Question
Chasser 1O Masagment Comrel of Opersa CASE 10-3 SIEMENS ELECTRIC MOTOR WORKS Ten years ago our elecrie motor business win real duce electric motors for other applications. At the end of trouble. Low labor rates allowed the Eastem Bloc countries to seli slandard motors at prices we were mable to match We had become the high-cost World War II, the Bad Neustadt plant was the only Siemensfactory in West Germany capable of producing electric nsotors, All the other Siemens production facil producer in the industry. Consequently, we decided to ities had been completely destroyed or seized by Eastern change our strategy and become a specialty motor Bloc countries. Afier an aggressive rebailding program, Bad Neustadt emerged as the firm's primary producer of producer. Once we adopled our new strategy, we discovered that waile or eising cost system was electrie motors. Through the 1970s, EMW produced about 200 different lypes of standard motors, at a otal annual volume around 230,000 motors, Standard motors accounted far 80 percent of sales volumes-the remaining 20 percent were customized motors. The production process was characterized by relatively long runs of a single type of motor. Because identical motors were used by a wide range of customers, standard motors were inventoried and shipped as orders were inaccurate information hew e used it to cosi specially motors Karl Hein Las, Siemens Corporation Headquartered in Munich. Siemens AG, a producer of received. The market for standard ANC motors was price aggres profit. Despite a majar expan- sion and automation program begun in 1974, by the early 1980s EMW found it could not lower its costs electrical and electronic d electronic pruducts, was one of the exlremely competitive. The fim was under c world's largest carporations Revenues totaled 51bi pressure to reduce costs so that it coukd lion deutsche marks in 1987, with roughly half this sively and still make a of Germany. The Siemens organizatian was split into seven major groups and five corporate divisions. The ulliciently to offset the lower labor rates of its Eastern argest group, Energy and Automation, accounted for Blocmpetitors. 24 percent of toal revenues. Low-wattage altemating current (AC) 0 motars were produced at the Electric Change in Strategy Motar Works (EMW). which was part of the ManufacAensive study revealed that EMW could become a turing Industries Divisian of the Energy and Automa profitable producer of low-volume, customized AIC tion Group. h-e motors were produced a s To help implement this strategy, the Bad Neustadt plant was enlarged and dedicated to the manu- another facility facture of A/C motors with power ratings ranging from 0.16 to 18.5 kilowatts. These motors supported a num ber of upplications including automation engineering The Electric Motor Works Located in the small town of Bad Neastadt, the original Siemens EMW plant ws built in 1937 to manufacture refrigerator motors for Valkskuhlsch-raenke(people's refrigerators). Less than a year later, Mr. Siemens halted the production of refrigerator motoers and Sicnes A-191-006 and SienceB 9-189-0901 cases wren by Preleson Robin Coopes aad Kacn Wruck S tool camphity dr he ide od Felk wear mise or", r. Bee began to po-
Explanation / Answer
Answer 1:
Siemens need to introduce a new type of product cost system because of the following reasons
The old product cost system was not suitable for the new strategy and the old cost system was suitable for old product strategy. The old products strategy resulted into high cost producer for the Siemen Electric Motors.
Siemens has developed the new strategy for their business and they changes from high cost producer to specialist motor producer so that they can explore their competency in motor manufacturing. Hence for this new business strategy the y need to have the suitable product cost strategy and process so that they can rightly placed the pricing for the motors and ear their profit as per their targets.
New system cannot work on the old product cost system, hence they need to get the new product cost system to be remain profitable in the business, hence they revised the product cost system as per their new business strategy.
The wrong with the old system was that the old system product cost calculation was with respect to the products material cost and overhead costs. The old product cost system was not capturing all the product costing including fixed cost and variable cost properly. This creates the problem for the Siemens. The Product cost structure is not advanced way of calculating the product costing.
The old cost system was a problem, because it made the Siemens as a high cost producer in the market. Thus this will create a big problem for the Siemens motor business and they can lose their market. Hence the old cost system created a big problem for the Siemens Motors company.