The Impact of PlumbCos New Model

Armed with the accurate cost information provided by a spreadsheet model based on its new intellectual model, PlumbCo was able to make numerous changes that not only improved its own profitability, but also reduced costs to its customers. 

The first change enabled the company to more quickly and reasonably establish price discoimts for its customers. Prior to the activity-based analysis, discounts were negotiated with customers by sales personnel who required approval from the corporate office before the discoimt percentage could be finalized. Approval could take several days. These discounts were generally based on anticipated annual sales volume. 

Customers can receive greater discounts by changing their ordering characteristics. PlumbCo enters the projected ordering characteristics on which discounts are based into their computer system and then compare them with each customer s actual ordering characteristics. If more costly ordering behavior is detected for a 3-month period, the discoxmt is canceled and must be renegotiated. 

Pricing and discount decisions were not the only areas in which the new model had an impact on PlumbCo s management. The identification of costs with the individual activities involved in manufacturing and distribution helped direct the company s cost reduction and process improvement efforts. 

Two major areas in manufacturing were addressed set-ups and in-process material movement. Set-ups, which had long been buried in overhead, were attacked from two perspectives the cost of the set-up itself and the equipment capacity lost while the set-up is taking place. In-process material move- 

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