BUSINESS PRODUCTS DIVISION OF NORTEL
Thousands of low cost high-volume parts were accounting for a significant amount of the manufacturing costs.
The Challenge. Using an activity-based costing model, The Business Products Division analyzed the high cost of material related activities. This analysis revealed the primary cost driver as the large number of different “C” parts (low cost high-volume parts) used in manufacturing. There were thousands of these parts and they accounted for the bulk of the activity cost.
The Solution. The costing model showed that three cost drivers were responsible for the high cost: the large number of vendors, the large number of different parts, and the cumbersome procurement procedures. The Division used the data in the costing model to simulate various alternative ways of reducing cost. The cost of each alternative was computed by multiplying the activity-driver quantity by the cost per unit of the driver. The lowest cost alternative completely changed the way C parts were purchased, and substantially reduced the number of vendors and parts. The impact on cost was substantial. Only one purchase order was issued and twelve invoices processed each year versus thousands under the old system. Several activities, such as receiving, counting, unloading, inspecting, moving and stocking, were completely eliminated for the C parts.