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1 Cost Analysis Techniques. 2 Project  something related to purchasing  how the purchasing function affects a company?  how can a company improve its.

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Presentation on theme: "1 Cost Analysis Techniques. 2 Project  something related to purchasing  how the purchasing function affects a company?  how can a company improve its."— Presentation transcript:

1 1 Cost Analysis Techniques

2 2 Project  something related to purchasing  how the purchasing function affects a company?  how can a company improve its purchasing functions?  possible forms  a case study on a company  literature review on a topic related to purchasing  methodology  management principle

3 3 Project Proposal  a 15-minute presentation  what is it about?  why is the project important? Useful? Interesting?  how will you proceed?  what are the expected results? Expected challenges?  examples

4 4 Outline  collaborative cost management  total cost ownership model  Kazuo Inamori’s idea on pricing and costing  activity-based costing  value analysis and value engineerin  value analysis and value engineering  process mapping  learning curve  quantity discount

5 5 Collaborative Cost Management

6 6 Collaborative Approaches to Cost Management  target pricing: price acceptable by market, or price for competition  searching for design methods, material, and production process to match the target price  reducing the gap between the target price and the actual price provided by suppliers  cost-saving sharing: incentive offered to a vendor for cost saving  pre-requisites  information sharing  vendor to buyer: details of production process, cost structure  buyer to vendor: quantity, quality requirements, plan from near to intermediate term  agreement on cost saving sharing  example: data setting and calculationdata settingcalculation

7 7 Total Cost Ownership Model

8 8  costs throughout the life cycle of an item  hidden cost in purchasing #1 hidden cost in purchasing  payment method, inflation, life, salvage value, auxiliary charge, packaging, transportation, installation, service support, training, maintenance, service parts, etc.  example: cost structure and calculationcost structure calculation #1 Zeger Degraeve and Filip Roodhooft (2001) A Smarter Way to Buy, Harvard Business Review.

9 9 『稲盛和夫の実学 経営と会計』 稻盛和夫的實學 : 會計與經營 Kazuo Inamori's Pragmatic Studies: Management and Accounting Kazuo Inamori's Pragmatic Studies: Management and Accounting Kazuo Inamori's Pragmatic Studies: Management and Accounting いなもり かずお 稲盛 和夫 Kazuo Inamori いなもり かずお 稲盛 和夫 Kazuo Inamori

10 10 Some Ideas in the Book  core of business: divine doctrine (天道)、 self-evident truth (公理)、 consensus and concord (人心)  cash-basis management: a grip on true cash flow of company  fair accounting: one-to-one correspondence between orders and items  muscular management: the cheapest method for a given task  perfectionism  transparency  amoeba management  double-checking system with shared responsibility

11 11 Some Glimpses of Some Glimpses of Pragmatic Studies: Management and Accounting Pragmatic Studies: Management and Accounting  the difference between reality and accounting rules  standard accounting rules for depreciation of machines  difference between actual working life of a machine and its depreciation life by rules

12 12 Some Glimpses of Some Glimpses of Pragmatic Studies: Management and Accounting Pragmatic Studies: Management and Accounting  asset or cost?  would equipment for production an asset or cost?  example: a stall selling banana  a box of ¥300; a table cloth of ¥1,000; a stick of ¥200  buying 20 hands of banana, ¥50 per hand, selling at ¥150 per hand  all sold out  how much profit ¥2,000 or ¥500? TAX!!!  getting rid of excess production with small probability of future use

13 13 Some Glimpses of Some Glimpses of Pragmatic Studies: Management and Accounting Pragmatic Studies: Management and Accounting  difference among book profit, actual profit, and cash flow  distortion of actual profit by accounting rules, classification of asset cost, account payable and account receivable at different dates, etc.

14 14 Questions  Pricing and costing of an item are always important issues in purchasing. Discuss what you have learnt about these two issues from the book “Kazuo Inamori's Pragmatic Studies: Management and Accounting” by Dr. 稻盛和夫.Kazuo Inamori's Pragmatic Studies: Management and Accounting 稻盛和夫

15 15 Pricing and Costing Issues in Pragmatic Studies: Management & Accounting Pragmatic Studies: Management & Accounting  overhead cost  depreciation: difference in law and in reality  inventory and equipment as resource or liability  obsolete inventory and equipment, especially for small production lot  price setting  first item price acceptable to market  then (material and production) cost matching with the price

16 16 Activity-Based Costing

17 17 Activity-Based Costing (ABC) Activity-Based Costing (ABC)  assigning overhead of a product or service  traditional cost accounting  based on fixed percentage of direct labor, direct material, or both direct labor and material  more overhead for high volume items  ABC  trace the cause and effect of overhead  cost drivers: activities in the overhead for the product or service

18 18 Example #1  a factory producing only 2 products, L & S  1,500 pieces of L & 150 pieces of S  setups: 2 for each product, each of $900  direct material cost: L $2 and S $3  ignoring labor cost for simplicity #1 許振邦( 2007 )採購與供應管理 (originally from Raedels (2000)

19 19 Product LProduct STotal Production Qty1,5001501,650 Direct Material$2$3  Direct Labor  Total Direct Cost$3,000$450$3,450 Overhead Setup224 Cost/Setup$900 $3600 Traditional Costing Method Overhead cost/item$2.08$3.14 Cost/Item$4.08$6.14 ABC Method ABC$1.2$12 Cost/Item$3.2$15

20 20 A Single-Item Example Traditional Costing (TC) Cost per unit Direct Material$21.00 Direct Labor$4.00 Manufacturing Overhead Overhead ComponentBurden Rate Activity per Unit Fixed $64.50/DLH × 0.4 DLH/unit$25.80 Variable $11.90/DLH × 0.4 DLH/unit$4.76 Manufacturing Overhead per Unit $30.56 Manufacturing Cost per Unit $55.56 Fixed Burden Rate (TC) = Estimated Annual Factory Fixed Manufacturing Overhead/Estimated Annual Factory DLH = $967,500/15,000 DLH = $64.50/DLH DLH = Direct Labor Hours

21 21 Activity-Based Costing (ABC) Direct Material$21.00 Direct Labor$4.00 Manufacturing Overhead: ActivityCost Driver Rate Units of Cost Driver # of Units Fixed ($12.50/MH × 9,800 MH)/10,000$12.25 Inspection ($0.69/Insp. × 20,000 Insp.)/10,000$1.38 Materials Handling ($0.60/lb. × 45,000 lbs.)/10,000$2.70 Machine Setup ($625.00/Setup × 8 Setups)/10,000$0.50 Engineering Changes ($3,500.00/ECO× 3 ECOs)/10,000$1.05 Manufacturing Overhead per Unit $ 17.88 Manufacturing Cost per Unit $42.88 MH = Machine Hours; Insp. = Inspections; ECO = Engineering Change Orders Fixed Rate (ABC) = Estimated Annual Factory Fixed Manufacturing Overhead / Estimated Annual Factory MH = $500,000/40,000 MH = $12.50/MH

22 22 ValueValue Analysis and Value Engineerin Value Analysis and Value EngineeringAnalysis ValueAnalysis

23 23 Value Analysis and Value Engineering  value analysis: examining all elements of a component, assembly, end product, or service to make sure it fulfills its intended function at the lowest total cost  value engineering: application of value analysis principles during product or service design value = function/cost

24 24 Personnel in Value Analysis  everyone: executive management, suppliers, supply management, design engineering, marketing, production, industrial/process, engineering, quality control

25 25 Typical Questions to Ask in VA  Does the use of this product contribute value to our customers?  Is the cost of the final product proportionate to its usefulness?  Are there additional uses for this product?  Does the product need all its features or internal parts?  Are product weight reductions possible?  Is there anything else available to our customers given the intended use of the product?  Is there a better production method to produce the item or product?  Can a lower cost standard part replace a customized part?  Are we using the proper tooling considering the quantities required?

26 26 Typical Questions to Ask in VA  Will another dependable supplier provide materials, components, or subassemblies for less?  Is anyone currently purchasing required materials, components, or subassemblies for less?  Are there equally effective but lower cost materials available?  Do material, labor, overhead, and profit equal the product’s cost?  Are packaging reductions possible?  Is the item properly classified for shipping purposes to receive the lowest transportation rates?  Are design or quality specification too tight given customer requirements?  If we are making the item now, can we buy it for less? Or vice versa?

27 27 Value Analysis Process  gather information  speculate  analyze  recommend and execute  summarize and follow up

28 28 Value Analysis Process  gather information  what does this product do for the customer?  why does a customer buy this product?  primary vs. secondary functions  name each function with a noun and a verb  collect detailed product information  speculate  wide-open, creative thinking  use brainstorming or other idea creating techniques  develop as many improvement ideas as possible without judgment

29 29 Value Analysis Process  analyze  perform critical evaluation of ideas created in speculate stage  cost/benefit analyses  feasibility assessment  do ideas address the original goals and objectives?  general  specific  recommend and execute  determine priorities  make proposal to management for approval  requires:  motivation and creativity  good communication skills  analytical thinking and product knowledge  commitment and salesmanship

30 30 Value Analysis Process  summarize and follow up  implement  timing  budget  responsibilities  generate support from outside the team

31 31 Example of Value Analysis  rescue of Nissan by Carlos Ghosn  reduction of design cost by eliminating special parts or components  condition: without compromising quality, service, or both  headlight  some components better than competitors  minor differences not picked up by eyes  reducing cost by 2.5% by changing reflectors and illuminators

32 32 Example of Value Analysis  rescue of Chrysler by Lee Iacocca  design of K-car: no more than 176” to pack more car in transportation

33 33 Example of Value Analysis Example of Value Analysis  experience of 4 first-tier suppliers of automobiles  benefits and challenges to leverage their suppliers’ expertise in collaborative VA  process process  benefits and barriers benefits and barriers Hartley, J.L. (2000) Collaborative Value Analysis: Experiences from the Automotive Industry, The Journal of Supply Chain Management, Fall, 27-32.

34 34 Process Mapping

35 35 Process Mapping  process: an outcome of a set of tasks, activities, or steps  expressing processes as their component parts or activities by a cross-functional team  identifying and eliminating non-value-added activities

36 Process Mapping Example 36 Step #ActivityAverage Time Required 1Employee 1 physically places trailer at receiving dock15 minutes 2Employee 2 unloads the trailer with material handling equipment30 minutes 3 Employee 3 checks load quantity from the trailer against shipping documents for accuracy 30 minutes 4 Employee 4 acknowledges receipt of the material on the computer and prints control tickets to move material to required warehouse locations 60 minutes 5Employee 5 attaches control tickets to individual loads20 minutes 6Employee 6 inspects inbound material30 minutes 7 Employee 7 moves material to required warehouse location, freeing up the receipt line for another trailer 30 minutes 8 Employee 4 files copy of shipping documents and forwards copies to Accounts Payable at the end of the day (no physical movement required) 15 minutes Total Average Time to Unload Trailer (excludes Step # 8)215 minutes Non-value-addingValue-adding

37 Process Mapping Example 37 Step #1 Step #2 Step #3 Step #4 Step #5 Step #6 Step #7 Hour 1Hour 2Hour 3Hour 4 Non-value-addingValue-adding Remove non-value-adding steps Seek to combine other steps

38 38 Learning Curve

39 39 Learning Curve  reduction of production time due to repetition of task  empirical evidence: learning rate as production double  e.g., 85% learning rate: reduction of 15% direct labor as production doublelearning rate

40 40 Example on Learning Curve  first order 200 pieces at $228/unit  material $90; direct labor $50 (5 hours per unit, at $10 per hour)  overhead at 100% of direct labor  profit margin 20%  total cost per unit = ($90+$50+$50) = $190  price per unit = ($190)(120%) = $228

41 41 Example on Learning Curve  price for another 600 pcs for 80% learning rate  average time for 800 units = 5(0.8) 2 = 3.2 hr  total time for 800 units = (3.2)(800) = 2,560 hr  total time for the additional 600 units = 2,560  1,000 = 1,560 hr  direct labor cost per unit = $(10)(1560)/600 = $26  total cost per unit = ($90+$26+$26) = $142  price per unit = ($142)(120%) = $170.4

42 42 Quantity Discount Analysis  is a discount scheme reasonable?  for better understanding of incremental price prices at specific quantities vs. prices at quantity ranges  two types of quantity discount: prices at specific quantities vs. prices at quantity ranges  quantity discount analysis for price breaks at specific quantities  1 unit @ $85 each  3 units @ $80 each  6 units @ $70 each  10 units @ $69 each

43 $85.00$77.50$60.00$67.50 $85.00$240.00$420.00$690.00 43 Quantity Discount Analysis 1234 Number of units/order 13610 Price/unit (quoted)$85.00$80.00$70.00$69.00 Total price/order Price difference between orders Quantity difference/order Price/unit/order quantity difference $85.00$155.00$180.00$270.00


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