In both areas of the business, traditional
standard cost accounting had driven ACS into a vicious cycle
of having to charge high prices to get the right “recovery”
from the mill. These high prices were insufficiently competitive
to win the business, which meant that the remaining base
load of product had to “absorb” more costs as
volumes decreased. This absorption of fixed costs meant
that the remaining product had to be sold at a higher price
to “recover” the allocated overheads and the
vicious cycle continued.
After outlining the TOC approach to costing, known as Throughput
Accounting, the CEO was sufficiently convinced that he convened
a meeting of his whole management team so that David Hodes,
MD of TOCCA, could have an opportunity to explain the basic
principles and secure the buy-in of the management team
that is so critical to the success of any project.
The Solution
The key to unlocking the puzzle at ACS was to challenge
the basic assumption of standard costing. Hodes proved to
the ACS team that the assumption – that the sum of
the local activities is the best that the system can do
as a whole – was fatally flawed. The existence of
a constraint, or limiting factor, fundamentally impacts
the costs and benefits of any decision.
For example, one of the processes at ACS involved spinning,
dyeing, balling and shipping. Looking at the capacity of
each component and working these to maximise each department’s
efficiencies provided a far less profitable solution for
the whole Company, compared to maximising spinning and subordinating
the rest of the plant (and indeed the rest of the business,
from materials planning to sales and marketing) to that
idea.
The TOCCA challenge was not to simply make the case for
Throughput Accounting, but to help project manage the change
from a standard cost based company to one based on a Throughput
Operating Strategy. In order to execute this, TOCCA had
to: |
