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2 Operational Efficiency and Business process Performance Operational Efficiency and Business process Performance Just in Time Systems (J I T) Reductions in inventory level, reduction in storage, lower inventory taxes, pilferage and obsolescence risks. Reductions in inventory level, reduction in storage, lower inventory taxes, pilferage and obsolescence risks. The focus of quality control under JIT shifts from the discovery of defective parts to the prevention of quality problems, so zero machine break down zero defects are ultimate goals. The focus of quality control under JIT shifts from the discovery of defective parts to the prevention of quality problems, so zero machine break down zero defects are ultimate goals. JIT is a pool system, items are Pulled Through production by current demand not Push Through by anticipated demand. JIT is a pool system, items are Pulled Through production by current demand not Push Through by anticipated demand. JIT is the total system of purchasing, production and inventory control. KANBAN is one of the many elements in the JIT system. JIT is the total system of purchasing, production and inventory control. KANBAN is one of the many elements in the JIT system. Kanban means ticket, Tickets (also described as cards or markers) control the flow of production or parts so that they are produced or obtained in the needed amounts at the needed times.

3 Operational Efficiency and Business process Performance ……… Material Requirement Planning Push system. Material requirement planning system enables a company to efficiently fulfill the requirements of the MPS (Master production schedule) by coordinating both the manufacture of component parts for finished goods and arrival of raw materials. Manufacturing Resource Planning Outsourcing Business Process Outsourcing Insourcing, Cosourcing. Theory of Constraints Identify the Constraint Identify the Constraint Determine the most profitable product mix given the constant Determine the most profitable product mix given the constant Maximize the flow through the constraint Maximize the flow through the constraint Increase capacity at the constraint Increase capacity at the constraint Redesign the manufacturing process for greater flexibility and speed. Redesign the manufacturing process for greater flexibility and speed.

4 Operational Efficiency and Business process Performance ……… TOC has a short term focus, based on cost of materials and product mix ABC has along term focus, which considers all products costs and is concerned, with strategic pricing and profit planning. TOC analysis addresses the issues of resource constraints and operational capacity TOC ignores cost drivers focusing mainly on process time ABC requires defining cost drivers in every part of the organization

5 Operational Efficiency and Business process Performance ……… Throughput Costing sometimes called super variable costing, recognizes only direct material costs as being truly variable and thus relevant to the calculation of throughput margin. All other manufacturing costs are ignored because they are considered fixed in short run. Throughput Margin= Sales – Direct Material ProductAssemblyTesting Airborne Radar 34 Seagoing810 Ground Radar 55

6 Operational Efficiency and Business process Performance ……… Company has 150 hours available every month for testing Under current set up testing phase is constraint. Throughput Margin Per Hour Airborne Radar Seagoing Radar Ground Radar Price $ 200,000 $ 600,000 $ 300,000 Less: Material Cost (100,000)(400,000)(250,000) Throughput Margin $ 100,000 $ 200,000 $ 50,000 Constraint Time 4105 Throughput Margin Per Hour $ 25,000 # 20,000 $ 10,000

7 Operational Efficiency and Business process Performance………….. The crucial factor in determining the optimal product mix is not which product is the most profitable product in terms of absolute throughput margin (the seagoing sonar) but which one generates the highest margin per time spent in the bottleneck operation. The crucial factor in determining the optimal product mix is not which product is the most profitable product in terms of absolute throughput margin (the seagoing sonar) but which one generates the highest margin per time spent in the bottleneck operation. Porter’s Model for capacity expansion Porter’s Model for capacity expansion Must identify the options in relation to their size, type degree of vertical integration and possible response by competitors. Must identify the options in relation to their size, type degree of vertical integration and possible response by competitors. Forecast demand, input costs and technology developments. Forecast demand, input costs and technology developments. Analysis of competitors Analysis of competitors Prediction of Total Industry capacity and firms market share., predict price and market share. Prediction of Total Industry capacity and firms market share., predict price and market share. Final step, testing for inconsistencies. Final step, testing for inconsistencies.

8 Operational Efficiency and Business process Performance………….. Value Chain analysis : To remain in the market product must provide value to the customer and profit to the seller. To remain in the market product must provide value to the customer and profit to the seller. Cost---Price---Value Cost---Price---Value A value chain is model for depicting the way in which every function is a company adds value to the final product. A value chain is model for depicting the way in which every function is a company adds value to the final product. Support Services Primary Activities Product Human Resources Information Technology Contract Management Inventory Management Plant Maintenance Research & Development Product Design Manufacturing Marketing & Distribution Customer Service PRODUCT

9 Operational Efficiency and Business process Performance………….. Value Chain analysis is a strategic analysis tool that allows a firm to focus on those activities that are consistent with its overall strategy. 1st step is to identify the firm’s value creating activities. 1st step is to identify the firm’s value creating activities. 2ns step is to determine how each value creating activity can produce a competitive advantage for the firm. 2ns step is to determine how each value creating activity can produce a competitive advantage for the firm. Value chain analysis is a tem effort. Management accountants needs to collaborate with engineering, production, marketing, distribution, and customer service professionals to focus on the strengths, weaknesses, opportunities, and threats identified in the value chain analysis. Value chain analysis offers an excellent opportunity to integrate strategic planning and management accounting to guide the firm to survival and growth. In inventory management, by sharing information among all the parties, demand uncertainty is reduced at each level with consequent decreases of inventory at each level, minimization of stock outs and avoidance of over production and rush orders. Such cooperation an counteracts has been called backlash effect

10 Operational Efficiency and Business process Performance………….. Critical success factors Value chain and supply chain analysis should be used to meet customer requirements for better performance regarding Cost Reduction Cost Reduction Efficiency Efficiency Continuous improvement of quality to meet customers needs and wants Continuous improvement of quality to meet customers needs and wants Minimization or elimination of defects Minimization or elimination of defects Faster product development and customer response times and Faster product development and customer response times and Constant innovation Constant innovation Value engineering is a means of reaching targeted cost levels. It is systematic approach to assessing all aspects of the value chain cost buildup for a product. The purpose is to minimize costs without sacrificing customer satisfaction. Value engineering is a means of reaching targeted cost levels. It is systematic approach to assessing all aspects of the value chain cost buildup for a product. The purpose is to minimize costs without sacrificing customer satisfaction. The linkage of product costing and continuous improvement of processes is activity based management. The linkage of product costing and continuous improvement of processes is activity based management. KAIZEN is the Japanese word for the continuous pursuit of improvement in every aspect of organizational operations. KAIZEN is the Japanese word for the continuous pursuit of improvement in every aspect of organizational operations.

11 Operational Efficiency and Business process Performance………….. Benchmarking Benchmarking Benchmarking involves continuously evaluating the practices of best-in-class organizations and adapting company processes to incorporate the best of these practices. Benchmarking involves continuously evaluating the practices of best-in-class organizations and adapting company processes to incorporate the best of these practices. Select and prioritize benchmarking projects Select and prioritize benchmarking projects Benchmarking Teams Benchmarking Teams Investigate and document internal processes Investigate and document internal processes Researching and identifying best-in-class performance Researching and identifying best-in-class performance Data analysis phase Data analysis phase Implementation phase. Implementation phase. Balanced Scorecard The trend in managerial performance evaluation is the balanced scorecard approach. The trend in managerial performance evaluation is the balanced scorecard approach. A typical scorecard includes measures in four categories A typical scorecard includes measures in four categories 1. Financial 1. Financial 2. Customer 2. Customer 3. Learning, growth and innovation 3. Learning, growth and innovation 4. Internal business processes 4. Internal business processes Costs of quality: Prevention, Appraisal, Internal Failure and External failure Costs of quality: Prevention, Appraisal, Internal Failure and External failure