Case Study of Upm-Kymmene

Questions I

Total quality management, TQM, is according to Blocher et.al., defined as “the unyielding and continuous effort by everyone in the firm to understand, meet, and exceed the expectations of customers” (2012, p.711). The TQM often increases the functionality, reliability and the durability of a product or a service since it focuses on the customer’s perception and definition of quality.

The process management´s (PM) idea is by focusing on the continuous improvements and processes a company has it will be able to increase the quality of their products and services. The main idea with the continuous improvements is to learn how to advance within the field of critical success factors, which is why this method is related to the TQM (Blocher et.al., 2012, p.13).

The customer focus is the core key for understanding and executing the TQM. Since TQM is based on the understanding of the customers and how to exceed their expectations regarding products and services, customers are needed to perform the method. By focusing on the customers, it will be easier to get good measurements in understanding their definition of quality. Since the TQM is connected to the process management through continuous improvements and can, therefore, be argued that customer focus is just as important for PM.

Looking at Wisapaper, they have had some problems with the TQM and started thereby little by little implement the process management. Since the TQM failed, it cannot provide support through continuous improvements to the PM, which is why one can argue that the ideologies do not support each other.

One of the most successful tools for a good customer relationship has been the customer segmentation. As one can see in Table 7.3 (Partanen et al., n.d., p.8), the customer segments are divided into five groups depending on the customer's strategic importance.

Another tool is the customer profitability information, which latest was retrieved through Accounting Based Costing (ABC). By performing different analyses such as time consumption analysis, it can be determined how profitable customers are. The system through ABC also shows country-specific information when looking at profitability among customers. The profitability information can be used both for operational and strategic purposes and helps to prepare for future decisions.

The customer segmentation tool was used in order to control customer focus and a way of influence the organisational thinking. The control was used mainly towards the Bulk and Others category. Meanwhile, a more enhanced customer orientation was applied towards the rest of the segments. Looking at the customer profitability information, the tool was used to control the focus on the customer where the profitability information lays an important foundation for how to deal with different customers.

Questions II

Firstly, we need to identify how Wisapaper is operating and secondly, understand what is the typical context for ABC application. Wisapaper is a paper-converting mill and a kraft paper mill; it operates independently in UPM-Pack which is the division in charge of packaging materials. With four different main products, we consider that Wisapaper has a low proportion of overhead costs, thus a relatively low process and product diversity (limited range of paper products). Also, the ABC system is a costing approach for allocating overhead factory more precisely “to cost objects based on activities performed for the cost objects” (Blocher et.al., 2012, p.133). It is commonly used in a complex environment composed of many machines, a wide range of products, and intertwined processes, unlike Wisapaper. According to the criteria defined in the case, Wisapaper seems to fit perfectly with a Volume Based Costing (VBC) rather than ABC. This model is common to use when costs are small, or when the supporting activities are relatively similar (Blocher et.al., 2012, p.132).

Due to the success of the ABC Model at Wisatimber, Högnabba also implemented it at Wisapaper. The main issue for the management was their lack of insight of customer profitability. With their former model, they were not able to analyse customer’s profitability in reference to their size, location, ordering pace and other determining factors which ABC made possible. It also provides accurate calculations, which helped the firm to renegotiate contracts, which were a significant source of poor profitability. The critical factor was the bad allocation of time to different activities regarding the type of customer. Using ABC allowed the firm to get a broad range of comparisons and analyses, thus a clear perception of customer profitability. Refined customer profitability information serves both strategic, customer segmentation and timeframe, and operational purposes, renegotiation of quantities and frequency of delivery. Vikström made a point about the reliability of accounting figures when it comes to small products or customers. One can now rely on accounting numbers for decision-making, but the amounts captured in the system needs to be reliable, regardless of the size. Thus the management unit needs to be assured that the sufficient rigour and policy precision has been applied in the accounting department.

Questions III

Variable Costing (VC) system only includes costs directly related to the production, such as the costs of direct materials, direct labour and variable overhead. Fixed overhead cost is not included and would be treated as a period cost and deducted after gross margin in the VC income statement. Full Costing (FC) system includes all the above costs as product cost, even the fixed overhead, which is evenly divided and distributed to each produced unit. However, this also gives managers incentives to manipulate costs by increasing inventory. ABC system allocates the overhead costs into different cost pools that are calculated by their different activity rates. Even though the process of implementing this method is highly demanding, it will result in a more accurate and