Business performance analysis for small and medium enterprises through system dynamics modelling: a case study of chemical production industry

Abstract

Most research on business performance analysis was done using Traditional Costing (TC). Little research was carried out using Activity Based Costing (ABC). This research aims to support small medium enterprises (SMEs) in business planning through the use of system dynamics models. In particular, it has been hypothesized that through the use of a system dynamics model building process, SMEs’ entrepreneurs can better understand the cause-and-effect relationships underlying company’s product costing. Such an approach also enables decision makers to improve their understanding about the cost drivers affecting the price of product with the integration of ABC. In order to reach such a goal, this research has been carried out through the use of a case-study. A small company investigated is household chemical company operating in Johor, Malaysia. The report makes explicit main feedback mechanisms underlying company profit, product costing and return of investment. Summary of this research helps entrepreneurs on the business planning through study of SMEs in business performance analysis using System Dynamics (SD) models. This study has shown that SD model is effective in helping SMEs in its business performance analysis. This research also analyze cause and effect relationship underlying business performance such as the effect of each cost drivers to the profit, the effect of varying the sales volume forecast to the profit and also the effect of production rate to the cost per unit of product and integrate SD models with ABC. This research shows that the result of SD modelling able to achieved 80% of the actual performance of the case study company. Through the integration of ABC into SD model, this research predicts the profit, product cost per unit and return of investment. Thus, it provides evidence that SD model can be used as a tool to analyze business performance of other SME companies. This helps SMEs entrepreneurs for future business planning and decision making.