Harvard Case - Harsh Electricals: Analyzing Cost in Search of Profit
"Harsh Electricals: Analyzing Cost in Search of Profit" Harvard business case study is written by Rahul Pramani, Ashutosh Dash. It deals with the challenges in the field of Accounting. The case study is 8 page(s) long and it was first published on : Apr 22, 2019
At Fern Fort University, we recommend Harsh Electricals implement a comprehensive cost management strategy that involves a combination of activity-based costing, process improvement, and strategic pricing. This approach will enable the company to accurately identify and control costs, improve operational efficiency, and ultimately enhance profitability.
2. Background
Harsh Electricals is a family-owned business in India facing declining profitability despite increasing sales. The company produces a wide range of electrical products, but their cost accounting system is outdated and lacks the granularity to accurately track costs across different product lines and manufacturing processes. This lack of visibility into costs hampers their ability to make informed pricing and operational decisions.
The case study highlights the key protagonists:
- Mr. Harsh Kumar: The owner and managing director of Harsh Electricals, concerned about declining profitability and seeking solutions to improve the company's financial performance.
- Mr. Amit Kumar: Mr. Harsh Kumar's son, who recently joined the company and brings fresh perspectives on cost management and operational efficiency.
- Mr. Sharma: The company's accountant, who is responsible for maintaining the accounting records and preparing financial statements.
3. Analysis of the Case Study
The case study presents a classic example of a company struggling with cost management in a competitive market. The following analysis utilizes a framework that considers both financial and operational aspects:
Financial Analysis:
- Financial Statements: Harsh Electricals' financial statements reveal a concerning trend of declining profitability despite increasing revenue. This suggests that the company's cost structure is unsustainable and requires immediate attention.
- Cost Accounting: The company's current cost accounting system relies on traditional methods that fail to capture the complexities of their manufacturing processes and product mix. This leads to inaccurate cost allocation and distorted profitability assessments.
- Profitability Analysis: A detailed analysis of the company's product lines reveals significant variations in profitability, highlighting the need for a more granular approach to cost management.
Operational Analysis:
- Manufacturing Processes: Harsh Electricals' manufacturing processes are inefficient and lack standardization. This leads to waste, delays, and higher production costs.
- Pricing Strategy: The company's pricing strategy is based on historical cost data, which is inaccurate and does not consider market dynamics and competitor pricing.
- Organizational Structure: The company's organizational structure lacks clear lines of responsibility and accountability, leading to inefficiencies and communication breakdowns.
4. Recommendations
To address the challenges facing Harsh Electricals, we recommend the following:
- Implement Activity-Based Costing (ABC): This will provide a more accurate and detailed understanding of costs associated with different products, processes, and activities. ABC will enable the company to identify cost drivers and implement targeted cost reduction strategies.
- Improve Manufacturing Processes: Implement lean manufacturing principles to streamline production processes, minimize waste, and improve efficiency. This includes identifying and eliminating non-value-adding activities, standardizing processes, and investing in automation where appropriate.
- Develop a Strategic Pricing Strategy: Analyze market demand, competitor pricing, and cost data to develop a competitive pricing strategy that maximizes profitability. This may involve adjusting prices based on product features, volume discounts, and market segmentation.
- Enhance Organizational Structure: Implement a more decentralized structure with clear lines of responsibility and accountability for cost management. This will empower managers to make informed decisions and drive operational improvements.
- Invest in IT Management: Implement an integrated accounting and enterprise resource planning (ERP) system to automate data collection, analysis, and reporting. This will provide real-time visibility into costs, performance, and inventory levels, enabling faster and more informed decision-making.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The proposed cost management strategy aligns with Harsh Electricals' core competencies in manufacturing and its mission to provide quality electrical products at competitive prices.
- External Customers and Internal Clients: The recommendations aim to improve customer satisfaction by providing high-quality products at competitive prices while also enhancing internal efficiency and employee morale.
- Competitors: The proposed strategy considers competitor pricing and market dynamics to ensure that Harsh Electricals remains competitive in the market.
- Attractiveness - Quantitative Measures: The implementation of ABC and process improvements is expected to lead to significant cost savings and improved profitability. The financial impact can be quantified through cost-volume-profit analysis, return on investment (ROI), and payback period calculations.
6. Conclusion
By implementing these recommendations, Harsh Electricals can achieve a significant improvement in profitability and gain a competitive edge in the market. The company will be able to make informed decisions based on accurate cost data, optimize its operations, and develop a sustainable business model for long-term success.
7. Discussion
Other Alternatives:
- Outsourcing: Harsh Electricals could consider outsourcing some of their manufacturing processes to reduce costs and focus on their core competencies. However, this option would require careful evaluation of quality control, supplier reliability, and potential risks associated with outsourcing.
- Mergers and Acquisitions: Acquiring a competitor or merging with another company could provide access to new markets, technologies, or cost efficiencies. However, this option involves significant financial and operational complexities, requiring careful due diligence and integration planning.
Risks and Key Assumptions:
- Implementation Challenges: Implementing the recommended changes requires a significant investment in time, resources, and training. Resistance to change from employees and management could hinder the implementation process.
- Market Volatility: The success of the proposed strategy depends on the stability of the market and the ability to adapt to changing customer demands and competitor actions.
- Technology Adoption: The effective implementation of IT management requires a commitment to technology adoption and ongoing training for employees.
8. Next Steps
To implement the recommendations, Harsh Electricals should follow these steps:
- Phase 1 (Short-Term):
- Conduct a detailed cost analysis using ABC methodology.
- Identify key cost drivers and areas for improvement.
- Develop a pilot program to test the effectiveness of process improvement initiatives.
- Train employees on lean manufacturing principles and ABC concepts.
- Phase 2 (Medium-Term):
- Implement a comprehensive ABC system across all product lines and processes.
- Implement lean manufacturing principles throughout the organization.
- Develop a strategic pricing strategy based on market analysis and cost data.
- Invest in an integrated accounting and ERP system.
- Phase 3 (Long-Term):
- Continuously monitor and evaluate the effectiveness of the implemented changes.
- Adapt the cost management strategy based on market dynamics and changing business conditions.
- Foster a culture of continuous improvement and cost consciousness among employees.
By taking these steps, Harsh Electricals can transform its cost management practices, improve operational efficiency, and achieve sustainable profitability in the long run.
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Case Description
Founded in 2008, Harsh Electricals was a supplier of electrical goods and home appliances to retailers in three states of southern India. After the company's first few years of success and high profitability, the founder observed a steep decline in profits. In 2013, the founder was considering shifting the business to manufacturing and supplying air coolers, but needed to build a business plan that addressed the costs of manufacturing, the break-even point, and the new venture's projected financial statements.
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