chapter 12: operations management: financial dimensions
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CHAPTER 12: OPERATIONS MANAGEMENT: FINANCIAL DIMENSIONS
©2013 Pearson Education Publishing as Prentice Hall 12-2
Chapter Objectives
• To define operations management• To discuss profit planning• To describe asset management,
including the strategic profit model, other key business ratios, and financial trends in retailing
• To look at retail budgeting• To examine resource allocation
©2013 Pearson Education Publishing as Prentice Hall 12-3
Operations Management
Operations management involves the efficient and effective implementation
of the policies and tasks necessary to satisfy the firm’s customers, employees, and management (and stockholders, if a
public company).
This has a major impact on both sales and profits.
©2013 Pearson Education Publishing as Prentice Hall 12-4
Profit Planning
• Profit-and-loss (income) statement • Summary of a retailer’s revenues and
expenses over a given period of time• Review of overall and specific revenues
and costs for similar periods and profitability
©2013 Pearson Education Publishing as Prentice Hall 12-5
Major Components of a Profit-and-Loss Statement—Donna’s Gift Shop 2012
• Net Sales• Cost of Goods Sold• Gross Profit (Margin)• Operating Expenses• Taxes• Net Profit After Taxes
Net Sales $330,000
CGS $180,000
Gross Profit $150,000
Operating Expenses
$ 95,250
Other Costs $ 20,000
Total Costs $115,250
Net Profit before Taxes
$ 34,750
Taxes $ 15,500
Net Profit after Taxes
$ 19,250
©2013 Pearson Education Publishing as Prentice Hall 12-6
Percent Profit & Loss Statement: Donna’s Gift Shop 2012
• Net sales• Cost of Goods Sold• Gross Profit• Operating Expenses• Net profit Before tax
Net Sales 100.0 CGS 54.5 Gross Profit 45.5 Operating Expenses 28.9 Other Costs 6.1 Total Costs 34.9 Net Profit before Tax 10.5 Taxes 4.7 Net Profit after Taxes 5.8
©2013 Pearson Education Publishing as Prentice Hall 12-7
Asset Management
• The Balance Sheet• Assets• Liabilities• Net Worth• Net Profit Margin• Asset Turnover• Return on Assets• Financial Leverage
©2013 Pearson Education Publishing as Prentice Hall 12-8
(as of August 31, 2012)
©2013 Pearson Education Publishing as Prentice Hall 12-9
Figure 12-1: The Strategic Profit Model
©2013 Pearson Education Publishing as Prentice Hall 12-10
Increasing Profit Margins• Increase sales of private label brands• Centralize buying to increase bargaining power• Reduce SKUs in each category to increase
bargaining power• Reduce operating expenses via self-service
operations, and through “buy on line, pick up in-store” to reduce delivery costs
• Increase Web sales• Reduce labor expenses through increased use of
part-time help, better scheduling
©2013 Pearson Education Publishing as Prentice Hall 12-11
Increasing Asset Turnover• 24/7 operations• Outsource delivery and credit operations• Lease instead of own assets (virtual corporation owns few
assets)• Reduce inventory levels through quick response, through
reducing product proliferation, and through drop shipping• Utilize second-use locations to reduce store renovation
expenses• Utilize inexpensive fixtures—pipe rack, cut case displays
©2013 Pearson Education Publishing as Prentice Hall 12-12
Other Key Business Ratios• Quick ratio—cash plus accounts receivable divided
by total current liabilities (due within one year).• Current ratio—total current assets (including
inventory) divided by total current liabilities. • Collection period—accounts receivable divided by
net sales and then multiplied by 365. (Aging accounts receivable).
• Accounts payable to net sales—accounts payable divided by annual net sales.
• Overall gross profit—net sales minus the cost of goods sold and then divided by net sales.
©2013 Pearson Education Publishing as Prentice Hall 12-13
Financial Trends in Retailing
• Slow growth in U.S. economy• Funding sources• Mergers, consolidations, spinoffs• Bankruptcies and liquidations• Questionable accounting and
financial reporting practices
©2013 Pearson Education Publishing as Prentice Hall 12-14
Funding Sources
• Mortgage refinance (due to low interest rates)• REIT (retail-estate investment trust) to fund
construction• Company dedicated to owning and operating
income-producing real estate
• Initial public offering (IPO)
©2013 Pearson Education Publishing as Prentice Hall 12-15
Figure 12-2: The Demise of Linens ‘n Things
©2013 Pearson Education Publishing as Prentice Hall 12-16
Budgeting
• Budgeting outlines a retailer’s planned expenditures for a given time based on expected performance.
• Costs are linked to satisfying target market, employee, and management goals.
©2013 Pearson Education Publishing as Prentice Hall 12-17
Figure 12-3: The Retail Budgeting Process
©2013 Pearson Education Publishing as Prentice Hall 12-18
Benefits of Budgeting• Expenditures are related to expected performance.• Costs can be adjusted as goals are revised.• Resources are allocated to the right areas.• Spending is coordinated.• Planning is structured and integrated.• Cost standards are set.• Expenditures are monitored during a budget cycle.• Planned budgets versus actual budgets can be
compared.• Costs/performance can be compared with industry
averages.
©2013 Pearson Education Publishing as Prentice Hall 12-19
Preliminary Budgeting Decisions
1. Specify budgeting authority
2. Define time frame
3. Determine budgeting frequency
4. Establish cost categories
5. Set level of detail
6. Prescribe budget flexibility
©2013 Pearson Education Publishing as Prentice Hall 12-20
Cost Classifications• Capital expenditures—long
term investments (can be leased, often depreciated
• Fixed costs– constant over range of sales
• Direct costs—can be traced to departments, stores, products
• Natural account expenses—classified by name such as salaries
• Operating expenses—short run expenses
• Variable costs-based on sales levels
• Indirect expenses-general overhead that can be allocated to cost centers
• Functional account expenses-classified by purpose or activity, such as cashiers, customer service personnel;
©2013 Pearson Education Publishing as Prentice Hall 12-21
Bad Costs• Bad costs are costs incurred for
customer services that:• Customers do not value (will pay not
additional prices for)• Are not required by customers
©2013 Pearson Education Publishing as Prentice Hall 12-22
Causes and Examples of Bad Costs
Cause Example
Over-centralizing stores operations
Common hours of operation and services regardless of location needs
Reducing all expenses on a proportionate basis
Some services are more highly valued like low waiting lines or custom-made sandwiches
Trading-up to capture more affluent customers
Alienating existing customers and not attracting more affluent ones
©2013 Pearson Education Publishing as Prentice Hall 12-23
Causes and Examples of Bad Costs (cont)
Cause ExampleNot responding to changes in consumer behavior due to technology
Ignoring Web– order on-line and pick up in-store; using catalogs versus Web
Not responding to competition
Not understanding low-cost competition, unbundled pricing opportunities
©2013 Pearson Education Publishing as Prentice Hall 12-24
Ongoing Budgeting Process
• Set goals• Specify performance standards• Plan expenditures in terms of
performance goals• Make actual expenditures• Monitor results• Adjust budget
©2013 Pearson Education Publishing as Prentice Hall 12-25
Cash Flow• Cash flow relates the amount and timing of
revenues received to the amount and timing of expenditures for a specific time.
• In cash flow management, the usual intention is to make sure revenues are received before expenditures are made.
• If cash flow is weak, short-term loans may be needed or profits may be tied up in inventory and other expenses.
• For seasonal retailers, erratic cash flow may be unavoidable.
©2013 Pearson Education Publishing as Prentice Hall 12-26
Table 12-6: The Effects of Cash Flow
©2013 Pearson Education Publishing as Prentice Hall 12-27
Resource Allocation
• Capital Expenditures• Long-term
investments in fixed assets
• Operating Expenditures• Short-term
selling and administrative costs in running a business
©2013 Pearson Education Publishing as Prentice Hall 12-28
Enhancing Productivity• A firm can improve employee performance,
sales per foot of space, and other factors by better matching employee workloads to store traffic patters, upgrading training programs, increasing advertising, evaluating item profitability and turnover, etc.
• It can reduce costs by automating, having suppliers perform certain tasks, etc.
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photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
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