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If Airborne attains 80% of capacity, its cost per package = $$/(80%)Cap, which can be rewritten as
1/80% × $$/Cap, which equals 1.25 $$/Cap.
At 67% of capacity, a competitor‟s cost per package = $$/(67%)Cap, which can be rewritten as
1/67% × $$/Cap, yielding 1.50 $$/Cap.
In summary, by computing the ratio of Airborne‟s air delivery cost to its competitors‟ costs, the
impact of this lower-volatility strategic target on cost per package can be calculated: 1.25 $$/Cap ÷
1.50 $$/Cap = 83%. In an industry that competes based on cost leadership, Airborne has a 17% cost
advantage in the air delivery cost. An analysis of the truck utilization factor shows an even larger
advantage, given that drivers make fewer stops due to the narrowly defined customer characteristics
and pick up more at each stop. Although this cost advantage may seem small, assuming that Airborne
passes on, say, half this advantage in the form of lower prices to the targeted customers and keeps the
rest, any services purchasing manager whose performance is based on attainment of budget would
jump at an 8% drop in price of a high-volume delivery cost.
A short but precise definition of strategy is to do something different that others cannot imitate. Is
Airborne‟s cost advantage sustainable? Can FedEx or UPS easily copy? A thorough analysis would
reveal that before Airborne‟s entry, this high-volume, low-volatility customer segment was
subsidizing the other customers. In response, both the competitors could match Airborne‟s price in this
segment, but this would mean that if they wish to maintain profitability they would have to raise prices
to the other more volatile customers while providing them the same level of service. Those firms that
have found themselves in this situation realize how hard this is to accomplish.
A noteworthy epilogue to this story is that approximately 10 years prior to Airborne‟s entry into this
market, FedEx did much the same thing to UPS. At that time UPS dominated package delivery but did
not recognize express as a separate segment. FedEx targeted this segment with a value proposition
based on uniqueness of service and low cost, successfully capturing a large and profitable portion of
UPS‟s business. In the “Reflections” section of this chapter I stated that defining the right level of
detail for an ABC system is based on a cost-benefit criterion, which, in turn, is a function of the
competitiveness of an industry. In hindsight, should FedEx have understood the cost structure of the
segment Airborne targeted and acted accordingly, thereby closing the door before Airborne entered?
Maybe the cost for this level of detail was deemed greater than the benefit. Hindsight being 20/20,
there is no doubt that FedEx and/or UPS now wish they had built this level of detail into their cost
systems. The lesson here is that one cannot ignore the competitive forces in an industry. SCM systems
must be constantly monitored to ensure that they produce the requisite level of detail as industries
evolve.
Lessons from Japan
By the early 1990s a number of researchers began studying Japanese management cost systems. They
hypothesized that the recent dominance of these firms in such industries as automobiles, steel, and
electronics might be due to better management cost information. Their findings were to the contrary.
If anything, Japanese cost systems had more “peanut buttering” of overhead costs than their U.S.
counterparts.