barriers to successful implementation of abc for continuous improvement: a case study

intornatlonal journal of

production economics

Int. J. Production Economics 36 (1994) 39.-52

Barriers to successful implementation of ABC for continuous improvement: A case study

Dominique Waeytens *, Werner Bruggeman

The VIerick School of Management, Univemit~ qf‘Ghent, Bellewe 6, 9050 Ghent - Ledeberg, Belgium

Abstract

Continuous improvement is the process of gradually working toward the achievement and sustainment of competitive advantage. Activity based costing has been suggested as an appropriate tool for guiding and directing the process of improvement through the use of activity based management. Several case studies have been described demonstrating the use of ABC and ABM in this process of continuous improvement. Not much has been said, however, about unsuccessful implementations of ABC and ABM. We beiieve we can learn a lot by analyzing cases in which the use of ABC failed or turned out to be ineffective. Therefore, we present this case study: it is a description of a company in which the ABC information could not be used in a way to yield continuous improvement. It is the objective of this paper to analyze the barriers to a succesful implementation of ABC for continuous improvement in this company.

1. Introduction

In recent years the focus of competition has shifted from achieving low costs as the primary determinant of profitability to maximizing the value offered to customers at a competitive price [I, 21. Maximizing value creation implies the elim- ination of non-value adding activities in all functional areas of the value chain. The objective is the achievement of a competitive advantage based on a deliberate strategic choice [3].

The process of gradually working toward the achievement and sustainment of a competitive advantage involves a program of continuous im-

* Corres~nding author. Tel.: 32(~)210.97.11. Fax: 32(~)2~0.97.~

provement in the production, development and marketing area [3, p. 231. This is primarily a management process in which people’s behavior is influenced in the strategic direction. An appropriate accounting system can assist this process by pointing out to priorities for improvement, by infiuenc- ing and motivating appropriate behavior, and by measuring the effect of the improvements [4].

Activity based costing (ABC) has been suggested as an appropriate tool for sustaining processes of continuous improvement. The use of ABC information for the improvement of business process and the achievement of the competitive advantage has been called activity based management (ABM) [S].

Cases have been described demonstrating the use of ABC and ABM in this process of continuous improvement (see e.g. [6]). Very often these cases have been based on a few “success stories” which

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lead to a somewhat fragmented view on the role of accounting systems in the process of continuous improvement [7]. According to Anthony, most of what we know about recent developments in management accounting is anecdotal: there is very little information on new techniques that were tried and worked, and those that were tried and did not work [8, p. 181. We believe we can learn a lot by analyzing cases in which the use of a new technique failed or turned out to be ineffective. On the subject of ABC, Spicer 19, p. 241 suggests to investigate further the different types of ABC, and the effectiveness of ABC in terms of internal and external performance. It is in this light that we will report our findings of a case study of ineffective use of ABC information for continuous improvement (we will explain the term “effectiveness” later). It is a description of a company in which the ABC information could not be used in a way to yield continuous improvement.

2. Problem statement and research objectives

Although there is no general agreement about the design and the role of ABC in the process of continuous improvement, several authors have ar- gued that ABC daes have a role in the process of continuous improvement [4, 10, 111: - providing process information; - pointing out to priorities of improvement; _ influencing and motivating appropriate behavior; _ measuring the effect of the improvements However, at the same time it becomes more and more obvious that better accounting information as such is not a sufficient condition for increased competitiveness. John Miller summarizes this idea as follows:

. . a Cost Management System. by itself, produces no in-

crease in productivity, no reduction in cost, no improvement in quality, no reduction in cycle time, and no increase in customer satisfaction. Its true benefit can be measured only in the light of

management’s actions initiated based on information provided by the new CMS. Those actions should be directed toward

continuously improving the organi~tion’s activities and busi-

ness processes through better decision making [12, p. 531”.

Several other examples seem to confirm that better accounting information as such does not

generate continuous improvement (see [ 131). Ac- cording to Turney [ 141 this is due to an inadequate preparation of the change process by top management. Moulton et al. [ 151 argue that a process of continuous improvement demands an atmosphere of “excitement” among the employees, and describe a methodology to assure this. Reid [16] suggests that it is not sufficient to tell your employees to improve without indicating how to improve, and that you need total management involvement in the process of improvement. Finally, Kaufman de- scribes four barriers that might block the process of improvement: (I) Goals and strategies of the improvement pro-

gram are not clearly communicated. (2) Top management’s behavior is not always in

line with the strategy and does not eliminate the barriers that constraint improvement.

(3) Some incentives conflict with the program’s objectives.

(4) Reporting systems and organizational struc- tures are often not adapted to the program goals [ 171.

The current literature does not provide sufficient insight into the causes of unsuccessful use of ABC information for continuous improvement purposes. This is partly due to the lack of case descriptions of unsuccessful ABC implementations. This does not mean, however, that there are no examples of companies in which ABC was not implemented successfully. The problem is to assess at one moment in time whether an ABC implementation is successful or not. A possible definition of a “less than successful” implementation could be “a company that had completed the implementation, reported its ABC findings, and sequently scrapped the system” [13, p. 341. In this last quoted book no company was found that fitted this description and was willing to participate in the research. We believe that the company that we analyzed does fit in the description of an unsuccessful ABC implementation for continuous improvement: _ an ABC model was developed for the whole

company with the help of a consulting firm; _ the ABC information should be used to initiate

continuous improvement; - a formal activity-based improvement program

was set up;

D. Waeywns, W. Bruggemanllnt. J. Production Economics 36 (1994) 39-52 41

_ managers were given clear objectives and a deadline to formulate initiatives of improvement based on the ABC information;

~ no real outcomes of the activity-based improvement program were identified (ineffectiveness of the continuous improvement program);

_ top management did not decide to proceed with the activity-based information project.

Based on these characteristics this company can be classified as an example of an unsuccessful implementation of ABC for continuous improvement. Part of our definition is based on the ineffectiveness of the activity-based continuous improvement program. We clarify the term “ineffectiveness” by de- fining its opposite “effectiveness”. An improvement program is effective if desired behavior sequences are certain to occur and if organizations are certain to achieve desired states (based on the definition of “effective control” by Katz and Kahn [ 181).

This case study is longitudinal: we could observe the design process of the ABC model and the start of the ABC program. We collected the data about the improvement initiatives at the time the department heads had to turn in their proposals to the management accountant. Our objective was to study the role of ABC information in the process of continuous improvement, Since it turned out that there were hardly any results of the activity-based improvement program, we changed the research focus to an analysis of the causes of the unsuccessful use of ABC information in a process of continuous improvement. This study can help us to formulate hypotheses about the design of an ABC system for continuous improvement, and about the role of ABC information in the improvement process.

Before starting the case analysis, we will first shape the context in which this study takes place. We will define what we mean by “continuous improvement”, and we will indicate why in the literature ABC is said to be an appropriate tool for guiding and directing continuous improvement processes.

3. Continuous improvement and ABC

McNair [19, p. E4-61 defines continuous improvement as “an incremental change process that

focuses on performing existing tasks more effectively: small improvements are made in the status quo as a result of ongoing efforts. In a continuous improvement environment, every individual, whether in the management or on the shop floor, assumes responsibility for the quality, timeliness, efficiency, and effectiveness of the productive process. The focal point of everyone’s attention is the dynamic flow of resources through the organization that results in a value-added product (whether physical goods or a service) that meets customer requirements”.

According to Turney and Anderson [6, p. 381 continuous improvement involves the achievement of “manufacturing excellence”, “engineering excellence”, and “marketing excellence”. Manufacturing excellence is characterized by low inventories, high-quality levels, low scrap percentage, and short delivery times. This can be achieved with a JIT material flow and production control system (or equivalent), and through total quality control programs. Engineering excellence involves the achievement of simplified product design, enabling smooth production flows and less disturbances or waste. Marketing excellence implies a good understanding of the needs of customers and an effective communication of these needs to development departments and production departments.

ABC has been suggested as an appropriate information system for guiding and sustaining processes of continuous improvement. This property of ABC has been attributed to its reflection of the real production processes [3]; its quantification of resource usage [5]; its consideration of interdependence between activities [20]; and its effect on managers’ behavior [21].

However, a lot has still to be studied about the design of an ABC model for continuous improvement (is there a trade-off between a product costing ABC system and an ABC system for continuous improvement?), the role of the ABC information in the process of continuous improvement (what is the role of the ABC information relative to other inputs to the improvement program and to the management control system?), and what are the organizational and environmental characteristics that affect the way the ABC information is used in the improvement process. We believe that the following

42 D. Waqwns. 19. Brugqemanllnt. J. Production Economics 36 (1994) 39-52

case study can help us to get additional insight into these issues.

4. Case description

The research site is a Belgian company produ- cing machines for textile industry. The company competes on a world level in this business, employ- ing approximately 2000 people.

The company got interested in ABC as a better way to cost products and contracts, and to calculate the cost of providing spare parts in the war- ranty period of contracts. It felt that the current costing system which used machine hours as a major overhead allocation base did not correctly reflect the products’ use of overhead resource categories such as purchasing, planning, R&D, maintanance, marketing and sales, technical customer support, and warehousing.

Therefore, top management decided to start an ABC project in June 1991. It engaged one of the world’s leading consulting companies to conduct the analysis and to assist in the implementation. The first deadline was estimated to be December 199 1. We believe it is important to describe how the project evolved, because we felt that this could have had an important impact on the outcome of the improvement process.

The project started in June 1991 with the primary objective to build an ABC model to calculate better product costs and to provide more insight in the real cost of engineering changes, spare parts, customer service, etc. Three groups were formed to supervise and manage the project at different levels: (1) The strategic group developed the objectives of

the study and decided about length and cost of the project. The strategic group was formed by the top management and the major functional directors, such as sales and marketing, finance, production, purchasing, and personnel. This group was periodically kept informed on the progress of the project.

(2) The project group was formed by Division Managers, who were assigned to steer the project on a more operational level.

(3) The ABC team was formed by the consultants and two people from the management account-

ing department, who were fully assigned to the project. The ABC team conducted the interviews and periodically provided feedback to the project group and the strategic group.

The consultants used a standard methodology for the project involving 13 stages with considerable importance attached to the engagement of top management, committing and motivating people for the project, assuring consciousness for the project throughout the whole company at all levels, and planning and designing the project and the model. The project started in one division of the company, which served as a pilot study before actually continuing the project in the whole company. By the time of the first deadline (December 1991), the analysis of the pilot project was finished, as well as the analysis of most other departments, which enabled to calculate the cost of parts through the use of a preliminary software.

In the mean time, some internal and external changes to the company caused a delay of the project. One of the management accountants who was full time dedicated to the ABC project quit the job, leaving only one internal person to be fully occupied with the project. Furthermore, a sharp decline of the market in 1991 caused additional pressure for concrete results and for relevant management information in order to find opportunities for cost reduction and improvement initiatives. This new situation gave rise to a shift of priorities for the project from calculating better product costs to providing a management tool to assist cost reduction and improvement processes. The need for cost reduction was felt so sharply that the top management already drastically cut down on the number of people by the end of 1991 and the beginning of 1992.

The changing priority from a cost calculation tool to a cost management tool confused the ABC team about the implications for the design of the model. The team members believed that a product costing model could be less detailed than a cost management tool, but they did not know how to integrate both objectives in the same model. They decided to start working with two categories of cost drivers: a logical driver and a cost calculation driver. The calculation driver was used to allocate costs to products in order to obtain a more accurate

D. Waeytens, W. Bruggeman/int. J. Production Economics 36 (1994) 39-52 43

product cost. The logical driver was made to catch the real cost behavior of the resource categories and to provide insight to management in how to control costs.

In practice, however, it was very difficult to work with those two drivers and it made the model very complex. The team could not find an acceptable degree of detail, and finally the model ended with more than 300 cost drivers, 20-40 of which were effectively used for product costing. The study ended by mid-1992 with an official report and an ABC model presented in a written form as well as in a preliminary software. The software enabled to generate reports of activities grouped by division, cost driver information linked to activities and to departments, and types of costs linked to activities. Management information was included in the model by the use of “attributes”, which are key words such as “quality”, “standardization”, “safety”, “transport”, “value-added”, “engineering changes”, etc., and which grouped all cost related to those attributes.

After the model was finished, the top management was overwhelmed by the complexity of the system, and they were reluctant to decide to implement formally the model on a definitive software which would replace the existing costing software. However, the top management felt that they had invested a lot of money in the system, and they wanted to turn the model into improved profitability through cost management based on the ABC information. Therefore, they invited a well-known professor to a meeting with over 50 people of the top and middle managements and some staff from accounting and marketing. He made the people aware of the need for cost reduction and continuous improvement in general, and explained how ABC could help them to identify opportunities for improvement and to manage their costs effectively. They were very enthusiastic about this meeting and appreciated the simplicity with which the professor mentioned, and the focus on cost management instead of cost calculation. Together with the top management, the professor committed these people to formulate initiatives of cost reduction and improvement in their divisions, based on the ABC approach. He recommended the department managers to conduct a new small-scale ABC analysis

within their department. The existing ABC model was kept available for all the managers, so that they could consult it whenever they wanted. They got two to three months time to accomplish this task. They were further formally informed of this task by a note from the management accountant.

Our research is an analysis of how the managers tried to find cost reduction opportunities based on activity information and cost driver information. In the next section we will first describe the methodology and research design.

5. methodology and research design

This research is about analyzing why in a particular situation the ABC information could not be successfully used to generate continuous improvement. This is certainly an essential step in the development and evaluation of ABC as was suggested by Young and Selto [7]. Furthermore, it is generally recommended nowadays to start studying the practice and the role of management accounting in relation to other business processes [9]. In this view, we consider management accounting not as an isolated information system for decision making and control (the “textbook view”, [22, p.281, but we place it in a wider organizational and behav- ioral context [22]. This research is more descriptive than prescriptive, because the latter usually implies that we already have a good understanding of management accounting practice, an understanding that is already biased by the conventional textbook on management accounting [22]. Case studies are appropriate for this purpose because of their holis- tic nature, and because of their use in areas where theory is not yet developed [23].

For this research we had interviews with 21 managers, who were explicitly asked to detect cost reduction opportunities based on ABC information. In order to get structure in the interviews we used a questionnaire and noted the answers on the space under the questions. Each interview took at least half an hour, and maximum 2 h, depending on how well the interviewee was involved in the ABC project or was informed about the cost reduction objective. We asked the

44 D. Waeytens, W. Brugguman/Inr. J. Production Eronomics 36 (1994) 39-52

following questions: 1. 2.

3.

How were you involved in the ABC project? How were you informed about the results of the ABC project? What did the ABC project reveal? What was the importance of the ABC project for your department?

4.

5.

6.

How were you asked to detect cost reduction and improvement initiatives? Did you formulate cost reduction initiatives? NO: Why not? YES: Which? How did you formulate these initiatives? Did you use the ABC model? Do you believe in the ability of the ABC study to make processes more efficient? Or ABC in general?

7. Do you feel any lack of information to manage your department effectively?

6. Data analysis

All the 21 people we interviewed had been formally asked to participate in the cost reduction process. All but one of them were acknowledged with the technique of ABC and were informed on

the evolution and the outcome of the ABC project. In Table 1 we present the interviewees in diminishing degree of involvement in the ABC project.

We also had an interview with the General manager who was a member of the strategic group, in which he was periodically kept informed on the progress of the project. However, he was not formally involved in the activity-based management process, in the sense that he did not have to conduct this exercise in a particular department.

It was remarkable to hear that most of the interviewees answered in very general terms on the question what they had learnt from the ABC model. Most of what they said applied to the technique and philosophy of ABC in general rather than to the usefulness of the model to their department. Only five interviewees mentioned a specific contribution of the model to their department (Table 2).

The general opinion on the model, however, was that it had not revealed anything new to anybody. Most of the interviewees complained that it had not helped them to understand better their department costs. As a matter of fact, they felt that they already knew their department costs well enough, and that they knew the cost drivers. They believed that they

Table 1

The interviewees in diminishing degree of involvement in the ABC project

Degree of involvement Interviewee

Strategic group

Project group

Personnel Manager

Financial Manager

Production Manager Quality Manager

Manager of purchasing/material management/ and EDP

Only involved via interviews Managers of five different production cells

Maintenance Manager Administrator of material management

Manager of technical customer service

Marketing Manager Sales Manager

Purchaser Accountant

Only involved via general information session

Only involved via end report

Not involved

EDP Administrator

Manager of the foundry department

Manager of sales and stock of spare parts

Manager of export finance

D. Waeytens, W. Bruggeman/Int. J. Production Economics 36 (1994) 39-52 45

Table 2

What did the model reveal? What did it learn to you as a Manager?

Contribution of the ABC model Interviewee

In General: Financial Manager

Thinking in terms of activities and drivers

New way of thinking Production Manager

Manager of purchasing/material management/and EDP

Administrator of material management

Quality Manager Better way to calculate costs The cost of engineering changes in the whole company

Insight in the cost of activities

Specifically:

To link resources to the special projects in our department

To link the cost of wage administration to its cost driver:

number of employees

To link the purchasing costs to purchased parts: is useful for

make or buy decisions

Is useful to detect excess capacity in the department

Measures the cost of setups

One Production Cell Manager



EDP Administrator

Personnel Manager

Purchaser



Table 3

Reasons for wanting better cost information

Type of information Interviewee

The true cost of stock keeping and reordering must be known to control the

stocklevels better.

Information about who is influenced by an engineering change, in order to be

able to plan better and control these changes.

A system that reports costs associated with special projects, and measured

over the lifetime of the project in order to signal to other departments not to

ask for so many special projects.

Information about the profitability of products via a sample accounting

system.

Information to assist policy decisions such as make or buy decisions and

decisions about the recruitment of personnel.

Information about the standard time necessary to perform certain activities,

Information of the costs of product demonstrations,

Value analysis of the activities: why do we do what we do? Also: what is the

cost of the spare parts that are stocked in my department.

Statistical information about relationship between maintenance interven-

tions and type of machine or process; information about the cost or break- downs, which should be balanced against the need and the cost of preventive maintanance.


Quality Manager

EDP Administrator and One production cell Manager

Production Manager

Personnel Manager

Purchaser

Marketing Manager


Maintenance Manager

46 D. Waqvtear, W. Bruggemanilnt. J. Production Economics 36 (1994) 39-52

did not really need ABC to manage their departments. However, they were very interested in re- ceiving more cost information to specific questions, which they found unanswered in the model. Most of the managers did not feel the need for a new management tool; however, they did feel the need for better cost information. In Table 3 we present some of the needs for better cost information.

According to the general ABC literature most of these information needs can be accounted for by an ABC system. However, although the model was very complex and detailed, most of the managers did not find any answers to their problems. In Table 4 we present the reasons why they did not believe in the model.

Table 4 Reasons why they did not believe in the ABC mode1

This table represents overall feeling of disbelief in the need of a formally installed ABC system. From Tables 3 and 4 we can derive that the managers are interested in more accurate and more relevant cost information, but that they are not prepared to install and maintain a complex information system for this purpose. They believe that the potential benefits from such a system would not be worth the effort. Furthermore, we observed that the managers did not feel the need of ABC information for the management of their departments. They all believed that the model did not provide new insights that they did not know before on an intuitive or rational level.

Nevertheless, as we can see from Table 2 that most of the managers did believe in the validity of

Shortcoming of the ABC model Interviewee

Too complex and the activities are badly defined.

We cannot see the effect of our actions on the costs.

We cannot affect the costs of our department.

We do not see the link to other programs such as the IS0 9001 program. (Lack of

congruence between the different improvement programs.)

Not action oriented: what can we do? Too much detail, and too much focus on production instead of the real overhead activities.

Too much focus on a complex calculation system instead of a simple and comprehensive

management information system.

The ABC mode1 is only a snap shot: by the time we were asked to use the model for

improvement, the situation had already changed. A formal implementation of the ABC system would create a revolutionary change in the

company.

Our activities are very diverse and change over time. A formal implementation would create an enormous maintenance effort for the model.

Furthermore, we are already involved in the IS0 9001 program: you cannot do everything

at the same time!

Since we do not have information about the standard time required for certain activities, we cannot use the ABC mode1 to trace excess capacity.

You cannot implement ABC just by telling the people to do an activity analysis. ABC is a drastic change process which requires formal procedures, control mechanisms, etc (like we

do in the quality control program).

ABC as decision support system would provide certain information too late: it is no use to know all the costs traceble to a specific contract after the contract has ended (often after

5-10 years). We cannot know these costs in advance (such as the number of visits to the

customer, the number of technical interferences of the technical support service, etc). Furthermore, If we would know the costs in advance, the market situation does not permit

to refuse contracts.


Quality Manager

EDP Administrator

Production Manager

Personnel Manager


Purchaser


Sales Manager

ABC on a conceptual level. They do believe that ABC can provide more accurate product costs, and that it can assist managers in their decision making and control activities. However, for their specific management environment they did not see any important contribution of the model they had been presented. For product costing the model was too complex, and for cost management the information was not presented in an accessible and flexible way, or did it represent what they actually wanted to know: How can we measure the capacity utilization of our department? How can we influence costs? How can we measure the effect of our actions? How can we control the workload in our department, when it depends on the activities in other departments? etc. (see Table 3).

Although the managers did not really believe in the model as it was developed by the consultants, they were enthusiastic about the presentation of the professor who talked about management based on activity analysis. They liked the way ABC was presented as an ad hoc small scale informal project on the department level to look for opportunities for improvement, rather than the complex and technical calculation system that would be formally implemented in their departments. All the managers thought that this approach would be more realistic and more practical. In this attitude they

Table 5

Why managers could not come to improvement initiatives based on

were asked to formulate initiatives of improvement based on their own small-scale ABC analysis within their departments, and on the formal ABC model if they thought it necessary. They were further made aware of this task by a written note from the management accountant.

We were very surprised with the poor outcome of this activity-based improvement program. None of the managers had been able to come to any realistic and quantified improvement initiative. Half of the managers had not formulated anything at all, while the other half had tried to do something but had difficulties in doing this. Those who had tried something resorted under the production Manager, who was very deliberate in his search for improvement and cost reduction opportunities. Therefore, he had developed a specific document he sent to his Cell Managers and ordered them to get the documents spread into the department, and filled out within a month. He stressed that he paid considerable importance to this plan, and that anybody should find time to do the job.

Since this was a different approach than in the other departments, we present the outcomes of the improvement and cost reduction process separately for both groups. Table 5 shows the reasons why the first group did not formulate any reasonable activity-based initiative.

ABM

Motivation Interviewees

Top management did not consider this as a priority. We were Sales Manager~Manager of mou1dry~Manager of technical cus- not explicitly asked and we were not motivated to do it. tamer support~Personne1 ~anager~Admin~strator of material

management

We are already involved in several other projects such as the Manager technical customer support/Personnel Manager/EDP ad- IS0 9001 program. ministrator/Manager of mouldry

We already lost people last year; we cannot cut down on people Quality Manager/Manager of purchasing, EDP, and material man- again! agement

We cannot influence our costs in the short run. There are more Quality Manager/EDP administrator structural problems that have to he solved first.

We cannot really manage our department: First of all we are Marketing Manager~Manager of mouldry involved in the daily operations, and secondly we do not have the freedom or the power to manage resources flexibly.

Our department is too small to find any significant improve- Accountant ment.

48

Table 6

D. Wac,ytens, W. Bruggeman )/ ht. J. Production Economics 36 i 1994) 39-52

Reaction to ABM by the production related managers

Motivation Interviewees

Our people were not enthusiastic about the document approach. Four Production Cell Managers

We had no time; we were forced to it; we were not guided. We did

not see It as a priority.

The ABC study does not help us to quantify our suggestions. Two Production Cell ManagersiMaintenance Manager;

Manager of spare parts

We cannot control our work load: it depends on other departments. One Production Cell Manager/Maintenance Manager

We cannot influence our costs.

We do not have the freedom or the power to manage our resources One Production Cell Manager

flexibly.

Although this group did not really formulate any activity-based improvement initiative, some managers did know that they had to change on a more structural level in order to achieve real improvement. The EDP administrator knew that he could free up capacity in his department by decreasing the number of special demands the other departments addressed to him. However, he could not control this input by himself, and so the problem asked for some more structural solutions. In the same way, the quality manager knew how to improve quality and how to diminish the number of engineering changes and related problems, but he could not influence this by his own; a more structural approach from the design stage and better adherence to existing procedures would be necessary.

Table 6 summarizes why the managers resorting under production did not come up with any activity-based suggestion.

7. Discussion

The data presented above show that there are broadly three categories of causes that account for the failure of the activity-based improvement process: (1) Causes related to the design of the ABC system

(factors such as complexity of the model, definition of activities, etc):

(2) Causes related to the organizational and environmental characteristics that affected the way

(3)

the ABC information was used (e.g. the existence of several projects at the same time); Causes related to the characteristics of the management control system (such as priority attached to the ABC project and the way progress is monitored).

We will discuss each of these categories separately.

7.1. The impact qf’ the design decisions

In terms of design decisions and their impact on the outcome of the improvement process, we could conclude that indeed these decisions do affect the improvement process. These design decisions, of course, are entirely related to the model as it was developed with the help of the consulting firm and not to the local initiatives which were more informal in nature. Among the reasons for the poor outcome of the ABM process were (Table 4):

ill

(2)

The complexity qf the model: This was a deliberate choice of the ABC team in order to provide as much management information as possible. This complexity had an overwhelming effect on the managers who could not find their way through the ABC reports. The way the activities were dqjined: Some managers mentioned the point that they did not know exactly what was included in the definition of activities. They were not familiar with the language used in the model to indicate certain tasks of their employees.

D. Waeytens, W. Bruggemanllnt. J. Production Economics 36 11994) 39-52 49

(3) The model was not action oriented: The model did not provide specific information to specific management questions asking for action. The “attributes” defined in the mode1 (“Quality”, “Standardization”, “engineering changes”, etc) did not always reflect what the managers really wanted to know. Some of them were interested in information relating to a make or buy decision, but could not find the answer in the model, since “make or buy” was not defined as an attribute. Furthermore, the preliminary software did not always allow to extract information about a specific attribute for one particular department. This is indeed a technical problem of software design, but on the other hand, this raises the question whether all the specific information needs can be anticipated in the design stage, and can be integrated in one overall model.

(4) The mode1 being a representation of resource usage did not allow to simulate the effect of specific actions on the costs. This would require a model defined in terms of resource spending.

(5) The ABC model was a snapshot of the activities at one moment in time: by the time the model had to be used for the ABM process, some activities had already been eliminated and others had changed.

(6) The activities and cost drivers were not defined in terms of standards, simply because these standards were not available for most activities. Consequently, the model could not be effectively used to trace excess capacity in the departments.

These arguments would suggest that indeed in this case, one major cause of the failure of the ABM process might be the design of the model. The way the model was designed did not generate the appropriate information for activity-based management. On the other hand, this would imply that if these arguments form the necessary design characteristics of an ABC mode1 for continuous improvement, such a mode1 would not be appropriate for product costing because of its complexity and its definition in terms of resource spending.

One might argue that the poor outcome of the improvement process could not be attributed to the design of the ABC model, because the model was not actually used in the process of improvement.

However, it was clear in our interviews that the reason why the managers did not use the model, had very much to do with the design of the mode1 as is pointed out above.

7.2. Organization and environmental characteristics

According to our information in Tables 4-6 there were also some organizational factors influencing the outcome of the ABM process. With organizational factors we mean the characteristics of the internal and the external management environment in which the process had to take place. The literature does not provide any insight in those elements and how they affect the ABC/ABM process. (1) First of all this is a case of a company in a crisis

situation. A decreasing market had already forced the company to cut down on the number of people in all the departments a year age. Conse- quently, the capacity in most departments had been drastically reduced, and the managers did not see how they could further diminish these resources. They were afraid to suggest any new initiatives that would further reduce their capacity. Furthermore, in this situation of crisis the first priority went to the operations of the departments, leaving no time for excessive management projects. In this study this was certainly a factor affecting the outcome of the improvement process, although we are not sure what this would imply for the generalization of this result. Is an ABC/ABM project not suitable in a situation of crisis, or is it exactly a tool to come out of the crisis? Kaplan and Cooper suggest the latter (e.g. in the John Deere Case), while Johnson [24] believes that ABC/ABM is not the appropriate tool to become competitive again. This case study might support Johnson’s thesis, not because of an inherent shortcoming in the technique of ABC or ABM, but because of the organizational characteristics associated with a corporate crisis.

(2) In this company there were some other major projects going on, such as the IS0 9001 program and an effort to make overall job descriptions. The managers felt that there was no

congruence between these programs and ABC/ ABM project. First of all these programs already asked for a considerable part of their time, and they were not enthusiastic about going into just another major program. Second, it was not just a matter of time. The managers believed far more in the ability of the IS0 9001 program to come to improvement than in the ABC approach. They appreciated the qualita- tive nature of the IS0 approach., which they believed was as least as effective as the quanti- tative ABC approach. They perceived the IS0 program to be less threatening and more motivating than the ABC project, and third, they believed that top management gave far more importance to the IS0 program than to the ABC project. One top manager had spoken of the IS0 program as a necessary step for the survival of the company. So we believe that the existence of other major projects on the one hand, and the different approach of these programs on the other hand could have affected the poor outcome of the ABC/ABM project.

(3) All the managers, including top management, were afraid of the drastic implications of the ABC project. They were reluctant to change fundamentally their management accounting system, and to introduce a completely new management tool in the departments. Further- more, they were not sure whether the company already had the right management culture necessary to dive into the ABC adventure. They believed that the ABC/ABM would necessitate a complete cultural change, which they were not ready or prepared to take yet.

(4) Finally, we observed that there were some structural cost drivers such as the number of engineering changes, which could not be affected on the departmental level. These structural problems demanded a more fundamental solu- tion starting in the design stage and extending to all other departments. Therefore, some managers thought that the focus of the ABM project on the departmental level would not lead to major improvements as long as these structural problems were not solved. In this case study, the ABC/ABM approach was probably not the right tool to attack these problems.

7.3. The characteristics of’ the management control

sJ1.F t em

As can be observed from Tables 4-6 there could be important elements of management control which counted for the failure of the ABM process. With management control we mean the process by which management ensures that the organization strategies are carried out. Management control has to do with the organization structure, reporting systems, incentive systems, and elements of type of control such as top-down versus bottom-up approaches, commitment and style of top management, etc [S]. (1) The organization is structured in cost centers,

led by a department manager with cost responsibility and reporting to higher-level top manager. The ABM project was carried out at the department level, and most of the managers we spoke had costly responsibility. Therefore we had expected these managers to be enthusiastic about an approach to manage their costs effectively. However, beside the reasons already dis- cussed above, the managers complained about their lack of authority to really manage their resources. They said they did not have the power to compensate between types of resources. The marketing manager, for instance, said that he could not decide to save money on product demonstrations and to spend it on his personnel. He did not get the authority to reward and motivate his people for their good perfor- mances. This made them feel responsible for their costs, but not feel like a real manager. As a result they were not really interested in a management tool for which they could not motivate their people. Further research on this topic would have to investigate the appropriate organization structure to underly an ABM process.

(2) A second element of management control is the way top management motivated its managers for the project. It was a general belief that the top management did not really consider this project as a top priority, and it was certainly not communicated as such. Consequently, the managers did not really know how important this exercise was to the company, and they were not eager to sell the project to their people. On

D. Warytens, W, Bruggemani Int. 1. Producrion Ecanomic.~ 36 (1994) 39-52 51

the other hand, one can suppose that the top management did consider the project as really important, given the time, the money and the effort they spent on it. However, the fact that the project had such a long development time, and the fact that the top management did support the project throughout, were not sufficient signals to consider the continuity of it as a priority. Also in the production department, where the production manager developed a document to conduct the ABM process in the production cells and also put some time pressure on it, the managers did not perceive this as a sufficient signal of priority. The least we can conclude is that probably there was something going wrong in the communication of the objectives of the project.

(3) The way the ABC/ABM project was worked out was certainly top down. Our study in- dicated that the department managers and their personnel were certainly not demanding parties for such a system. It was as if they were kindly forced to manage by activities, whether they were interested or not. Again this is a remarkable different approach than in the IS0 9001 program which is more conducted bottom-up.

(4) Finally, we observe that providing information is by itself not sufficient to generate initiatives of improvement. What is needed is some kind of incentive and a motivating approach in order to get the managers on your side. We know that we have to be careful with such a conclusion because we could not separate the effect of the bad quality of the information and the weak- nesses in the control system. However, we have sufficient information to believe that lack of motivation was an important block on the road to a successful ABM implementation.

8. Conclusions

In this paper we have identified three categories of barriers to a successful impIementation of ABC for continuous improvement: (1) The design choices made+for the ABC model: In

this company it turned out to be difficult to design a system appropriate for both product

costing and continuous improvement. The final model was very complex, the activities were badly defined, it did not allow simulations at the spending level, the drivers could not always be managed, etc. This case would argue in favor of a trade-off between an ABC system for product costing, and one for continuous improvement.

(2) Organizational and environmental characteristics: This company experiencing a crisis situation was very sensitive to new cost reduction approaches. Most of the managers were not interested in identifying excess capacity again. At the same time the existence of other (often less threatening) improvement projects inter- vened in the activity-based program, and com- peted for the manager’s precious time. On top of this came the unwillingness and unpreparedness to change at different levels of the organization.

(3) The characteristics of the management control

system: In this company the management control system was not adapted to allow actions of activity-based management. Managers did not have the authority to manage their resources flexibly. Furthermore, they did not appreciate the way the ABC project was im- posed on their departments, instead of being initiated bottom-up. Finally, something went wrong in the communication of the objectives and in communicating the priority that the top management attached to the project.

These conclusions should be interpreted within the context of this particular case. Further research is needed to study the degree to which these conclusions can be generalized to other organizations. Also, further research is to be done to evaluate the relative importance of these barriers to the success or the failure of the activity-based improvement program. This kind of research would enable one to design an ABC model that is most effective in the light of continuous improvement, and it would indicate the conditions that have to be present for a successful implementation of ABC.

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barriers to successful implementation of abc for continuous improvement: a case study

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