Kanthal 90
Ridderstrale, upon becoming president in 1985, saw the need for a strategic plan for Kanthal.
The company had been successful in the past, We needed to use this base of experience to influence the future. We had to have a consolidated view to ensure that we did not sub-optimize in narrow markets or with a narrow functional view. Resources were to allocated so that we could increase profits while maintaining a return on employed capital in excess of 20%
The Kanthal 90 plan specified overall profit objectives by division, by product line, and by market. Currently, however, salespersons were compensated mostly on gross sales volume. Higher commissions were being paid for selling obviously higher-margin products, such as Super, and higher bonuses were being awarded for achieving sales targets in the high-margin products. But Ridderstrale wanted to achieve the additional growth planned under Kanthal 90 without adding sales and administrative resources to handle the increased volume anticipated
We needed to know where in the organization the resources could be taken from and redeployed into more profitable uses. We did not want to eliminate resources in a steady-state environment. We wanted to reallocate people to generate future growth.
With our historically good profitability, and lacking any current or imminent crisis, we could not realistically consider laying off people at the Hallstahammar plant. But we wanted to be able to redeploy people so that they could earn more profit for us; to move people from corporate staff to division, from the parent company to operating subsidiaries, and from staff functions into sales, R&D, and production. Ideally, if we could transform an accounting Clerk at Hallstahammar into a salesman of Kantgak-Super in Japan, we could generate a substantial profit increase.
Exhibit 2 shows the distribution of Kanthal’s incurred costs. The existing cost system treated most sales, marketing, and administrative costs as a percentage of sales revenue. Therefore, customers whose selling price exceeded the standard full cost of manufacturing plus the percentage mark-up for general, selling, and administrative expenses appeared to be profitable, while a customer order whose selling price was below standard manufacturing cost plus the percentage mark-up appeared unprofitable. Ridderstrale knew, however, that individual customers made quite different demands on Kanthal’s administrative and sales staff.
Low profit customers place high demands on technical and commercial service. They buy low-margin products in small orders. Frequently they order nonstandard products that have to be specially produced for them. And we have to supply special selling discounts in order to get the business.
High profit customers buy high-margin, standard products in large orders. They make no demands for technical or commercial service, and accurately forecast for us their annual demands.
He felt that a new system was needed to determine how much profit was earned each time a customer placed a particular order. The system should attempt to measure the costs that individual customer orders placed on the production, sales, and administrative resources of the company. The goal was to find both “hidden profit” orders, those whose demands on the company were quite low, and the “hidden loss” orders, those customer orders that under the existing system looked profitable but which in fact demanded a disproportionate share of the company’s resources to fulfill.
Ridderstrale pointed out the weaknesses with the present method of profitability measurement.
We distribute resources equally across all products and customers. We do not measure individual customer’s profitability or the real costs of individual orders. In this environment, our sales and marketing efforts emphasize volume, more than profits. In the future, we want Kanthal to handle significantly increased sales volume without any corresponding increase in support resources, and to gain the share in our most profitable products.
Our current method of calculating product costs may show two customers to be equally profitable on a gross margin basis. But there could be hidden profits and hidden costs associated with these customers that we are not seeing (see Exhibit 3 ). If we could get more accurate information about our own manufacturing cost structure, as well as the
Costs of supplying individual customers and orders, we could direct our resources to customers with hidden profits, and reduce our efforts to customers with the hidden losses. We might end up with the same market share, so that our competitors would not even see this shift in our strategy, but our profitability would be much higher. To execute such a strategy, however, we need better information about the profitability of each order, each product, and each customer.
The biggest barrier we have to overcome is the notion that production overhead, selling,and administrative costs are “fixed.” The definition of strategy is to recognize that all costs are variable. Our sales people must learn how to deploy resources to their most profitable use.