Cost differential between two similar manufacturing operations in South African and the Czech Republic

Abstract

EXECUTIVE SUMMARY A quest to establish the source of cost differences between two manufacturing plants with similar policies, methods and procedures, product ranges and process, as well as senior management is the focus of this paper. A South African (ZA) plant has been losing business to its Czech Republic (CZ) counterpart on internal bids to supply the Automotive Industry with various components. The corporation (“the Group”) to which the plants belong, is found to have a uniform product costing model (“iCOST”) backed by guidelines on what business costs to consider. However, there are no mathematical, scientific or economic methods defined and documented for determining most of the inputs. Underpinning the study are Accounting Management theories of Management and Cost accounting. In Section 3, various costing methods and techniques are explored – primarily to form basis for the paper but also to give an overview to the reader with little or no knowledge on this specialized field and/or these management theories. Each sub-section concludes with critical questions that eventually form the foundation for data collection. The data collected – primarily by means of interviews, but also through the use of a reference case study, SAP (the organization’s Enterprise Resource Planning system) and various reports including Global Capacity Planning Reports – is presented in Section 4, followed by critical analysis and contrasts with literature in Section 5. Data reveals how various managers use traditional budgeting methods for departmental budgets which are used for various overheads (OH) costs. Their accuracy levels remain unclear, despite their significance to product cost calculation in the ZA plant where they contribute approximately 20% of the overall manufacturing cost evident on the reference case presented. Between the managers is also a vast difference on the basic knowledge of cost accounting – or even more relevant to them, the cost components used in the organization’s iCOST. Revealed further by the data is how the age of equipment and lack of newer technologies at the ZA plant constrain its productivity by increasing reliance on the _______________________________________________________________ _______________________ _________________________ - 2 - human resources operating; and those maintaining the equipment. Furthermore, lack of automation at the ZA plant leads to the need for simulations of manufacturing processes during quotations. Done for cycle time estimations, these simulations arguably result in less accurate values – typically reportedly higher for fear of under-quoting. The use of replacement values for some categories of machinery for quotation, presents an unintended consequence. A Plant matches this high equipment cost with existing slower manufacturing time, typically from aged machinery, with little or no new technologies, slow and high reliance on human effort. These factors, along with electricity costs (60% higher in ZA than CZ) result in high direct machine costs; which form over 11% of manufacturing costs at the ZA plant. Due to its location, the CZ plant benefits from economies of scale unlike its ZA counterpart. Recommendations include equipping managers with basic costing and Better Budgeting knowledge; correct matching of manufacturing times with quoted equipment values and capabilities; and, strategic partnerships to boost economies of scale benefits.