WS Industries benefits from activity-based costing

A hard look at its various products, and the costs of the various products, was revealing. The summary of resources utilised for the activities performed in a month was charted out and a grouping done of resources consumed at the activity centre for various services rendered to products. This was mostly done manually. “It took us a very long time to get the data in place, and computerisation is essential to help with the process,” said WS Industries joint managing directorNarayan Sethuraman at the Cost Congress ’98 here on Wednesday.

Convincing the shopfloor employees along with the others was another difficult task. But every employee was compulsorily involved in the effort – in a long term as well as a short term project, though people were free to take up more projects.

The process of correction was initiated at the insulator factory in Porur and it has taken two years for the company to identify that 200 out of 400 products it had were non-profitable.

The ABC is yet to be translated into financial accounting, but Sethuraman had more than one warning in ABC implementation. Keeping the employees motivated, when no immediate benefits were tangible, was one. Oversimplifying matters was another. There could be no complete replacement of the old accounting system, particularly where material costs were more than 70 per cent of sales. ABC was more ideal for non-manufacturing at times, he pointed out. Also ABC became relevant only with a business process reengineering tofollow. For mere costing does not improve the bottom line. BPR takes the corrective measures after glaring costs are revealed. ERP systems have to implemented after BPR exercise is concluded to chalk out future growth path.

The company could, however, bring down its fixed costs by 20 per cent and these were largely in areas of administration overheads, energy controls, employee cost and maintenance. There was no retrenchment and there was no addition of staff during this exercise. The cycle time of products was reduced to three months from seven months where possible. Shopfloor employees learned a lot from display boards and visual controls. Excess capacity was created as a result of the exercise and BPR was in place to utilise the capacity. “We expect that excess capacity could be increased to as much as 40 per cent,” said Sethuraman.

After it was found that material movement costs were unduly high, followed by inspection costs, the factory was re-laid. Costs were brought down by a further 50 percent.

The results have infused fresh optimism into the company. "We expect the company’s turnover to go to Rs 100 crore by 2000," said Sethuraman. Now it is Rs 60 crore. Also exports which cow constitute Rs 20 crore is expected to go up to Rs 60 crore. The experiment at the insulator factory will be taken to other factories ofthe company, he said.

For Sethuraman, however, the achievement has already come with cost consciousness spreading to the shop floor.