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1. Divide the indirect channel partners into the three classifications as just discussed.
2. For each of these, map the activities necessary to satisfy the end customer, regardless of
who provides them—third party or company.
3. Identify the company resources that support each of these activities (e.g., technical field
sales, internal sales, etc.).
4. Derive the costs for each of these activities.
5. Offer a sliding commission schedule that reflects the activity costs from step 4.
It became clear that the one-stop shops were merely order takers that dedicated few resources to
building the business. Abrasive products were a necessary element for their portfolios of products, and
their primary focus was on building the overall volume from a client since this drove their revenues.
They needed the abrasives line as much as the company needed this indirect channel, and a lower
commission might be acceptable.
The full-line group was a bit different. Their primary focus was on abrasive products, and their
revenue line was dependent on building volume in this arena only. With the higher-end offerings, they
often needed technical assistance and did see the value of this. To build volume in this area, they
would be willing to adjust the commission in recognition of the effort of the technical field
salesperson; they basically saw it as a payment for services rendered.
The high-end group were mostly VARs who needed little technical assistance but who dedicated a
good amount of resources in building their businesses. To compensate them for the sales they
generated, a much higher commission structure was necessary.
The company was very happy with this report and implemented it with little change. There was
some push-back from those who wound up with lower commissions, but the logic of the changes
when communicated often was accepted. On the high end, sales increased markedly and within two
quarters the overall costs for channel management were moving in the right direction.
It should be clear that the basis of this analysis was ABC. If, however, the consultant had called it
such, the job would have been lost. This discussion represents the bad and the good of ABC systems.
It can be argued that ABC was never developed as a better model for inventory costing within a
financial reporting system. It is best used as a process analysis tool to add transparency in the area of
value creation. As in the earlier Company Z example, once the costs of the indirect distribution
activities for the abrasives company became apparent, the obvious next step was to reengineer the
system to capture the value embedded in the system.
Activity-Based Costing → Activity-Based Management → Strategic Cost Management
An interesting reflection on the two examples discussed so far might be: Why are the companies
examining their costs systems after the fact? Would not the insights gained from the analyses have
been of more value in the planning process—before the fact rather than after the fact? Shank and
Govindarajan argued exactly this point and called for a change in context in management accounting
systems. Rather than focusing only on the internal scorekeeping and problem-solving arena, they
urged a more strategic view, noting that “what we do starts with our consensus about why we do it.” 5