1. 1 Financial Measures Training for the Annual Self Assessments (ASAs) Office of Business Systems and Finance Office of Research Services National Institutes of Health August 2002

2. 2 Training Objectives Unit Cost Measures Asset Utilization Measures Questions Agenda

3. 3 Training Objectives Understand unit cost and asset utilization measures Discuss calculation of unit cost and asset utilization measures

4. 4 Common Objectives and Measures The first common measure for the Financial Perspective is analyzing and understanding changes in the unit cost for each Discrete Service in your Service Group. Financial Perspective in the ASA Template The second common measure in the Financial Perspective is analyzing actual assets utilized compared to planned asset utilization for each Discrete Service.

5. 5 Unit Cost Measures

6. 6 Why Care About Unit Costs? Consider this example…… –Spent about $14.00 on gas – was that good? It depends. » 9 gallons »12 gallons –Require number of gallons to determine whether high or low price » 9 gallons @ $1.55 per gallon »12 gallons @ $1.15 per gallon –Number of gallons is the unit of output Without knowing the unit cost, customer cannot evaluate the price they are paying

7. 7 Change in Total Cost of Services Perform veterinary surgery Translate documents Plan and execute renovations Issue and track parking permits Collect and dispose of recyclables $ 975 $ 334 $1,923 $ 164 $1,913 FY2004 Forecast $ 774 $ 268 $2,415 $ 143 $1,197 FY2003 Forecast

8. 8 Analysis of Change in Total Cost How much will be due to change in demand? How much will be due to change in cost each time to perform the service? ORS will use unit cost to understand why service providers’ total costs are changing –Due to changes in demand volume? –Or due to changes in the cost of one unit of service delivery?

9. 9 Unit Cost = Total Cost / Number of Units of Output “Output” means product and services generated from the consumption of resources “Total cost” is the sum of all resources (direct and indirect) consumed –Use actual cost data if available, or –Use cost from the ORS Business Plan »Forecasted costs »Available for FY01, FY02, FY03, FY04 Calculating Unit Cost Measures

10. 10 Choosing Unit Cost Measures “Unit of output” is –Single quantity regarded as a whole –A determinate quantity adopted as a standard or basis for comparison What constitutes one more unit of output? On what dimension is one unit of the product or service equivalent to another? –Number of procedures »Most procedures are around the same number of hours or days –Number of procedure hours »Procedures can vary from one hour to one day »The number of hours drives the cost

11. 11 May have multiple unit cost measures –One unit cost for each product –One unit cost for a group of products –One unit cost for all products Select unit costs that are strategically important –Focus on the most important aspects of your business –Highlight areas of management focus Choosing Unit Cost Measures

12. 12 Sample Units of Output Number of procedures [or hours] Perform veterinary surgery Number of documents [or pages] [or words] Translate documents Dollar value of projects [or project days] [or square feet] Plan and execute renovations Number of permitsIssue and track parking permits Number of tons [or pieces] [or pickups] Collect and dispose of recyclables

13. 13 Sample Units of Output Number of maintenance hours [or number of stations] Maintain scientific equipment and workstations Number of design hoursDesign and fabricate custom instruments Number of collaborative hoursConduct collaborative physical science and bio- engineering research Number of personnel hours [or event hours] Coordinate and provide security for events Number of planning hoursPlan emergency preparedness strategies

14. 14 Sample Units of Output - A Tiered Approach Number of personnel hoursSpecial public event Number of event hoursEmployee social event Number of press conferencesPress conference Coordinate and provide security for events:

15. 15 Example Calculating Unit Cost Measures Service: collect and dispose of hazardous waste Unit of output: number of metric tons = 250,000 in FY02 Cost of resources in FY02:

16. 16 Example (cont.) Calculating Unit Cost Measures Service: collect and dispose of hazardous waste Unit Cost = $5,690,520 / 250,000 Unit Cost = $22.76 per metric ton

17. 17 $22.76$23.21 250,000280,000 Data might be displayed using bar chart to allow for comparisons. Example (cont.) Graphing Unit Cost Measures

18. 18 Data might be displayed using a run chart (shown) or control chart. Refer to the Data Analysis and Graphing Training for more information on how to construct this graph. Example (cont.) Graphing Unit Cost Measures Unit Cost by Quarter

19. 19 Analyzing Unit Cost Measures Benchmarking –Compare unit cost to others in similar industry/business –Are your costs above or below others? Why? Trend analysis –Study unit cost over time –Are your costs going up or down? Why? Cost projection –Use unit cost data to make cost projections for the future »This year’s unit cost was $22.76. Assume that costs are expected to increase by 2% to $23.21 »Next year will process 280,000 metric tons »280,000 x $23.21 = $6,498,800 »Increase in total cost of 14%

20. 20 Step 1: Analyze need for unit cost information Step 2: Choose unit cost measures Step 3: Complete the unit cost measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance) Step 4: Gather unit cost data Step 5: Graph unit cost data and interpret findings. Possible techniques include –Analyzing trends (historical and forecasted) –Evaluating causes and cost drivers –Comparing to benchmarks –Identifying improvements Steps to Prepare Unit Cost Measures

21. 21 Asset Utilization Measures

22. 22 Capacity and Asset Utilization Who is responsible for capacity management? How can we obtain more capacity without buying it? What are the sources of idle capacity? How much unused capacity is assigned to product/service cost? Where will we find hidden, unused capacity?

23. 23 Why Care About Asset Utilization? To measure the difference between what an asset is capable of producing and what it actually produces To calculate the “opportunity gap”

24. 24 Causes of Loss in Asset Utilization Standard operating procedures Planned shutdowns Sales demand Raw materials shortages Product quality Equipment failure Acts of nature

25. 25 Calculating Asset Utilization The ratio of actual output to the output that could be achieved if an asset operated at maximum capacity Asset utilization = (actual output / maximum output capacity) Opportunity gap = maximum output capacity – actual output ORS is basing maximum output capacity on planned utilization

26. 26 Determining Planned Utilization Planned utilization can be based on –Theoretical capacity: asset at its maximum output capacity when operating for 365 days per year while producing 100% quality product –Practical capacity: allows for normal downtime –Historical capacity: risks institutionalizing inefficiencies

27. 27 Determining Planned Utilization (cont.) Practical capacity is attainable through reasonable, though highly efficient, efforts –Arbitrary estimate: specified percentage of theoretical capacity –Normal volume: May be used to approximate until evidence is available to obtain a better estimate. Only an issue when normal volume is substantially below practical capacity. –Time series analysis: review past activity levels and adjust for delays, poor quality, overtime, or other stresses –Analytical approach: deduct maintenance, repairs, startups, shutdowns, and protective (or surge) capacity from theoretical capacity

28. 28 Example * Calculating Asset Utilization Service: review extramural construction projects Actual output = 128 reviews Maximum output capacity –Assume each review takes one week (40 hours) when operating at maximum capacity with 100% quality product –Assume practical capacity of 1,840 hours per year per FTE –Assume 3 FTE –Maximum capacity = (3 x 1,840) / 40 = 138 reviews Asset utilization = 128/138 = 92.8% * Example based on hypothetical data

29. 29 Alternate Calculation Method Traditional asset utilization ratio requires standard output measure Some activities are difficult to measure in terms of standard outputs –Use of resources may vary significantly –May not have single quantity that can be regarded as a whole –Analysis may take place at an aggregated service level May substitute inputs for outputs when standard output is not appropriate Must separate productive from nonproductive inputs

30. 30 Alternate Calculation Method (cont.) Asset utilization = (actual productive input / maximum input capacity) Opportunity gap = maximum capacity – actual productive input

31. 31 Example * Alternate Calculation Service: provide technical assistance in radiation safety Maximum input capacity: –Assume 1,840 hours per FTE and six FTEs –Maximum input capacity = 6 x 1,840 = 11,040 Actual nonproductive input –Assume 160 hours standby –Assume 192 hours duplication of effort * Example based on hypothetical data

32. 32 Service: provide technical assistance in radiation safety Asset utilization = (11,040 – 160 – 192) / 11,040 Asset utilization = 10,688 / 11,040 Asset utilization = 96.8% Example (cont.) Alternate Calculation

33. 33 Asset Utilization As Metric Focuses improvement efforts on eliminating cause of business opportunity gaps Minimizes the level of non-productive assets within regulatory and risk tolerance constraints Measures ability of managers to invest in earning assets when measured as ratio of earning assets to total assets

34. 34 Example Graphing Asset Utilization Data 60%67% March 93%88% February 79%75% January BenchmarkDiscrete Service

35. 35 Example (cont.) Graphing Asset Utilization Data

36. 36 Example Run Chart of Asset Utilization Data might be displayed using a run chart showing % deviation from capacity. Refer to the Data Analysis and Graphing Training for more information on how to construct this graph.

37. 37 Asset Utilization Hierarchy Productive capacity Nonproductive capacity Idle capacity

38. 38 Capacity Model* Good product Product development Process developmentProductive capacity Setups Maintenance Waste StandbyNonproductive capacity Marketable Off limits Not marketableIdle capacity Specific ModelSummary Model * Excerpted from Consortium of Advanced Manufacturers-International (CAM-I) Capacity Model

39. 39 Step 1: Identify appropriate asset base to include in measure Step 2: Determine planned capacity for FY02 if not already established Step 3: Complete the asset utilization measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance) Step 4: Gather asset utilization data Step 5: Graph asset utilization data and interpret findings. Possible techniques include –Analyzing trends (historical and forecasted) –Evaluating causes and cost drivers –Comparing to benchmarks –Identifying improvements Step 6: Determine planned capacity for FY03 Steps to Prepare Asset Utilization Measure

40. 40 Conclusion ASA Teams will determine how to implement the two common financial measures –Unit cost –Asset utilization This data will be used both by ASA Teams and ORS- wide to gauge our performance Work with the financial people in your area to clarify your measures and obtain data For more assistance, please contact: –Amy Vandenburg (OBSF) »(301) 402-3827 »vandenba@ors.od.nih.gov