Debunking Misleading Cost Data
A leading electronics company hired Ventana to examine in-house business modeling activities and the company’s data for supporting them. The purpose of the Ventana work was to recommend ways to strengthen in-house analytical efforts and to help improve the performance of a failing sector in the company’s corporate portfolio. Within days of starting work, Ventana was able to show that in-house business modeling efforts were misdirected. The internal efforts focused on exploiting existing data and providing new analytical capabilities, but the company had not figured out how the new capabilities would improve decision-making. Indeed, no clear track existed. Much more important, however, Ventana showed that existing internal cost data were too inaccurate to support an impending decision to eliminate unprofitable product lines. Ventana contended that indirect costs were so large and the rules for allocating overheads so arbitrary that the company did not have accurate measures of product line profitability.
The client’s corporate auditors confirmed Ventana’s assessment and helped the firm develop an accurate activity-based costing system. With improved operating data available, the company successfully pruned unprofitable product lines. The next fiscal year the company reported a 60% gain in the sector’s profitability.