TLDR A healthcare automation start-up struggled with Activity Based Costing, resulting in unclear profitability and a 20% increase in operational costs, alongside a 15% drop in market share due to competition. By implementing ABC and optimizing operations, the company improved margins by 10% and launched two innovative products, underscoring the need for accurate cost allocation and efficiency to regain market competitiveness.
TABLE OF CONTENTS
1. Background 2. External Assessment 3. Internal Assessment 4. Strategic Initiatives 5. Activity Based Costing Implementation KPIs 6. Activity Based Costing Best Practices 7. Activity Based Costing Deliverables 8. Adopt Activity Based Costing (ABC) 9. Streamline Supply Chain Operations 10. Accelerate R&D Innovation 11. Activity Based Costing Case Studies 12. Additional Resources 13. Key Findings and Results
Consider this scenario: A cutting-edge robotics start-up specializing in healthcare automation is struggling to apply activity based costing effectively, leading to unclear cost allocations and profitability analysis.
Facing a rapidly evolving market, the organization confronts internal challenges such as inefficiencies in production and R&D processes, contributing to a 20% increase in operational costs over the past two years. Externally, the company is up against stiff competition from established tech giants and fast-moving startups, leading to a 15% decline in market share. The primary strategic objective is to streamline operations, adopt precise costing methods, and capture greater market share in the healthcare automation sector.
This robotics start-up, at the forefront of innovation in healthcare automation, finds itself at a critical juncture. The core issue appears to be an inability to accurately allocate costs and measure profitability, affecting strategic decision-making. Further examination suggests that internal inefficiencies and the pace of technological advancement are outstripping the company's current operational capabilities, while competition intensifies externally.
External Assessment
The healthcare automation industry is witnessing exponential growth, driven by technological advancements and increased demand for efficient healthcare delivery.
Understanding the competitive landscape is essential for navigating this dynamic market. The forces shaping the industry include:
- Internal Rivalry: High, with both established corporations and nimble startups vying for market share.
- Supplier Power: Moderate, due to the specialized nature of robotics components and the limited number of suppliers.
- Buyer Power: High, as healthcare providers have multiple automation solutions to choose from.
- Threat of New Entrants: Moderate, given the high barriers to entry, including technological expertise and capital investment.
- Threat of Substitutes: Low, with few alternatives offering the same level of efficiency and integration in healthcare settings.
Emergent trends include:
- Increased integration of AI and machine learning, presenting opportunities for advanced diagnostics and patient care but requiring substantial R&D investment.
- Growing emphasis on telehealth and remote patient monitoring, opening new markets but also intensifying competition.
The STEEPLE analysis reveals significant political, economic, social, technological, environmental, legal, and ethical factors shaping the industry, from regulatory changes favoring automation in healthcare to ethical considerations around patient data privacy.
For effective implementation, take a look at these Activity Based Costing best practices:
Internal Assessment
The organization boasts innovative healthcare automation solutions but faces challenges in production efficiency and cost management.
A MOST analysis highlights misalignments between the company's mission and its operational strategies, particularly in scaling production to meet demand while maintaining quality.
The Resource-Based View (RBV) Analysis suggests that the company's core competencies in robotics and AI development are strong, but gaps in supply chain management and cost accounting practices are evident.
A Gap Analysis underscores the discrepancy between current operational capacities and the strategic goals of market leadership and cost-effectiveness, pointing to areas requiring immediate attention.
Strategic Initiatives
- Adopt Activity Based Costing (ABC): Implement ABC to gain a clearer understanding of cost drivers and profitability per product line. This initiative aims to improve pricing strategies and resource allocation, expected to enhance margin by 10%. It will require software tools and training for the finance and operations teams.
- Streamline Supply Chain Operations: Reengineer supply chain processes to reduce costs and improve efficiency. This initiative intends to cut supply chain costs by 15%, creating value through optimized inventory management and supplier negotiations. Resources needed include supply chain consulting expertise and implementation of an integrated ERP system.
- Accelerate R&D Innovation: Prioritize R&D projects with the highest potential for market disruption and patient impact. The goal is to launch two new products in the next 18 months , securing a competitive edge. Investment in advanced R&D facilities and talent recruitment is essential.
Activity Based Costing Implementation KPIs
KPIS are crucial throughout the implementation process. They provide quantifiable checkpoints to validate the alignment of operational activities with our strategic goals, ensuring that execution is not just activity-driven, but results-oriented. Further, these KPIs act as early indicators of progress or deviation, enabling agile decision-making and course correction if needed.
A stand can be made against invasion by an army. No stand can be made against invasion by an idea.
- Margin Improvement per Product Line: This KPI will track the financial impact of adopting ABC, crucial for evaluating pricing and product strategy effectiveness.
- Supply Chain Cost Reduction: Measuring the decrease in supply chain costs will indicate the success of process improvements.
- Time-to-Market for New Products: A reduction in development cycles will signal improved R&D efficiency and faster market response.
These KPIs provide insights into the strategic initiatives' effectiveness, highlighting areas of success and opportunities for further improvement.
For more KPIs, take a look at the Flevy KPI Library, one of the most comprehensive databases of KPIs available. Having a centralized library of KPIs saves you significant time and effort in researching and developing metrics, allowing you to focus more on analysis, implementation of strategies, and other more value-added activities.
Learn more about Flevy KPI Library KPI Management Performance Management Balanced Scorecard
Activity Based Costing Best Practices
To improve the effectiveness of implementation, we can leverage best practice documents in Activity Based Costing. These resources below were developed by management consulting firms and Activity Based Costing subject matter experts.
Activity Based Costing Deliverables
These are a selection of deliverables across all the strategic initiatives.
- Activity Based Costing Implementation Plan (PPT)
- Supply Chain Optimization Roadmap (PPT)
- New Product Development Framework (PPT)
- Financial Impact Model (Excel)
Explore more Activity Based Costing deliverables
Adopt Activity Based Costing (ABC)
The organization decided to implement the Activity Based Costing (ABC) initiative by utilizing the Value Chain Analysis and Economic Value Added (EVA) frameworks. Value Chain Analysis, originally introduced by Michael Porter, was instrumental in dissecting the company's operations into primary and support activities. This breakdown was crucial for identifying cost drivers and areas where ABC could be most effectively applied. The Economic Value Added framework, on the other hand, provided a clear picture of the company's financial performance by calculating the true economic profit of the company, which was essential for assessing the impact of ABC on the company's bottom line.
Following these insights, the organization took several steps:
- Mapped out the entire value chain, identifying key activities that significantly impacted costs.
- Allocated costs to these activities based on resources consumed, using the ABC methodology.
- Implemented EVA calculations to measure the before and after impact of ABC on the company's economic profit.
The adoption of ABC, guided by Value Chain Analysis and EVA, led to a more accurate cost allocation across products and services. This precision enabled the company to identify unprofitable products and services, resulting in a 10% improvement in margins. Additionally, the clearer financial picture provided by EVA highlighted areas of the business that were truly adding value, leading to more informed strategic decisions.
Streamline Supply Chain Operations
In the initiative to streamline supply chain operations, the organization employed the Lean Management and Demand Forecasting frameworks. Lean Management, with its emphasis on waste reduction and efficiency, was pivotal in reengineering the company's supply chain processes. Demand Forecasting, meanwhile, allowed the company to better predict customer demand and adjust supply chain operations accordingly, ensuring optimal inventory levels and reducing holding costs.
The company took the following steps to implement these frameworks:
- Conducted a thorough analysis of the supply chain to identify waste and inefficiencies, applying Lean Management principles.
- Developed a sophisticated Demand Forecasting model, utilizing historical sales data and market trends to predict future demand.
- Adjusted procurement and inventory management practices based on the insights gained from the Demand Forecasting model.
The streamlined supply chain operations, underpinned by Lean Management and Demand Forecasting, resulted in a 15% reduction in supply chain costs. The initiative not only improved operational efficiency but also enhanced the company's ability to respond to market demand swiftly, leading to higher customer satisfaction and reduced risk of stockouts or excess inventory.
Accelerate R&D Innovation
To accelerate R&D innovation, the organization embraced the Disruptive Innovation and Agile Project Management frameworks. Disruptive Innovation, a concept popularized by Clayton Christensen, provided a lens through which the company could identify and develop groundbreaking healthcare automation solutions that could potentially disrupt the market. Agile Project Management, with its iterative approach and focus on customer feedback, was instrumental in speeding up the R&D process, allowing for rapid prototyping and adjustments based on real-world testing.
The company executed these frameworks through a series of actions:
- Identified potential areas for disruptive innovation in healthcare automation, focusing on unmet needs and emerging technologies.
- Adopted an Agile methodology in the R&D department, organizing teams into small, cross-functional units working in sprints to develop prototypes.
- Engaged closely with early adopters to gather feedback and refine products continuously.
The application of Disruptive Innovation and Agile Project Management frameworks significantly accelerated the company's R&D efforts, resulting in the launch of two innovative products within 18 months . These products not only solidified the company's position as a leader in healthcare automation but also opened new revenue streams, contributing to a competitive advantage in the rapidly evolving market.
Activity Based Costing Case Studies
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Additional Resources Relevant to Activity Based Costing
Here are additional best practices relevant to Activity Based Costing from the Flevy Marketplace.
Key Findings and Results
Here is a summary of the key results of this case study:
- Implemented Activity Based Costing (ABC), leading to a 10% improvement in margins by accurately allocating costs across products and services.
- Streamlined supply chain operations, achieving a 15% reduction in supply chain costs through Lean Management and Demand Forecasting.
- Launched two innovative products within 18 months by leveraging Disruptive Innovation and Agile Project Management, enhancing market competitiveness.
- Identified and discontinued unprofitable products and services, reallocating resources to high-value areas.
- Improved operational efficiency and customer satisfaction by optimizing inventory management and reducing the risk of stockouts or excess inventory.
- Enhanced strategic decision-making through a clearer financial picture provided by Economic Value Added (EVA) calculations.
The strategic initiatives undertaken by the organization have yielded significant results, notably in margin improvement, supply chain cost reduction, and the successful launch of innovative products. The adoption of Activity Based Costing (ABC) has been particularly effective, enabling precise cost allocation and the identification of unprofitable segments, thereby improving profitability. Streamlining supply chain operations has not only reduced costs but also improved responsiveness to market demand, a critical factor in customer satisfaction and competitive advantage. The launch of two innovative products within a relatively short timeframe underscores the effectiveness of the R&D strategy, leveraging frameworks for Disruptive Innovation and Agile Project Management.
However, the results also highlight areas for improvement. The focus on cutting-edge innovation and efficiency gains may have overshadowed investments in market analysis and customer engagement outside of the early adopter segment. This oversight could limit broader market penetration and long-term sustainability. Additionally, while the initiatives have strengthened the company's competitive position, they have not fully addressed the loss in market share, suggesting that further strategic adjustments are necessary to recapture and expand market presence.
Recommendations for next steps include deepening market analysis and expanding customer engagement strategies to encompass a broader range of healthcare providers. This could involve developing more inclusive product offerings or services tailored to segments of the market not currently served. Further, the company should consider strategic partnerships or collaborations to enhance market penetration and access new customer bases. Continuous investment in innovation should remain a priority, but with an added focus on scalability and integration capabilities to meet diverse customer needs. Lastly, enhancing internal capabilities in data analytics and customer insights could provide a more nuanced understanding of market dynamics and customer preferences, informing future strategic decisions.
Operational Excellence, Management Consulting
The development of this case study was overseen by Joseph Robinson. Joseph is the VP of Strategy at Flevy with expertise in Corporate Strategy and Operational Excellence. Prior to Flevy, Joseph worked at the Boston Consulting Group. He also has an MBA from MIT Sloan.
To cite this article, please use:
Source: Activity Based Costing Refinement for Industrial Equipment Manufacturer, Flevy Management Insights, Joseph Robinson, 2024
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