pan african sfm lecture 5

8/8/2019 Pan African SFM Lecture 5

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Copyright © Amity University1

PAN African eNetwork

ProjectMASTER OF FINANCE & CONTROL

STRATEGIC FINANCIAL MANAGEMENT

Semester - III

Mr. SURAJ PRAKASH



Copyright © Amity University

FINANCIAL ASPECT OF

SUPPLY CHAIN MANAGEMENT



A supply chain is a network of facilities and distribution options that

performs the functions of

1. Procurement of materials,

2. Transformation of these materials into intermediate and finished

products, and

3. The distribution of these finished products to customers.



Supply chain management is typically viewed to lie between

fully vertically integrated firms, where a single firm, and those

own the entire material flow where each channel member

operates independently.

Therefore coordination between the various players in the

chain is key in its effective management.

Cooper and Ellram [1993] compare supply chain management

to a well-balanced and well-practiced relay team. Such a team

is more competitive when each player knows how to be

positioned for the hand-off.

The relationships are the strongest between players who

directly pass the baton, but the entire team needs to make a

coordinated effort to win the race



SUPPLY CHAIN DECISION

6

We classify the decisions for supply chain management into twobroad categories ±

strategic and operational.

As the term implies, strategic decisions are made typically over alonger time horizon. These are closely linked to the corporate

strategy (they sometimes {\it are} the corporate strategy), and

guide supply chain policies from a design perspective.

On the other hand, operational decisions are short term,and focus on activities over a day-to-day basis. The effort in

these type of decisions is to effectively and efficiently

manage the product flow in the "strategically" planned

supply chain.




S upply Chain Decisions

There are four major decision areas insupply chain management:

1) Location,

2) Production,

3) Inventory, and

4) Transportation (distribution),

and there are both strategic and operationalelements in each of these decisionareas.




Location DecisionsThe geographic placement of production facilities, stocking points,

and sourcing points is the natural first step in creating a supplychain.

The location of facilities involves a commitment of resources to along-term plan.

Once the size, number, and location of these are determined, so arethe possible paths by which the product flows through to the finalcustomer.

These decisions are of great significance to a firm since theyrepresent the basic strategy for accessing customer markets, andwill have a considerable impact on revenue, cost, and level of

service.

These decisions should be determined by an optimization routinethat considers production costs, taxes, duties and dutydrawback, tariffs, local content, distribution costs, productionlimitations, etc.

Although location decisions are primarily strategic, they alsohave implications on an operational level.




Production Decisions

The strategic decisions include what products toproduce, and which plants to produce them in, allocationof suppliers to plants, plants to DC's, and DC's tocustomer markets.

As before, these decisions have a big impact on therevenues, costs and customer service levels of the firm.

These decisions assume the existence of the facilities,but determine the exact path¶s through which a productflows to and from these facilities.

Another critical issue is the capacity of the manufacturingfacilities--and this largely depends the degree of verticalintegration within the firm.



Operational decisions focus on detailedproduction scheduling. These decisions include theconstruction of the master production schedules,scheduling production on machines, and equipment

maintenance.

Other considerations include workload balancing,and quality control measures at a production facility.




Inventory DecisionsThese refer to means by which inventories are managed.

Inventories exist at every stage of the supply chain as either rawmaterials, semi-finished or finished goods.

They can also be in-process between locations.

Their primary purpose to buffer against any uncertainty that might existin the supply chain. Since holding of inventories can cost anywherebetween 20 to 40 percent of their value, their efficient managementis critical in supply chain operations.

It is strategic in the sense that top management sets goals. However,most researchers have approached the management of inventoryfrom an operational perspective.



These include deployment strategies (push versus pull),control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safetystock levels, at each stocking location. These levels are

critical, since they are primary determinants of customer service levels.




Transportation Decisions

The mode choice aspect of these decisions are the more strategicones. These are closely linked to the inventory decisions, since thebest choice of mode is often found by trading-off the cost of usingthe particular mode of transport with the indirect cost of inventoryassociated with that mode.

While air shipments may be fast, reliable, and warrant lesser safetystocks, they are expensive. Meanwhile shipping by sea or rail maybe much cheaper, but they necessitate holding relatively largeamounts of inventory to buffer against the inherent uncertaintyassociated with them. Therefore customer service levels, andgeographic location play vital roles in such decisions. Sincetransportation is more than 30 percent of the logistics costs,

operating efficiently makes good economic sense.

Shipment sizes (consolidated bulk shipments versus Lot-for-Lot),routing and scheduling of equipment are key in effectivemanagement of the firm's transport strategy.




Supply-Chain Management (SCM)

Another aspect of Advanced Planning and

Scheduling.

It administers the flow of supplies, logistics,

services and information through the supply-

chain, from suppliers, manufacturers, sub-

contractors, stores and distributors to customers

and end-users. It involves business strategy,

information flow and systems compatibility.




Benefits

Improved visibility of information betweensuppliers and customers: quicker responseto changes in demand.

Shared knowledge: reducing waste andinventories, improving product quality andservices throughout the chain.

Development of a longer term ³learningnetwork´ for the benefit of customers,suppliers and individuals.



Physical v/s Financial Supply

Chains Physical Supply Chain

± Information andprocesses related to thestatus and movement of

the physical goods in transitor storage

E.g. Procurement,supply, logistics,Customs, qualityinspection and

regulatory aspects of thephysical movement

Financial Supply Chain

± Information andprocesses related to thestatus and compliance

stages of the financial aspects of Supply ChainManagement

E.g. Supplier and Buyer Finance process progressstatus, DC and Open




Financial Aspects of the

Supply Chain Aim to give companies a real insight on the role the

supply chain plays to reduce costs in the wider companybusiness model.

It focuses on how one can reduce costsand create valuewithout resorting to lowering supplier rates. To methods inhow through greater internalcollaboration between financeand logistics departments, cash flow and working capitalimprovements can berealized. And in how greater

collaboration with partners within your supply chain willresult in lower totalsupply chain costs.




Supply Chain Financing Solution

Vendor (Supplier) Financing

± Post Shipment Financing ± Pre Shipment Financing

± Inventory Financing

Distributor Financing Receivables Financing and Risk

Management




TURBULANT BUSINESS ENVIRONMENT FINANCIAL

DIMENSIONOF DECISION MAKING




SUPPLY CHAIN DESIGN

PROBLEM- FINANCIAL ISSUE Process data

a set of products

a set of markets. a set of potential geographical sites.

a set of potential equipment

lower and upper bounds for capacityincrement

product recipes




Financial data

product prices

Direct costs

relationship indirect expenses/ capacity.

relationship investment/capacity coefficients for marketable securities

discount factors (Qty., prompt payment)

pledging costs.

tax rate and depreciation data. Interest rates

salvage value

premium risk (shareholders)



Improved collaboration between finance and other business and supply chain functions is necessary tofacilitate the process to develop activity based costing.

This collaboration should help to overcome the

seemingly widespread inability of supply chainmanagers to articulate the cost and benefit of supplychain activities.

Capitalizing on these opportunities requires the ability toplan for and measure supply chain performance and toeffectively communicate performance implication infinancial terms. The supply chain manager¶s ability toarticulate the financial implications of exchangebetween firms will become more important in future.




Activity Based Costing

What?

Why?

How?



Requirement of Cost Systems Valuation of inventory and measurement of

the cost of goods sold for financial reporting.

Estimation of the costs of activities, products,services, and customers.

Providing economic feedback to managers

and operators about process efficiency.



Today¶s businesses are working in an

increasingly complex environment.

Use of Advanced Technology

Product Life Cycle

Product Complexity

Channels of Distribution

Quality Requirements

Product Diversity



0

100

1 2 3 4

Composition of Cost

Direct Material Labour Overheads



Conventional Costing Total Cost = Material + Labour+ Overheads

Overheads are allocated to the products on

volume based measures e.g. labour hours,machine hours, units produced

Will this not distort the costing in the

new environment?

ABC provides an Alternative.



Conventional Costing

Expenses

Cost Objects

AB Costing

Resources

Activities

Cost Objects

Economic

Element

Work

Performed

Product or

service



Basics of A B C Cost of a product is the sum of the costs

of all activities required to manufacture

and deliver the product.

Products do not consume costs directly

Money is spent on activities

Activities are consumed by

product/services



Basics of A B C (contd.) ABC assigns Costs to Products by tracing

expenses to ³activities´. Each Product is

charged based on the extent to which it usedan activity

The primary objective of ABC is to assign

costs that reflect/mirror the physical dynamics

of the business



Basics of A B C (contd.) Provides ways of assigning the costs of

indirect support resources to activities,

business processes, customers, products. It recognises that many organisational

resources are required not for physical

production of units of product but to provide a

broad array of support activities.



32




ABC systems addresses

the following Questions:

What activities are being performed by the

organizational resources?

How much does it cost to perform activities? Why does the organization need to perform

those activities?

How much of each activity is required for the

organization's products, services, and

customers?



Basics of A B C : How?Steps:

1. Form c ost pools

2 . Identify activiti es

3. M ap resour c e c osts t o activiti es

4. De

fine

activity c o

st dr

iv er

s5 . C alculat e c ost

Cost pools are groups or

categories of individual

expense items




Identify Activities

In developing an ABC system, the

organisation identifies the activities

being performed:

Move material

Schedule

productionPurchase material

Inspect items

Respond to

customers

Improve productsIntroduce new

products

Explore new markets

Activity Dictionary




Map resource costs to activities

Financial accounting categorizes expenses

by spending code; salaries, fringe benefits,

utilities, travel, communication, computing,depreciation etc.

ABC collects expenses from this financial

system and drive them to the activities

performed.



Salaries 313,000

Depreciation 155,000

Electricity 132,000

Supplies 25,000

Travel 100,000

Total 725,000

Accounting RecordsActivities Salaries Depreciati Electricity Supplies Travel Total

Business Development 20,000 25000 5000 5000 55,000

Maintianing Present Business 80,000 60000 50000 5000 10000 205,000

Purhcasing Material 125,000 50000 20000 20000 60000 275,000

Set upMachines 25,000 10000 2000 37,000

Running Machines 50,000 10000 50000 110,000

ResolveQuality Problems 13,000 5000 25000 43,000

Total 313,000 155000 132000 25000 100000 725,000

ABC Records

Mappin g



Activities: Types

Unit level:Performed each time a unit isproduced.

Batch level:Performed each time a batch is

produced Product level:Performed to support production

of different type of product

Customer Level: Performed to support servicing

customers

Facility level: Residuary head




Define activity drivers

The linkage between activities and costobjects, such as products, customers,, isaccomplished by using activity drivers.

An activity driver is a quantitative measureof the output of an activity.

The selection of an activity driver reflects a

subjective trade-off between accuracy andcost of measurement.



Activities Drivers

Unit Level

Acquire and Use material for containers No. of Containers

Acquire and Use material for baby-care p No. of products

Batch Level

Set up manually controlled machines No. of batches of con

Set up computer controlled machines No. of batches of B.

Product Level

Design and manufacture moulds No.of moulds require

Use manually controlled machines Product type (contain

Use conputer controlled machines Product type (B.Prod

Customer Level

Consult customers No. of consultations

Provide warehousing for customers No. of cubit feet

Faciltiy Level

Manage workers Salaries



Activities Drivers Activity Cost Activity Volum Activity RUnit Level

Acquire and Use material for containers No. of Containers 40,000 1,000,000 0.04

cquire and Use material for baby-care products No. of products 80,000 8,000 10

Batch Level

Set up manually controlled machines No. of batches of containers 3,000 10 300

Set up computer controlled machines No. of batches of B. Produst 12,000 20 600

Product Level

Design and manufacture moulds No.of moulds required 5,000 5 1000

Use manually controlled machines Product type (containers) 15,000 1 15000

Use conputer controlled machines Product type (B.Products) 40,000 1 40000

Customer LevelConsult customers No. of consultations 4,000 40 100

Provide warehousing for customers No. of cubit feet 2,000 10,000 0.2

Faciltiy Level

Manage workers Salaries 3,000 15,000 0.2

Use main building Square feet 48,000 16,000 3



Ascertaining Cost

A c t i i t i e s A Ra te A.Volume Containers Baby Product

n i t e e

Acquire and Use material for containers 0.04 1,200,000 48,000

cquire and Use material for baby-care products 10 7,000 70000

a tc e e

Set up manually controlled machines 300 12 3,600

Set up computer controlled machines 600 16 9600

r o c t e e

Design and manufacture moulds 1000

1 1,0004 4000

Use manually controlled machines 15000 1 15,000

Use conputer controlled machines 40000 1 40000

C sto e r e e

Consult customers 100

Containers 2 200

B.products 40 4000

Provide warehousing for customers 0.2

Containers 8,000 1,600B.products 2,000 400

a c i t i e e

Manage workers 0.2

Containers 4,000 800

B.products 10,000 2000

Use main building 3

Containers 5,000 15,000

B.products 7,000 21000

o ta C o st 85,200 151,000



Building an ABC Model

Identify

esources

Identify

Activities

Identify

Cost Objects

Define

esource

Drivers

Define

Activity

Drivers

Enter

esource

Costs

Enter

esource

Driver Qty.

Enter

Activity

Driver Qty.

Calculate

Costs



ABC: Where to Use?

High Overheads

Product Diversity or Multiple Products

Customer Diversity Service Diversity

Stiff Competition



TARGET COSTING

45

Target costing is a pricing method used by firms.

It is defined as "a cost management tool for reducing

the overall cost of a product over its entire life-cycle

with the help of production, engineering, research and

design".

A target cost is the maximum amount of cost that can

be incurred on a product and with it the firm can still

earn the required profit margin from that product at a

particular selling price.

In the traditional cost-plus pricing method materials,

labor and overhead costs are measured and a desired

profit is added to determine the selling price.



46

Target costing involves setting a target cost by subtracting a desired profit marginfrom a competitive market price.

A lengthy but complete definition is

"Target Costing is a disciplined process for determining and achieving a full-

stream cost at which a proposed product with specified functionality,performance, and quality must be produced in order to generate the desired

profitability at the product¶s anticipated selling price over a specified period

of time in the future."



47



48

This definition encompasses the principal concepts:

products should be based on an accurate assessment of the wants and

needs of customers in different market segments, and cost targets

should be what result after a sustainable profit margin is subtracted from

what customers are willing to pay at the time of product introduction andafterwards.

These concepts are supported by the four basic steps of Target Costing:

(1) Define the Product

(2) Set the Price and Cost Targets(3) Achieve the Targets

(4) Maintain Competitive Costs.



49

To compete effectively, organizations must continually redesign their products ( or services) in order to shorten product life cycles.

The planning, development and design stage of a product is therefore critical to an

organization's cost management process. Considering possible cost reduction at

this stage of a product's life cycle (rather than during the production process) is

now one of the most important issues facing management accountants in industry.

Here are some examples of decisions made at the design stage which impact on

the cost of a product.

The number of different components Whether the components are standard or not

The ease of changing over too Japanese companies have developed target

costing as a response to the problem of controlling and reducing costs over the

product life cycle.




What is Operations Management?

The business function responsible for

planning, coordinating, and controlling

the resources needed to produce a

company¶s products and services




What is Operations Management?

It is a management function.

Organization¶s core function.

Every organization has OM function

± Service or Manufacturing

± For profit or Not for profit




Typical Organization Chart




© Wiley 2007 54

What is Operations Management

Role? OM Transforms inputs to outputs

± Inputs are resources such as

People, Material, and Money

± Outputs are goods and services




© Wiley 2007 56

OM¶s Transformation Role

To add value

± Increase product value at each stage

± Value added is the net increase between output product value

and input material value

Provide an efficient transformation

± Efficiency ± perform activities well at lowest possible cost



© Wiley 2007 57

Goods & Services

Services Intangible product

Product cannot beinventoried

High customer contact

Short response time

Labor intensive

Manufacturing Tangible product

Product can beinventoried

Low customer contact

Longer response time

Capital intensive




© Wiley 2007 58

On the other hand«

Both use technology

Both have quality, productivity, & response issues

Both must forecast demand Both will have capacity, layout, and location issues

Both have customers, suppliers, scheduling and

staffing issues

Manufacturing often provides services Services often provides tangible goods




© Wiley 2007 59

Hybrid organizations

Some organizations are a blend of service/manufacturing/quasi-

manufacturing Quasi-Manufacturing(QM) organizations

QM characteristics include

± Low customer contact & Capital Intensive




© Wiley 2007 60

Improving Products

http://www.npr.org/templates/story/story.php?sto

ryId=89070760

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqXPK8X2MaL8




© Wiley 2007 61

Improving Services

http://www.npr.org/templates/story/story.p

hp?storyId=88196545

http://www.npr.org/templates/story/story.p

hp?storyId=7000908



© Wiley 2007

62

Trends in OM

Service sector growing

to 50-80% of non-farm

jobs- See Figure 1-4

Global competitiveness

Demands for higher

quality

Huge technology

changes

Time based competition

Work force diversity




OM Decisions

All organizations are based on decisions

Decisions follow a similar path

± First decisions very broad ± Strategic

decisions Strategic Decisions ± set the direction for the entire

company; they are broad in scope and long-term innature

± Following decisions focus on specifics -Tactical decision




OM Decisions

Tactical decisions focus on

± Specific day-to-day issues

Resource needs, schedules, & quantities to

produce

± Tactical decisions are very frequent

± Strategic decisions less frequent

± Tactical decisions must align with strategicdecisions




OM Decisions




© Wiley 2007 67

Why OM?

For long-run success companies must placemuch important on their operations ± The 1950-1960 era was the U.S. golden era where

primary opportunities were marketing

± The 1970-1980 U.S. companies experienced a largedecline in productivity growth ± international firmsbegan to challenge in many markets

± The 1970-1980 era saw U. S. firms lagging behind in

methods and processes ± The resurgence of American business in the 1990¶scapitalized on improved operations




© Wiley 2007 68

Historical Development of OM

Industrial revolution Late 1700s

Scientific management Early 1900s

Human relations/Human Resources1930s -

Management science Mid-1900s

Computer age 1970s

Environmental Issues 1970s




© Wiley 2007 69

Historical Development of OM Just-in-Time Systems (JIT) 1980s

Total quality management (TQM) 1980s

Reengineering 1990s

Global competition 1980s

Flexibility 1990s




Historical Development of OM

Time-Based Competition 1990s

Supply chain Management 1990s

Electronic Commerce2000s

Outsourcing and

flattening of the world 2000s




71

OM in Practice

OM has the most diverse organizational function

Manages the transformation process

OM has many faces and names such as;

± V. P. operations, Director of supply chains,Manufacturing manager

± Plant manger, Quality specialists, etc.

All business functions need information from OM

in order to perform their tasks



72

Business Information Flow




© Wiley 2007 73

OM Across the Organization Most businesses are supported by the

functions of operations, marketing, and

finance

The major functional areas must interact to

achieve the organization goals




© Wiley 2007 74

OM Across the Organization -

continued Marketing is not fully capable of meeting customer needsif they do not understand what operations can produce

Finance cannot judge the need for capital investments if they do not understand operations concepts and needs

Information systems enables the information flowthroughout the organization

Human resources must understand job requirementsand worker skills

Accounting needs to consider inventory management,capacity information, and labor standards




© Wiley 2007 75

Highlights

OM is the business function that is responsible for managing and coordinating the resources needed toproduce a company¶s products and services.

Its role of OM is to transform organizational inputs into

company¶s products or services outputs OM is responsible for a wide range of decisions, ranging

from strategic to tactical.

Organizations can be divided into manufacturing andservice organizations, which differ in the tangibility of the

product or service



STRATEGIC COST

MANAGMENT

PRODUCT LIFE CYCLE



P ODUCT LIFE CYCLE

77



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