Kanthal Furnance Products Case

The case study on Kanthal Furnace Products illustrates how a successful company reengineered its accounting system and redeployed its personnel to become even more successful. The issue at hand pertains to Kanthal's antiquated accounting system that distributed resources equally across all products and customers. What Kanthal's president, Carl-Erik Ridderstrale, understood is that customers required different levels of his company's indirect costs such as selling and administrative. He implemented the new Account Management System to track how many total resources, both direct and indirect, each customer required to determine their true profitability which was once defined by sales volume. In his words, "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." These are very sensible goals because it gave his company a much better and in-depth perspective on the total input and output of tangible and intangible resources.

The previous accounting system was inadequate for his company's new strategic direction because all resources were allocated equally. Since low profit customers place high demands on technical and commercial services, and high profit customers buy high-margin, standard products in large orders that reduce or eliminate demands for technical and commercial services, the old system was not capable to determine how much profit was earned each time a customer placed a particular order. The strategy, therefore, was to maximize hidden profits from customers whose demands on the company were low, and reduce/eliminate hidden losses from customers who demanded a disproportionate share of the company's resources. A customer that incurs hidden costs are primarily those who frequently purchase low-volume, high change products....