Sieman Case

Topics: Electric motor, Costs, Cost accounting Pages: 13 (2057 words) Published: November 17, 2014
For the exclusive use of M. Muse, 2014.
Harvard Business School

9-191-006
Rev. October 2, 1997

Siemens Electric Motor Works (A) (Abridged)
Ten years ago our electric motor business was in real trouble. Low labor rates allowed the Eastern Bloc countries to sell standard motors at prices we were unable to match. We had become the high cost producer in the industry. Consequently, we decided to change our strategy and become a specialty motor producer. Once we adopted our new strategy, we discovered that while our existing cost system was adequate for costing standard motors, it gave us inaccurate information when we used it to cost specialty motors. —Mr. Karl-Heinz Lotte, director of Business Operations, EMW

Siemens Corporation
Headquartered in Munich, Siemens AG, a producer of electrical and electronic products, was one of the world's largest corporations. Revenues totaled 51 billion deutschmarks in 1987, with roughly half this amount representing sales outside the Federal Republic of Germany. The Siemens organization was split into seven major groups and five corporate divisions. The largest group, Energy and Automation accounted for 24% of total revenues. Low wattage alternating current (A/C) motors were produced at the Electric Motor Works (EMW), which was part of the Manufacturing Industries Division of the Energy and Automation Group. High wattage motors were produced at another facility.

The Electric Motor Works
Located in the small town of Bad Neustadt, the original Siemens EMW plant was built in 1937 to manufacture refrigerator motors for "Volkskuhlschraenke" (people's refrigerators). Less than a year later, Mr. Siemens halted the production of refrigerator motors and began to produce electric motors for other applications. At the end of World War II, the Bad Neustadt plant was the only Siemens factory in West Germany capable of producing electric motors. All the other Siemens production facilities had been completely destroyed or seized by Eastern Bloc countries. After an aggressive rebuilding program, Bad Neustadt emerged as the firm's primary producer of electric motors. Through the 1970s, EMW produced about 200 different types of standard motors, at a total annual volume around 230,000 motors. Standard motors accounted for 80% of sales volumes—the remaining 20% was customized motors. The production process was characterized by relatively long runs of a single type of motor. Because identical motors were used by a wide range of customers, Professors Robin Cooper and Karen Hopper Wruck prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1990 by the 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.

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This document is authorized for use only by Michael Muse in Financial & Managerial Accounting taught by Brandis Phillips, at North Carolina A & T State University from August 2014 to February 2015.

For the exclusive use of M. Muse, 2014.
191-006

Siemens Electric Motor Works (A) (Abridged)

standard motors were inventoried and shipped as orders were received. The market for standard A/C motors was extremely competitive. The firm was under constant pressure to reduce costs so that it could price aggressively and still make a profit. Despite a major expansion and automation program begun in 1974, by the early 1980s EMW found it could not lower its costs sufficiently to offset the lower labor rates of its Eastern Bloc competitors.

Change in Strategy
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