Low cost companies – how do they manage this? An examination of the primary activities.
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A company strategy has a direct impact on shaping the management accounting requirements of a company. Let’s take Amazon as an example. Amazon is an internet retailing company, one that we have studied before, both within these blogs and the book. Amazon aim to offer their customers the lowest prices possible and they achieve this through their pricing policies, shipping policies and operational efficiencies.
We have previously discussed Amazon’s price bundling and predatory pricing strategies; however, the value chain/ network of any organisation demonstrates that value/ cost efficiencies can be added in many parts of the organisation to maintain a low cost structure. Within Amazon, one example, is the increasing use of robots that are used in the fulfilment centres, these provide zero labour cost and the production costs of the robots is low because they are produced by an in-house subsidiary – a good example of vertical integration. Trying to reduce costs within the operations of fulfilment centres is vital because in 2015 the fulfilment costs, as a percentage of sales, was 16.9%.
Another area that Amazon are actively working on to reduce costs relates to outbound logistics. In 2015 Amazon’s reported shipping revenue was £6520 million but the cost was £11,539 million. Therefore, innovatively Amazon are undertaking research in the use of drones and investing in leasing airplanes, both aimed to reduce the significant cost that they won’t pass on to consumers.
Management accounting is key in managing a company aiming for low cost structures, there is a need to understand the business, industry, marketing, operations, to list just a few areas. However, the most important element is understanding the impact on the accounts behind all the functional areas of a business and the innovative plans to take a company into the future.
Accounting information from the Amazon Annual Report 2015
