more on the right pricing of the product, Activity Based Management (ABM) has a different focus. Activity Based Management (ABM) evaluates the costs of activities as well, but focuses more on the causes of the occurring costs and how those costs can be reduced. ABC has a more strategic focus and ABM has a more operational focus. ABC helps to reduce distortions caused by the traditional costing system and obtains more accurate product costs. ABM focuses on improving business efficiency and effectiveness, and increasing not only the value perceived by customers but also the firm’s profits (Blocher et al, 1999).
1.2.2 Definition
Activity Based Costing is an analysis used to improve the accuracy of cost analysis by improving the tracing of costs to cost objects (Blocher et al, 1999)
Activity Based Management is an activity analysis used to improve operational control and management control (Blocher et al, 1999)
The definitions combined form the strategic cost management technique Activity Based Costing and Management (ABC/M). ABC/M can be applied to all major processes and activities of an organization and all elements of the supply chain. It is one of the ten main management techniques mentioned in the next paragraph. To understand ABC/M it is important to understand the technique in its theoretical context, the field of Strategic Cost Management (SCM).
Within Heineken the combined definition is intertwined with the software model Metify that is used for both Activity Based Costing and Activity Based Management. Therefore I have chosen to use the combined term from now on, unless specified differently.
1.3 Strategic Cost Management
1.3.1 Origin
Strategic Cost Management is a theoretical field that strongly emerged in the 1990’s, triggered by articles about Strategic Management Accounting as early as 1981. The demand for Strategic Cost Management (SCM) has grown parallel with the development of strategic thinking in business generally. Although concepts of strategy have been around for several thousand years, the modern field of business strategy is predominantly a creation of the past 30 years with its own set of business terms and meanings (Simmonds, 1981).
Two observations emerge. Fist there is an extensive and rapidly growing literature on the concept of Strategic Cost Management. Second, the ideas reflected have to date received scant attention in the leading accounting research journals, the leading textbooks, or graduate and undergraduate curricula (Shank & Govindarajan, 1993).
1.3.2 Definition
In 1997 strategic cost management (SCM) is still seen as an emerging field. Typical for any emerging field is the lack of consensus on the definition of the new phenomenon. Strategic cost management is for instance alternatively known as strategic management accounting
For a good definition of strategic cost management, strategy has to be defined fist. Wilson mentions the definition of Chandler for strategy. In his words strategy is the determination of the basic-long term goals and objectives of the enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals (Wilson,1997).
Because this definition doesn’t explicitly emphasise the relation of a company to it’s environment, meaning competitors, it is not sufficient to define strategy to my opinion.
Surviving is based on relative position in competition. Strategy is a way to influence that relative position; therefore I prefer the following definition. Strategy is a set of goals and action plans that, if achieved, will provide the desired competitive advantage (Blocher et al., 1999).
This definition is in line with Richard Wilsons’ own definition of the field of strategic cost management in the introduction of his book that carries that same field as title. Wilson defines Strategic Cost Management as an approach that explicitly highlights strategic issues and concerns. It sets management accounting in a broader context in which financial information is used to develop superior strategies as a means of achieving competitive advantage (Wilson, 1997). Shank and Govindarajan support this by saying that the central theme of their book is that accounting exists within a business primarily to facilitate the development and implementation of business strategy (1993). It can be seen as a decision support system using cost data to identify superior strategies that will provide sustainable competitive advantage (Iyer, 2003).
In the third chapter a selection form the ten techniques will be made. ABC/M will then be compared to some of the ten management techniques. Before getting into depth on the theories first an overview will be given on the firm they will be applied to in paragraph 1.4.
The underlying foundations for choosing the theories should become much clearer when reading the problem context in the beginning of the next chapter.
1.4 Heineken N.V.
1.4.1 Introduction of Heineken N.V.
Gerard Adriaan Heineken founded Heineken N.V. in 1864. Today it has developed into a worldwide brewer, operating in over 170 counties. With total beer volume of 108,9 million hectolitres in 2002, Heineken is also among the largest. Beer is produced at over 110 breweries in more than 60 countries, and by other brewers under licence. Heineken also has a strong export business. Europe accounts for over half of the sales volume (Annual report 2002). During my stay at Heineken they took over BBAG, the biggest take over in Heineken history. A more extensive company profile can be read in appendix A.
Under Heineken N.V. Corporate 37 subsidiaries companies can be distinguished. To reduce the complexity of the organisation chart only the subsidiaries, which either are based in the Netherlands or served from the Netherlands are included in figure 1.1.
Figure 1.1. Organisation chart Heineken NV Corporate
Heineken USA
Heineken Export Group
Heineken Breweries
Heineken NL Business
Services Heineken
Technical Services Heineken
NL Supply
Vrumona Other
Operating Companies
Heineken N.V.
Corporate
Heineken Breweries, Heineken Export Group, Heineken USA and Other Operating Companies are selling companies and internal customers to Heineken Netherlands Supply (described in the next paragraph). Vrumona is a producer and bottler of soft drinks like Pepsi, Royal Club and Sisi. Heineken Business Services provides business services to the (Dutch) operating companies. Heineken Technical Services is an internal consultants group that can be employed to assist on projects at the operating companies.
As one can see Heineken is divided into operating companies. An operating company can be viewed as a separate company of Heineken in a country. A few countries have several operating companies, many countries are operating companies and finally there are a lot of countries that fall under the responsibility of an operating company in another country. The operating companies have a supplier-customer relationship. Because the study takes place within a department of Heineken Netherlands Supply (HNS), this operating company will be discussed next.
1.4.2 Introduction of Heineken Nederland Supply
HNS is responsible for the total supply chain of beer, produced in the Netherlands, including production itself, purchasing, physical distribution, planning and scheduling. Figure 1.2 represents the organisational structure of HNS.
The objective of HNS is to attune the resources in such a way that the result of the total chain is being maximised. The maximisation needs to take place in such a way, that the customer- service-level (the result of the chain) and the costs to the client are optimal.
Figure 1.2 Organisational chart Heineken Nederland Supply
The research is carried out from the department Financial Planning & Control. It is aimed at the management team of Heineken Nederland Supply. This management team consists of the general manager of HNS and the leading managers of all the departments within HNS.
Heineken Nederland
Supply
Breweries:
- Zoeterwoude - - Den Bosch - - Brand Purchasing &
Sourcing Management
Human Resources &
Organisation Development
Demand &
Supply Management
Financial Planning &
Control
Distribution
& Customer Service Supply
Development
& Support
The brewery in Zoeterwoude operates 7 days a week, 24 hours a day and produces mainly the regular Heineken and Amstel beers in large quantities. The brewery in Den Bosch operates 5 days a week, 24 hours a day and produces all available beers, also in smaller quantities, which makes this brewery more specialised.
The Dutch breweries do not only produce for the domestic market, but also for export markets. The markets that are being served are grouped into the clients Heineken Breweries (domestic market), Heineken USA, Heineken Export and other Operating Companies (OpCo’s). Figure 1.3 shows the internal customers of HNS. Each of the clients has an account manager within the department Demand and Supply Management to assure supply for the markets.
Figure 1.3. Overview of the main customers of Heineken Nederland Supply
The Netherlands and the USA are by far the biggest markets for HNS, with a sales volume of respectively 6,5 million hectolitres and 5,5 million hectolitres. As the Dutch market is stagnating and the American market is still growing, it is expected that the latter will become the biggest market for Heineken within some years. The Heineken Export Group serves the markets, which do not have their own production sites and the other Operating Companies (OpCo’s) serve markets that do have production sites, but do not have sufficient capacity to meet complete demand.
1.4.2 Developments on the global beer market
The worldwide market is becoming under more pressure each day. The global beer market is no exception. The last couple of years these international beer brewers at least had to deal with the following developments. Firstly, the stabilizing of major beer markets forces breweries to expand in the corners of the world in search for growing markets with less volume. Secondly, the shortening of product-life cycles forces breweries to invest more in product development. Within Heineken the list of specific product codes (the unique code for every product) is growing exponential. This mainly causes the third development. The increase in complexity caused by a growing number of product/customer combinations puts pressure on costs to rise. A fourth development, the increasing of global competition with highly competitive trading conditions, is working like a negative leverage on the expected high margins of the differentiating products. Due to a long list of take-overs within the industry, it is highly likely that only a few big players will survive within this fierce competition.
The recent biggest take over in the history of Heineken is a clear witness of this development. The worldwide recession is putting pressure as a fifth development on the premium segment in particular. Painfully for Heineken this is their main focus.
HNS
Heineken Breweries
OpCo's Heineken
Export Heineken
USA
Market:
Consumers
Internal markets:
The worldwide brewers have standard areas of concern that come back each year. Weather can impact demand, as was the case in Europe in the summer of 2002. Besides the excise duties can differ significantly. The exchange rates can have a big impact on results as well.
Since the outbreak of SARS1, the fear for diseases pumped in by the media makes people avoid gathering places like airplanes and bars. Finally governmental measures can have effect as well. The prohibition on smoking in café’s in the Netherlands is a good example of a governmental measure with negative effects for the breweries. From my point of view, this risk is partly diversified by the vast amount of countries in which Heineken is operating, although it is noteworthy dependant on the USA.
1.4.3 Performance of Heineken
Despite the fact that Heineken new that these developments probably would continue to increase in the foreseeable future, Heineken expected global beer consumption to continue growing in 2002. They presumed that the economic uncertainty being experienced by many markets would have a negligible effect on global beer sales. Although there could be a temporary shift away from the main beer segment towards the low-priced segment in a number of emerging markets, the international beer segment would continue to grow in most countries, they assumed. Internationalisation and consolidation would continue to be defining features of the global market in 2002 (Annual Report, 2001).
The results over 2002 that have been published in March 2003, support their assumptions for at least their company. But a lot of gains have resulted from increasing prices, which put pressure on the long run demand for the product. Because of this increased selling price and moreover because the consolidating world beer market is in the adult phase of the product- life cycle, the focus on decreasing costs will increase to my opinion.
In the annual report on 2001 it is stated as following (In the annual report on 2002 it is stated approximately the same):
As well as expansion, an optimum cost structure is also an important goal, and increasing use will be made of economies of scale. Excluding effects of acquisitions, the total number of employees will decrease slightly in 2002 as a result of efficiency improvements.
When finalising this research Heineken has given it’s first profit warning since its existence.
This could not more underline the assumptions made in the text above.
1.4.4 Reorganisation Heineken 2003
Heineken has initiated a reorganisation this year called Taking Heineken to the next Level, which is planned to roll out until summer. With partly a focus on decreasing costs, the number of FTE’s will decline further. The same activities should be done at a higher level of quality with less people. The decrease of FTE’s, as well as other cost reductions, will have a noticeable effect on the way resources are assigned to activities and activities are assigned to cost objects.
1.4.5 Conclusion
The importance of the use of Activity Based Costing/Management at Heineken seems evident. There are two reasons for Heineken to focus on activities and related costs. Firstly because the consolidating beer market worldwide has triggered a shift from a focus on merely creating volume to a focus on costs. I believe this is felt throughout the organisation.
Secondly the consequences of the reorganisation opt for a more intensive use of ABC/M to focus on the relation between resources, activities and cost objects. With an increased focus
1.5 Conclusion
What is there to conclude about a describing chapter? Suffice it to give an overview of the most important descriptions.
The origins and definitions of Activity Based Costing/Management (ABC/M) and Strategic Cost Management (SCM) have been explained for the general knowledge of the reader.
Activity Based Costing is an analysis used to improve the accuracy of cost analysis by improving the tracing of costs to cost objects (Blocher et al, 1999). Activity Based Management is an activity analysis used to improve operational control and management control (Blocher et al, 1999).
The definitions combined form the strategic cost management technique Activity Based Costing and Management (ABC/M).
Strategic Cost Management is an approach that explicitly highlights strategic issues and concerns. It sets management accounting in a broader context in which financial information is used to develop superior strategies as a means of achieving competitive advantage (Wilson, 1997).
These subjects and their mutual relationship will be dealt with more thoroughly in the third chapter.
Besides an insight is given about the challenges any worldwide brewer is facing and the way Heineken is coping with this challenges lately. The economy of the world, the international beer market and the premium beer segment in particular are under pressure. This has lead to the conclusion that a focus from creating volume to reducing costs is the general development. It becomes more and more important to know and correctly price your products to sustain competitive. It also has lead to a reorganisation of Heineken.
Activity Based Costing and Management can play an important role within Heineken to contribute to the right pricing of products and the reducing of costs. It is a tool from the field of Strategic Cost Management that deals with a strategic look at costs in general. It is important to understand ABC/M in that theoretical context. That could be key to deal with the stated challenges in the future. In the next chapter it is explained how the model can become more effective and efficient in its role.
2 Research Design
2.1 Introduction
In the research design, the goal of the research is stated and the way to achieve this goal.
The questions to achieve this goal are structured and it is defined what is within the scope of the project within the bordering conditions. The main target group for the research is stated there as well. Besides an overview is given on the used theories and methods. The structuring of problems in relation to theory is visualised in the conceptual framework. Finally the relation between the sub-questions and the goal of the research becomes clear in the research framework. There will be started with the problem background. It is a profound overview of the reasons and structuring of the problems that lead to the problem statement.
2.2 Problem Background
2.2.1 Introduction
Knowing the importance of ABC/M within Heineken it is time to take a closer look at the problems Heineken is facing in respect to ABC/M on the level of the ABC/M manager at Heineken Nederland Supply. An overview will be given on the current use of ABC/M and the two main problems related to ABC/M at Heineken; it’s ineffective use and it’s inefficient use.
2.2.2 Current use of ABC/M
Heineken has experience with using ABC/M for several years. There is an allocation of all costs based on ABC/M methodology within Heineken done every year for budgeted and actual figures. Since a few years the ABC/M data is used to calculate the fixed part of the transfer price. The transfer price is an exchange price between different business units, in this case different OPCO’s, within a firm for the exchange of products and services. The price is often based or related to market prices. The price consists of a fixed part, a variable part and a percentage to break even the cost of capital. This percentage is in this case equal to the earnings before interest and taxes (EBIT). The transfer price is billed to the four main customers of Heineken Nederland Supply (HNS), documented in a Service Level Agreement.
The operating company Heineken Nederland Supply can therefore be viewed as a standard cost centre. A standard cost centre is one of the five types of decentralized units described in the book Advanced Management accounting (Kaplan and Atkinson, 1998). A standard cost centre can be established whenever we can define and measure output well and can measure and specify the amount of inputs required to produce each unit of output. Managers of standard cost centers do not determine the price of their outputs, so they are not responsible for revenue and profit. They are, however, responsible for controlling the overhead costs expected to vary with activity volumes and the level of discretionary fixed cost in the centre.
The purpose formulated for ABC/M within Heineken is ”to be able to evaluate from different angles and for better comparison between Operating Companies (OPCO’s)”. In my point of view this is in line with how I see the information resulting from ABC/M. The data is packed in an ‘information cube’, where you can choose e.g. the packaging costs of a defined product of a defined packaging line of a defined customer and use this information for analyses. The evaluation now takes place on the level of Operating Countries (OPCO’s) and Countries by Corporate. Currently the transfer prices fluctuate too much and ABC/M data is only used on an international level to compare countries. This last issue is felt as a missed opportunity for the management team of Heineken Nederland Supply. ABC/M data does not contribute to
2.2.3 Ineffective use of ABC/M
At the moment, the ABC/M data is being used for external purposes; calculating the fixed part of the transfer price. It is believed it can be used internally as well, namely to support Strategic Cost Management decisions on a lower aggregation level. It is said within HNS that the ABC data in the system can be used more effective, meaning more in line with the formulated purpose of ABC/M. Because effective use of ABC/M for management means to be able to evaluate form different angles and better comparison between Operating Companies (and Breweries), effective implicates two things. On the one hand it means more effective evaluation and comparison, on the other hand it means that it must be possible to implement the output of the goal, the resulting management decisions, effectively within the organisation. Otherwise the purpose becomes almost useless.
To become more effective in evaluating from different angels and better comparison it is important that three conditions are met. These three conditions I have structured using Hasselhoff’s triangle (“drie-luik”) as a guideline (De Leeuw, 2000). But instead of using it on a whole organisation it is used on a lower aggregation level, namely on the ABC/M model in relation to the formulated purpose. The position of the ABC/M model can be viewed to my opinion as a sub system within a bigger system, in this case the organisation Heineken Nederland Supply.
Haselhoff views the organisation in three dimensions. The first dimension is the organisation as a technical-economical system, the second as an open system and the third as a social system. These dimensions relate respectively with appropriateness, surviving, and meaning within the organisation. All these dimensions strongly relate to effectiveness from a different angle. Each dimension can be related to the effectiveness of ABC/M within Heineken Nederland Supply.
First the information used in the ABC/M model must be appropriate in relation to the purpose formulated by management. In this dimension it is important that all possible angles are considered to be included in the information cube of the ABC/M model. Therefore it must be discussed what type of cost management approaches could and should be included, taking costs and timeliness into consideration. If not all angles are considered, blur views will emerge resulting in sub optimal decisions and missed opportunities.
Second it is important to management that the ABC/M model can survive as a tool within the organisation. It is an open system that has to survive within its environment. Therefore it is important that it meets up with crucial expectations from the people who work with, including the customers who pay the transfer price that is partly based on the system. If important aspects of fixed costs to management are not and cannot be included in the model, the model loses its raison d’être.
Third it is important to understand ABC/M as a social system. It is not only important that the system survives due to some users of the system. The effectiveness of the system is depending on all people involved with the system. The extra worth of the system must be perceived by employees, not only expressed in euros, but in possibilities for self-realisation as well (De Leeuw, 2000). Therefore the ABC/M model should meet embracement, not resistance. If there would be resistance, the input for the evaluation could not be trusted fully, resulting into ineffectiveness of the purpose formulated. Besides the implementation of the decisions resulting form the purpose would be ineffective, making even a fully accomplished purpose ineffective by itself.
Therefore effectiveness means both effective regarding the accomplishment of the formulated purpose and effective regarding the implementation of the results of the purpose. The focus will be on the first, as it is the prerequisite for the latter. To find out what areas for improvement of effectiveness there are, interviews have been carried out resulting in three main problems that have to be overcome in order for the ABC/M model to become effective.
Of course other problems could have been included in this approach, but these three are the most apparent and represent all three dimensions of the triangle of Haselhoff.
The first problem is related to the dimension of the ABC/M model that, as a technical- economic system, should be appropriate. Currently ABC/M is viewed as an isolated tool in the sense that it is marginally used and is not related to other Strategic Cost Management (SCM) techniques within the organisation. To my opinion it is not discussed what type of cost management approaches could and should be included in the ABC/M model. To make more effective use of ABC/M, it is important to understand ABC/M as a strategic cost management tool. By using ABC/M only to construct the fixed part of the transfer price it is clearly not used to it’s full potential. To understand a tool and its possible angles, it is important to understand what role ABC/M takes within it’s theoretical field. By comparing ABC/M to other SCM techniques a more solid overview can be obtained. Therefore an exploration of ABC/M compared to a few other strategic cost management techniques will be given. In this way the model becomes more appropriate as a technical-economical system that is kaleidoscopic.
The second problem is related to the dimension of the ABC/M model as an open system that tries to survive in its environment. It concerns the tool itself. Through the “Puerto Rico - case”
I found out that costs in the ABC/M model are not causally related to the cost objects.
Heineken contains irregularities in cases. Due to a shift of volume from packaging line A to packaging line B, the remaining hectolitres on packaging line A became more expensive. A rise in price of these hectolitres was unacceptable for the Puerto Rican market. Clearly the influence of how (unused) capacity on the lines influences the ABC/M build up fixed part of the transfer price had to be examined. The influence of (unused) capacity needs to be taken into account when comparing internally because the causal relationship between fixed costs and cost objects is otherwise neglected. This should make ABC/M within Heineken more effective. If it cannot incorporate this (to management) crucial element, the model can become obsolete. But one crucial element must not be neglected as well. The people who deliver the input for the model must trust the output as an input for their behaviour towards costs.
Because of the fluctuating transfer price and other causes, ABC/M still meets resistance, within the organisation. This third problem is clearly related to ABC/M as a social system that struggles with its meaning to all people involved within the organisation. The controllers who deliver the input for ABC/M complained “they throw information over a blind wall and never receive any feedback”. Another cause of resistance is for instance the current reorganisation.
ABC/M has to take a new position within the organisation. From theory we know that resistance is related to every organisational change. Therefore the role of organisational change will be discussed as well. Because the two subjects, organisational change and ABC/M after the reorganisation, have already been dealt with in a research within Heineken (Duursema, 2003), this section will not be dealt with in depth. The focus will be on the direct trust in the ABC/M model by the people that have to deliver the input data. As a conclusion a definition will be given of effective use of the ABC/M model.
Definition effective
With effective is meant an appropriate, surviving, and meaningful ABC/M model that meets the formulated purpose by management. The purpose of the ABC/M model to management is to be able to evaluate form different angles and better comparison between Operating Companies (and Breweries).
Because of the fluctuating transfer price, managers where reluctant to trust the output of the model; “is the amount of days brewing correct?”, “does the new way of filtration within brewing has influence on the way costs are calculated?” , “how can it be that departments only perform one activity?” Since these and other remarks where less related with the goal of the ABC/M model and more with the degree in which this goal is achieved the discussion of its effective use shifted to the efficiency of the model. This (in-) efficiency is discussed in the next sub paragraph.
2.2.4 Inefficient use of ABC/M
Partly because of internal miscommunication and miscalculation related to over-capacity, there has been risen doubt about the correctness of the current ABC/M model used within Heineken Nederland Supply. The people who work with the data doubt the consensus made in the past about the cost drivers used. The fact that ABC/M reporting is normative vs.
financial reporting that is based on actual costs makes it useful to evaluate these choices.
More important, the buying OPCO’s should have full confidence in the presented transfer price. If there is doubt, the ABC/M model cannot be used to its full potential. It becomes harder to make management decisions based on the outcomes and if the doubt is well founded the wrong decisions can and will be made. The possibilities to refine the efficiency of the ABC/M instrument should therefore be thoroughly examined.
A three-step model developed by Blocher, Chen and Lin is used to examine this efficiency in chapter six. There will be carried out an analysis of the cost drivers. If the cost drivers do not represent the causal relationship between occurring costs and the cost objects blamed for the costs, the model becomes inefficient as a tool for supporting management decisions.
Besides the activity structure will be thoroughly analysed for the same reason. If the activities are not structured in an optimal way that it is useful to support the management decisions, the goal of ABC/M is not optimally achieved. It is shown how it can be achieved better.
After the analyses on efficiency are carried out, a redesign of the allocation model is proposed. The new model should gain the trust of all parties involved; the controllers who deliver the input, the management team of HNS who has to manage based on these figures and the buying OPCO’s who want a price from their suppliers that reflects fair market value.
As a conclusion, the efficiency of the ABC/M model is defined precisely.
Definition efficient
With efficient is meant an ABC/M model that is build by using the three steps of Blocher, Chen and Lin with an emphasis on the causal relationship between costs and cost objects.
2.2.5 Conclusion
There are two main areas for improvement compared to the current situation within the problem context. The first area of improvement is the ineffective use of ABC/M that should be overcome. Exploring related strategic cost management techniques should make the ABC/M model more appropriate. An examination of the influence of (unused) capacity on the price of the products should secure the survival of the ABC/M model within Heineken. Finally it should become more effective by overcoming barriers of resistance related to organisational change.
The second area for improvement is the inefficient use of ABC/M that should be overcome.
This should be done by thoroughly analysing the activity structure and cost drivers of the current ABC/M model. Using the three-step approach developed by Blocher et al. can do this.
When this analysis is carried out properly, a redesign of the model in both areas is proposed.
This has lead to the following problem statement.
2.3 Problem Statement
The problem statement consists of the research objective and the research issue. The research objective is the goal that the assembling and interpreting of the data leads to. It displays the relevance of the research. The emphasis of this research is to contribute through practical relevance as is stated by Baarda en de Goede in their book ‘Methoden en technieken’ (Baarda, 1995). The research objective results from the problem background in the previous paragraph. In the research issue it is formulated what is wanted to be known.
2.3.1 Research objective
The goal of the research is to contribute to a more effective and more efficient ABC/M model to support the strategic cost management decisions made by the Management team of Heineken Nederland Supply.
2.3.2 Research Issue
In what way can the ABC/M model become more effective and more efficient in order to support the strategic cost management decisions of the Management team of Heineken Nederland Supply in a better way?
2.4 Research sub-questions
The main question of the research issue can be divided into two groups of sub-questions that lead to the combined goal. Sub-questions 1 to 4 deal, in three dimensions, with the process from ineffectiveness of ABC/M to effectiveness. Sub-questions 5 to 6 deal with the process form inefficiency to efficiency.
1. In what way can the four other main theoretical Strategic Cost Management techniques related to ABC/M contribute to a more effective ABC/M model?
2. In what way can the ABC/M model become more effective by taking (unused) capacity into account?
3. In what way can the ABC/M model become more effective by overcoming (part of) the resistance towards it?
4. What should the changes resulting form sub-questions 1 till 3 be to make the ABCM/model more effective?
Once the dimensions of effectiveness have been dealt with, a closer look will be taken at the efficiency of the ABC/M model.
5. What is theoretically inefficient about the current activities and cost drivers of the ABC/M model?
6. What should the changes resulting from sub-question 5 look like in order to make the ABC/M model more efficient?
Each of these questions will be viewed at from a theoretical and practical point of view. The relation between the different questions is pointed out in the problem context. A graphic overview of their relation will be given in the Research framework in paragraph 2.8 and it will be repeated at the beginning of each chapter from now on.
2.5 Bordering Conditions
2.5.1 Scope
As can be derived from the research objective, research issue and sub-questions this thesis will focus on the usage of ABC/M data by the Management team of Heineken Nederland Supply. The place of the Operating Company within its’ context is given in paragraph 1.4.1.
Besides strategic cost management decisions there are a lot of other management decisions that could be supported by ABC/M data. I have decided to not take them into account because the scope of the project would be too broad to my opinion.
The general scope of the research is the supply chain of beer products of Heineken NV from the Netherlands to Heineken USA, Heineken Export Group, Heineken Domestic and Other Operating companies. The supply chain is the process from purchasing raw materials to selling beer products at a transfer price to demand points of the OPCO’s specified above.
The main scope for the research will be on the brewing, packaging and logistics process of Heineken in Den Bosch and Zoeterwoude in the Netherlands. Some issues in planning and purchasing will be discussed as well.
The scope of benchmarking is limited to comparing breweries and operating companies within Heineken. In exploring the benchmarking opportunities I could not gain access to reports that compares Heineken to it’s main competitors. Even if I could have gotten access the research would become to broad I reckon.
Any assumptions during the research will be stated at the place where they are made.
2.5.2 Target group
This thesis will attempt to contribute to better strategic decision-making based on an ABC/M model that is effective and efficient, as well as aspects of other strategic cost management techniques. The primary recipients of the research findings are the managers of the Management Team of Heineken Nederland Supply. The secondary recipients are the controllers who have to deliver the input for the ABC/M model and the Operating companies who buy their products from Heineken Nederland Supply.
2.6 Conceptual Framework
The conceptual framework describes the relation between the main issues that combined lead to the goal of the research.
The ineffective use of ABC/M should become effective by:
A. Giving insight into the theoretical relation between ABC/M plus four other main strategic management techniques and discuss their possible usage within HNS
B. Giving insight into ABC/M as a strategic cost management technique and it’s relation to (unused) capacity in theory and at HNS
C. Giving insight into the theoretical and practical means to overcome resistance within the organisation for using ABC/M as a strategic decision tool
The inefficient use of ABC/M should become correct by:
A. Analysing on a theoretical base all cost drivers and activities of the main departments (brewing, packaging and logistics) within HNS.
B. Redesign the allocation method from cost centres to cost objects and implement this in the software tool
Figure Conceptual Research Model Ineffective use of ABC/M
Inefficient use of ABC/M
Effective use of ABC/M
Efficient use of ABC/M Becoming effective by:
A. Analysing ABC/M related to other SCM techniques
B. Analysing ABC/M related to capacity C. Overcoming resistance
Becoming efficient by:
A. Analysing activities and cost drivers B. Redesign of allocation model
Research Goal
Present Future
2.7 Methods & Theories used
2.7.1 Methods used
The data is gathered through desk research and interviews. The desk research consists of analyses of:
The workshops of ABC/M from 1995 till 2003 within Heineken,
All further present documents on ABC/M of the preceding ABC/M managers,
All information on ABC/M on the intranet of Heineken NV
All major books on ABC/M and SCM (Kaplan, Cooper, Shank, Govindarajan, Blocher, Chen, Lin, Wilson)
Interviews
Researches
Management journals
Internet sites
The research will be a practice-oriented research project. It will be a qualitative, empirical research characterised by dept instead of breadth. It is a single case study in the sense that there will not be made a comparison between different cases. There will be made an intervention in order to change an existing practical situation. A research with an intervention has seldom the character of experimenting in it’s pure form. One can carefully register what happens in practice, while in reality being busy with problem solving, with improving the organisation, with improving the management process (De Leeuw, 2000). This ‘learning by doing’ is often referred to as action research.
Making use of 24 semi-structured interviews carries out the research. Semi-structured interviews are interviews with partly open questions that are not strictly followed. If an interesting subject emerges during the interview that has not directly been intended with the questions, but is relevant for the research, the subject will dealt with in depth or a new appointment for an interview is made.
The validation of the content is secured by making summaries of the interviews that has to be agreed on by the recipients. The ABC/M-manager of Heineken Nederland Supply crosschecks the resulting information for increased validation. Besides there have been carried out practice interviews as is suggested for complex interviews by Baarda and de Goede.
2.7.2 Theories used
The structure for the effectiveness is given in the problem background and is based on Haselhoff’s triangle, but used on a lower aggregation level. Through three dimensions the ABC/M model should become more effective.
The first dimension, the technical-economic system, is related to giving insight into ABC/M as a strategic cost management technique and it’s relation to four other main strategic management techniques and their possible usage within HNS. This insight will be gained by analysing the main contemporary strategic cost management techniques of Blocher Chen and Lin. Additional remarks will be given from the division of Strategic Cost Management into three types of analyses, made by Shank and Govindirajan (sub-questions 1 and 4)
The second dimension, the open system, is concentrated on overcapacity in theory. Insight is gained by analysing the books of Cost and Effect and The design of cost management systems by Kaplan and Cooper (sub-questions 2 and 4). Furthermore this supported by the book Activity Based Costing in Financial Institutions written by Mabberly. It is shown that they all have opinions about how overcapacity should be taken into account, but they don’t have ready to hand theories.
The third dimension, the social system, will focus on giving insight into the means to overcome resistance within the organisation for using ABC/M as a strategic decision tool.
Insight will be gained by analysing theories form articles of Management Control Advanced Course and the research of Duursema (sub-questions 3 and 4)
The efficiency of the ABC/M model will be researched as well. The analyses of all cost drivers and activities of the main departments (brewing, packaging and logistics) within HNS will be theoretically supported by the work of H.Theunisse about policy aimed ABC and the steps in designing an Activity Based Costing system by Blocher Chen and Lin (sub-question 5 and 6).
A research framework is developed to see how these questions relate in the chapters.
2.8 Research framework
The research framework translates the conceptual framework and main research sub- questions in relation to the research goal into a structure of chapters.
Research goal:
The objective of the research project is to contribute to a more effective and more efficient ABC/M model to support the strategic cost management decisions made by the Management team of Heineken Nederland Supply.
Sub-questions 1 & 4
Describe and analyze the theoretical and practical possibilities for making ABC/M more effective by exploring ABC/M in relation to four other strategic cost management techniques
Chapter 3
Conclusions and Recommendations
Combine and analyze conclusions from the previous chapters in a way that contributes to the effectiveness and efficiency of the ABC/M model
Chapter 7 Sub-questions 5 & 6
Describe and analyze the theoretical and practical possibilities for making ABC/M more efficient for brewing, packaging and logistics
Chapter 6 Sub-questions 2 & 4
Describe and analyze the theoretical and practical possibilities for making ABC/M more effective by taking (unused) capacity into account for brewing and packaging
Chapter 4
Sub-questions 3 & 4
Describe and analyze the theoretical and practical possibilities for making ABC/M more effective by (partly) overcoming resistance related to organizational change
Chapter 5
EFFECTIVENESS EFFICIENCY
