DT: 26.03.

10

Managerial Accounting

PGXPM VI

Term I

Case Solution

N.V.Deepak
Making the Company’s Products Upright in
Contrast to the Existing Scenarios:

Introduction:

A durable consumer electronics company, a leading manufacturer of domestic electronics

equipments and gadgets.

Company’s existing scenario:

The company is experiencing a drop in profit and constant chaos due to intense competition
from local competitors as well as competitors from China and Vietnam.

The company is currently showing a higher inventory accumulation of their finished products
which used to be fast moving earlier.

It is also indicated that there is huge increase in indirect costs and support costs which has
pushed the overall costs, which has made the price uncompetitive and where prices have
been kept competitive, profit has come down.

In order to resolve the problems, we have to first attack the problem of rising costs.

To start with let us understand the basic concept of pricing of a product;

Price = (Direct Cost + Indirect Cost + Support Cost) + Profit

The price of a product is arrived by adding its direct & indirect cost with the profit. In
monopolistic market conditions the price of a product is determined by the manufacturer by
adding the cost and the profit element.

But in highly competitive market the company fails to clear its inventory due to decrease in
the attractiveness of the products among their customers due to the availability of equally
good product at a reasonable and lower price. Hence, the manufacturer is forced to bring
down the price of the product. This is known as “Market Driven Price”, where the market
determines the price of the product.

In order to sell the product at market driven competitive price and still earn profit, the
manufacturer has to work on the various elements of cost so as to reduce it. In this case it is
given that there has been huge increase in the indirect cost and support cost which will have
to be brought down so as to achieve competitive price.

Competition Based Pricing:

With a competition-based pricing policy, a company sets its prices by determining what other
companies competing in the market charge. A company begins developing competition-based
prices by identifying its present competitors. Next, a company assesses its own product or
service. After this step, a company sets it prices higher than, lower than, or on par with the
competitors based on the advantages and disadvantages of a company's product or service
as well as on the expected response by competitors to the set price. This last consideration
the response of competitors-is an important part of competition-based pricing, especially in
markets with only a few competitors. In such a market, if one competitor lowers its price, the
others will most likely lower theirs as well.

This pricing policy allows companies to set prices quickly with relatively little effort, since it
does not require as accurate market data as the demand pricing. Competitive pricing also
makes distributors more receptive to a company's products because they are priced within
the range the distributor already handles. Furthermore, this pricing policy enables companies
to select from a variety of different pricing strategies to achieve their strategic goals.

It is apparent in the case that the marketing of the product is not efficient due to,

1. Lack of co-ordination with the supply chain decisions and customer demand from CRM.

2. Customer of least profit getting maximum attention and more profitable customers
deflecting.

3. CRM is unable to correctly forecast the demand of different products in different

markets.

4. CRM is unable to distribute efficiently as per demand of various markets.

The failure in supply chain management can have two possibilities as;

1. CRM (Customer Relationship Management) manager not providing proper inputs of

Supply Chain.

2. The Supply Chain Manager is taking an incorrect decision.

The supply chain manager plans the input of raw materials and the other manufacturing
supporting & related products based on the customer or market requirements given by the
CRM. Thus CRM plays a vital role in the supply chain execution, any slight deviation in any
inputs given to supply chain will result in over or under stocking of the raw materials and
other products.

To resolve this market segmentation has to be done to enable focus on the proper market in
terms of profitable customer’s products and regions.

MARKET SEGMENTATION:
Because all customers do not have the same needs, expectations, and financial resources,
managers can improve their pricing strategies by segmenting markets. Successful
segmentation comes about when managers determine what motivates particular markets and
what differences exist in the market when taken as a whole. For example, some customers
may be motivated largely by price, while others are motivated by functionality and utility. The
idea behind segmentation is to divide a large group into a set of smaller groups that share
significant characteristics such as age, income, geographic location, lifestyle, and so on. By
dividing a market into two or more segments, a company can devise a pricing scheme that
will appeal to the motivations of each of the different market segments or it can decide to
target only particular segments of the market that best correspond to its products or services
and their prices.

Managers can use market segmentation strategically to price products or services in order to
attain company objectives. Companies can set prices differently for different segments based
on factors such as location, time of sale, quantity of sale, product design, and a number of
others, depending on the way companies divide up the market. By doing so, companies can
increase their profits, market share, cash flow, and so forth.

This Market Segmentation report shall be done based on the feedback obtained from CRM’s
and by market analysis on the basis of these feedbacks. Having segmented the market we
have to practice as to which market and which product to be targeted for high profitability
and turnover.

The CRMs of these market segments shall give projections of demand of various products in
their data of markets. These demands shall be fed to the production units and supply chain
management who will ensure that the procurement of inputs, manufacturing and supply of
finished products to the respective market segments are done in such a way those products
are available on demand without unreasonable high inventory.

Thus the above condition can be achieved by creating an Operations Management

department headed by a well experienced person in the field of marketing, supply chain
management, CRM and process planning and control, so as to streamline the process flow
without any flaws.

When it comes for the drifting up of the more profitable customers such as leading
retailers and the least profitable customers getting more concern is due to lack of
support and co-ordination given to the big customer. Such issues can be resolved by;

1. Organising a meeting or a program which all of the company’s customers and making
them feel that they are the integral part of the company.

2. Retain the big customer by giving attractive offers and constantly updating him with
the new plans and the new products entering into the market.
 3. Constantly gathering feedback from all the customers and working according to those
to maintain a good interpersonal relationship with them.

4. Since every customer is a god, the least profitable customer is also to be retained.

Sales force placing unreasonable demands, thus leading to flooding up of the

inventories, is due to following reasons;

1. Due to wrong inputs from CRM, the sales force is placing unreasonable demands and
hence the supply chain getting the same input resulting in the excess accumulation of
the inventories.

2. Due to the above the planning and production control is getting interrupted.

Depending on the Market Segmentation reports and demand of various customer groups
and assigned parties an efficient supply chain has to be developed and on the same basis as
planned by sales force, production shall have to be planned. This will result into competitive
pricing, retaining old customers and capturing new customers, meeting demand by proper co-
ordination with production department and thus establishing efficient supply chain.

The above can be resolve by the Operations Management head in coordination with the
respective department sub heads of CRM and Supply Chain whose main motive is to analyse
the market review by CRM and providing accurate inputs to Supply Chain, thus enabling the
production planning and control department to properly draft their plan to the shop floor
accordingly and hence eliminating the unwanted interruptions.

Cost based pricing creating havoc in profits, as the products should be analysed and
priced in the perspective of the customer. In this connection to overcome the above case
Activity Based Costing should be practiced in place of Cost Base Pricing.

Cost Based Pricing:

A cost-based price is the cost of producing a unit of the product plus a certain margin, i.e.

Cost of a product = Price + Profit margin.

With cost-based pricing, the Product Manager tries to find the right margin but can also take
the impact on volume into account. The hazard is that all the variables are dependent, and
maintaining positive margin may result in such small volume that the product isn't profitable.

It is a straight forward method which doesn’t involve in examining the market or considering
the competition and other factors that might have an impact on pricing, thus ultimately
leading to high prices in weak markets and low prices in strong markets.

Activity Based Costing:

As activities consume resources and products consume activities, ABC is a costing model that
identifies activities in an organization and assigns the cost of each activity resource to all
products and services according to the actual consumption by each activity.

The objective of an ABC implementation is to relate all of the costs of doing business to
products, services, or customers. Developing the initial model consists of the following five
steps:

1. Identify the Resources (expenditures) of an organization

2. Determine Activities (work performed) that are supported by Resources
3. Define Cost Objects (products, services, customers)
4. Develop Resource Drivers to link Resources to Activities
5. Develop Cost Drivers to link Activities to Cost Objects

Activity-Based Costing determines the true cost & profitability of customers, products, or
services. It measures the costs and profits of an organization based on the activities
performed within that organization. By focusing on processes that contribute to revenues and
business operations, ABC can accurately determine how each process relates back to specific
products, customers, or services.

Lack of co-ordination among the top officials can be eliminated by;

1. Arranging a meeting between the top officials to install a belief among them that the
product is growing.
2. During the meeting the problems faced by each member and their respective
departments to be discussed and solutions based on their requirements to be provided.

3. Motivating all the departments by giving them clear cut targets and introducing
performance appraisal system.

4. The departments will be provided with a set of targets in their respective areas to
achieve and the results are measured.

5. These performance results are analysed and should be grouped under different levels
performance.

6. These are levels are calibrated and Performance Appraisals/Pay are allocated to an
individual or a team accordingly.

7. Thus creating a competitive environment among the employees and between various
departments in timely achievement of the targets.

8. A competency report for each and every employee should be maintained to monitor the
field of expertise, their skills and a proper training based on the report to be given in
the areas in which one is lagging.

9. Technical and Managerial training to be conducted for employees of each and every
level on a regular basis to keep them updated with the current market
requirements/needs.