the modern business environment

CIMA – Management Level

Performance Management“The Modern Business Environment”

ADS Corpconsultants Private Limited

Characteristics of MBE

– Global Environment (No border restriction)

– Flexibility (Competitive)

– Employee Environment (Empowering employees)

– Just in Time (JIT)

– World Class Manufacturing (under Total Quality Management)


JIT• JIT : -

is a ‘pull system’ which responds to demand unlike to a ‘push system’ whereInventory acts as a buffer.The Objective is to produce/procure products or components as they are requiredby Customer rather than for Inventory. It is a Zero Inventory Model at all stages ofprodn incld. Finished Goods (FG).

Pull System

Push System

Aims of JIT are to produce:- the required Item- at required Quality- in required Quantity- at required precise Time

PRODUCTIONSupplier Customer

PRODUCTIONCustomer Supplier


JIT• Requirements of JIT:

i. Versatile Labourii. Grouped by Product Lineiii. Strong Information Systemiv. Zero Defects & Get it Right First Timev. Strong Supplier Relationships

JIT Production: - a production system driven by demand for FGwhere each component on a Production Line is producedONLY when needed for the Next Stage.

JIT Purchase: - a purchasing system where Material purchase iscontracted in such a way that Receipt & Usage of material, tomax. extent possible, COINCIDE.


TQM

• TQM : -

seeks to ensure that goods produced & services supplied

are of Highest Quality and is based on 2 basic principles:

i. Get it Right, First Time – Zero rejects & 100% Quality

ii. Continuous Improvement – Dissatisfaction with status quo

Continuous Improvement Approaches

i. Kaizen Costing

ii. Target Costing


COST OF QUALITY

NON-COMPLIANCE COST

COMPLIANCE COST

Appraisal Cost- Incoming inspection- Set-up Inspections - Process Control

Prevention Cost- Training- Routine Repair - Quality in Design - Correct Engineering

Internal Failure Cost- Scrap Cost- Reworking Cost- Process Failure Cost

Internal Failure Cost- Marketing Cost of failed

product- Loss of Goodwill - Manufacturing/Process Engineering cost of failed product

-Liability Claims - Travelling Cost - Repair Cost -- Compensation/

Replacement of returned product


Kaizen Costing & Target Costing• Continuous Improvement or “Kaizen” is an integral part of JIT

philosophy. “Kaizen” is a Japanese term meaning “improvingprocesses through small, incremental amount rather than throughlarge innovations”.

• Improvements – sought all the time

• Improvements – small & numerous rather occasional & far reaching

• Cost reduction targets – set & applied on a more frequent basis

• Kaizen Costing is a planning method used during themanufacturing cycle that emphasizes reducing Variable Costs of aperiod below the cost level in the base period.

• Target Costing is a form of life cycle costing and derived bydeducting Target Profit from predetermined Selling Price. (Detaileddiscussion in next lecture)

TC = SP - TP


Standard Costing Concepts Vs. Kaizen Costing Concepts

S. No. Standard Costing Concepts Kaizen Costing Concepts

i) Cost Control Concept Cost Reduction Concept

ii) Assume current manufacturing Conditions

Assume continuous improvement in manufacturing

iii) Meet Cost performance standards Achieve cost reduction targets

S. No. Standard Cost Techniques Kaizen Cost Techniques

i) Standard set annually or semi-annually Monthly cost reduction targets are set & applied

ii) Cost Variance Analysis (CVA) using Standard and Actual Cost

CVA using Target Kaizen & Actual Cost reduction amount


Value Analysis/Value Engineering/BPR

• Value Analysis (VA) – for Existing Products– is systematic examination of factors affecting cost of product/service in order

to achieve specified purpose most economically at the required standard ofquality & reliability.

– to identify unnecessary cost elements within component of goods & services,i.e., any cost that don’t add value should be eliminated.

– often leads to reduction of component used, use of alternatives, cheapercomponents & standardization of parts across several product line

• Value Engineering (VE) – for Products to be produced– Is redesign of an activity, product/service so that value to customer is

enhanced while costs are reduced or at least increased by less than resultingprice increase.

• Types of Value• Cost Value – cost of product

• Exchange Value – Price that customer is willing to pay

• Esteem value – Status/regard associated with ownership of a product


Value Analysis/Value Engineering/BPR

• Business Process Re-engineering (BPR)– involves examining business processes and radically redesigning these

processes to achieve cost reduction, improved quality & customer satisfaction.

– is all about major changes to how business processes operate.

– is concerned with making far reaching One-off changes to improve operationsor processes

• The objective of all the above activities VA/VE/BPR are zeroed to achieve

– Cost Reduction

– Improved Quality

– Customer Satisfaction

in the product/service offered to the customer

• Porter suggests ONE of the following Two strategies by organizations totake competitive advantage:-

i. Low Cost Strategy – through Economies of Scales & Tight Cost Control

ii. Differentiation Strategy – creating something that customer perceives as

unique via brand loyalty, superior customer service, product design & features.


Value Chain

• Value Chain– was designed by Prof. Michael Porter of Harvard Business School in 1985

– is a linked set of value creating activities starting from basic Raw Materialsources or Component Suppliers through ultimate end-use product or servicedelivered to the customer.

– creates conditions to improve customer satisfaction; particularly in terms of“Cost efficiency, Quality & Delivery” identify unnecessary cost elements

Value Chain Activities

Primary Activities Support Activities

- Inbound Logistics- Operations- Outbound Logistics- Marketing & Sales- Service

- Procurement- Technology development- HR Management- Firm Infrastructure


Supply Chain Management• A supply chain is a network of customers & suppliers that a

business deals with.

• SCM can be broken into – Purchasing

– Stock/Inventory

– Customer Ordering

– Delivery & logistics

– Outsourcing

S. No. Insourcing Outsourcing

i) High degree of Control over INPUT Low/ No Control

ii) Increase Visibility over process Loss of Visibility

iii) High Investment No Investment

iv) Requires high volume No

v) Dedicated equipment limited flexibility Not required

vi) Not a core competence Can concentrate on core competence

vii) Cash Outflow Improved cash flow

Purchasing

Stock

OrderDel. &

Logistic

Outsourcing


Gain Sharing Arrangement

• GSA– is an approach to review & adjust an existing contract or series of contract

where adjustment provides benefits to both parties.

– is attractive to companies because they can provide insulation from the cut-throat price competition.

– is popular where there exists potential to achieve mutual benefit amongparties concerned. The gain/benefit could be fin./no-fin. in nature.

• Companies typically guarantee their customer that they will achieve acertain amount of cost savings or top-line improvement. If targets are notmet, Co commits to make up difference in cash. However, if targets areexceeded, supplier may also receive a pre-specified %age of gain.

• Components of GSA– Mutual Interdependence & Trust

– Common Goal

– Agreed procedure of Decision making & Problem solving

– Continuous Improvement commitment

– Team Work

– Predetermined Gain/Pain sharing arrangement

– Open book accounting

– Targets that provide continuous measurable improvements on programeADS Corpconsultants Private Limited

Atul KumarACA, Adv Dip in MA

[email protected]+91-9004614321


mailto:[email protected]

the modern business environment

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