ActivityBased Management and Todays Advanced Manufacturing Environment

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Chapter Six

• Activity-Based Management and Todays Advanced
  Manufacturing Environment

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Question

• What do Dell and Toyota have in common?

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Strategic Cost Management and the Value Chain
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Elimination of Non-Value-Added Costs
Activities
Analysis andClassification
Value-addedActivities
Nonvalue-addedActivities
Reduce orEliminate
Continually Evaluate and Improve
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Non-Value-Added Costs
Suppose our production process looks like this
VA Valued-added activity NVA
Non-value-added activity
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Activity-Based Management
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Two-Dimensional ABC and Activity-Based Management
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Using ABM to Eliminate Non-Value-Added Activities
and Costs

• Identify Activities.
• 2) Identify Non-Value-Added Activities.
• 3) Understand Activity Linkages, Root Causes,
  and Triggers.
• 4) Establish Performance Measures.
• 5) Report Non-Value-Added Costs.

Specify parts
Select vendor
Receive parts
Produce goods
Inspect finished goods
Rework defective products
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Achieving Cost Reduction
Activity Reduction
Activity Selection
Reduce Non-Value-Added Costs
Activity Elimination
Activity Sharing
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Just-in-Time Inventory and Production Management

• No materials are purchased and no products are
  manufactured until they are needed.

The primary goal of a JIT production system is to
reduce or eliminate inventories at every stage of
production.
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Key Features of the JIT Approach
1. Smooth, uniform production rate
2. Pull method of production
3. Purchase is small lot sizes
4. Quick, inexpensive setups
5. High quality of materials
6. Effective preventive maintenance
7. Teamwork
8. Multiskilled workers
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JIT Purchasing
Long-term contracts with suppliers.
Only a few suppliers.
Grouped payments to vendor.
Parts delivered in small lots.
Minimal inspection of materials.
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Bodacious Bagels, Inc pg 242

• 6 37
• Identify the non-valued added activities.
• 6 38
• Redesign the bagel production process so that it
  adheres to the JIT philosophy.
• Explain how the 8 key features of JIT systems
  would be present in the new process.
• What new equipment would the company need to
  purchase in order to implement the JIT approach
  fully?

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Customer Profitability Analysis
Customer profitability analysis
uses activity-based costing to determine the
activities, costs, and profit associated with
serving particular customers.
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Customer Profitability Analysis
Requiredspecialpackaging.
Orderssmallquantities.
Demandfastservice.
Ordersfrequently.
Oftenchangesorders.
A costly customer
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Customer Profitability Analysis
A company may used theses customerrelated costs
to help determine theprofitability of each
customer.
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Customer Profitability Analysis
Exercise 6 36, page 241
Also consider If you ranked customers in terms
of sales revenue rather than operating income,
would their rankings be the same? Why or why not?
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Target Costing

• Design a product, and the manufacturing process,
  so that the product can be manufactured at a cost
  that will enable the firm to make a profit when
  the product is sold at an estimated market-driven
  price.

Target Price
Target Cost
Target Profit
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Target Costing
Market researchdetermines the priceat which a
new product will sell.
Management computes a manufacturing cost that
will provide an acceptable profit margin.
Engineers and cost analysts design a productthat
can be made for the allowable cost.
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Target Costing
Keyprinciplesof targetcosting
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Kaizen Costing

• The process of cost reduction during the
  manufacturing phase of an existing product.

Product cost
.
Current year cost base.
.
Cost base for next year.
3/31/98
3/31/99
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Kaizen Costing

• The process of cost reduction during the
  manufacturing phase of an existing product.

Product cost
.
Kaizen goal cost-reduction amount.

.
3/31/98
3/31/99
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Benchmarking

• The continual search for the most effective
  method of accomplishing a task, by comparing
  existing methods and performance levels with
  those of other organizations.

Here are the best practices in our industry. . .
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Re-engineering

• The complete redesign of a process, with an
  emphasis on finding creative new ways to
  accomplish an objective.

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Theory of Constraints

• A management approach seeking to maximize
  long-run profit through proper management of
  organizational bottlenecks or constrained
  resources.

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Keys to Successfully Implementing ABC and ABM
1. Organizational Culture.
2. Top-Management Commitment.
3. Change Champion.
4. Change Process.
5. Continuing Education.
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End of Chapter 6
Look at Problem 6-48 It is a good problem that
illustrates the JIT cost savings. 15 45 are
examples of target costing problems.