1. Advanced Operations and Supply Chain Management Various Professors BUSI 3703 Yorkville University Table of Contents Introduction to Activity-Based Costing..............................................................................................5 Johnson Beverage, Inc...................................................................................................................19 Nissan: Recovering Supply Chain Operations................................................................................27 Advanced Operations and Supply Chain Management BUSI 3703 Various Professors Yorkville University 2. 9-197-076 R E V : J U L Y 5 , 2 0 0 1 ________________________________________________________________________________________________________________ Professor Robert S. Kaplan prepared this note as the basis for class discussion. Copyright © 1997 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. R O B E R T S . K A P L A N Introduction to Activity-Based Costing In this note, we introduce activity-based cost (ABC) systems. The motivation for ABC systems is simple to articulate. Consider two hypothetical and almost identical factories. Single Factory makes one million pens, all the same color: blue. Multi Factory also makes one million pens, but of many different colors, sizes, and varieties. This factory, in a typical year, produces about 2,000 different types (SKUs) of pens, ranging from specialty pens, with annual production volume as low as 50-100 per year, to higher-volume standard pens (blue and black), whose annual production volumes are each about 100,000 per year. Even though both factories make the same basic product, Multi Factory requires many more resources to support its highly varied mix. Relative to the blue pen factory, Multi Factory would have much larger production support staff, requiring more people to schedule machines and production runs, perform setups, inspect items after setup, move materials, ship orders, expedite orders, rework defective items, design new products and improve existing products, negotiate with vendors, schedule materials receipts, order, receive, and inspect incoming materials and parts, and update and maintain the much larger computer-based information system. Multi Factory would also operate with considerably higher levels of idle time, setup time, overtime, inventory, rework and scrap. Since both factories have the same physical output, they would both have roughly the same cost of materials (ignoring the slightly higher ...

1. 1.
Advanced Operations and
Supply Chain Management
Various Professors
BUSI 3703
Yorkville University
Table of Contents
Introduction to Activity-Based
Costing...................................................................................
...........5
Johnson Beverage,
Inc..........................................................................................
.........................19
Nissan: Recovering Supply Chain
Operations...............................................................................

2. .27
Advanced Operations and Supply Chain Management BUSI
3703
Various Professors Yorkville University
2.
9-197-076
R E V : J U L Y 5 , 2 0 0 1
_____________________________________________________
_____________________________________________________
______
Professor Robert S. Kaplan prepared this note as the basis for
class discussion.
Copyright © 1997 President and Fellows of Harvard College.
To order copies or request permission to reproduce materials,
call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163,
or go to http://www.hbsp.harvard.edu. No part of this
publication may be
reproduced, stored in a retrieval system, used in a spreadsheet,
or transmitted in any form or by any means—electronic,
mechanical,
photocopying, recording, or otherwise—without the permission

3. of Harvard Business School.
R O B E R T S . K A P L A N
Introduction to Activity-Based Costing
In this note, we introduce activity-based cost (ABC) systems.
The motivation for ABC systems is
simple to articulate. Consider two hypothetical and almost
identical factories. Single Factory makes
one million pens, all the same color: blue. Multi Factory also
makes one million pens, but of many
different colors, sizes, and varieties. This factory, in a typical
year, produces about 2,000 different
types (SKUs) of pens, ranging from specialty pens, with annual
production volume as low as 50-100
per year, to higher-volume standard pens (blue and black),
whose annual production volumes are
each about 100,000 per year.
Even though both factories make the same basic product, Multi
Factory requires many more
resources to support its highly varied mix. Relative to the blue
pen factory, Multi Factory would have
much larger production support staff, requiring more people to
schedule machines and production
runs, perform setups, inspect items after setup, move materials,
ship orders, expedite orders, rework
defective items, design new products and improve existing
products, negotiate with vendors,
schedule materials receipts, order, receive, and inspect
incoming materials and parts, and update and
maintain the much larger computer-based information system.
Multi Factory would also operate
with considerably higher levels of idle time, setup time,
overtime, inventory, rework and scrap. Since

4. both factories have the same physical output, they would both
have roughly the same cost of
materials (ignoring the slightly higher acquisition costs in Multi
Factory for smaller orders of
specialty colors and other materials). For actual production, if
you assume that all pens are of about
the same complexity, both Single and Multi Factory would
require the same number of direct labor
hours and machine hours for actual production (not counting the
higher idle time and setup times in
Multi Factory). Multi Factory would likely also have about the
same property taxes, security costs,
and heating bills as Single Factory. But Multi Factory would
have much higher indirect and support
costs (i.e., overhead) because of its more varied product mix
and complex production task.
Consider now the operation of a typical standard cost system in
these two plants. Single Factory
has little need for a cost system to calculate the cost of a blue
pen. The financial manager, in any
single period, can simply divide total expenses by total
production volume to get the cost per blue
pen produced. For Multi Factory, the costs of the indirect and
support expenses would be traced to its
various production cost centers. Once expenses are accumulated
in each production center, they
would be applied to products based on the cost driver for that
cost center: direct labor, machine
hours, units produced, or materials quantity processed. On a per
unit basis, high-volume standard
blue and black pens require about the same quantity of each of
these cost drivers as the very low
volume, specialty products. Therefore, Multi Factory’s overhead
costs would be applied to products

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197-076 Introduction to Activity-Based Costing
2
proportional to their production volumes. Blue and black pens ,
each representing about 10% of the
plant’s output, would have about 10% of the plant’s overhead
applied to them. A low volume
product, representing only .01 of 1% of the plant’s output (100
pens per year), would have about .01
of 1% of the plant’s overhead allocated to it. Therefore, the
standard costing system would report

10. essentially identical product costs for all products, standard and
specialty, irrespective of their
relative production volumes.
Clearly, however, considerably more of Multi Factory’s indirect
and support resources are
required (on a per-unit basis) for the low-volume, specialty,
newly designed products than for the
mature, high-volume, standard blue and black pens. Traditional
cost systems, even those with
hundreds or thousands of production cost centers, will
systematically and grossly under estimate the
cost of resources required for specialty, low-volume products
and will over estimate the resource cost
of high volume, standard products (see Exhibit 1). The
distortion in reported costs between standard
and specialty products can be avoided only if the standard and
specialty pens are manufactured on
separate machines in different cost centers.
Abandoning the assignment of support resource costs entirely
and moving to direct costing
systems does not solve this problem. Under direct or marginal
costing, blue and black pens, which
have about the same materials and direct labor cost as the low -
volume, specialty pens, will have the
same variable costs. Also, direct costing systems fail to explain
why the two factories with exactly the
same physical units of production (e.g., one million pens) have
dramatically different levels of “fixed
costs.”
Activity-based cost systems extend traditional cost systems by
linking resource expenses to the
variety and complexity of products produced, not just the
physical volumes produced. We can think

11. of ABC as providing the answer to the following four questions:
1. Why is the organization spending money on indirect and
support resources?
The answer to this question, of course, is that the spending on
indirect and support resources is
necessary because of the activities performed (for example,
scheduling, purchasing, customer
administration, and improving products) or the capabilities
being supplied by these resources (such
as information technology and suitable production and customer
support space). So the focus has
already shifted from how to allocate costs (the question
answered by traditional cost systems) to why
is the organization spending money in the first place (the ABC
initial question). As the organization
answers this initial question, it identifies the set of activities
being performed by its indirect and
support resources. Activities are described by verbs and objects:
schedule production, move
materials, purchase materials, inspect items, respond to
customers, improve products, introduce new
products, etc. The identification of activities culminates with
construction of an activity dictionary
that lists and defines all the major activities performed in the
production facility.
In some initial applications, engineers and accountants defined
activities at a very micro level,
perhaps at an individual task level, leading to several hundred
or more activities. This was both
expensive and confusing. Now, ABC project teams use rules of
thumb, such as to ignore activities
that use less than 5% of an individual’s time or a resource’s
capacity. Activity dictionaries can be

12. relatively brief, say 10-30 activities, especially where the prime
focus of the ABC system is to estimate
product and customer costs. In other applications, ABC systems
continue to be built with hundreds
of activities. Typically, such highly detailed systems have been
constructed to serve as the foundation
for process improvement and process redesign efforts. The
number of activities, therefore, is a
function of the purpose of the model and the size and
complexity of the organizational unit being
studied.
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17. Introduction to Activity-Based Costing 197-076
3
The second question answered by an ABC system is:
2. How much is the organization spending on each of its
activities?
To answer this question, the ABC system maps, from resource
expenses to activities, using
resource cost drivers. The resource cost drivers link spending
and expenses, as captured in the
organization’s financial or general ledger system, to the
activities performed. Resources are the initial
building block of both traditional and ABC cost systems.
Classifying resource expenses by activities performed
accomplishes a 90° shift in thinking about
expenses (see Exhibit 2).
Data from the organization’s financial system categorizes
expenses by spending code; for
example, salaries, fringe benefits, overtime, utilities, indirect
materials, travel, telecommunications,
computing, maintenance, and depreciation. The resource cost
drivers (see Exhibit 3) collect expenses
from this financial system and drive them to the activities being
performed by the organizational
resources. Thus, after going through this step, organizations
learn, usually for the first time, how
much they are spending on activities like purchase materials,
and introduce new products.
The actual mechanics of selecting resource cost drivers and
estimating the quantity of each

18. resource cost driver are reasonably well documented in several
books that describe the details of
implementing ABC systems. Typically, the ABC analyst
interviews or surveys employees. They may
give employees a survey form with the activity dictionary, and
ask them to estimate the percentage of
time they spend on any activity (in excess, say, of 5% of their
time) on the list.
For nonpersonnel resources, the ABC project team either relies
on direct measurement (how much
power, computer or telecommunications time) or estimates the
percentage of the resource used by
each activity in the dictionary. ABC systems, like traditional
systems, drive expenses to production
cost centers—where the activity is part of the actual product
conversion process like fabricate parts,
mix chemicals, or assemble products. But, in addition, the ABC
system drives operating expenses to
activities that are not directly involved in converting materials
into intermediate and finished
products, like setup machines, schedule production runs, and
perform engineering change notices.
Traditional cost systems, in contrast, drive the expenses of such
activities to production cost centers
where they get arbitrarily allocated to products proportional to
production volumes.
One does not need extensive time-and-motion studies to link
resource spending to activities
performed. The goal is to be approximately right, rather than
precisely wrong, as are virtually all
traditional product costing systems. Many traditional standard
cost systems calculate product costs
out to six significant digits ($5.71462 per unit) but, because of
arbitrary allocation procedures, the first

19. digit is wrong.
Hierarchy of Activities
Once resource costs have been traced to activities, managers get
powerful insights from
identifying critical attributes of the activities. One of the most
important attributes classifies
manufacturing activities along a cost hierarchy dimension: unit,
batch, and product, customer, and
facility sustaining.
Unit-level activities are activities performed for every unit of
product or service produced. The
quantity of unit-level activities performed is proportional to
production and sales volumes. Examples
include drilling holes in metal parts, grinding metal, and
performing 100% inspection.
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24. n.
7
197-076 Introduction to Activity-Based Costing
4
Traditional cost systems, which use allocation bases such as
labor hours, machine hours, units
produced, or sales dollars to assign indirect costs to cost
objects, rely exclusively on unit-level cost
drivers. One of the principal differences between activity-based
and traditional cost systems is the
use of non-unit cost drivers (e.g., batch, product sustaining) for
assigning resource costs to products
and customers.
Batch-level activities are those performed for each batch or
setup of work performed. Batch
activities include setting up a machine for a new production run,
purchasing materials, and
processing a customer order.
The resources required for a batch-level activity are
independent of the number of units in the
batch (number of components produced after a setup, number of
items in a purchase order, or the
number of products in a customer shipment). Activity-based
cost systems measure and assign the
cost of handling production orders, material movements, setups,
customer orders, and purchasing to
the products, customers, and services that triggered the activity.

25. Product-sustaining activities are performed to enable the
production of individual products (or
services) to occur. Extending this notion outside the factory
leads to customer-sustaining activities
that enable the company to sell to an individual customer but
that are independent of the volume and
mix of the products (and services) sold and delivered to the
customer. Examples of these product-
and customer-sustaining activities include maintaining and
updating product specifications, special
testing and tooling for individual products and services, and
technical support provided for
individual products and to service individual customers.
Product- and customer-sustaining activities are easily traced to
the individual products, services,
and customers for whom the activities are performed. But the
quantity of resources used in product-
and customer-sustaining activities are, by definition,
independent of the production and sales
volumes and quantity of production batches and customer
orders. Traditional cost systems, relying
only on unit-level drivers, cannot trace product and customer-
sustaining resources to individual
products and customers.1
The ABC cost hierarchy enables all organizational expenses to
be mapped to a particular
hierarchical or organizational level where cause and effect can
be established. That is a customer-
sustaining expense is not allocated to the products or services
purchased by that customer, since this
expense is incurred independent of the volume and mix of
products or services acquired by this
customer. The customer-sustaining expense can be avoided or

26. controlled only by operating at the
customer level (dropping the customer, changing the level of
support provided to the customer), not
by changing the volume or mix of the individual products and
services the customer acquires.
The batch, product-sustaining, and customer-sustaining
categories give powerful insights into
why two facilities, like the two pen factories, that have identical
total physical outputs could have
drastically divergent cost structures. Both Single (blue pen)
Factory and Multi Factory have the same
quantity of unit-level activities, since they have the same
physical output of 1 million pens per year.
They also likely have the same level of facility-sustaining
expenses (assuming that all non-
1 Beyond unit, batch, product, and customer-sustaining
activities, other resources supply capabilities that could not be
traced to individual products and customers. Some activities,
such as product development and advertising, can be classified
as brand or product-line sustaining since they support an entire
brand or product line. Others provide general production or
sales capabilities. Facility-sustaining expenses, such as a plant
manager and administrative staff, and channel-sustaining
expenses—trade shows and advertising, catalogs—can not be
traced to individual products, services, or customers. The
expenses of product-line, facility, and channel resources can be
assigned directly to the individual product-lines, facilities, and
channels but should not be allocated down to individual
products, services, or customers within these product lines,
facilities,
and channels.
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Introduction to Activity-Based Costing 197-076
5
manufacturing costs occur outside the factories). But Multi
Factory, producing thousands of
products, ranging from low-volume, specialty products to high-
volume blue and black pens, requires
far more resources than Single Factory to perform the additional
batch and product-sustaining
activities required by the many different products and
production runs.

32. In summary, at the end of the second phase of building an ABC
model, the organization knows
expenses characterized by activities performed. Already at this
stage, organizations have new
information that can be used for a range of activity and process
improvement actions. But before
turning to how ABC information can be used, let’s continue
with the construction of the first full ABC
model. For the next phase, we answer a third question about
why ABC?
3. Why is the organization performing activities?
Answering the first two questions identifies the activities being
performed and the cost of
performing those activities. The answer to the third question, of
course, is that the organization has to
perform activities to design, build, and deliver products and
services to its customers. Therefore, in
answering this third question, the ABC project team identifies
all the organization’s products,
services, and customers. Initially, since we are focusing on
analyzing the indirect and support costs of
manufacturing facilities, we will focus on driving costs to
products, deferring the assignment of
activity costs to services and customers to later in the course.
The answer to question number 3 was simple, though even
asking this question has eluded some
practitioners of activity-based costing. These practitioners have
focused only on how to make
activities and processes more efficient, but have not asked the
more fundamental question as to
whether these activities or processes are worth doing. Is the
organization getting paid adequately for
performing these activities? To determine whether the

33. organization is being compensated for
performing activities requires that activity costs be linked to the
products, services, and customers
who are the ultimate beneficiaries of the organization’s
activities. Addressing this issue leads
naturally to the fourth question to which ABC systems provide
the answer.
4. How much of each activity is required for the organi zation’s
products, services, and
customers?
The linkage between activities and cost objects, such as
products, services, and customers, is
accomplished using activity cost drivers. An activity cost driver
is a quantitative measure of the
output of an activity. Examples of typical activity cost drivers
for particular activities are shown on
the list below:
Activity Activity Cost Driver
Run machines Number of machine hours
Setup machines Number of setups or setup hours
Schedule production jobs Number of production runs
Receive materials Number of material receipts
Support existing products Number of products
Introduce new products Number of new products introduced
Maintain machines Number of maintenance hours
Modify product characteristics Number of engineering change
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197-076 Introduction to Activity-Based Costing
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Exhibit 3 shows the overall structure of an activity-based cost
model, linking one resource—indirect
labor—to the activities performed and then, via activity cost-
drivers, to cost objects, such as products.
Selecting Activity Cost Drivers
The selection of an activity cost driver reflects a subjective
trade-off between accuracy and the cost
of measurement. Because of the large number of potential
activity-to-output linkages, designers
attempt to economize on the number of different activity cost
drivers. For example, activities
triggered by the same event—prepare production orders,
schedule production runs, perform first

39. part inspections, and move materials—all can use the same
activity cost driver: number of production
runs or lots produced.
ABC system designers can choose from three different types of
activity cost drivers:
Types of Activity Cost Drivers
1. Transaction
2. Duration
3. Intensity or Direct charging
Transaction drivers, such as the number of setups, number of
receipts, and number of products
supported, count how often an activity is performed.
Transaction drivers can be used when all
outputs make essentially the same demands on the activity. For
example, scheduling a production
run, processing a purchase order, or maintaining a unique part
number may take the same time and
effort independent of which product is being scheduled, which
material is being purchased, or which
part is being supported in the system.
Transaction drivers are the least expensive type of cost driver
but could be the least accurate, since
they assume that the same quantity of resources is required
every time an activity is performed; that
is, the activity is homogeneous across products. For example,
the use of a transaction driver like the
number of setups assumes that all setups take the same time to
perform. For many activities, the
variation in use by individual cost objects is small enough that a

40. transaction driver will be fine for
assigning activity expenses to the cost object. If, however, the
amount of resources required to
perform the activity varies considerably, from product to
product, then more accurate and more
expensive cost drivers are required.
Duration drivers represent the amount of time required to
perform an activity. Duration drivers
should be used when significant variation exists in the amount
of activity required for different
outputs. For example, simple products may require only 10-15
minutes to setup, while complex,
high-precision products may require 6 hours for setup. Using a
transactions driver, like number of
setups, will overcost the resources required to setup simple
products and will undercost the
resources required for complex products. To avoid this
distortion, ABC designers would use a
duration driver, like setup hours, to assign the cost of setups to
individual products.
Examples of duration drivers include setup hours, inspection
hours, and direct labor hours. For
materials movement, distance moved can be viewed as a
duration driver; distance acts as a proxy for
the time taken to move materials from one point to another. In
general, duration drivers are more
accurate than transactions drivers, but they are much more
expensive to implement since the model
requires an estimate of the duration each time an activity is
performed. With only a transaction driver
(number of setups), the designer would only need to know how
many times a product was setup,
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10
Introduction to Activity-Based Costing 197-076
7
information that should be readily available from the production
scheduling system. Knowing the
setup time for each product is an additional, and more costly,
piece of information. The choice
between a duration and a transactional driver is, as always, one
of economics, balancing the benefits
of increased accuracy against the costs of increased
measurement.

46. For some activities, however, even duration drivers may not be
accurate. Intensity drivers
directly charge for the resources that are used each time an
activity is performed. Continuing with
our setup example, a particularly complex product may require
special setup and quality control
people, as well as special gauging and test equipment each time
the machine is setup to produce the
product. A duration driver, like setup cost per hour, assumes
that all hours are equally costly, but
does not reflect extra personnel, especially skilled personnel
and expensive equipment that may be
required on some setups but not others. In these cases, activity
costs may have to be charged directly
to the output, based on work orders or other records that
accumulate the activity expenses incurred
for that output.
Intensity drivers are the most accurate activity cost drivers but
are the most expensive to
implement; in effect they require direct charging via a job order
costing system to keep track of all the
resources used each time an activity is performed. They should
be used only when the resources
associated with performing an activity are both expensive and
variable each time an activity is
performed.
The choice among a transaction, duration, or direct charging
(intensity) cost driver can occur for
almost any activity. For example, for performing engineering
change notices (to upgrade and support
existing products), we could use:
• cost per engineering change notice (assumes every ECN
consumes the same quantity and cost

47. of resources),
• cost per engineering change hour used for the ECN done for
an individual product (allows for
ECNs to use different amounts of time to perform but assumes
every engineering hour costs
the same), or
• cost of engineering resources actually used (number of
engineering hours, price per hour of
engineers used, plus cost of equipment such as engineering
workstations) on the job.
Similarly for a sales activity, like support existing customers,
we could use either a transaction,
duration, or intensity driver; e.g.,
• cost per customer (assumes all customers cost the same)
• cost per customer hour (assume different customers use
different amounts of sales resource
time, but each hour of support time costs the same)
• actual cost per customer (actual or estimated time and specific
resources committed to specific
customers).
Activity cost drivers are the central innovation of activity-based
cost systems but they are also the
most costly aspects of ABC systems. Often project teams get
carried away with the potential
capabilities of an activity-based cost system to capture
accurately the economics of their
organization’s operations. The teams see diversity and
complexity everywhere and design systems
with upwards of 500 activities. But in selecting and measuring

48. the activity cost drivers for such a
system, a reality check takes hold. Assume that each different
activity requires a different activity cost
driver, and that the organization has, say, 5,000 individual
products and customers (not an atypically
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11
197-076 Introduction to Activity-Based Costing
8
low number for many organizations). The analyst would have to
enter up to 2,500,000 pieces of

53. information (500 x 5,000), the quantity of each activity cost
driver used by each individual product
and customer. This is why most ABC systems for product and
customer costing purposes try to have
no more than 30 to 50 different activity cost drivers, most of
which can be accessed and traced to
individual products and customers relatively simply in their
organization’s existing information
system.2
Where to Apply Activity-Based Cost Systems
When will activity-based cost systems have the greatest impact?
Or, asking this question another
way, where should an organization look initially to demonstrate
the potential benefits from building
an activity-based cost system? We have found that two simple
rules help to guide the search for high-
potential ABC applications:
1. The Willie Sutton rule:3 Look for areas with large expenses
in indirect and support resources,
especially where such expenses have been growing over time.
Operations where almost all
expenses are direct labor and direct materials, which can
already be directly traced to
individual products by traditional costing systems, may have
less need for ABC systems. In
effect, if organizational activities are all at the unit level
(virtually no batch or product-
sustaining activities), then ABC systems and traditional cost
systems will likely give very
similar economic signals.
2. High Diversity: Look for a situation in which large variety
exists in products, customers, or

54. processes. For example, consider a facility that produces mature
and newly introduced
products, standard and custom products, high-volume and low-
volume products. For
marketing and selling expenses, companies may have a mixture
of customers who order high-
volume, standard products with few special demands as well as
customers who order in small
volumes, special products, and require large quantities of pre-
sales and post-sales technical
support.
Not all organizations fall within the Willie Sutton rule. Take the
example of an early Apple
Computer factory that had been designed for automatic, high-
efficiency assembly operations. The
factory did only final assembly operations. It did no component
or parts fabrication and no sub-
assembly operations. As a result, more than 90% of the factory
expenses were for purchased parts,
equipment, and a small amount of direct labor. In this case,
direct charging for labor, materials, and
machine time, a process done well by a traditional cost system,
would work fine. The indirect and
support expenses were extremely small, since the factory had
been designed for focused, unit-level
operations. The Willie Sutton rule would have directed ABC
designers at Apple to focus on product
development, marketing, distribution, and selling expenses not
on factory overhead.
The high diversity rule is violated by Single Factory, making
only a single product−blue pens.
When a factory produces only a single product, then all of its
manufacturing expenses are easily

55. 2 With many organizations installing data warehouses and
integrated, enterprise resource planning (ERP) systems is that
many more potential activity cost drivers become automatically
available for ABC systems.
3 Willie Sutton was a successful bank robber in the United
States during the 1950s. Willie, who was eventually captured at
his
home not far from a local police station, was asked during his
initial interrogation, “Why do you rob banks?” Willie replied,
with the wisdom that had made him successful for many years,
“That’s where the money is!” When developing ABC systems,
we should follow Willie’s sage advice (but not his particular
application of the insight) to focus on high cost areas where
improvements in visibility and action could produce major
benefits to the organization. Applying an ABC analysis to a set
of
resource expenses that are below 1% of total spending will not
lead to high payoffs to the organization.
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60. la
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12
Introduction to Activity-Based Costing 197-076
9
attributable to that product. The organization does not need an
ABC system, in fact any system, to
calculate its product costs. Just take manufacturing expenses
and divide by number of items
produced (or producible, as we will see later) to obtain an
accurate estimate of the unit product cost.
Even in highly focused factories, however, where product
costing is not a major concern, some
organizations have still benefited from building ABC models to
give visibility to their underlying
process costs. For example, an early ABC implementation
occurred in a defense factory that made
only a single product; a complex weapon system consisting of
tens of thousands of parts. Thus all
costs were easily associated with production of that system. The
plant’s management team wanted an
ABC model so that they could understand better the costs of all
the activities and processes used to
produce the weapon system. So the diversity of processes was
sufficient to create a demand for the
more accurate attribution of costs, in this case to activities and
processes, that an ABC model can

61. provide.
ABC: Lowest Cost System, Not the Most Accurate One
The goal of a properly constructed ABC system is not to have
the most accurate cost system.
Consider a target (see Exhibit 4), where the bulls-eye represents
the actual cost of resources used each
time a product is made, a service delivered, and a customer
served. To hit this bulls-eye each time
requires an enormously expensive system. But a relatively
simple system, perhaps with 30 to 50
activities and using mostly transactions drivers, should enable
the outer and middle rings of the
target to be hit consistently; that is, activity and process costs
will be accurate to within 5% or 10%.
Traditional cost systems virtually never even hit the target, or
even the wall on which the target is
mounted, as their highly distorted costs are like firing a shotgun
at a barn but shooting directly up in
the air or to the sides. Good engineering judgment should be
used; most of the benefits from a more
accurate cost system can be obtained with relatively simple
ABC systems.
A properly constructed ABC model should represent an
economic model or map of the
organization’s expenses. And perhaps people would be less
confused about what the purpose of an
ABC system is if we called it an activity-based economic map.
An ABC system is like a map or a set of
architectural drawings. Can one drive from one location to
another without a map? Can one build a
house without a set of architectural drawings? Absolutely. If a
manager is working in familiar
territory (either a drive we’ve taken or a house we have built

62. hundreds of times before), then the
manager can rely on experience and good judgment for a
successful outcome. But when the territory
is new, and conditions have changed in important ways from
prior experience, that’s when an
information system like a good map or a good set of drawings
become invaluable.
For companies operating in stable environments, with mature
products that the company has
extensive experience producing, and with stable customer
relationships, the company’s traditional
cost system, or perhaps no cost system, is fine to guide
operations. But when the company is now
producing many new products, introducing new processes,
reaching new customers, and satisfying
many more customer demands, then it would be easy for the
company to get lost, economically, as it
operates in the new environment. An activity-based cost system
provides companies with an
economic map of their operations by revealing to them the cost
of activities and business processes,
leading to knowledge of the cost and profitability of individual
products, services, customers, and
operating units.
The map produced by traditional cost systems looks like the
Great Plains in the U.S. midwest. The
terrain looks the same in whatever direction you look. No
guidance is provided to managers about
where to land and devote their energy and attention. The map
produced by an ABC system looks like
the southeastern part of California, making visible the Sierra
Madre peaks of profitable products and
F

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67. is
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13
197-076 Introduction to Activity-Based Costing
10
the Death Valley craters of losses. Managers get much more
direction about where and how their
scarcest resource—energy, time, and attention—act to bring the
craters of Death Valley losses to at
least sea-level (break-even), and eventually to modest hills of
profitability.
Summary

68. Traditional cost systems, using only unit-level cost drivers such
as direct labor hours, direct labor
dollars, machine hours, and units produced, cannot capture the
economics of complex, multi-product
production processes. Activity-based cost systems provide more
accurate cost information about
business activities and processes, and of the products, services,
and customers served by these
processes. ABC systems focus on organizational activities as
the key element for analyzing cost
behavior in organizations by linking organizational spending on
resources to the activities and
business processes performed by these resources. Activity cost
drivers, collected from diverse
corporate information systems, then drive activity costs to the
products, services, and customers that
create the demand for (or are benefiting from) the
organizational activities. These procedures
produce good estimates of the quantities and the unit costs of
the activities and resources deployed
for individual products, services, and customers.
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73. la
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14
197-076 -11-
Exhibit 1
Product ComplexityProduct Complexity
�� Small batch sizesSmall batch sizes
�� Long set-up timesLong set-up times
�� Unique componentsUnique components
�� Special inspection and testsSpecial inspection and tests
�� Extensive material handlingExtensive material handling
�� Special vendorsSpecial vendors
High OvercostedOvercosted
UndercostedUndercostedLow
High
VolumeVolume
Customer ComplexityCustomer Complexity
�� Customized productsCustomized products
�� Short lead timesShort lead times
�� Unpredictable ordersUnpredictable orders
�� Extensive technical supportExtensive technical support
�� Extensive post-sales supportExtensive post-sales support

74. �� Special tests and requirementsSpecial tests and
requirements
Low
TraditionalTraditional
CostsCosts
ComplexityComplexity
Traditional Systems Distort Product and Customer Costs
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15
197-076 -12-

79. Exhibit 2
Activity-
Based
Costing
Process customer
orders
Salaries
and Fringes
Eqpmt
& Tech.
Supplies
Purchase materials
Schedule production
Move materials
Set up machines
Inspect items
Maintain product information
Perform engineering changes
Expedite orders
Introduce new products

80. Resolve quality problems
$480,000TOTAL
Occupancy
Occupancy
$120,000
Equipment &
Technology
$75,000
Supplies
$35,000
Salaries
and Fringes
$250,000
,
TOTAL $480,000
Activity-Based Costing:
From Expense Categories to Activities
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85. op
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16
197-076 -13-
Exhibit 3
ABC: Expenses Flow from Resources to Activities
to Products, Services and Customers
Prepare
Tooling
Inspect
Incoming
Materials
Move
Materials
Setup

86. Machines
Maintain
Machines
Indirect Labor
... ... ... ...
Resource
“Resource
Drivers”
Activity
“Activity # Receipts # Moves Maintenance Setup #
Setups
Cost Driver” (Uncertified Materials) (or # Setups)
Hours Hours
$/Receipts $/Moves $/Maintenance $/Setup $/Setup
Hour Hour
Product/
Services/
Customers
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17
197-076 -14-
Exhibit 4
Cost Accuracy Target
Extensive
ABC System
Actual
Cost
Simple
ABC
System
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96. a
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18
3.
UVA-C-2292
Rev. June 17, 2009
This case was prepared by Associate Professor Luann J. Lynch.
It was written as a basis for class discussion rather
than to illustrate effective or ineffective handling of an
of Virginia Darden School Foundation, Charlottesville, VA. All

97. rights reserved. To order copies, send an e-mail to
[email protected] No part of this publication may be
reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any
means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden
School Foundation. Rev. 6/09. ◊
JOHNSON BEVERAGE, INC.
As president and primary owner of Johnson Beverage, Inc.
(JBI), Jack Johnson was
beginning to realize that retaining long-term customers was
becoming a challenge. During a
delivery run yesterday, driver Joe Stevens had noticed a
competitor’s sales manager talking with
the general manager of Saver Superstore, one of JBI’s largest
customers. Then, that morning,
Johnson’s sales manager, Marsha Ketchum, had mentione d that,
during her visit with the same
general manager on Wednesday, he was starting to make some
noises about wanting to negotiate
a lower price. This could cause a dilemma because this
customer had been one of the company’s
largest and most loyal customers for years.
Johnson leaned back in his chair. These things always seemed to
come up on Friday—
just in time to monopolize his thoughts over what otherwise
would have been a restful weekend.
Deciding to address the situation head on, he scheduled a

98. meeting with Stevens, Ketchum, and
several others for later that afternoon.
Company Background
JBI distributed beverages to retail customers. The company had
been in business for two
decades and had become a preferred distributor among several
retail outlets in the local area. JBI
primarily distributed bottled sports drinks made by small
specialty beverage companies, and its
business had grown steadily with the popularity of sports drinks
over the past 10 to 20 years.
Last year, JBI’s revenues totaled $12 million. The company
serviced about 20 customers
whose beverage purchases totaled anywhere from about
$100,000 to over $1 million annually.
The undiscounted list price on the sports drinks that JBI
distributed was $15.20 per case of 24
bottles. The full cost (excluding customer service costs) of the
bottled drinks was $13.10 per
case. The company offered discounts to some of its customers,
which varied by customer based
on a number of factors, including the volume of drinks the
customer purchased, the future
potential of the customer, and the negotiating success of the
company’s sales representative,
among others.

99. F
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100. nd
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103. s
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la
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n.
19
-2- UVA-C-2292
The Meeting
Johnson opened the meeting by summarizing what he had heard
from Stevens and
Ketchum over the past couple of days. “It looks like we’ve got
some competition for one of our
best customers: Saver Superstore. I guess I’m not too surprised.
They’re a big customer.”

104. “This isn’t the first time this has happened,” added Ketchum.
“You might remember that
this same competitor has approached Saver Superstore before.
But that time, we were able to
keep the business by offering a bit more of a discount. I think
we’ll have to do more of that this
time, or I’m afraid we’ll lose the customer.”
Johnson responded quickly. “We can’t get into a price war on
this. I know this is a big
customer, and a loyal one too, but it’s certainly not one of our
most profitable. I had Jim pull
some numbers together on several of our accounts. Saver
Superstore is one of our lowest-margin
customers. Take a look.” Jim Thomas in accounting, who was
also in the meeting, had prepared
a report (Exhibit 1), which Johnson laid on the table for the
others to look at.
Thomas explained how the accounting group compiled the
numbers:
For each customer, we just pull the revenues right out of the
accounting system.
We know what they ordered and what we shipped, and we know
what price we
charge each customer, so that part is pretty easy. And we know
that the cost per
case, excluding our customer service costs, is $13.10. So we can

105. multiply $13.10
per case by the number of cases we shipped to get our cost of
goods. Then, we
subtract our cost of goods from revenues for each customer and
get a gross
margin. Now, you may remember that we’ve talked about how
hard it is to trace
our customer service costs to any particular customer. Our
customer service costs
run about $1.2 million a year, roughly 10% of revenues. To
make things easy, we
allocate those to each customer based on its share of the
company’s total
revenues. So if a customer accounts for 5% of our revenues, we
allocate it 5% of
our customer service costs. Then, we calculate a customer
margin for each
customer.
Johnson looked at the numbers and said:
I don’t think we can lower our price to Saver Superstore much
more and make
any money on this one. And just think, if we offer a larger
discount to them, then
we’ll have our other customers wanting the same thing—
especially the other big
ones. I can see it now: Marsha is going to walk in here next
month and tell us that
Oscar’s OddLots has heard about the deal we struck with Saver
Superstore, has
been talking with that competitor, and they want the same thing.
F
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107. up
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108. V
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109. ob
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110. a
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v
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la
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20
-3- UVA-C-2292
Oscar’s OddLots, a large local retailer on the edge of town, was
another of JBI’s large
customers.
Jason Rodgers, the operations manager for JBI, was listening
carefully. This was the first
he had heard of the situation, but to a careful observer, his nod
would have revealed what he was
thinking. He said:

111. You know, I’m not a bit surprised to hear all this. Saver
Superstore is a great
customer. They buy lots of beverages, and they’re easy to deal
with. They place
their orders on a regular basis and almost never ask for anything
special. I don’t
remember the last time we had to run around in the warehouse
pulling together a
rush order from them. Who wouldn’t want that business?
Stevens agreed, “You’re right. I almost never have to change
my delivery schedule
because they’ve asked for quick delivery. And they’re right
around the corner, so they’re easy
for us to get to.”
Rodgers continued:
I think about some of our other customers. They seem to never
be able to
anticipate that they’ll be out of stock. Then they call us and
make it our problem
to deal with. It seems like we have some customers that we
work on all day every
day. Why can’t that competitor go after those customers? It’s
hard for me to
believe that some of those customers are more profitable than
Saver Superstore.
Maybe we ought to add what we guys in the warehouse call a
“pain factor” onto
those other customers and then see who is most profitable for

112. us.
As Johnson listened, he realized Rodgers might be onto
something. “Jim, what types of
costs are included in those customer service costs?”
Thomas replied, “Well, that number includes several things.”
He continued:
It includes anything related to handling the beverages, like
picking the beverages
from the warehouse shelves according to the order instructions,
moving the
beverages over to the dock, and loading them on the delivery
truck. It includes
any costs related to taking, coordinating, and administering the
orders, like what
we pay the people in the sales office who take phone orders
from customers, the
supervisory costs to administer the order, and similar things. It
includes anything
related to delivering the beverages to the customer’s location,
like the cost of the
delivery trucks, truck maintenance, and what we pay Joe and
people like him to
drive the trucks. It includes anything related to all those rush
orders you’re talking
about, like overtime, extra scheduling, and stuff like that. And
it includes what we
pay Marsha for what she does, like visiting the customers to
check in on them. So
there’s quite a bit of stuff in there.
F
or

113. u
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114. up
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115. V
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117. a
c
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21
-4- UVA-C-2292
Johnson thought about this. “So you’re telling me that there are
some customers that you
are spending a lot more time on than others? And it’s not Saver
Superstore?”
“That’s right,” Rodgers replied.
Johnson continued, “But since our accounting system is
allocating these customer service

118. costs based on revenues, and since Saver Superstore is one of
our biggest customers, it’s
allocating a large share of those costs to Saver Superstore.”
“Exactly,” Thomas said.
Let me do this: Let me spend a couple of days collecting some
information. I’ll
need some help from each of you because I want to try to find
out how much of
your time you are spending on each of our customers. Maybe
it’s time to get more
sophisticated about how we look at these customer service
costs. It may be worth
the effort.
Stevens, Ketchum, and Rodgers all agreed to spend some time
with Thomas so he could
summarize the amount of activity they devoted to each
customer. They would meet again the
following Friday. Thomas promised to compile an analysis that
might help them determine how
profitable each of their customers really was.
Activity Analysis
Before he left for the weekend, Thomas decided to pull together
some information about
the customer service costs he had described in the meeting:
handling the product, taking the
orders, delivering the product, expediting rush orders, and
visiting the customer. He searched

119. through the accounting system and determined how much of the
annual $1.2 million in customer
service costs was associated with each of those categories
(Table 1).
Table 1. Customer service costs during the prior year by area of
activity.
Area of activity Total $
Product handling
$ 672,000
Taking orders from customers 100,000
Delivering the product 140,000
Expediting deliveries (other than automobile) 198,000
Sales visits to customers 90,000
Total
$ 1,200,000
Fo
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120. th
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121. M
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122. fe
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123. 2.
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124. v
io
la
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n.
22
-5- UVA-C-2292
Then, on Monday, Thomas met individually with Stevens,
Ketchum, and Rodgers. With
their help, he determined what he thought to be the primary
driver of the costs in each of those
customer service categories (Table 2).
Table 2. Cost drivers by area of activity.
Area of activity Cost driver
Product handling
Number of cases sold
Taking orders from customers Number of purchase orders
Delivering the product Number of miles traveled
Expediting deliveries (other than automobile) Number of
expedited deliveries

125. Sales visits to customers
Number of sales visits
Thomas determined from the company’s accounting records that
the company sold
800,000 cases of beverages and processed 500 purchase orders
the previous year. Stevens
checked the mileage records for the delivery vehicles and
determined that the vehicles had
traveled a total of 44,800 miles. Rodgers was able to determine
that the company made 4,480
deliveries, 2,500 of which were expedited deliveries. And
finally, Ketchum checked her daily
travel log to determine she had made a total of 360 sales visits
to the company’s customers.
Thomas’s next step was to determine how much of these cost
drivers were attributable to
each customer. Again, he was able to obtain some of that
information (e.g., number of cases)
relatively easily from the company’s records. Then his
colleagues helped him determine
customer numbers for the rest of the activities. Exhibit 2
presents this data for the four
customers included in Thomas’s first report (Exhibit 1).
F
or
u

126. se
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127. pl
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128. ar
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130. c
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23
-6- UVA-C-2292
Exhibit 1
JOHNSON BEVERAGE, INC.
Report of Customer Profitability during the Previous Year for
Four Customers
Prepared by Jim Thomas

131. Saver
Superstore
Oscar’s
OddLots
Midwellen
Supermarket
Downtown
Retail Total for JBI
Net revenues $ 1,168,000 $ 1,192,000 $ 121,520 $ 454,500
$12,000,000
Cost of goods 1,048,000 1,048,000 104,800 393,000
10,480,000
Gross margin $ 120,000 $ 144,000 $ 16,720 $ 61,500 $
1,520,000
Customer service costs 116,800 119,200 12,152
45,450 1,200,000
Customer profit $ 3,200 $ 24,800 $ 4,568 $ 16,050 $
320,000
Customer profit (% of net revenues) 0.3% 2.1% 3.8% 3.5%
2.7%
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133. in
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135. 02
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136. ht
v
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24
-7- UVA-C-2292
Exhibit 2
JOHNSON BEVERAGE, INC.
Additional Information from Prior Year for Four Customers
Saver
Superstore
Oscar’s
OddLots
Midwellen
Supermarket
Downtown
Retail Total for JBI
Price per case $14.60 $14.90 $15.19 $15.15 $15.00

137. Number of cases 80,000 80,000 8,000 30,000 800,000
Number of orders 16 40 20 30 500
Number of deliveries1 110 400 200 230 4,480
Miles traveled per delivery 5 19 11 4 10
Number of expedited deliveries 10 250 130 90 2,500
Number of sales visits 12 25 18 9 360
1 Includes both expedited and regular deliveries.
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138. d
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139. ni
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141. es
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25

142. 4.
9B16D013
NISSAN: RECOVERING SUPPLY CHAIN OPERATIONS1
Shikha Aggarwal and Manoj Kumar Srivastava wrote this case
solely to provide material for class discussion. The authors do
not
intend to illustrate either effective or ineffective handling of a
managerial situation. The authors may have disguised certain
names
and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized
or otherwise reproduced in any form or by any means without
the
permission of the copyright holder. Reproduction of this
material is not covered under authorization by any reproduction
rights
organization. To order copies or request permission to
reproduce materials, contact Ivey Publishing, Ivey Business
School, Western
University, London, Ontario, Canada, N6G 0N1; (t)
519.661.3208; (e) [email protected]; www.iveycases.com.
Copyright © 2016, Management Development Institute Gurgaon
and Richard Ivey School of Business Foundation Version: 2016-

143. 05-30
The year 2011 was tough for the Japanese automotive industry.
A 9.0-magnitude earthquake and tsunami
followed by a nuclear crisis had ripped the country. The
collective economic cost of the “3/11 disaster” as
estimated by the World Bank totalled around US$235 billion.2
In the automobile sector, production was
immediately stopped.3 In 2010, Japanese automakers had
manufactured around 8.3 million passenger cars
in Japan.4 IHS Global Insight, an international economic and
financial consulting firm, forecasted that as a
result of the disaster, cumulative production for Japanese
automakers in 2011 would drop by around 2.2
million units. Automakers Toyota, Nissan, Honda, and Suzuki
were adversely affected and made their
respective recovery efforts. Of the top automotive firms, Nissan
was acknowledged by analysts and industry
experts for the company’s recovery and resilience strategy.5
The catastrophe took place in March 2011. Nissan lost 17
family and five staff members. More than 50 of its
dealers6 and 40 of its component suppliers were damaged. Two
of Nissan’s plants—the Tochigi engine and
vehicle assembly plant and the Iwaki engine plant—were
severely damaged.7 Each day of lost production was
costing Nissan $25 million in profits.8 But, surprisingly, the
Tochigi engine and vehicle assembly plant was
back on line in April, and the Iwaki engine plant was fully
recovered with production back to pre-disaster
levels by mid-May.9 “Nissan was one of the companies, which
have responded the fastest, and in the most
efficient way to what happened after the earthquake,” Carlos
Ghosn, the chief executive officer (CEO) of

144. Nissan, exclaimed.10
NISSAN AND THE JAPANESE AUTOMOBILE INDUSTRY
Nissan Motor Company Ltd., based out of Yokohama, Japan,
was the second largest automotive company
in the country. It employed approximately 248,000 people
globally. In 2010, its annual sales exceeded 4.1
million vehicles. Its annual revenue in that year was around
$102.37 billion (JP¥8.77 trillion).11 Nissan’s
Chairman and CEO was Carlos Ghosn, a French-Lebanese-
Brazilian, and Nissan’s board was comprised
of members of different nationalities. This was different from
the corporate structure of other Japanese
automakers whose board members were exclusively Japanese.
Colin Dodge was the most senior non-
Japanese member on the board. He took over as Nissan’s Chief
Recovery Officer in Japan. This post was
unique, not found at other automakers.12
F
or
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145. co
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146. a
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147. or
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148. U
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de
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v
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149. la
tio
n.
27
Page 2 9B16D013
Nissan delivered a wide range of models—a total of 64—under
Nissan and Infiniti brands. It exhibited a
strong commitment to developing exciting and innovative
products. In 2011, Nissan earned several
international awards such as European Car of the Year and
World Car of the Year.13 Nissan used common
parts on a global scale and standard parts worldwide. This
practice resulted in low-cost manufacturing and
gave the company an advantage in dealing with the crisis
situation.
The automotive sector was one of the core industrial sectors in
Japan’s economy. In 2009, automotive
shipments alone accounted for 15.3 per cent of the total value of
manufacturing shipments in Japan. The
value of the automotive shipments in that year amounted to
$472.7 Billion (JP¥40.5 trillion).14 Japan was
the second largest vehicle producing country after China.
Because Japan was home to many innovative technologies in the
automotive sector, suppliers got
“substantial and growing shares of the global market.”15 A
motor vehicle consists of more than 15,000 parts;
lack of an important component can stop production or impede

150. completion of vehicles, and result in a
slowdown or total stoppage of assembly lines.16
IMPACT OF 3/11 ON THE JAPANESE AUTOMOBILE
INDUSTRY
The triple disaster in Japan disrupted both domestic and global
supply chains. The most affected industries
were electronics and automobiles, both well-represented in
Japan.17 Due to fuel shortages across the country
and power outages in the affected area of Tokyo, production and
distribution were severely impacted, and
staff members were unable to reach their workplaces. Plant
shutdowns in Japan disrupted the supply of
products—from semiconductors to automobiles—to
manufacturers around the world.18
The foremost effect of the disaster, however, was suffered by
Japanese automakers. Their assembly plants
were shut down for weeks. They assessed that Tier 1, Ti er 2,
and Tier 3 suppliers had been impacted.19
Supply chains of Japanese automakers were believed to be
keiretsu—interlocked, with products procured
from Tier 1 suppliers being manufactured with parts procured
from Tiers 2 and 3 suppliers. “We thought it
was pyramid-shaped, but it turned out to be barrel-shaped,” a
Toyota official remarked post-disaster, noting
few critical suppliers at the base of the network.20
Many electronic component suppliers that supplied critical parts
to automobile companies around the world
were unable to meet commitments. They soon realized that it
would take them months to recover
completely.21 For example, Renesas Electronics, which

151. provided 40 per cent of the global market for
microcontrollers for automobiles, was badly hit by the disaster
and took more than a couple of months to
restart production. Renesas Electronics was the sole supplier of
chips to all Japanese automakers.22
Until March 26, Toyota had suspended operations in 12 of its
assembly plants, and estimated a loss of
around 140,000 vehicles.23 It stopped production in its U.S.-
based assembly plants because of the
difficulties with shipping parts out of Japan. Similarly, Honda
suspended production immediately after the
earthquake and continued the suspension for an additional two
weeks. One-fifth of its Tier 1 suppliers had
been affected by the earthquake. The company announced that
the suppliers would take more than a week
to recover operations.24
Nissan lost 1,300 Infiniti and 1,000 Nissan cars to the tsunami.
All 2,300 vehicles were ready and waiting
to be loaded and transported to the United States.25 The
company immediately closed five plants: the Iwaki
Plant in Iwaki City, the Tochigi Plant in Kawachi County, the
Yokohama and Oppama Plants in Yokohama
City, and the Zama Operations Center in Zama City.26
F
or
u
se
o
nl
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152. in
th
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co
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153. in
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154. ro
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155. 02
2.
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156. ht
v
io
la
tio
n.
28
Page 3 9B16D013
Ghosn told Bloomberg News:
This is serious and it’s still difficult to evaluate. You have the
earthquake, you have the tsunami,
rolling blackouts, and fuel shortages hitting at the same time,
and they aren’t only hitting the car
manufacturers, but also the suppliers and the dealers.27
CRISIS MANAGEMENT AT NISSAN
The “Great East Japan” earthquake struck at 2:46 in the
afternoon. Within 15 minutes, Nissan had set up
its Global Disaster Control Headquarters (GDCH) in its head
office in Yokohama, where it could update
information on disaster management, work for employee safety,
and ensure business continuity. The crisis

157. management committee was led by Toshiyuki Shiga, the chief
operating officer.28 The committee oversaw
all recovery activities and supervised operations in the country
as well as abroad.29 Ghosn reported in an
interview with Reuters, “You need to establish a clear order of
importance and a diagnosis of the company,
or the country. This is absolutely essential, because after this
you are going to act and when you act you
need to do it fast. People need to be aligned and share your
vision so you can move in the same direction.”30
In addition to quick decision making after the occurrence, the
company made use of its earlier developed
capabilities to make a speedy recovery. Since 2003, Nissan had
been applying seismic retrofitting and
requirements in its plants and facilities located in the
earthquake prone areas. Also, evacuation centres and
routes had been prepared well in advance.31
Shiga explained Nissan’s approach:
After these type[s] of disasters occur, the company should know
that employees’ safety is first. We
should also know about the safety of the suppliers, dealers, or
our affiliated companies and then,
how to restore operations. This process [aims] to prioritize and
to make a decision—through this
type of training drills, we can easily understand the priority and
not panic.32
First and foremost, the company confirmed the safety and status
of its employees, suppliers, and vendors.
The safety confirmation system that was earlier based on email
was shifted to web access. Then the

158. company started recovery operations at all business locations
and plants. Because they had practiced drills
and simulations every year, Nissan was able to conduct recovery
operations in an expedited and focused
manner. The drills and simulations helped Nissan forecast and
respond to every eventuality that followed
the natural calamity.33
Nissan Senior Vice-President Hitoshi Kawaguchi acknowledged
the importance of regular drills:
This company has been doing this every year, for the last five or
six years. Once you prepare
yourself for all kinds of disasters then you don’t panic, and I
think that’s quite important for us to
be well-trained for natural disasters like a great earthquake or
anything which could damage the
company’s operations.34
Within a few days, Ghosn was shown on television, with a film
crew behind him, surveying the impact of
the disaster at the damaged plant in Iwaki. Talking with
reporters, Ghosn was clear and decisive in his
assessment about what had happened, and what Nissan’s future
action plans were. He was quick and precise
in communicating when the engine-making plant would be back
in operation. This kind of openness and
clarity was rare in the Japanese corporate arena.35
F
or
u
se

159. o
nl
y
in
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160. y
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161. io
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162. 0
7,
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02
2.
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163. op
yr
ig
ht
v
io
la
tio
n.
29
Page 4 9B16D013
Chris Keeffe, Yokohama-based spokesperson for Nissan,
commented that Nissan was swift in gathering its
key executives to assess and analyze the situation, and to
quickly sketch out possible solutions. He drew a
vivid picture of the future course of action and identified the
top-level executives in charge of the recovery
plan. He also added that one of the major strengths of the
company that had enabled it to overcome the
crisis was its ability to work together in a quick and focused
manner.36 Hundreds of employees from other
sites were called upon to assist in recovery of the damaged
plants. The employees worked together in a
cross-functional and cross-regional manner.

164. Frequent power outages in the area were badly affecting
production. The company considered night time
operations, in-house generation of electricity, and a change in
workweek to overcome the effects of power
shortages.37 In April, Nissan informed its dealers that it would
mainly manufacture only the best-selling
models while the parts shortages continued at the plants.
Rumours suggest that just before the earthquake,
the company had ordered parts in bulk, which, if true, would
have also contributed to Nissan’s recovery.38
Nissan prioritized delivery of vehicles to the U.S. and Chinese
markets.39 The company was able to deliver
cars when their competitors could not, which resulted in better
sales for Nissan.40 Still, Ghosn
acknowledged that Nissan would initially face a “significant”
loss of market share globally but expected to
recoup losses in the latter half of the financial year.41
In the aftermath of the disaster and its impact, the company
realized the need to strengthen its supply chain.42
To prevent similar disruptions and damages in future, Nissan
planned to ask its Tier 2 and 3 suppliers to use
alternate sourcing for their parts, which they had not
implemented at that time. In that way, the suppliers could
manufacture the same component in different factories across
the country and ensure an uninterrupted supply
of component parts to the plants, even during disruptions. Shiga
claimed that if Nissan adopted what he called
a “supply risk management chain” that incorporated principles
of risk management, Nissan’s power of
monozukuri—process engineering activities and craftsmanship
in manufacturing—would be strengthened.
Over the following months, the crisis management committee
continued to tackle production recovery

165. issues whenever they occurred.43 Nissan later discovered that
they had underestimated the damage that
could be caused by a disaster. They re-evaluated and modified
their disaster strategy. They prepared new
evacuation centres and routes and stockpiled food reserves and
other resources wherever needed.44 Toward
the end of 2011, Ghosn mentioned in a speech, “There’s going
to be another crisis. We don’t know what
kind of crisis, where it is going to hit us, and when it is going to
hit us, but every time there is a crisis we
are going to learn from it.”45
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170. Page 5 9B16D013
EXHIBIT 1: EFFECT OF THE 3/11 DISASTER ON NISSAN’S
PRODUCTION, SALES, AND EXPORTS
Change from Previous Year (%)
Category March 2011 April 2011 May 2011
Production in Japan −52.4 −48.7 0.8
Sales in Japan −35.7 −37.5 −12.9
Exports −12.5 −72.0 −5.6
Key Financial Figures (in no. of units)
Category March 2011 April 2011 May 2011
Production in Japan 47,590 44,193 80,036
Sales in Japan 60,584 24,068 37,981
Exports 41,746 14,642 45,321
Source: “Nissan Production, Sales, Export Results for May
2011,” press release, June 28, 2011, accessed August 18, 2015,
www.nissan-global.com/EN/NEWS/2011/_STORY/110628-01-
e.html.
EXHIBIT 2: SUMMARY OF REPORTS ISSUED BY THE
COMPANY POST- DISASTER

171. Date Regarding Plants Regarding Suppliers/Dealerships
March 11, 2011 Suspended operations,
evacuations begun
Assessments of damage yet to be
conducted; Few dealerships reported
damage, others to be confirmed yet
March 12, 2011 Damage to 2300 vehicles
reported
Discussions regarding part damages going
on with suppliers
March 14, 2011 Suspension of operations
continue
<No report issued regarding suppliers>
March 16, 2011 Most resume production, will
continue while inventory of
supplies last
Difficulty in getting part supplies
March 25, 2011 Repairs and infrastructure re-
establishment continuing
Will support suppliers based on requests
received
March 30, 2011 Still recovering, production based
on earlier inventory only
Awaiting recovery of suppliers for parts
delivery

172. April 8, 2011 All plants will resume operations
by mid-April
Supporting suppliers to restore quickly
Source: Summarized from News Releases January–March 2011,
Nissan, accessed August 18, 2015, www.nissan-
global.com/EN/NEWS/2011/01_03.html.
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31

177. Page 6 9B16D013
ENDNOTES
1 This case has been written on the basis of published sources
only. Consequently, the interpretation and perspectives
presented in this case
are not necessarily those of Nissan Motor Company Ltd., or any
of its employees.
2 Tomoko A. Hosaka, “Japan Disaster Likely to Be World’s
Costliest,” Washington Post, March 23, 2011, accessed August
18, 2015,
www.washingtonpost.com/wp-
dyn/content/article/2011/03/23/AR2011032300579.html. All
currency amounts are in US$ unless otherwise
specified; US$1=JP¥81.12 on December 31, 2010.
3 Peter Nunn, “Why Nissan’s Disaster Recovery Bested Rivals,”
Edmunds Auto Observer, December 5, 2011, accessed August
18, 2015,
www.edmunds.com/autoobserver-archive/2011/12/why-nissans-
disaster-recovery-bested-rivals.html.
4 Bill Canis, The Motor Vehicle Supply Chain: Effects of the
Japanese Earthquake and Tsunami (Washington: Congressional
Research
Service, report no. R41831, May 23, 2011), accessed August 18,
2015, www.fas.org/sgp/crs/misc/R41831.pdf.
5 Nissan, “Nissan Undertakes Yearly Emergency Drill Ahead of
March 11 Anniversary,” press release, March 5, 2012, accessed
August 18,
2015, http://nissannews.com/en-US/nissan/usa/channels/Japan-
Earthquake-Updates/releases/nissan-undertakes-yearly-
emergency-drill-
ahead-of-march-11-anniversary.
6 Nissan, “Nissan Recovery Stories,” press release, July 1,
2011, accessed August 18, 2015, http://nissannews.com/en-

178. US/nissan/usa/channels/Japan-Earthquake-
Updates/releases/893f9bd6-480c-4efd-b3f4-2c06f34b84ac.
7 Ibid.
8 David Zeiler, “Supply Chain Disruptions from Japan Disasters
Hit Auto, Electronics Industries,” Money Morning, accessed
August 18, 2015,
http://moneymorning.com/2011/03/24/supply-chain-disruptions-
from-japan-disasters-hit-auto-electronics-industries.
9 Peter Nunn, op. cit.
10 Nissan, “Nissan CEO: Honmoku is ‘The Benchmark’,” press
release, July 18, 2011, accessed August 18, 2015,
http://nissannews.com/en-
US/nissan/usa/channels/Japan-Earthquake-
Updates/releases/c17b858d-7b46-4cb8-bb2a-14e8c253889c.
11 Nissan, “Nissan to Provide NV200 Vanettes to Earthquake-
Affected Areas in Japan,” press release, August 2, 2011,
accessed August 18,
2015, http://nissannews.com/en-US/nissan/usa/channels/Japan-
Earthquake-Updates/releases/3a0dfe13-2c3b-40a4-aa0d-
9242c61d1355.
12 Peter Nunn, op.cit.
13 Nissan, “Nissan to Provide NV200 Vanettes to Earthquake-
Affected Areas in Japan,” op. cit.
14 The Motor Industry of Japan 2011 (Tokyo: Japan Automobile
Manufacturers Association, May 2011), accessed August 18,
2015,
http://jama.wpengine.com/wp-content/uploads/2013/12/The-
Motor-Industry-of-Japan-2011-Publications-Industry-Report-
2011.pdf.
15 Bill Canis, op. cit.
16 Gavin Blair, “Cars After Japan’s Quake: Toyota, Nissan, and
Honda Plan to Restart Production,” Christian Science Monitor,
April 5, 2011,
accessed August 18, 2015, www.csmonitor.com/World/Asia-
Pacific/2011/0405/Cars-after-Japan-s-quake-Toyota-Nissan-and-
Honda-plan-to-

179. restart-production.
17 David Zeiler, op. cit.
18 “Factbox: Japan Quake Impact on Auto, Electronics
Makers,” Reuters U.S., March 23, 2011, accessed August 18,
2015,
www.reuters.com/article/2011/03/23/us-japan-companies-
idUSTRE72M26N20110323.
19 Bill Canis, op. cit.
20 Kyodo, “Manufacturers Expect Lasting Quake Impact,”
Japan Times, May 20, 2011, accessed August 18, 2015,
http://japantimes.co.jp/news/2011/05/20/news/manufacturers-
expect-lasting-quake-impact.
21 Bill Canis, op.cit.
22 Kyodo, op. cit.
23 Carlos Barria, “Supply Chain Disruptions Force More Delays
in Japan,” Reuters U.S., March 22, 2011, accessed August 18,
2015,
www.reuters.com/article/2011/03/23/us-japan-supplychain-
idUSTRE72M21J20110323.
24 David Zeiler, op. cit.
25 Daniel Patrascu, “Nissan Lost 2,300 Brand New Cars to
Tsunami,” Autoevolution, March 14, 2011, accessed August 18,
2015,
www.autoevolution.com/news/nissan-lost-2300-brand-new-cars-
to-tsunami-32777.html.
26 Ibid.
27 David Zeiler, op.cit.
28 Nissan, “Nissan Undertakes Yearly Emergency Drill Ahead
of March 11 Anniversary,” op. cit.
29 “Disaster Response at Nissan,” Nissan Sustainability Report
2012 (Yokohama: Nissan, August 2012), 9, accessed August 18,
2015,
htwww.nissan-
global.com/EN/DOCUMENT/PDF/SR/2012/SR12_E_P008.pdf.
30 “Thomson Reuters Newsmaker — Rebuilding Japan” (blog),
Reuters U.S., June 20–22, 2016, accessed August 18, 2015,

180. http://live.reuters.com/Event/Thomson_Reuters_Newsmaker_-
_Rebuilding_Japan.
31 “Disaster Response at Nissan,” op. cit.
32 Nissan, “Nissan Undertakes Yearly Emergency Drill Ahead
of March 11 Anniversary,” op. cit.
33 “Disaster Response at Nissan,” op. cit.
34 Nissan, “Nissan Undertakes Yearly Emergency Drill Ahead
of March 11 Anniversary,” op. cit.
35 Peter Nunn, op. cit.
36 Peter Nunn, op. cit.
37 Makiko Kitamura and Yuki Hagiwara, “Nissan Says Fewer
than 20 Suppliers Are in Critical State,” May 12, 2011, accessed
October 28,
2015, www.bloomberg.com/news/articles/2011-05-12/nissan-
beats-estimates-after-earthquake.
38 , Peter Nunn, “Why Nissan’s Disaster Recovery Bested
Rivals,” Edmunds Auto Observer, December 5, 2011, accessed
August 18, 2015,
www.edmunds.com/autoobserver-archive/2011/12/why-nissans-
disaster-recovery-bested-rivals.html. Accessed August 18, 2015
39 Bill Canis, op. cit.
40 Peter Nunn, op. cit.
41 Makiko Kitamura and Yuki Hagiwaraop, op. cit.
42 Ken Miyazaki, “Nissan to Strengthen Parts Supply Chain
Following Quake,” March 27, 2012, accessed October 28, 2015,
http://ajw.asahi.com/article/0311disaster/recovery/AJ201203270
075.
43 Nissan, “Nissan Undertakes Yearly Emergency Drill Ahead
of March 11 Anniversary,” op. cit.
44 “Disaster Response at Nissan,” op. cit.
45 Bill Powell, “The Global Supply Chain: So Very Fragile,”
Fortune, accessed May 30, 2016, http://fortune.com/2011/12/12
/the-global-supply-chain-so-very-fragile/.
F

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32
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186. www.iveycases.com
Advanced Operations and Supply Chain
ManagementIntroduction to Activity-Based CostingJohnson
Beverage, Inc.Nissan: Recovering Supply Chain Operations
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