Cost Control Chapter 11

Front 1

Strategic Cost Management

Back 1

is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage.

Front 2

Strategic Decision Making

Back 2

the goal is to select a stategy to assure long-term growth and survival . . . the key to achieving this goal is to gain a competitive advantage.

Front 3

Competitive Advantage

Back 3

is creating better customer value for the same or lower cost than offered by competitors or creating equivalent value for lower cost than offered by competitors.

Front 4

Customer value

Back 4

the difference between what the customer receives and what the customer gives up.

Front 5

What are the Three strategies to increase customer value to achieve competitive advantage

Back 5

1. Cost Leadership: provide the same or better value to customers at lower cost than offered by competitors. Increases customer value by minimizing customer sacrifice.

2. Differentiation: provide something to the customers that is not provided
by competitors. Strives to increase customer value by increasing what
the customer receives.

3. Focusing: selecting or emphasizing a market or customer segment in
which to compete.

Front 6

Strategic Positioning

Back 6

is the process of selecting the optimal mix of these three general strategic approaches.

Front 7

Value chain

Back 7

is the linked set of value-creating activities

Front 8

What are the links of value-creating activities?

Back 8

Internal linkages, External linkages,

Front 9

Internal linkages

Back 9

are relationships among activities that are performed within a firm’s portion of the value chain

Front 10

External linkages

Back 10

describe the relationship of a firm’s value chain activities that are performed with its suppliers and customers.
There are two types of external linkages:
1. Supplier linkages
2. Customer linkages

Front 11

what are the two types of Organizational activities:

Back 11

Structural, Executional,

Front 12

Structural activities

Back 12

activities that determine the underlying economic structure of the organization

Front 13

Executional activities

Back 13

activities that define the process and capabilities of an organization. Executional activities are “how things are done”. They are related to continuous improvement

Front 14

Operational activities

Back 14

day-to-day activities performed as a result of the structure and processes selected by the organizations. (Operational cost drivers are those factors that drive the cost of operational activities.)

Front 15

Cost reduction

Back 15

is the emphasis of life-cycle cost management

Front 16

Product life cycle

Back 16

= the time from conception to abandonment

Front 17

Revenue-producing life

Back 17

time a product generates revenue for a company

Front 18

Consumable life

Back 18

is the time a product serves the needs of a customer.

Front 19

Marketing viewpoint

Back 19

describes the sales pattern as the product passes through the Introduction, Growth, Maturity and Decline stages. This is a revenue-oriented viewpoint. The emphasis is on revenue behavior.

Front 20

Production viewpoint

Back 20

emphasizes costs associated with the activities performed in the stages of the life cycle, for example, research & development, production, logistics. The focus is on cost reduction, not cost control.

Front 21

The consumable life-cycle viewpoint

Back 21

This is from the customer perspective. It is the total cost of ownership, the purchase price, operating costs, maintenance costs, and disposal costs. It has a customer-value oriented viewpoint.

Front 22

Target cost

Back 22

= sale price – desired profit

This is an effective tool in life cycle management because cost reduction is the goal. Target costing is especially useful in establishing cost reduction goals in the design stage.

Front 23

Three cost reduction methods are typically used are

Back 23

Reverse engineering, Value analysis, Process improvements

Front 24

Reverse engineering

Back 24

closely analyzing competitor products in an effort to discover more design features

Front 25

Value analysis

Back 25

attempts to assess the value placed on various product functions by customers. If the price the customer is willing to pay for a function is less than the cost, then the function is a candidate for elimination.

Front 26

Process improvements

Back 26

both production and marketing processes are sources of potential cost reductions.

Front 27

JUST-IN-TIME (JIT)

Back 27

Technically, the term Just In Time (JIT) refers to systems designed to reduce inventories. Common business practice has expanded the concept to refer to a broad spectrum of actions managers take to improve business processes.

Front 28

a pull approach

Back 28

The pull is exerted from the final workstation which is responding to customer orders. The final workstation requests from the preceding, workstation the exact amount of parts needed over the next few hours and only that amount of parts and materials are provided. The same type of exact request works its way back up the production line.

Front 29

the traditional push approach

Back 29

In a conventional system, each workstation completes its processing on a batch of units and pushes the units to the next workstation regardless of whether that workstation is ready to receive them. This results in partially completed inventory building up throughout the system.

Front 30

There are five (5) key elements involved in the successful operation of a JIT system.

Back 30

1-Limited Number of Suppliers, 2-Improving Plant Layout,
3-Reduced Setup Time,
4-Zero Defects and JIT (Total Quality Control (TQC),
5-Flexible Work Force

Front 31

Limited Number of Suppliers

Back 31

Dependability of suppliers is vital in a JIT inventory system. There must be a close working relationship with a few suppliers to guarantee prompt and dependable service.

Front 32

Improving Plant Layout

Back 32

Workstations in a product flow line (the physical path taken by a product through the manufacturing process) are grouped together so that work in process is not shifted from place to place, but rather moves from start to finish in a direct, focused manner. This type of plant layout is to as a focused factory.

Hint 32

Benefits Of Improved Plant Layout

1. A plant with multiple flow lines saves costs in two (2) ways:
A. It minimizes material handling costs
B. It eliminates partially completed inventory waiting for the next step in the production process.

2. Increases throughput, that is the total volume of production through the facility during a period.

3. Decreases throughput time, that is the time it takes to turn raw materials into finished goods. Throughput time is synonymous with cycle time.

4. Workstations on the flow line may consist of two or more different machines clustered together that are needed to complete one part or component of the finished product. This clustering of machines at a single workstation is called a cell.

Front 33

Reduced Setup Time

Back 33

Setup time refers to the time involved with changing equipment, moving material about, and getting forms and jigs in place to accommodate the production of a different item. By reducing setup time (and thereby making it easier to move from the production of one item to another) a company is able to avoid long production runs that create inventory that must wait before further processing at the next workstation.

Hint 33

Ways to reduce setup time:

1. each product has a dedicated flow line(s) thereby eliminating setup time

2. employee training and awareness of the need to complete setups quickly

3. automation of the production processes - this includes:

a. use of numerical control (NC) machines, i.e. machines
controlled by a computer that has been programmed to guide the equipment through all the steps necessary to complete some portion of the final product. To setup for a different product, one need only change the program in the computer.

A manufacturing cell consisting of all NC machines is called an island of automation.

b. use of a flexible manufacturing system (FMS) i.e. when the cells on a product flow line are linked together with an automated material-handling system and the flows between cells are controlled by a central computer. This allows the entire flow line to be flexible in that the FMS master computer can be programmed for rapid setup in various cells as changes are made from one product to another.

c. use of computer integrated manufacturing (CIM) ... the goal is to integrate an organization's business functions with its manufacturing functions. FMS is a subset of CIM.

Front 34

Zero Defects and JIT (Total Quality Control (TQC)

Back 34

TQC means no defects can be allowed in parts and materials received from suppliers, in work in process, or in finished goods. Because inventories are minimal throughput production, a defective parts can shut down a product line. The problem with a defective product in the hands of a customer is obvious. To maintain TQC, there is continuous monitoring, throughout the production process. Any worker can stop the product flow to correct a defect.

Front 35

Flexible Work Force

Back 35

Workers must be multiskilled. They must be able to operate and maintain various equipment and develop teamwork skills.

Front 36

What are the Benefits of a JIT system

Back 36

1. increased worker productivity
2. decreased setup time
3. decreased total production time
4. TQC reduces waste
5. reduced inventories of all types
6. working capital tied up in inventory is released for investment elsewhere
7. inventory storage areas are freed for more productive uses
8. defects rates are reduced

Hint 36

Expansion of the JIT Concept

The JIT philosophy says that wherever possible in an organization, management should focus its efforts on simplification and on elimination of waste.

Front 37

Three (3) Ideas Pivotal to the JIT Philosophy

Back 37

1. All activities that do not add value to a product or service, should be eliminated. Activities that add cost to a product but do not add market value to the product are called non-value-added activities. Value-added activities are costs associated with the actual processing of goods that increase the market value.

2. A commitment must be made to achieve and maintain high levels of quality in all aspects of a company's activities.

3. A commitment must be made to continuous improvement in all of a company's activities and in the usefulness of data generated for its management.

Hint 37

Continuous improvement refers to the constant pursuit of ever greater value being provided for the customer.