1 “strategic cost analysis @ capacity decisions” paint it right!paint it right!paint it...
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![Page 1: 1 “Strategic Cost Analysis @ Capacity Decisions” Paint it Right!Paint it Right!Paint it Right!Paint it Right! Fedor DurnevSergey Kolmagorov Fabrizio Malinconico](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d605503460f94a4184a/html5/thumbnails/1.jpg)
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“Strategic Cost Analysis @ Capacity Decisions”
PPaaiinntt iitt RRiigghhtt!!
Fedor Durnev Sergey Kolmagorov
Fabrizio Malinconico Giorgio Ronca
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Strategic means Strategic means Necessary…Necessary…
STRATEGY
TACTICS
OPERATIONS
WHAT?
HOW?
WHAT AND HOW?
Managerial level Key question Applied to accounting
HOW TO USE RESOURCES?
HOW TO ALLOCATE COSTS?
WHAT INFORMATION
TO GATHER AND HOW TO
DO THAT?
Strategic decisions are fundamental.
They impact on the way a company rules its business, its activities and its operations
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……and what is Strategic and what is Strategic Cost Analysis (SCA)?Cost Analysis (SCA)?
It’s the process of developing cost information
to help managers making strategic choices
MAX (use of strategic resources)Today
Tomorrow
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So, what SCA does ?So, what SCA does ?
• SCA examines the basic relationship between
the cost of providing a product or a service
The value delivered
And how?
…by understanding properly the underlying causes of costs
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What does SCA take into What does SCA take into account?account?
Two main types of cost drivers:Structural
Capacity, set of resources and business model serve as variables, but only with a fundamental decision
Executional
Range of decisions lie within existing capacity. Decisions about product and process design, quality control and capacity management
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Strategic cost analysisStrategic cost analysis
• Strategic cost analysis helps managers to take strategic decisions basing on two main points:
- clear understanding of relationship between costs and value delivered
- maximizing overall profitability of limited resources used
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Let’s make it more interesting…
Considering a practical example
AUTOSHINE ®
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AUTOSHINE
The colours of your life
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AUTOSHINE : company profile: company profile• Founded by Mr. Kolmagorov in 1991 in
St.Petersburg
• Provides a set of different services in area of painting cars’ components
• Very customized services: immense number of combinations of coatings and colors job is very complex
• Four main variables of production process: coating, color, shape and size
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A snapshot of the production process
Painting
Conveyor speed = f (colour; shape; coating; size)
Defects?
N Y
OutputFinessing
Defects?YN
Eliminated
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AUTOSHINE : present situation• The company uses only one conveyor line
for all the production and cannot be used by different activities at once
• Used to take all the orders offered…without undertaking a customer strategy
• And what if the demand increases dramatically?
NO CONSTANT AND STABLE DEMAND!
Problem!
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AUTOSHINE : company profile
• Initially, the company used the absorption costing method short-term orientation
• In fact, many paint jobs were thought profitable under this absorption costing analysis but….
• ...with an ABC analysis the situation appeared very different….
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Strategic costingStrategic costing
Different profitability
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ABCABC Vs Vs Absorption Absorption costingcosting
In addition, some differences refer to products representing a large percentage of the company’s sales…
Then the problem of a correct analysis of products’ profitability is really crucial for AUTOSHINE !
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Let’s move to an ABC analysis…
• ABC is a better option to guide a longer-term decision making AUTOSHINE moves to an ABC approach
• Anyway demand is bigger than the existing capacity of conveyor line the management should decide what to produce
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Let’s move to an Let’s move to an ABCABC analysis…analysis…
• ABC doesn’t take into account opportunity costs occurred when using bottleneck by one extra unit of product
• Company’s profitability was stagnating despite evident growth of demand
• Sergey invited two consultants from Graduate School of Management: Fabrizio Malinconico and Fedor Durnev.
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Capacity management: Capacity management: key issuekey issue
• ABC-analysis does relate costs of resources to profitability of activities, employing them
• But it doesn’t take into account alternative costs of capacity used!
So, what might be done? What is the best solution for AUTOSHINE?
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What consultants suggest…What consultants suggest…
Either:
• To use conveyor in an efficient way, calculating a more precise product profitability
Or:
• To introduce new conveyor line in case of stability of demand growth
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Plan A in actionPlan A in action
Let’s take some different products made (types of orders taken).
Let’s handle some formulas…Yield Rate (YR) = 1 – percentage of defects
occurred after process
Recovery Rate (RR) = percentage of defects eliminated while finessing job
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Variables…Variables…
Run factor involves both the latter ones
RF = 1/(YR + RR)
Complexity factor (CF) is negatively correlated with a required speed of conveyor for each particular product
Demand Factor (DF) = RF*CF
Demand per square foot (DSF) = DF/ Square feet required by different products
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The resultThe result
The two advisors suggest a new measure, PTU that stands for…
Adjusted Product Profit per Throughput unit profit per sq ft/Bottleneck demand per square foot
PTU = Profit per unit/(square feet per unit*BDF)
PTU is just the metrics of product profitability, taking into account alternative costs of using shared capacity.
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Improving the Improving the PTUPTU
• The management can promote a specific product related to the shift of demand
• The ultimate goal is to find the optimal product mix the combination of products with the highest PTU
BUT HOW?
• By working on each different variable that is directly related to PTU
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Plan BPlan B
• The two consultants gave also a different framework to be implemented…
• If the demand is expected to grow steadily and constantly, why not invest in capacity?
How?
Adding a new conveyor line!!! More attention
to accounting!!!
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To sum up…To sum up…
2 scenarios for AUTOSHINE
Change in the “demand mix”
Variations in the demand for different products
Constant increase in demand
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THANK YOU!!!GRAZIE!!!
СПАСИБО!!!
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Questions…?