The Impact of Activity-Based Costing On Managerial Decisions at Insteel Industries

The Impact of Activity-Based Costing on
Managerial Decisions at Insteel

IndustriesA Field Study
V.G. Narayanan and Ratna G. Sarkar
Harvard Business School
Boston, MA 02163
In this eld-based study, we interview top- and middle-level managers at

Insteel Industries and conduct statistical analysis of rm-level data in order
to shed light on whether activity-based costing (ABC) provides new information to managers and whether activity-based management (ABM) signicantly inuences product and customer-related decisions. We nd that after
the ABC analysis, Insteel undertook a number of process improvements that
resulted in signicant cost savings. Additionally, Insteel displayed a higher
propensity to discontinue or increase prices of products and discontinue customers that were found comparatively unprotable in the ABC study. Thus
we provide empirical evidence that ABC inuences both strategic and operational managerial decisions.
1. Introduction
In this paper, we provide empirical documentation of the effect of
activity-based costing (ABC) information on product- and customerrelated decisions made by managers in a company.
Cooper and Kaplan (1998) argue that when an entity implements
ABC, it reaps at least two important benets. First, its entire operation
is scrutinized in great detail and its performance analyzed and benchmarked against best practices. Employees are encouraged to be critical
of the status quo and to suggest improvements. This critical analysis,
they argue, can result in process improvements that promote more
efcient use of resources and hence reduce costs. Cooper and Kaplan
A previous version of this paper was titled, ABC at Insteel Industries. We would
like to thank the Insteel Industries management for generously providing us with their
time and complete access, and Dave Conrad for the data. We also thank Stan Abraham,
Sarah Eriksen, and Gregg Friedman of the Harvard Business School for their research
assistance; and Eric Noreen, Naomi Soderstrom, the seminar participants at the Harvard
Business School, Pennsylvania State University, and the April 1999 NBER conference
on Organizational Change and Performance Improvement, Santa Rosa, California, and
Ed Lazear, the discussant at the conference, for their comments.
2002 Massachusetts Institute of Technology.
Journal of Economics & Management Strategy, Volume 11, Number 2, Summer 2002, 257288
258
Journal of Economics & Management Strategy
call this operational activity-based management. Second, ABC information may enable a rm to change the mix of products produced and
customers served, allowing it to focus on making protable products
and serving protable customers. Cooper and Kaplan call this strategic
activity-based management.
There are a number of teaching cases and other such anecdotal evidence of ABC improving managerial decisions. Likewise, there
are many other cases where ABC has no inuence on managerial
decisions, presumably because of organizational resistance to change.
To our knowledge, there has been no systematic, statistical investigation of whether ABC really inuences managerial decisions. An ABC
analysis may fail to have any impact on a rm for two reasons:
1. It may not reveal any new information to the managers, who intuitively know already what an ABC system formally captures.
2. It is conceivable that outside consultants are hired to do an ABC
analysis, but decisionmakers in the rm do not accept the ABC
numbers, which often differ signicantly from traditional cost numbers. Effective follow-up to the ABC analysis may require managerial decisions and actions signicantly different from the status
quo, resulting in organizational change and upheaval, to which
managers may be resistant.
In this study, we interview top and middle managers at Insteel
and conduct statistical analysis of rm-level data in order to shed light
on whether ABC provides new information to managers and whether
activity-based management (ABM) signicantly inuences productand customer-related decisions.
We nd that after the ABC analysis, Insteel undertook a number of process improvement actions that resulted in signicant cost
savings and displayed a higher propensity to:
1. Discontinue products that were found comparatively unprotable
in the ABC study products.
2. Increase price of products that were found comparatively unprofitable in the ABC study.
3. Discontinue customers that were found comparatively unprotable
in the ABC study.
The changes to the portfolio of customers served were similar
to but not as striking as the product-mix and pricing decisions. This
nding is consistent with senior managers intuition that product-level
decisions can be made faster than customer-level decisions.
The next section reviews the literature. Section 3 provides the
companys background and cost structure and discusses its decision
The Impact of Activity-Based Costing on Managerial Decisions
259
to use ABC analysis. Section 4 describes ABM at Insteel and analyzes

whether the ABC analysis had an impact on their operations and marketing decisions. Organizational issues are highlighted in Section 5.
2. Literature Review
Surveys of company practices in the US and abroad show that for at
least several decades overhead costs have been allocated to products.
Likewise, surveys of company pricing practices document that companies typically use fully allocated product costs, rather than short-term
variable costs, to set product prices. For example, Govindarajan and
Anthony (1983) surveyed pricing practices of Fortune 1000 industrial
companies and found that 83% of them use full cost, rather than variable costs, for their pricing decisions. See Horngren et al. (2000) for a
summary of a number of surveys on cost allocation practices in US,
Australia, Ireland, Japan, and the UK as well summaries of surveys
that ask managers to rank the importance of full cost relative to variable cost in their pricing decisions. The pervasive use of full costs,
as opposed to short-term variable costs or marginal costs, in pricing
decisions runs counter to the prescriptions of microeconomics that
rms should set prices in a way that equates marginal revenues with
marginal costs plus opportunity costs (shadow prices) of constrained
resources.
Many theoretical papers try to explain this paradox and identify
conditions under which using full costs for product pricing will
maximize rm value or at least serve as a good heuristic. Hansen and
Magee (1993) show that under specied circumstances, the sunk cost
of capacity approximates the optimal opportunity cost of capacity.
Johnson and Kaplan (1987), Cooper and Kaplan (1987), Zimmerman
(1979), and Demski and Feltham (1976) suggest that sunk costs could
be a crude proxy or surrogate for the externality costs and opportunity cost of resources. Balachandran and Srinidhi (1987) use queuing
theory to model uncertainty and show that a xed charge (over and
above marginal costs) needs to be applied to achieve an optimum use
of service centers in the presence of uncertainty in demand. Fixed
charges help relieve congestion of service centers and reduce delay
costs to the rm. Whang (1989) considers information, incentive, and
congestion effects of cost allocations and shows that cost allocation,
in contrast to marginal-cost pricing, induces users to reveal their
true values and achieves ex post efciency in allocating purchased
capacity. Cooper and Kaplan (1987) argue that managers rely on full
costs, rather than marginal costs, because they view product portfolio
and pricing decisions as long-term decisions. Under that viewpoint
260
all long run costs are variable and constraints are less likely to be
binding, and full costs will serve as a proxy for long-run marginal
costs. Govindarajan and Anthony (1983) reject the notion that managers are trying to maximize prots and appeal to Herbert A. Simons
satiscing model to explain the use of full costs as opposed to variable
costs in pricing decisions.
Traditionally, all overhead was allocated to products based on
volume drivers such as labor hours, machine hours, or number of
units produced. Over the last decade, a new way to allocate overhead
costs to products, called activity-based costing, has emerged. Recent surveys indicate that 15% to 20% of companies have adopted ABC and
an equal number are considering adopting it (see Horngren et al.,
2000). The term activity-based costing was rst used in John Deere
Component Works (see March and Kaplan, 1987).
Under both traditional costing and ABC, overhead costs are assigned to cost objects such as products and customers in a two-step
process. Cost of resources such as rent, utilities, depreciation, and
indirect labor are rst assigned to cost pools using resource drivers.
For example, rent is assigned using oor space, while depreciation
is assigned using book value of assets. Under traditional costing,
cost pools were often departments (e.g., machining, assembly, and
nishing), whereas under ABC, cost pools include not only departments but also activities such as inspecting incoming materials, moving materials, and performing setups. Costs are allocated from cost
pools to cost objects using cost drivers. Under traditional costing,
cost drivers were typically volume drivers such as machine hours
and labor hours. Under ABC they include not only volume drivers,
but also activity drivers such as number of inspections, moves, and
setups. ABC recognizes that it is cheaper to produce products in larger
batches than smaller batches. For example, under ABC setup costs
are assigned to a batch whenever a setup is performed, independent
of the batch size. Likewise, product design and engineering costs are
incurred independent of the number of batches and units of a product
produced. Thus under ABC, managers must track separately expenses
that are required to produce individual units, to process batches, to
design or maintain a product, and to keep a manufacturing facility up
and running. See Figure 1 for a graphical representation of an ABC
system.
Robin Cooper and Robert Kaplan have written several cases and
articles about the design, implementation, and benets of ABC systems (see Cooper and Kaplan, 1988, 1991). The theory of a hierarchy of
costsunit-, batch-, product-, and facility-level costswas proposed
in Cooper (1990).
Product 1
$/Receipt
# Receipts
Inspect
Incoming
Materials
$/Move
# Moves
Move
Materials
Product 2
$/Setup Hour
Setup Hours
Setup
Machines
Indirect Labor
$/Setup
# Setups
Prepare
Tooling
Product 3
$/Direct Labor
Hour
Direct Labor Hours
Assembly
Product 4
$/Machine Hour
Machine Hours
Machining
Utilities
FIGURE 1. HOW EXPENSES FLOW FROM RESOURCES TO ACTIVITIES TO PRODUCTS UNDER ABC
Adapted from Cooper and Kaplan (1988)
Product
Cost Driver
Rate
Cost Driver
Activity
Activity
Resource

261
262
The theory of ABC (that overhead costs were related to nonvolume drivers, such as batch- and product-level drivers) was rst
empirically tested by Foster and Gupta (1990). They analyzed crosssectional data from 37 facilities of an electronics company and did not
nd evidence that overhead costs were related to nonvolume drivers.
Since then, however, a number of papers have found evidence of overhead costs being positively correlated with nonvolume drivers (see
Anderson, 1995; Datar et al., 1993; Banker and Johnston, 1993; and
Banker et al., 1995).
Another stream of literature addresses the question, Do ABC
implementations succeed in providing better information to managers and improving decisions? Shields (1995), Roberts and Silvester
(1996), Anderson et al. (1997), Anderson and Young (1997), and Foster
and Swenson (1997) have used surveys of companies implementing
ABC to understand what factors explain the success or failure of ABC
implementation efforts. These studies have identied the level of
team commitment, management support, and quality of other information systems as some of the factors that affect the success of ABC
efforts. Our interviews and surveys of company management support
the ndings of these studies and suggest that other factors such as
market forces and compensation structures also play a signicant
role in the ability and willingness of an organization to implement
ABM. These issues present themselves as leads for future work in the
empirical investigation of ABC implementations.
In this paper, we complement the earlier surveys on ABC implementations by focusing on decisions made within one company after
an ABC study. Using statistical analysis and interviews, we document
whether the ABC system affects product- and customer-related decisions at that company.
3. Research Site: Company Background and

Production Economics1
Since the 1950s, Insteel has operated as a manufacturer of precast concrete products for the construction industry. The company
entered the wire business in the early seventies, when it began
manufacturing welded wire mesh in response to a shortage of this
concrete-reinforcing product. Over the years, it has broadened its
product offering and extended its manufacturing capabilities beyond
the mesh business, expanding into a range of higher-value-added
products. Currently Insteel Wire Products (IWP), a subsidiary of
1 This section of the paper is drawn from Narayanan and Sarkar (1998).
263
Insteel Industries, Inc., manufactures and markets concrete reinforcing products, industrial wire, bulk nails, collated fasteners, PC strand,
and tire bead wire. The companys primary markets are the construction, home furnishings, appliance, and tire manufacturing industries.
Headquartered in Mt. Airy, North Carolina, the company currently
operates eight manufacturing facilities serving markets nationwide.
Annual sales revenues are about $300 million.
This paper studies the managerial and organizational issues
related to ABC at the Andrews, South Carolina, plant of Insteel
Industries. Four product lines are produced at the Andrews plant:
steel wire of different gauges (called bright wire or industrial
wire in the trade), galvanized wire of different gauges, wire mesh,
and nails. In 1996, about 477 individual products were spread across
these four product lines. However, 20% of the products accounted for
85% of Andrewss annual revenues of about $60 million. Likewise,
20% of Andrewss customers accounted for 95% of all sales.
The steel and galvanized-wire product lines are produced to
order; the other two product lines, nails and mesh products, are produced to stock (about 20 days inventory). While other Insteel plants
also produce wire products, all of Insteels nail products are manufactured at the Andrews plant, in Nail Mill A (commodity nails and
sinkers, a large-volume, nondifferentiated product line) and Nail Mill
B (pallet nails, manufactured to tight tolerances on diameter, heading,
and threading specications).
The primary raw material is hot-rolled steel rod, purchased in
large rolls of about 4000 pounds from both domestic and foreign suppliers. Wire drawing, which is the rst production stage, is common
to all of Andrewss products and generally operates at capacity. See
Figure 2 for a graphical representation of Insteels production process.
Prior to 1996, Insteel did not have a sophisticated cost system.
The price per ton of steel rod, the basic raw material, was closely
Galv
Galv
Wire
Wire
Nail Machine # 2
Mesh
Mesh
to
Nail Machine # 55
Wire Galvanizer
Nail Machine # 1
to
Wire Drawer # 16
Wire Drawer # 3
Wire Drawer # 2
Wire Drawer # 1
Cleaning House
Steel Rod
Wire
Wire
Mesh
Mesh
Bright
Bright
Nails
Nails
Nail
Galv
Galv
Galv
Nails
Nails
FIGURE 2. THE MANUFACTURING PROCESS AT ANDREWS
264
monitored. This price was used to estimate the material costs of all
of Insteels productsby multiplying the weight of the product by
the price of steel rod. Although freight was billed as a separate cost
on each invoice, customers were charged an average freight charge on
each shipment, independent of the actual destination. Price quotations
were based only on the weight of the product and estimated freight
costs.
In 1996, after years of product and customer proliferation, Insteel
decided to implement an ABC system. Insteels management recognized that the consumption of overhead resources had increased
substantially and varied signicantly over its product and customer
portfolio. Wishing to limit the upheaval caused by a change in the
status quo, and also to maximize the possibility of enthusiastic adoption, Insteels management selected the Andrews plant as its rst ABC
site. The plant had had a history of good communications between
plant management and workers and supervisors, it had minimal
operational overlap with other plants, and its manager, Bill Sronce,
was an enthusiastic champion of the process. He communicated
the objective and the process of the ABC study to all employees of
the plant. Dave Conrad, the director of cost management, was also
assigned full-time to the project. He worked in close coordination
with the consultants to implement the technology, analyze the data,
and train Insteels staff in the ABC methodology.
At Insteel, the ABC team took their rst ABC snapshot of operations at the Andrews plant in the summer of 1996 with the assistance of a big-six accounting rm. The ABC team analyzed Andrewss
operations and identied 12 business processes. Within each business
process, a number of activities were identieda total of 146 activities. Next, 426 employees were surveyed to estimate how they allocated their time to different activities. All overhead resources were
then collected in 80 cost pools and assigned to cost objects such as
products and customers (some cost pools included multiple activities).
This assignment was done by selecting cost drivers that link the performance of activities to demands made by individual products. For
example, the cost of the material-handling activity was assigned to
products based on the number of moves for that product, on the
ground that it is the number of times raw materials and work-inprocess is moved that causes material handling resources to be consumed, rather than the weight of materials moved. See Table I for
examples of unit-, batch-, product-, and customer-level activities and
the cost driver associated with each activity.
This cost allocation exercise resulted in Insteels rst ABC analysis and its rst ABC database (essentially a set of linked Excel spreadsheets and Access databases), maintained by the ABC team. Cost of
265
TABLE I.
Cost Hierarchy, Activities, and Cost Drivers at

Andrews and Mt. Airy, 1996
Cost Hierarchy
Unit cost
Cost (MM)
Cost Driver
Cleaning house
Production
Tons cleaned
Pounds produced
14
Material handling
Changeovers
Number of moves
Number of changeovers
Product
02
Pricing & advertising
Number of products
Customer
89
Invoicing
Selling products
Number of invoices
Sales calls
Batch
155
Activities/Cost Pools
goods sold was tabulated by products and customers and broken

down into six major cost categories as described below. A second
ABC snapshot was developed in the summer of 1997, by which time
Insteel had its own staff group collecting the data.
Insteel classied cost data into the following broad cost categories:
Material costs: Cost of steel rods and other materials used in production. These costs were assigned to products and customers based on
pounds produced and sold, respectively.
Conversion costs: Overhead resources consumed in converting steel
rod to nished wire or nail products. This category includes
unit-level costs (such as plant labor), batch-level costs (such as
wire-drawing setup resources), plant-level costs (such as plant
managers salary), and product-level costs (such as the costs of
special wire-drawing dies for particular products). Each component
of conversion costs was allocated to products using an appropriate
cost driver.
Customer costs: Overhead resources consumed in serving special
customer needs such as the packing and loading costs, orderprocessing and invoicing costs, cost of postsales services, and
carrying cost of receivables. Customer costs were traced to each
customer and allocated to products based on quantity of each
product purchased by that customer.
Capital costs: Cost of capital related to product- and customerspecic assets. Assets were rst allocated to products and customers. A weighted average cost-of-capital charge was then applied
to these assets and then charged to the corresponding product or
customer. For example, accounts receivable were identied with
266
individual customers. A cost-of-capital charge was then applied,

based on the days of sales outstanding for that customer.
Freight costs: The actual freight charge incurred by Insteel to make
each delivery. This freight cost is in contrast to the average freight
cost number that had been used in the actual pricing and billing.
Corporate overhead costs: Overhead resources incurred at the corporate ofce level (managerial salaries, information systems, nancial
services, etc.). These costs are allocated down to the Andrews plant
according to its share of total company assets, or its share of total
company revenues. Allocation to products is based on quantity of
product manufactured, and to customers is based on percentage of
sales revenue.
4. Activity-Based Management at Insteel

Insteel managers indicated that the new ABC system inuenced
operations and also product portfolio, product pricing, and customer portfolio decisions. The effect of ABC on operations (process
improvements) appears to be its rst benet. Process improvement
initiatives are unique and small in number and cannot be analyzed
statistically. We rely on anecdotal evidence, interviews, and review
of internal reports to document process improvements in the subsection below. Product- and customer-related decisions, on the other
hand, are a few hundred in number, and we examine empirically the
relationship between price/mix decisions and the ABC in Section 4.2.
4.1
Operational ABM: Process Improvements
Internal reports at Insteel prepared in 1996 and 1997 document

the use of ABC information for process improvements. The rst
ABC study, in 1996, reveals that the 20 most expensive activities
accounted for 87% of Andrews total physical and people resource
cost of $21.4 million. Within the top 20 activities, almost $5 million
pertained to quality-related activities such as reactive maintenance,
management of by-products and scrap, and preventive maintenance.
Analysis of the top 20 activities also revealed that material-handling
costs, including freight costs, consumed $4.6 million. Activities were
further classied into value-added and non-value-added or resourcedraining activities. Nearly $4.9 million was spent on resource-draining
activities such as reactive maintenance, management of by-products
and scrap, moving materials and resources, processing returns and
claims, reworking products, managing customer complaints, and
handling warranties, claims, and returns. These activities, within the
267
20 most expensive activities, were targeted for cost reduction and

process improvement.
The 1996 ABC reports also list improvement opportunities and
identify teams of senior and middle managers responsible for each
broad opportunity. For example, separate teams were formed for managing quality costs, material handling, and preventive maintenance.
As a part of the 1997 study, Insteel followed up on the process
improvement opportunities identied in the 1996 study. The company
estimates that within a year of the rst ABC study, $1.8 million had
been saved in quality costs, mainly through a reduction of scrap and
reactive maintenance costs. Freight costs were reduced $555,000 in a
year in the Andrews plant alone. Resource-draining activities were
reduced from 22% of activity costs to 17%.
Insteel focused on freight because delivering products to customers showed up as the most expensive activity following the
1996 ABC study. It represented 16% of the total people and physical
resources cost at the Andrews plant. We believe that prior to the ABC
study this cost would not have been apparent, because it would have
been billed to the customer. As a part of the ABC study, Insteel started
tracking freight cost per pound shipped. This directed attention to
ways in which these costs could be reduced. In 1997, by changing
the layout of boxes within each truck, the Andrews plant was able to
ship 7400 pounds more per truckload than in 1996. This represented
a 20% reduction in freight expense, from about $31/ton to about
$25/ton. Subsequently, all of Insteels other manufacturing facilities
also converted to heavier loads, emulating the results achieved at
Andrews. The resulting savings were signicant in comparison with
Insteels after-tax income of $4.2 million in 1996.
Customers were billed for freight in 1996 based on an average
rate agreed upon for each customer. For example a customer may
want goods shipped to three different locations during the next year.
Lets say the three locations are at distances of 100, 200, and 300 miles,
and the customer says that it plans to ship 50%, 30%, and 20% of the
volume to the three locations, respectively. Then the average freight
will be based on 170 miles (5100+3200+2300). However, some
customer who agreed to an average shipment of 170 miles would end
up shipping more goods to the 200- and 300-mile locations but get
billed for a 170-mile shipment. While this was a genuine estimation
error with some customers, others might have intentionally misstated
(biased downward) the expected shipping distances when the average
rate was agreed upon, hoping that Insteel would never follow up
to check whether the promised average shipping distances were in
fact close to the actual ones. The customer protability reports, which
268
matched the billed freight charge with the actual freight cost, revealed
this pattern of discrepancy.
When Insteel realized after the 1996 ABC study how much they
were actually incurring in quality costs, they put in place a team
responsible for probing deeper and understanding better what was
causing the quality costs to be incurred in the rst place and for suggesting steps to reduce them. Insteel realized that certain foreign suppliers of rods were lower in price but supplied poorer-quality rods
that caused breakdowns in Insteels manufacturing process. The lower
price of those suppliers did not compensate for the quality costs.
Insteel switched to higher-quality rod suppliers. Insteel also realized
that smaller-diameter wire products are more likely to break and disrupt the manufacturing process. Insteel migrated its product mix to
more large-diameter wire products. Such initiatives led to reduction
in quality costs from $6.7 million in 1996 to $4.9 million in 1997.
It is hard to estimate how much of these savings would have
been realized had Insteel not conducted an ABC analysis. From interviews with Insteel managers and sitting in on senior management
meetings, it appears that the activity analysis gave them an appreciation of the scope and quantied the magnitude of the improvement
potential, thereby allowing them to prioritize among various process
improvement possibilities. In the opinion of the senior management,
the ABC system also helped them keep track of the savings and ensure
that the promised payback was actually realized.
The plant manager reported that no other initiatives, such as
total quality management (TQM) and just-in-time (JIT), were being
introduced or practiced in the plant simultaneously with the adoption of ABC. Applying our past experience with at least ten ABC
implementations and our visits to more than a dozen JIT/TQM plants,
we observed certain factors at Andrews that lead us to believe that
the process improvements were indeed the result of the ABC study.
Under JIT or TQM, process improvements are undertaken by trained,
motivated, and empowered employees. Data about the manufacturing
process is collected, displayed, and shared with and by the workers,
either through charts and diagrams or via computers on the plant
oor. Workers are cross-trained and wage contracts are redesigned
to encourage teamwork and creative problem solving while working
with reduced buffer inventories, smaller lot sizes, and tightly coupled
workstations. Continuous process improvement is then a byproduct of
worker-level initiatives.
In contrast, in an ABC study, potential process improvements
emerge from the cost data analysis when certain activities show up
as being disproportionately expensive. Teams of managers usually
269
prioritize these improvement opportunities according to cost and

the available skill set and then coopt the workers in implementing
the most important changes. This was the nature of the operational
changes we observed at Insteel. For example, plant oor workers,
most of whom have only a high-school education and on-the-job
training on specic machines, were asked to improve monitoring of
the feed wire and the frequency of machine maintenance to reduce
downtime, and this resulted in lower scrap and reactive maintenance
costs. There was also some reduction in nished-goods inventory
levels motivated by the imputed carrying cost, but it was not accompanied by reduced lot sizes or reduction in work-in-process inventory
on the plant oor, which typically occurs in a JIT implementation.
Hence, we are inclined to believe that the process improvements
reported in this paper were largely driven by the ndings of the rst
ABC study, which highlighted for the managers the inefcient use of
certain overhead resources at Andrews.
ABC-induced process improvements raise two questions:
1. Of all the cost reduction opportunities, why were quality and
freight costs chosen for cost reduction?
2. Couldnt these costs have been reduced without an ABC study?
Its hard to answer these questions denitively, but we nd a strong
analogy to these questions in Rosenberg (1976) Rosenberg seeks to
understand why some cost-reduction technologies are undertaken and
not others, and why the cost-reduction technologies introduced tend
to reduce capital rather than labor. Rosenberg identies several factors, such as disruptions caused by war and threat of strikes, and
terms these factors focusing devices because they direct the rms attention to particular cost-reduction opportunities. Clearly ABC served as
a focusing device at Insteel by providing cost data by activity rather
than by department, directing attention to the top 20 activities, and
by labeling some of them as resource-draining activities.
4.2 Strategic ABM: Product- and

Customer-Related Decisions
ABC data is typically used for making product-line decisions such
as discontinuation of unprotable products, changing prices, and
introduction of new products similar to existing protable products.
In this section, rst we conduct simple univariate statistical analyses
to test the effect of ABC information on product-line decisions. We
also conduct a multivariate probit analysis of product-level decisions
and interpret these results in the light of interviews with Insteel
managers.
270
4.2.1 Univariate Analyses of Product- and

Customer-Related Decisions.
4.2.1.1
Impact of ABC on Product Portfolio
Hypothesis 1: Products found to be unprotable in the 1996 ABC

analysis are more likely to have been discontinued in the following
year than products found to be protable.
Products may also be discontinued at a particular plant for
various reasons, such as changes in customer requirements, general
changes in particular market segments (for example, a downturn in
the home-building industry), changes in availability of raw materials,
and shifting of production to other plants. Likewise, ABC numbers
may not inuence product portfolio decisions if managers do not
believe the numbers or if most of the overhead costs are xed and
irrelevant for product portfolio decisions.
We can observe order patterns for various products during the
year before ABC and the year after ABC. We count a product as discontinued if it was sold in 1996 but not in 1997. We cannot tell for
sure why a product was discontinued. It may be that customers who
used to order that product no longer source with the company, or
that those customers did not place an order for that product in year
following the ABC study, but may do so later on. Thus our denition of discontinuation includes products that are merely dormant.
The company may take longer than a years time to decide whether
to discontinue a product. The company may have raised prices on
unprotable products rather than discontinue them.
First we conduct a simple 2 test to examine whether unprofitable products, as per the 1996 ABC study, are more likely to be discontinued (dened as zero sales in 1997, the year following the rst
ABC analysis) than protable products [see Table II(A), columns A
and B]. To ensure that inferences, if any, are correctly attributable to
ABC numbers rather than the old gross-margin-based cost-accounting
system, we repeat the 2 tests for product protability measured by
gross margin per pound, where gross margin is dened as sales less
material costs. Since all but one of the products have positive gross
margins, we split the sample into above-the-median and below-themedian gross margin per pound to see if the two samples exhibit
differences in the proportions of products that are continued and discontinued [see Table II(A), columns C and D].
We see from columns A and B of Table II(A) that 80% of products found protable in the 1996 ABC study were also sold in 1997
(i.e., they were continued products), versus 62% for those that were
271
TABLE II.
Frequency Distribution of Products

Description
(A) By 1996 Protability and 1997 Availability for Sale

No. of products sold in 1996 and
1997 (continued products)
No. of products sold in 1996 but
discontinued in 1997
(discontinued products)
Total
193 (80%) 123 (62%) 161 (73%) 155 (70%)

48 (20%)
76 (38%)
59 (27%)
65 (30%)
241 (100%) 199 (100%) 220 (100%) 220 (100%)

(B) By 1996 Protability and 1997 Price Changes Relative to 1996
No. of products sold in 1996 and

also in 1997 for which prices were
decreased in 1997 relative to 1996
No. of products sold in 1996 and also
in 1997 for which prices were increased
in 1997 relative to 1996
Total
112 (58%)
52 (42%)
81 (51%)
83 (53%)
81 (42%)
71 (58%)
77 (49%)
75 (47%)
193 (100%) 123 (100%) 158 (100%) 158 (100%)
(C) By 1996 Protability and 1997 Price Changes or Availability Relative to 1996
No. of products sold in 1996 and also
112 (46%)
in 1997 for which prices were decreased
in 1997 relative to 1996
52 (26%)
81 (37%)
83 (38%)
No. of products sold in 1996 that were

discontinued or for which prices were
increased in 1997 relative to 1996
129 (54%) 147 (74%) 139 (63%) 137 (62%)
Total
241 (100%) 199 (100%) 220 (100%) 220 (100%)
A: number of products found protable in the 1996 ABC study; B: number of products found unprotable in the
1996 ABC study; C: number of products above or equal to the median 1996 gross margin per pound; D: number of
products below the median 1996 gross margin per pound.
unprotable in 1996 ABC study. The 2 test statistic is 17.984 (p =

0001), indicating that the likelihood of continuing a protable product, where protability is measured by the 1996 ABC numbers, is signicantly higher, and lending considerable support to Hypothesis 1.
Analysis by product lines, namely nails and wire products, leads to
similar results.
Columns C and D of Table II(A) indicate that 73% (70%) of products with 1996 gross margin per pound above (below) the median
were continued in 1997. The 2 test statistic is 0.404 (p = 0525),
indicating that the likelihood of continuing a more protable product
272
is not signicantly different from continuing less protable product,

when protability is measured by gross margin per pound.2
Thus, it appears that product continuation discontinuation decisions are more closely associated with ABC protability numbers than
with gross margins. Although a higher proportion of unprotable
products seem to have been discontinued after the ABC analysis,
the company can expect to improve overall protability only if the
resources and capacity freed from not producing these unprotable
products are redeployed in selling more of existing products or in
offering new products. Alternatively, these resources can be eliminated, thus removing the costs associated with these resources. The
company has chosen the former strategy, and just in the 19961997
period, after its rst ABC analysis, it introduced about 40 new nail
products and over 100 wire products.
In the nail product group it focused largely on high-value-added
specialized products such as pallet nails, which require precision
machining and cutting-edge packaging technology. Since nails are
manufactured only at the Andrews facility, the company could move
quickly on these ndings, and by early 1997 it had installed new manufacturing capacity for some of these products [see Narayanan and
Sarkar (1998) for a description of one of these initiatives]. Decisions
and actions related to wire products are intertwined with capacity
and utilization issues at other plants, and are therefore harder to
characterize.
An interesting question is whether the new products introduced
are more likely to be protable for Insteel than the old products,
and whether their degree of protability is higher. Unfortunately we
are unable to follow this issue up. There have been changes in the
databases used to store and analyze the cost information, and in particular, the product categories and codes have changed in a way that
does not permit us to map product codes between 19961997 and the
present.
Another potential explanation for the product discontinuation
decision runs as follows: Products go through a three-step process
ending in their discontinuation. First they are healthy and protable.
Then volume slows down and they become unprotable. Finally, they
are discontinued. This three-step process could have been happening at Insteel for several years and could be independent of the ABC
study. This would be the case if ABC prots were just a proxy for volume declines that were demand-driven rather than an active choice by
2 Results are virtually identical when protability is measured by gross margin per
dollar of sales.
273
TABLE III.
Correlation of Change in Sales Volume with Cost

and Prot Variables
Variable
Correlation with
Change in Volume
from 1996 to 1997
p-value
Sample
Size
Cost per pound in 1996

Cost per pound in 1997
Prot per pound in 1996
Prot per pound in 1997
Change in cost per pound from 1996 to 1997
Change in prot per pound from 1996 to 1997
067
028
026
011
015
015
237
622
641
847
786
795
316
316
316
316
316
316
managers acting on ABC information. We could test this alternative

explanation if we could go back and compute the ABC protability of
products in 1995 and examine whether the product continuation decisions in 1996 are related to 1995 ABC prots. Unfortunately, Insteel did
not do an ABC study for 1995, so this data is unavailable. Instead, we
try to see if product volume changes are correlated with ABC prots.
ABC prots could be mechanically correlated with volume
changes. For example, if volume declines for a product and overhead
costs of that product are xed, then the overhead costs would be
spread over fewer units and the product would appear less protable.
As the volume kept declining, the product would appear more and
more unprotable till it was nally discontinuednot because the
product was actually unprotable, but because it was not in demand.3
Table III reports correlations between the volume change
between 1996 and 1997 and product costs and prots in 1996 and
1997. We have 316 observations corresponding to products that were
sold both in 1996 and in 1997. We nd no signicant correlation
between the volume change and product costs or prots in either
1996 or 1997. Correlations between percentage change in volume from
1996 to 1997 and product costs and prots in 1996 and 1997 were
similarly insignicant. We spoke to Insteels management to help us
interpret these results. It turns out that very few resources at Insteel
were product-specic, and declining volumes in particular products
were made up by increasing volumes in other products. Hence, it
does appear that product discontinuation decisions were related to
3 Such a mechanical relationship between product protability and volume can be
avoided if rms use capacities rather than actual volume to allocate costs. However,
Insteel did not do that and is thus a good candidate to expect such a relationship.
274
the ABC initiative at Insteel rather than an apparent relationship

between volumes and ABC prots.
4.2.1.2 Impact of ABC on Product Pricing. We next analyze whether
Insteels pricing decisions were affected by the 1996 ABC study. Products found to be unprotable in the 1996 ABC study are likely to be
more costly to manufacture, on average, than previously thought by
Insteel. Likewise, products found to be protable in the 1996 ABC
study are likely to be less costly, on average, than previously thought
by Insteel. Based on this assumption, we formulate the following
hypothesis:
Hypothesis 2: Prices of products found to be unprotable in the 1996
ABC analysis are more likely to have increased in 1997 than prices of
products found to be protable.
Since we cannot observe prices of discontinued products, rst
we limit the test of Hypothesis 2 to continued productsi.e., those
that were sold in 1996 and in 1997. If certain products were discontinued by raising prices, it will bias our tests against nding support
for Hypothesis 2. We conduct a simple 2 test to examine whether
prices of unprotable products, as per the 1996 ABC study, are more
likely to have decreased in 1997 than prices of protable products [see
Table II(B), columns A and B].
To ensure that inferences, if any, are correctly attributable to
ABC numbers rather than the old gross-margin-based cost system, we
repeat the 2 tests for product protability measured by gross margin, where gross margin is dened as sales less material costs. Since
almost all products have positive gross margins, we split the sample into above-the-median and below-the-median gross margin per
pound to see if the two samples exhibit differences in the proportions
that have price increases and decreases [see Table II(B), columns C
and D].
We see from column A of Table II(B) that 58% of products profitable as per the 1996 ABC study, and sold in 1997, were sold at
a lower price in 1997 than in 1996. However, column B shows that
42% of the products unprotable in 1996 and sold in 1997 were sold
at a lower price in 1997 than in 1996. The 2 test statistic is 7.469
(p = 0006), indicating that the likelihood of decreasing prices for a
protable product is signicantly higher, and this lends considerable
support for Hypothesis 2.
We see from columns C and D of Table II(B) that 51% (53%)
of products with 1996 gross margin per pound above (below) the
median were sold at a lower price in 1997. The 2 test statistic is 0.051
275
(p = 0822), indicating that the likelihood of price increase for a profitable product is not signicantly different from that of an unprotable
product, when protability is measured by gross margin per pound.4
From Table II(A) we know that products found unprotable in
the 1996 ABC study are more likely to be discontinued than protable
products. It is conceivable that Insteel discontinued products by raising their prices to a level that would take them off the market. For
completeness, we include in discontinued products those for which
prices were increased in 1997 and run the analysis once again. The
results are shown in Table II(C). Naturally, relative to Table II(B) only
the second row of Table II(C) has increased frequencies, and the ndings are considerably stronger: From columns A and B of Table II(C),
74% of ABC-based loss-making products faced price increases or discontinuance, vs. 54% of prot-making products ( 2 = 193, signicant
at less than 0.01%). In contrast, the gross-margin-based frequency distributions in columns C and D show almost no difference between
high- and low-gross-margin products ( 2 = 004 with p-value 0.84),
further strengthening our ndings in support of Hypothesis 2. Thus,
it appears that 1997 product pricing decisions are more closely associated with ABC protability numbers than the old cost-accounting
systems gross-margin-based numbers.
4.2.1.3 Impact of ABC on Customer Portfolio. Next, we analyze
customer-level data to test whether the evidence broadly shows that
the sales force acted on these customer-level ndings of the ABC
analysis. Dening customers who appear in the 1996 and the 1997
data as continuing customers, and 1996 customers that dropped out
of Insteels 1997 customer list as discontinued customers, we formulate
the following hypothesis on customers:
Hypothesis 3: Customers found to be unprotable in the ABC study
are more likely to be discontinued in 1997 than customers found to
be protable.
Within the nail product group, we have 1996 and 1997 information about the total revenue from a customer, the total product
cost, customer cost, and freight cost, and the net protability of the
customer. The data we have on wire customers needs additional
decomposition before it can be used for a test of this hypothesis;
hence we restrict attention to customers for nail products. The results
are summarized in Table IV. Unlike the product-level data used in
4 The results are virtually identical when protability is measured as gross margin
per dollar of sales.
276

TABLE IV.
Frequency Distribution of Nail Customers by

1996 Protability and 1997 Purchases
No. of Nail Customers in 1996
Description
Protable
Unprotable
No. of customers that purchased from

Insteel in 1996 and 1997 (continuing customers)
66 (66%)
20 (53%)
No. of customers that purchased from Insteel in

1996 but not in 1997 (discontinued customers)
34 (34%)
18 (47%)
100 (100%)
38 (100%)
Total
Table II, we do not have the materials cost by customer and are
unable to estimate gross margin by customer. Hence we are unable
to perform gross-margin-based tests for customer continuationdiscontinuation decisions. We see in Table IV that 66% of customers
who were protable in 1996 were continuing customers in 1997, versus 53% for those that were unprotable in 1996. The 2 test statistic
of 2.1 is signicant only at the 15% level.
Compared to multivariate tests, univariate tests are simpler and
provide more economic intuition. However they are not informative of
marginal effects. To understand the marginal effect of ABC data after
controlling for volume and gross margins, we turn to multivariate
probit analysis.
4.2.2 Multivariate Analyses of Product and CustomerRelated Decisions. The results of the univariate analyses above
indicate that taken separately, ABC protability explains product mix

and pricing decisions more than gross margin does. To some extent, it
also seems to affect customer mix decisions. But ABC prots and gross
margins are correlated, and our 2 tests, by treating the independent
variables as categorical, ignore much of the variation on the prot and
gross-margin levels. Hence, the question arises, Would these ndings
[in support of Hypotheses 1, 2, and (weakly) 3] hold if we analyzed
the relationship between the mix/price decisions and the levels of
each type of protability, while controlling for the other? Additionally, we would want to control for the volume of business that a product or customer brings in: if a large-volume product or customer is
revealed to be unprotable, the company is likely to make a greater
effort to retain these strategic products and customers and to work
with them to convert them to protability in the long run. Such products and customers would also make larger relative contributions to
277
xed costs, and this would also cause Insteel to be reluctant to discontinue the product or re the customer. Since volume is also related
to protability, the hypothesis we wish to test is then
Hypothesis 4: The higher the 1996 ABC prots, the higher the 1996
gross margins, and the greater the 1996 share of volume of a product
(or customer), the higher will be the 1997 probabilities of continuing
to sell a product, of lowering product price, and of continuing to sell
to a customer.
To test this hypothesis, we conduct probit regressions of the decision to continue a product or raise prices against 1996 ABC prot per
pound (ABC PrPP96), 1996 gross margin per pound (GMPP96), and
share of volume of product sold in 1996 (LBS PCT96). Table V gives
univariate statistics and correlations for these variables: panel (A) is
based on all 440 products that were sold in 1996, panel (B) is based
on 316 continued products (those that were sold in 1996 and 1997),
and panel (C) is based on the 138 continued nail customers. As mentioned in the section on univariate tests, we do not have gross-margin
information for customers. We note that for products GMPP96 is negatively correlated with LBS PCT96, indicating that Insteel was selling a larger relative volume of lower-gross-margin products. Not surprisingly, GMPP96 is positively correlated with ABC PrPP96. At the
product and at the customer level, sales volume is not signicantly
correlated with ABC protability.
Relying on our earlier denition of continued products and customers, but recognizing that discontinued products may only have
been rendered dormant by high prices, in one of our tests we combine
discontinued products and those that experienced a price increase.
Specically, we conduct probit analyses of four decisions and report
the results in Table VI:
The decision to continue selling a 1996 product in 1997 (probit 1).

The decision to raise 1997 price on a continued product (probit 2).
The decision either to raise 1997 price or to discontinue a product
in 1997 (probit 3).
The decision to continue serving a 1996 nail customer in 1997 (probit 4).
Probit 1 (which is overall signicant at the 0.01% level, as
indicated by the likelihood-ratio statistic) indicates that ABC prots
and share of volume are positive and signicant determinants of
the decision to continue selling a product. Gross margin, although
0001
0006
ABC PrPP96
Mean
Variable
LBS PCT96
0010
ABC PrPP96
0161
0002
LBS PCT96
GMPP96
0167
Mean
GMPP96
Variable
TABLE V.
0074
0003
0112
0024
0086
Q1
0006
00003
0119
Med
0034
0002
0214
Q3
1192
0149
1683
Max
0090
(0060)
0153
(0001)
1000
GMPP96
0542
0045
Min
0016
0086
Q1
0010
00001
0118
Med
0036
00007
0215
Q3
0554
0046
0819
Max
0106
(0059)
0120
(0033)
1000
GMPP96
(B) Independent Variables for Probit Analysis 2 (see Table VI)
2333
0077
Min
Univariate Statistics Continued Products

(N = 316)
Std Dev
0160
0009
0138
Std Dev
Univariate Statistics for All 1996 Products

(N = 440)
(A) Independent Variables for Probit Analyses 1 and 3 (see Table VI)
0153
(0001)
0033
(0489)
1000
ABC PrPP96
0018
(0753)
0106
(0059)
1000
LBS PCT96
0120
(0033)
0018
(0753)
1000
ABC PrPP96
Correlation Matrix
(p-values in parentheses)
0033
(0489)
0090
(0060)
1000
LBS PCT96
Correlation Matrix
Independent Variables Used in the Probit Analyses
278
Mean
0007
0013
Variable
LBS PCT96
ABC PrPP96
0199
0018
Std Dev
169
Min
0005
0001
Q1
0015
0002
Med
0047
0005
Q3
Univariate Statistics for Continued Nail Customers

(N = 138)
0131
0162
Max
0056
(0512)
1000
0056
(0512)
1000
ABC PrPP96
Correlation Matrix
LBS PCT96
(C) Independent Variables for Probit Analysis 4 (see Table VI)

279
Likelihood ratio
(00001)
(3) = 404
0031
0068
0032
Marginal
Effecte
316
(04065)
(3) = 291
1416
(0161)
9529
(0678)
0307
(0639)
0002
(0989)
Coefcient
(p-value)
0029
0002
0016
Marginal
Effecte
Probit 2: Price Increase

Decision (on Continued Products)b
440
(00382)
(3) = 842
1563
(0017)
4313
(0533)
0465
(0367)
0254
(0017)
Coefcient
(p-value)
0034
0002
0023
Marginal
Effecte
Probit 3: Price Increase

or Discontinue Decision
(on All 1996 Products)c
138
(00001)
(3) = 452
2593
(0154)
2729
(0001)
N/A
0363
(0045)
Coefcient
(p-value)
0053
0416
Marginal
Effecte
Probit 4: Nail Customer

Continuation Decisiond
Prob(continue selling product in 1997 = 1) = F( + 1 GMPP96 + 2 LBS PCT96 + 3 ABC PrPP96).

Prob(price increase in 1997 = 1| continued product) = F( + 1 GMPP96 + 2 LBS PCT96 + 3 ABC PrPP96).
Prob(increase price in 1997 = 1 or discontinue product = 1) = F( + 1 GMPP96 + 2 LBS PCT96 + 3 ABC PrPP96).
d Prob(continue selling to customer in 1997 = 1) = F( + LBS PCT96 + ABC PrPP96).
1
2
e The marginal effect represents a change in the probability of the decision given a change in the independent variable over the interquartile range (i.e, from the 25th to the 75th percentile),
while other independent variables are set to their median values.
f Test of the null hypothesis that = 0 in each probit analysis.
(p-value)
440
1551
(0011)
ABC PrPP96
1372
(00011)
LBS PCT96
0705
(0167)
GMPP96
0551
(0001)
Coefcient
(p-value)
Probit 1: Product
Continuation Decisiona
Intercept
Variable
TABLE VI.
Probit Analyses of Product and Customer Portfolio Decisions
280
281
insignicant, negatively inuences the decision to continue selling a product. This nding lends further support to our test of
Hypothesis 1 [Table II(A)]. Probit 2 is overall insignicant, and the
individual coefcients are insignicant. Treating price increases and
product discontinuance as inseparable in the data, probit 3 (which
is overall signicant) indicates that the higher the ABC prots, the
lower is the propensity to raise price or discontinue a product. Finally,
probit 4, which is signicant, indicates that share of volume is the
only determinant of the decision to continue to serve a customer.5
The coefcient on ABC protability, although positive as predicted,
is not highly signicant (p = 154), and this is completely congruent
with the weak results we obtained for the inuence of ABC numbers
in the test of Hypothesis 3 (Table IV). The lower sample size for the
customer-related tests, compared to product related tests, could also
be responsible for the lower signicance levels.
Table VI also provides the marginal effect of each variable on the
probability of affecting activity-based management decisions. Overall,
a change within the interquartile range of ABC prots per pound
(from $0.26 per pound to $0.39 per pound in the entire sample of 440
products) reduces the probability of discontinuance or price increase
by about 3%. The most dramatic marginal effect is that of a customers
share of volume: a change within the interquartile range (from 0.06%
of total pounds to 0.50% of total pounds) raises the probability of
retaining the customer by almost 42%. This is strong evidence of the
importance of large customers to Insteels business.
Overall, our univariate tests provide some evidence of activitybased management, particularly the management of product mix and
prices. The multivariate tests provide evidence of ABM and show that
even after controlling for gross margins and volume-related signicance, ABC protability had an inuence on product mix and pricing
decisions, but not (as much) on customer portfolio decisions.
We discussed our ndings with Insteels plant mangers, sales
managers, and CFO. There was a general consensus that armed with
the ABC information, discontinuing an unprotable product or discouraging its purchase was one of the early initiatives undertaken
with respect to Andrewss products. Next, production and sales of
hidden-prot products were ramped up. For example, in Narayanan
and Sarkar (1998) we document their aggressive move into pallet
nails. The ABC analysis had also highlighted the high cost of the dies
5 The results of probit 4 are the same whether volume is dened as total pounds
of products sold to a customer in 1996, or total dollar sales to that customer. For consistency across the four probit analyses, we use product or customer pounds (as a fraction
of total pounds sold for all of Andrews).
282
that wear out in the wire drawing process and, hence, the greater relative protability of large-diameter wire. The sales force tried to push
these large-diameter wire products more aggressively after the ABC
product cost information was made available to them.
When we asked them why they had been unable to act more
decisively with respect to customers, they pointed out that consolidations and vertical integration within the industry during the period
of interest limited Insteels ability to jettison customers shown to
be unprotable in the ABC analysis. Specically, they pointed out
that some of Insteels most protable customers had been bought by
Insteels competitors, which were integrating forward into the value
chain. The loss of that protable business in 1997 meant that Andrews
would have excess capacity if it red more customers. The plant was
better off retaining some large unprotable customers who covered
their variable cost and made a positive contribution to xed cost.
4.3 Impact of ABM on Insteels

Financial Performance6
It is hard to isolate the nancial impact of ABM on Insteels overall
performance, and the evidence that we provide on that impact will
be only suggestive, for the following reasons:
1. While we have provided evidence consistent with Insteel taking
several product- and customer-related decisions based on ABC
information, the effect of these decisions on the bottom line may
not be felt for a few years yet. Also, those effects may be confounded by other changes at Insteel, such as the purchasing and
divesting of businesses.
2. The ABC project was piloted in the Andrews plant at Insteel in 1996
and 1997 and was subsequently rolled out to the other plants at
Insteel in 1998 and 1999. Our data analysis in the preceding sections
is conned to the Andrews plant. Financial data for Insteel as a
whole in the 19961999 period would not reect the performance
of just the Andrews plant.
3. Several industry-level factors would have affected Insteels nancial performance.
Given the above limitations, we present nancial information that
seems to support Insteels senior managements feeling that ABC has
had a positive nancial impact. Average and median gross margins
6. More detailed information on Insteels nancial performance is available from the
authors upon request.
283
(sales, less all costs, including materials, conversion, and customerand facility-level costs, but excluding allocated corporate overheads)
of Insteels plants improved after the introduction of ABC. For example, the gross margins at the Andrews plant improved from 8.28% in
19951996 to 11.26% in 19981999.
To control for industry-wide factors we compared the nancial
performance of Insteel with that of other rms with four-digit
SIC code 3310. Since Insteel introduced ABC into its non-Andrews
plants only in 1998, we can think of the nancial performance
in 1999 as being post-ABC. We examined return on equity (net
income/owners equity), return on assets (operating income before
interest expense/total assets), and stock returns. Insteel outperformed
industry median numbers under all three metrics in 1999, whereas
it had lagged behind the industry median under all three metrics in
1996. For instance, the Insteels returns on assets in 1996 and 1999
were 2.91% and 5.95%, whereas the industry medians were 5.38% and
5.09%, respectively. While by no means conclusive evidence, these
upward trends in gross margins and returns are compatible with the
managements perception of ABM having a positive nancial impact
at Insteel.
5. Organizational Issues7
The adoption of ABC at Insteel developed from a project in one location in 1996 to a company-wide initiative in 1999. Interviews with
the management indicate that they consider this effort to have been
successful in improving the bottom line despite the cost of analysis,
implementation, and managerial energy invested in the effort. Judging from our own observations at Insteel and ve other companies,
readings of case histories of similar projects, and input from Insteel
managers, we can say that worker involvement, intensive communication, and commitment from the sales force and upper management
were the key determinants of the perceived success of this project.
5.1
Worker Involvement and Communications
The ABC initiative was seeded in a controlled settingthe Andrews

plant. The plant had a successful history, and plant management was
enthusiastic and supportive. Those managers spent a great deal of
their time communicating the goals of the project and getting buy-in
7. This section is based upon our visits to Andrews, participation in meetings, telephone conversations, and the management interviews (transcripts available from
authors).
284
for the intensive interviewing and data-gathering process. Before the

rst interviews, the plant manager addressed two main worker concerns: job loss and compensation. He assured the workers that the
plant, operating at capacity, would continue to do so and there was
no threat of layoffs. Most of the workers participated in prot sharing,
and the plant manager strongly emphasized that the data gathered
from them as a part of the ABC study would help Insteel become
more protable and this, in turn, would increase each workers takehome pay.
The ABC interview team consisted of the plant industrial engineer, the area supervisor, one consultant, and the accountant in charge
of the ABC project. The plant manager was also actively involved in
the early interview rounds. The aims of the project were reinforced
at each interview, and workers were encouraged to suggest changes
to the activity dictionary and the drivers used in the ABC study.
Although the interview team had sufcient data by the time half the
workers had been interviewed, during that rst round they pressed
on and interviewed each and every worker on company time. This
was done to ensure that everyone felt included and had a chance to
discuss their concerns.
We attended one of the plant-oor meetings where the results of
the rst ABC analysis and its implications were shared with a small
group of about 15 workers. The mood was upbeat, and the workers asked a number of questions. Product and customer protability
results were shared with the workers. They were shown that small
(small-diameter) wire was unprotable and specialty nails were very
protable. Since they generally preferred to work with heavy (largediameter) wire, which suffered fewer breaks during production, the
wire-products outcome was welcome news.
Similarly, since the Andrews plant is the sole producer of nails
for Insteel, they understood that nail production would not be displaced, but the mix would change slightly in favor of specialty nails.
Specialty nails require more stringent quality standards, but better
feed wire is used as input, and this results in fewer line problems.
There were also a subset of workers keen to work on the more sophisticated product line, on modern, automated machines, and this was
an opportunity for them to upgrade their skills.
5.2
Reaction of Managers
Sometimes different managers reacted differently to the same ABC

data. When the study revealed that mesh products were unprotable,
the plant manager was keen to shut down the mesh machine in the
285
plant. But the senior management felt that mesh production was in
the long-term interests of Insteel. The company had its beginnings in
the agricultural and construction mesh business, and upper management was reluctant to drop mesh. The mesh-products sales manager,
who had been a long-time employee, made signicant efforts and successfully improved the protability of mesh products within one year.
She organized more efcient loading of trucks with rolls of mesh and
renegotiated prices with key customers.8
We observed the greatest enthusiasm for ABM among Insteel
middle managers, who acted quickly in gathering up the low-hanging
fruit of the rst ABC analysis, i.e., identifying and implementing process improvements with a quantiable payback. Quick wins were
shared and celebrated with all associates (a term that includes plantoor workers). This helped generate and maintain momentum for
the project when changes related to product mix inevitably caused
upheaval in the plant. John Calcagni, the sales manager for industrial
wire products pointed out that the ABC approach was the rst tool
that allowed them to model the effects of labor, product mix, and customer demandsi.e., factors other than volumeon protability and
nancial performance, and it could also be used to guide and justify
product and customer-mix changes made by the sales force.
5.3
Sales-Force Reaction
In volume-based businesses, it is usually difcult to motivate a sales

force to stop pushing certain products, and is even harder to get them
to re unprotable customers. Our analyses suggests that the Insteel
sales force was quite effective in discontinuing unprotable products,
albeit less so with unprotable customers. Although compensation
was not highlighted in our discussions with Insteel managers, it is
signicant that Insteels sales-force compensation is composed mainly
of straight salary. This means that they are usually willing to give
a new sales strategy a try even at the risk of losing some volume.
While the motivational effects of such a wage scheme are debatable,
we observed a high level of conviction and enthusiasm for the market
actions suggested by the ABC analyses among the sales managers.
Many of the unprotable products were the only ones purchased
by unprotable customers. In such cases, the salespeople intuitively
recognized that those customers had been opportunistically buying
those products from volume-driven Insteel, and that other US competitors had stayed away from those product-customer combinations.
8 Mesh products, which are only four in number, are not included in our product
or customer portfolio analyses.
286
For many of these products, prices were raised drastically, and the
customers were thus encouraged to leave. Some products were not
offered at all in 1997, and customers were encouraged to substitute
other Insteel products.9 One of Insteels largest customers, walked
in the face of raised prices and discontinued purchases after the 1996
study, but recently, having tried other sources, has become an Insteel
customer again. This, the sales force feels, is vindication for their new
ABC-based strategy.
5.4 Resources and Commitment from

Upper Management
Finally, the ABC initiative was given a high level of visibility within
Insteels upper management. This translated, in part, to adequate
levels of nancial support, computing resources, and managerial
attention during the early project phases (we attended some of
the monthly ABM meetings where all of the top management was
briefed). While the use of outside consultants had been discontinued
by 1998, more staff and IT resources were added to the ABC project.
All managers (including ex-employees) in production, sales, and
nance consider the ABC project at Insteel a success. At the current
time, almost four years after the start of the ABC initiative, a full
rollout to all plants has been implemented, supported by a new Oracle ERP relational database system.10 Automated data collection and
analysis on a monthly basis provide real-time feedback to managers
as they implement new market strategies and pursue operational
improvements.
The analyses from the new system are now being used to rationalize operational capacity across the plants. Some of the product
decisions made on a local plant level early in the ABC study have
been revisited, and those most closely involved with the ABC project
feel that the initiative should have been rolled out earlier to the other
plants.
6. Conclusions
In this study we sought to understand the impact of ABC on managers product pricing, product portfolio, and customer portfolio
decisions.
9 Note that in our empirical analyses, both of these types of products would be
counted as discontinued products.
10 This system change has also led to a complete overhaul of their product and
customer codes and a consolidation of their activity dictionary. This has made new,
post-1997 data hard to compare with the data used in this study.
287
Interviews with managers and our statistical analysis lend support to the hypothesis of changes in managerial decisions at Insteel
following the ABC study. The rationalizing of the product portfolio
and pricing decisions appears to have been inuenced by the ABC
study. Customers are now billed for freight in a more direct way. The
company has made several process changes attributable to the ABC
study. It has introduced new product lines. However, the rationalizing
of the customer portfolio, although initiated by the company, cannot
be statistically detected. These strategy changes will, we suspect, be
reected in the data in the future.
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The Impact of Activity-Based Costing On Managerial Decisions at Insteel Industries

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In this eld-based study, we interview top- and middle-level managers at

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