Part proliferation: role for activity-based costing An article in the Wall Street Journal by Neal Templin and Joseph B. White (June 23, 1993) reported on the major changes occurring at General Motors. Its new chief executive officer, John Smith, had been installed after the board of directors requested the resignation of Robert Stempel, the previous chief.
John Smith’s North American Strategy Board identified 30 components that could be simplified for 1994 models. GM had 64 different versions of the cruise control/turn signal mechanism. It planned to reduce that to 24 versions the next year and the following year to just 8. The tooling for each one cost GM’s A. C. Rochester division about $250,000. Smith said, “We’ve been talking about too many parts doing the same job for 25 years, but we weren’t focused on it.” (Note that the tooling cost is only one component of the cost of proliferating components. Other costs include the design and engineering costs for each different component, purchasing costs, setup and scheduling costs, plus the stocking and service costs for every individual component in each GM dealership around the United States.)
GM’s proliferation of parts was mind-boggling. GM made or bought 139 different hood hinges, compared with one for Ford. Saginaw’s Plant Six juggled parts for 167 different steering columns-down from 250 the previous year but still far from the goal of fewer than 40 by decade’s end.
This approach increased GM’s costs exponentially. Not only did the company pay far more engineers than competitors did to design steering columns, but it also needed extra tools and extra people to move parts around, and it suffered from quality glitches when workers confused one steering column with another.
Required
(a) How could an inaccurate and distorted product costing system have contributed to the overproliferation of parts and components at General Motors?
(b) What characteristics should a new cost system have that would enable it to signal accurately to product designers and market researchers about the cost of customization and variety?