Kanthal Profitability Analysis
Case: Finding out what is truly profitable
Understanding Hidden Costs
Kanthal had profitability issues. Their bottom line result was positive, but the costs were increasing, resulting in a decreasing profitability over time. Production costs remained stable, but the indirect costs, such as sales and administration, were increasing. In effect, the KPIs gave insufficient insights into what and where countermeasures should be applied.
Which products were profitable, which customers were profitable, and why did the overhead costs increase? The Kanthal CEO engaged SAM to conduct an order-line profitability analysis, to gain a better understanding of their costs.
New Insights and Processes
- Description of the profitability of customers and products which the management could use to create and prioritize countermeasures. Important insights include:
- 20% of the customers were responsible for 225% of the profit
- The largest customer, viewed as the most important one, was the most unprofitable
- Management introduced systems for automated order handling for selected customers resulting in turning these customers to profitable. The action did not interfere with the customer relations, but slightly improved them.
- The report and analysis were used as a tool in customer relations.
The results were changed processes and behaviors of both customers and staff at Kanthal, further contributing to the profitability.
How we did it
SAM conducted a series of interviews with employees to clarify their activities and how these related to the customers and products of Kanthal. Administration and sales related coste were of specific interest. These costs had increased in relation to production costs, and were currently lumped together in one account as ”overhead”.
By using the information gathered during the interviews, the overhead costs were allocated to relevant order rows to provide a better view of the profitability. An analysis of the data was then carried out and presented to the management.
SAM and Harvard Business School
The work with Kanthal was done before Activity Based Costing (ABC) was a widespread method. When Harvard’s Robert S. Kaplan and H. Thomas Johnson, wrote the book ‘Relevance Lost: The Rise and Fall of Management Accounting’, in which ABC was launched, the Kanthal case was included. This is the story how SAM came into contact with Robert and Thomas, which resulted in numerous collaborations. The Kanthal case is evidently still used at Harvard’s in their MBA program, and is one of their most widespread published cases.