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SUFFOSTOCK Super Bakery, Inc., has been developed on the lines of a virtu- al corporation. This company, which was formed by former Pittsburgh Steelers' running
SUFFOSTOCK Super Bakery, Inc., has been developed on the lines of a virtu- al corporation. This company, which was formed by former Pittsburgh Steelers' running back Franco Harris in 1983, is a sup- plier of donuts and other baked goods to the institutional food market. For the past 12 years, it has been gaining market share and establishing a firm foothold in the highly competitive institu- tional baked goods market. Instead of creating a large multifunctional organization to administer the business, the management of Super Bakery outsourced selling to a network of independent brokers and con- tracted out manufacturing, ware- housing, and shipping. Four regional sales managers guide BY TIM R.V. DAVIS AND BRUCE L. DARLING. CMA and assist the independent bro- kers. A small office staff processes orders and handles credit Certificate of Merit and collections. Super Bakery handles strategic planning, marketing, R&D, and finance/accounting in-house, and Fran- n a virtual corporation only the core, strategic functions of co Harris hired a master baker to develop new products. The the business are performed inside the company. The company also purchases ingredients and formulates and pro- remaining support activities are outsourced to a network duces its own dough. of external companies that specialize in each function. These Super Bakery's major challenge has been to coordinate firms form functional alliances to manufacture products or and control the various functional activities performed out- provide services for customers. The virtual corporation posi- side the company by brokers and contractors, This challenge tions itself at the center of these relationships and serves as consists of a twofold problem of controlling the quality of ser- the catalyst that draws these cooperating companies together vice provided to customers and controlling the cost of these and organizes how the work will flow. The goal is to extract services. Managers and employees at Super Bakery devel- the maximum value-added from these partnerships while oped a performance reporting and activity-based costing sys- making the minimum investment in permanent staff, fixed tem that helped the company maintain control over out- assets, and working capital.! sourced functions. 18 MANAGEMENT ACCOUNTING OCTOBER 1996SUPER BAKERY'S STRATEGIES management opts to outsource business functions, it can cre- When Super Bakery entered the institutional food busi- ate serious difficulties. The loss of control of these functions and the problems of coordinating activities need to be consid mess in the early '80s, the senior managers knew they faced cred carefully. The service aspects of a manufacturing busi- an uphill battle. The market was mature with little growth ness sometimes may be more important, strategically, than in the baked goods segment. Members of the management the production aspects, Super Bakery was able to control team, however, had extensive experience in the institutional product quality by supplying the dough, which contained its food business. Marketing strategies and policies were devel- unique product formulations, to manufacturers. The contract- sped that followed standard industry practices closely. ed bakeries simply add water to the mix and follow the bak- The first four years were disappointing for the company ing instructions, Penetrating the institutional food market proved more chal- The service elements of the business presented greater leaging than management had thought, probably because variability and risk Management carefully researched which Super Bakery followed industry practices too closely Cus service activities were most important to customers before tomers were not given any reason to buy from Super Bakery. When management started questioning industry practices and began developing unique strategies and tactics, sales began to take off. First, Super Bakery targeted the school system segment of . Convenient the institutional food market, which has been in a state of PER BAKERY'S CUSTOMER SERVIC Accurate order entry decline because of funding pressures and increasing govern- order . Knowledgeable ment health requirements. Management felt that this cus- scheduling customer tomer segment was poorly served. The company pioneered ASSISIance "low-calorie, vitamin-enriched donuts that tasted delicious Pricing and met USDA guidelines." This strategy helped Super Bak- and trade Promotional ery to grow annual sales while the sales of conventional, credit support high-fat donuts were declining. Warehousing Accurate Second, Super Bakery avoided the local market restrict and storage order Filling tions of most fresh baked goods by refrigerating the product, vacuum cooling It, and distributing it nationally, a strategy On-time . Performance that allowed Super Bakery to build a national presence in delivery bonding what was formerly a fragmented industry. Third, Super Bakery developed numerous ways of serving Accurate billing and supporting its customers such as distributors and school systems. They included helping customers obtain lower prices by acquiring government-supported commodities (flour, butter, and fruit), cooperating with noncompeting sup- deciding which functions to contract out. Super Bakery's pliers by providing complete prepackaged meals to schools, product is just one component of the mix of benefits that are and helping distributors reduce inventory carrying costs and provided to customers. There are other important services for avoid stockouts through reliable, just-in-time delivery customers (see figure), most of which are part of the order Fourth, Super Bakery reduced capital investment and management process. The order management cycle had the overhend expense by contracting out major functions of the biggest influence on customer satisfaction. Management business, Super Bakery does not manufacture, sell, or dis- believed that all of these activities did not have to be per- tribute its products. It is a virtual corporation. formed by Super Bakery, but the company had to be able to Those strategies have helped Super Bakery grow annual control and coordinate theso services. sales at an average rate of 20% to 30% for the past eight Upstream activities tend to drive the downstream activi- years. In 1994 sales reached $8 5 million with a staff of nine ties in a process. Upstream activities such as order entry, full-time employees-a very high rate of productivity per pricing and scheduling drive downstream activities such as employee. Operating profits have been twice the industry production, order picking, packing, and delivery Manage average, and the company also enjoys a very high return on mient wanted to control the upstream planning activities as equity and return on net assets. These superior levels of per- well as the coordination of each customer's order. Manage- formance can be expected in companies that reduce their ment also wanted to control billing and collections. It decided investment in payroll expenses and fixed assets, but there that selling, production, warehousing, and whipping could be also are risks in implementing the loan structure of a virtual contracted out if management retained overall control over corporation. the planning and tracking of these activities in the order management process. BREAKING OUT SERVICE ACTIVITIES Relationships with outside brokers, manufacturers, and IN A VIRTUAL CORPORATION trucking companies could make or break the company because they stand between the company and its customers The first decision a virtual corporation's managers need to The brokers in the different parts of the country would have make is which aspects of corporate activity must be por- to do an effective job of promoting and selling the company's formed in-house and which jobs can be contracted out. When products to distributors and school systems. The various 20 MANAGEMENT ACCOUNTING OCTOBER 1196Table 1. SUPER BAKERY'S NONFINANCIAL PERFORMANCE MEASURES Service Activity Measure (Number Of) Reported By Source Order entry speed Customer complaints Customer Telephone complaints, customer survey Order accuracy Correct orders Customer Telephone callbacks, (computer tracked) Order fill rato Complete orders Customer service Customer order, packing list (computer tracked) On-time delivery Hours earlytardy from Common carrier, Common carrier, delivery confirmations, promised delivery date customer customer complaints Accuracy of shipments Correct shipments Customer service Customer order, packing list (computer tracked] Product quality Customer product Customer, HAD Telephone complaints, customer survey, plant inspections Total order filing cycle time Days from order Customer service Order entry date to delivery confirmation receipt to delivery Damaged shipments Damaged orders Common comer, Credit memos customer, socounting Incomect billing Pricing errors, customer Customer, accounting Customer invoices billing complaints independent bakeries that manufactured the products would proceases is turned over to the contractor have to meet Super Bakery's quality standards. The trucking Most of the activities in the order-filling cycle are commu- companies would have to meet on-time shipping and delivery nicated by fax and telephone; others are coordinated by on- requirements. Some of those concerns were addressed by line modern. Front-line, customer service employees at Super clarifying the performance standards with contractors in Bakery take product orders from distributors and school ays- painstaking detail. Clearly defined requirements were built tems; quote prices, schedule production at the independent into contracts with outside vendors, but discrepancies often bakeries in New York, Indiana, and California; and set dellv- still occur between what is agreed to on paper and day-to ery dates. Using an activity-based coating (ABC) system, the day operations. bakery company constructed a detailed brookdown of the Companies run a risk when they let outside brokers or costs incurred in filling each customer's order. common carriers interact with customers. Most external con- tractors will not sign service guarantees, and they usually IMPLEMENTING AN ACTIVITY-BASED refuse to pay penalties or fines for failing to moct service COSTING SYSTEM standards. The key issue from a service perspective is what influence the contractor is having on the customer. That is The wide variation in the cost of serving different cis. why a constant stream of feedback from the field is essential tomers was a major concern, For example, freight costs var- for evaluating performance. led for each customer depending on the size of the order and the shipping distance. The contracted cost for manufacturing CREATING A PERFORMANCE REPORTING SYSTEM the donuts was higher for the plant in California than the plants in New York and Indiana. There also were numerous Management wanted a performance reporting system that other variations in the cost of serving different customers. would provide a balance of nonfinancial and financial mea- The company was faced with the choice of spreading product sures, The nonfinancial measures were needed to track cus- and service costs over the entire customer base and charging tomer service and satisfaction levels, and the financial mea- uniform prices or assigning the exact cost of processing each cures were needed to track the cost of filling orders and order and building these costs into the price charged to each serving customers, customer. The core process that most influenced customer satisfac In most firms, a standard costing system is used to allo- tion was the order management cycle. For Super Bakery, cate costs to products and to price customers' orders. Stan- these steps included order entry, credit clearance, costing. dard costs are the agreed target cost of direct labor and pricing, scheduling procurement, manufacturing, shipping, materials that go into making products. They also include billing. and collection, When some of these functions are out- the overhead operating expenses, such as selling, advertising, sourced, it is important to retain control over the administra- warehousing, shipping, and administration, which also are tive process that links these interdependent functions togeth. expended in servicing customer accounts. Under a standard er. Super Bakery developed nonfinancial measures of these costing system, these overhead expenses are allocated to processes that reflected customers' concerns (Table 1). products and spread over the entire customer base. Each cus- Some of these measures needed to be collected and tracked tomer's order is assumed to cost the same average amount to by Super Bakery's staff; others were collected from customers process. or contractors. To keep track of these performance measures, The fallacy of the standard costing system at many compa- a relational database was created at Super Hakery, One of nies, including Super Bakery, is that very few customers the advantages of contracting out functions is that managers orders consume the same amount of resources. At Super no longer need to worry about measuring processes: They Bakery, the profit on each sale varied significantly, Assigning only need to measure outcomes, The problem of managing costs accurately to each account would allow the company to PANAMAMINT ACCOUNTING OCTOBER 1096assess the profitability of different cus- tomers. Making customers pay for Someone in your company is still typing what they received is also a fairer arrangement. Few companies recover G/L numbers into a spreadsheet. the exact cost and expenses of serving customers in the sales price charged. In many businesses, profitable accounts subsidize unprofitable ones, and management is Done the wiser. In order to track costs more closely, man- agement made the investment in a more sophisticated information and accounting system. The management of Super Bakery docided to install a detailed ABC sys- tem, first, because it would allow man- agement to track the profitability of each customer's account and, second, because it would allow management to track the performance of outside con- tractors more closely. One of the main differences between Super Bakery's ABC aystem and other manufacturers' ABC systems is that the main focus is placed on capturing Stop it ! coats by customer order rather than by product. Overhead service expenses tend to be high and variable, while It is a tedious error prone F9 also provides tools to contracted manufacturing costs were activity. And entirely unnecessary. explore your G/L, drill down fixed. But, you say, spreadsheets are the multiple tiers to your G/L With most ABC systems, the con- sumption of coats is either directly best place to do financial reporting. transactions, prepare consolidations recorded as costs occur leg., specific 19 seamlessly integrates and more. freight charges) or recorded indirectly your G'L with your spreadsheet F9 even lets you create and by means of a coel driver. When a cost (Excel, Lotus 1-2-3, or Quattro Pro): edit budgets in a spreadsheet driver is used as the basis for asign- no macros, no imports, no exports. and write them back to the G/L! ing costs, management still is using an allocation method. It is an estimated With F9 you can create reports of coat, not the actual cost. Well-chosen any size or complexity, and never cost drivers, however, usually are supo- type another G/L balance into a rior to traditional standard cost bases spreadsheet. for allocating costs, such as percent of F9 is the perfect tool for F9 direct labor or percent of total sales. For instance, under a standard cost financial reporting. Create a single system many companies allocate order period income statement. With a "the future of handling charges on a percent of sales dick of the mouse, you can go to a basis. In other words, the greater the multi period comparative income financial reporting" value of the anles order, the higher the statement or any financial report order handling costs that will be 800-663-8663 x 332 charged to the customer. The problem you can imagine. And with a little with this standard cost accounting more effort, you can create a F9 works all these systems; practice is that the amount of time and complete EIS, with buttons, and AM5 ACCPAC PLE Business Works expense spent processing an order usu- "hot Charts" that change champion Date Pro Accounting ally is the same whether the order is Dynamics automatically when the data does. Gout PursAccounting for 200 or 2,000 cases. The cost driver And the best part is, if you know MeA-5/90 Edmond Opm YAT is not the number of casce ordered but Platinart the number of separate sales orders how to use a spreadsheet, you Ardworld Skyline Sulumun that have to be processed. In this age already know 95% of what you Fg Universal wil work with any accounting of just-in-time delivery, many compa- need to know in order to use F9. spemona PC. mini or mainframe. Cal funksah. nies would prefer to place a lot of small orders rather than book one large Circle No. 8Table 2. SUPER BAKERY'S ACTIVITY-BASED COST SYSTEM Cast/Revenue Activity Center Broken Out By Direct Allocated Measure Cost Driver Product cost Product Direc Contracted por case price for bach product line Freight and storage Order Direct Actual freight and storage costs per order Brokerage Isellingl Order Direct Fat 5% of sales Advertising Product Allocation Percent of advertising budget by projected cases sold Promotion Product Direct Actual cost by product line Trade shows llocall Customar Allocation Actual cost divided by projected cases sold Trade shows Inationall Product Allocation Budgeted cost divided by projected cases sold Samples Customer Direct Actual cost per case Bonds Customer Allocation Percent of projected cases cold Discounts Order Direct Actual discount per order Interest Customer Direct Per payment history (cost of capital) Order department Order Allocation Budgeted (historicall cost allocated per order Sales management Custommar Allocation Budgeted cost allocated by time spent in each territory Raw product Product Direct Per product case by formula Research and development Product Allocation Budgeted cost allocated by time for each product line Revenue price Product Direct Accumulated costs plus targeted profit margin for each product line order. By assigning costs based on the number of orders that functions it performs or contracts out and assigns them to have to be processed, instead of by the dollar value of the several responsibility centers: marketing, R&D, production, order, a much more accurate cost of order processing can be and office and finance. These responsibility centers are fur calculated for each customer. ther subdivided into various subcenters such as sales, At Super Bakery, actual costs are captured and assigned accounting, information systems, order processing, customer directly to a customer's account whenever possible. Some of service, and so on. Given the company's small staff, some these charges are based on the historical cost of serving par- employees wear several different hats in performing these ticular customers. Over the years, Super Bakery has accumu in-house functions. Each responsibility center has its own lated a great deal of cast information on serving different profit-and-loss statement, and internal charges are made customers. Cost drivers are used to assign costs when the between them for work that is performed by one department historical cost is unavailable or direct costing is impractical on behalf of another. This procedure does not include formal or impossible. In some cases, these costs are based on an nati- invoicing and payment, but journal entries are made on the mated percentage of the budget. books in order to assign costs to the user of the service, Out- A listing of Super Bakery's cost/revenue centers and cost sourced functions are treated as separate, arm's-length drivers for filling customer orders and assigning costs is pro- responsibility centers. vided in Table 2. By accurately capturing and accumulating Virtual corporations that outsource functions need a these costs, management can calculate the true costs of pro- detailed information system for controlling costs and evalu ceasing cuch order and servicing a particular customer's ating the profit on each sale. Such a system is especially account. Super Bakery is able to price orders accurately, important when expenditures on these functions are in the recoup the costs of serving its customer, and feel confident hands of outside contractors. An ABC system can be used to that a targeted amount of profit is being earned. control the behavior of contractors. The examples that follow The cost information needed to be available to customer show how the management of Super Bakery controls contrac- service employees on easily accessible computer screens or cors' spending of the company's resources. templates. Customer service employees have to be able to compute the cost of filling orders, quote accurate prices, and CONTROLLING CONTRACTORS WITH ABM communicate dependable delivery dates. The development of such a system required some experimentation. Front-line In virtual corporations, a great deal of money is spent on employees provided their feedback and suggestions on how service functions that are performed by an outside company. the information could be presented on the computer screen In other words, more of the company's budget is outsourced- in a more convenient form. an arrangement that can result in abuses. External contrac- If costs are broken out and assigned ixurately when they tors operate with considerably more freedom than company are incurred. they can be manipulated in a number of differ- employees. They do not operate under the direct supervision ent ways to evaluate the profitability and performance of dif- of company management. External contractors-salespeople, ferent components of the business. Through the use of a rela- trucking firms, warehouse companies, information service tional database, Super Bakery's management is able to companies, and payroll services-sometimes operate very examine costs by product, customer, order, broker, territory, inefficiently They can make decisions that make their own department, manufacturer, and common carrier. It uses jobs easier but squander company resources, therefore, can- responsibility centers and cost centers to assign costs in trols need to be imposed on spending. interdepartmental transactions. The company divides up the Independent sales brokers sell Super Bakery's products 24 MANAGEMENT ACCOUNTING OCTOBER 1996throughout the United States, and these interest charges for carrying a particular brokers also represent a variety of noncom 32 customer's account. These interest charges, peting companies and products. The inde- based on Super Bakery's cost of capital, are pendent sales brokers have looser ties to figured into the price that is quoted to cus- the company than any of the outside con- tomers for future orders. If the customer tractors. The regional sales managers demonstrates that it can pay within Super mainly judge the performance of brokers Bakery's net 30 terms, these charges are from the feedback they receive in sales dropped reports of orders booked. The brokers, who Brokers also have access to customers' are on straight commission, sometimes use files and can see which customers have not free samples, price discounts, and advertis- paid their last invoice. They know that new ing allowances to push deals through with orders will not be accepted until previous distributors. These incentives are supposed invoices have been paid. Brokers do not to be used to increase the size of customers' receive commission checks until customers orders so that the profit from the orders have paid their invoices. For this reason, bro- exceeds the additional selling expense. kers have an incentive to follow up with Super Bakery's regional sales managers overdue customers, which reduces Super look carefully at the cost of servicing each Bakery's collections' problems. account and whether to approve brokers" In some instances, delays in the receipt of requests for promotional allowances. They Franco Harris payments occur because school systems only are able to access an electronic file contain- cut checks on a particular day each month. If ing the volume and value of each customer's sales, past pro- this day is missed, vendors must wait until the same day the motional allowances, and servicing costs (credit history, ship- next month to get paid. Here it is critical to get in step with ping costs, etc.). On some occasions, promotional allowances the customer's billing and payables cycle. For the larger requested by brokers have exceeded the contribution margin accounts, Super Bakery's front-line service employees place a on the account. The management information and activity. call to the customer's payables clerk a few days prior to the based costing systems are used to evaluate the profitability day when checks are printed to make sure the invoice is of each account and whether to approve a broker's requests accurate and can be paid on time. for promotional allowances. Shipping performance and freight costs are another area of VIRTUAL ADVANTAGES critical importance. There is a tremendous amount of varia- tion in the quality and cost of service provided by different During the rapid growth of Super Bakery, management's trucking companies. Over the years, Super Bakery has used major concern has been making sure that staff and expenses 12 different common carriers. Today it uses three companies do not grow more rapidly than sales revenues and profits. that offer the company the beat rates and service in different For Super Bakery the advantage of contracting out manufac parts of the country. turing is that it obviates the need for investment in plant, Most common carriers have regularly scheduled routes equipment, and factory personnel. It also eliminates concerns and stops in particular locations. For instance, they may of capacity utilization and meeting minimum breakeven pro- deliver in Raleigh, N.C., on Tuesdays, and Hartford, Conn., luction levels, on Thursdays. Many common carriers will deliver full trailer Arm's-length relationships with external contractors may loads any day of the week, but they will not deliver less than sometimes give companies greater control over the perfor- trailer loads, unless it is a scheduled stop, without charging a mance and cost of certain functions than when these fune- price premium. A lot of Super Bakery's business consists of tions are handled internally. Moreover, contracted coats often less than trailer load shipments. Super Bakery must consoli- are fixed rather than variable. If the costs exceed a set date shipments to particular locations to make up full trailer amount, the contractor must absorb the loss, Management loads or conform to the common carriers' schedule for less can withhold payment of invoices from contractors who than trailer load shipments. Management and employees exceed agreed prices for manufacturing, warehousing, or must monitor the shipping performance and freight costs of shipping. Nevertheless, when sales, manufacturing, and dis- the different carriers carefully. They need to make sure that tribution are outsourced, the performance of brokers and they are not overcharged for different shipments. Super Bak- contractors must be monitored. A well-designed performance ery uses historical customer information to calculate the reporting and costing system is needed to evaluate their per- exact cost of transporting a specified number and type of formance and control expenses. The systems put in place at donuts to a particular location. In this way, actual freight can Super Bakery provide useful guidelines for other virtual be built into the price charged to the customer for each order. corporations, Any variances in these shipping charges are taken up with the common carriers. Tim R. V. Davis is professor of management and director of international Another instance where Super Bakery uses historical cost business programs at Cleveland State University Bruce L. Darling, CMA. is the controller of Super Bakery, Inc., and information is in the control of overdue receivables. As shown Prestige American Foods, Cleveland office. He is a member of Claveland in Table 2, Super Bakery keeps extensive information on East Chapter, through which this article was submitted. each customer's payment history and the average number of an "The Virtual Corporation" Summme Werk February I, Said, Modhome-Hil, Inc. days invoices are past due. This information is used to assess New York, N.Y. 28 MANAGEMENT ACCOUNTING OCTOBER 1998
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