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Western Sydney University *

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200108

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Industrial Engineering

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Jun 12, 2024

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M7+8 self-study SELF-STUDY PROBLEM 1: Interpreting operational performance measures Electro Systems manufactures small kitchen appliances, such as toasters and electric kettles. The following non-financial data were collected over the past six weeks. 1 2 3 4 5 6 Cycle time (minutes) 1.5 1.3 1.3 1.2 1.2 1.1 Number of defective finished products 44 40 30 41 30 20 Customer complaints 12 14 12 10 14 16 Unresolved customer complaints 8 7 6 2 2 20 Number of products returned 6 6 4 4 1 1 Average number of units produced per day per employee 40 45 41 41 45 50 Percentage of on-time deliveries 90 80 80 80 75 75 Percentage of customer orders filled 100 100 100 95 90 87 Average setup time (minutes) 60 60 50 50 45 50 Required 1. For each non-financial performance measure, indicate which of the following areas of manufacturing performance is involved: (a) (b) (c) (d) production processing product quality customer satisfaction delivery performance. (Some measures may relate to more than one area.) 2. Write a report to management evaluating the performance of the plant, noting any trends or other important results revealed by the data. SOLUTION TO SELF-STUDY PROBLEM 1 1. (a) (b) (c) (@ (b) (@ Production processing: = cycle time (minutes) = average number of units produced per day per employee = average setup time (minutes). Product quality: = number of defective finished products = number of products returned. Customer satisfaction: = customer complaints = number of products returned = unresolved customer complaints. Delivery performance: = percentage of on-time deliveries = percentage of customer orders filled. Production processing: Cycle time has reduced from 1.5 to 1.1 minutes over the six weeks and the setup time has also reduced, which is a positive trend. The average number of units produced per day per employee is also positive, increasing from 40 to 50 over the period. Overall, the three measures indicate improved efficiency of production processes. Product quality: The number of defective finished products and number of products returned show improvement over the six weeks, which indicates an improving level of quality control. Customer satisfaction: Customer complaints have increased over the six weeks, which is a worrying trend, and the number of unresolved complaints is high at the end of the six weeks. More investigations are needed to uncover the cause of these complaints. It could be due to poor on-time delivery performance. Delivery performance: Both performance measures (percentages of on-time deliveries and orders filled) were very high at the start of the period, but decreased over the six weeks. Investigation is needed to understand why this has occurred. It may also be driving the increasing number of customer complaints.
SELF-STUDY PROBLEM 2: Balanced scorecard Super Chicken operates a chain of takeaway chicken shops. The company is operating in a very competitive market, and it is difficult to gain and maintain market share. M believes that it is important to monitor competitors’ actions closely, and to continually offer new products and special promotions to create high visibility among customers. The management team has recently reviewed its mission, which is: To be a caring and envir [ p providing fresh and nutritious meals at an affordable price. Required Consider the four perspectives of Kaplan and Norton’s balanced scorecard. For each perspective, develop objectives and a series of performance measures. Consider both lag and lead indicators. Make sure that your objectives and measures support the mission of Super Chicken. SOLUTION TO SELF-STUDY PROBLEM 2 Performance measures Objectives Lag indicators Lead indicators 1 Financial = Improve returns to shareholders Return on equity = Number of new outlets opened Product profitability 2 Customer = Increase customer satisfaction Customer satisfaction measure Number of new products released Market share each quarter Number of customer complaints Number of customers participating in special promotion Average time to serve a customer Increase in sales revenue Average price per meal 3 Internal business processes = Maintain the quality of products Number of products currently under Time to develop new products Material wastage in kitchen Cycle time Electricity used per 10 kg output Labour productivity = Create new, innovative products development Average cost per meal = Improve efficiency of production processes = Improve environmental performance Kilograms packaging recycled 4 Learning and growth = Improve employee satisfaction = Improve employees’ knowledge of Employee satisfaction survey Number of employees completing Improvements in working conditions Number of employee suggestions company systems company training program = Number of employees achieving ‘gold star’ status C14.43 Review of Chapters 13(# and 14 (@ ; performance measures and reward systems; behavioural issues; benchmarking; continuous improvement L0 14.4, 14113 Refer to Case C14.42(2. Janice Cookson examined the performance-related pay system used to reward the managing directors and has prepared a report that recommends three changes: = add a more long-run emphasis to the bonus system = base rewards on achieving company-wide as well as divisional performance measures = include targets that are designed to consider the specific competitive challenges facing the managers of each division. Required 1. Suggest how the three proposed changes could be included in the bonus plan for each divisional managing director. Consider each division and be specific in your suggestions. 2. Outline any difficulties that could arise in implementing the changes to the bonus system. 3. Cookson has also recommended that the performance measurement system should make greater use of benchmarking, and incorporate continuous improvement to improve overall company performance. Why would she recommend benchmarking? Suggest the specific steps that would need to be undertaken to introduce benchmarking at the newspaper division. 4. Suggest how continuous improvement processes could be incorporated into the performance measurement system at the cable television division. Provide some examples of performance measures to illustrate your answer.
Long-run emphasis: A long-run emphasis could be added to the performance measurement system in several ways. For example: e linking rewards to average divisional performance over three years e choosing performance measures that focus on long-term performance, such as those relating to new product development, and employee training e implementing a share option plan which may encourage managers to consider future performance. Company-wide and divisional-based performance measures: This can be achieved by tying rewards to both company performance and divisional performance. This can encourage managers to consider the effect of various decisions on both divisional and company-wide performance. A share option plan may also help managers identify with the company as a whole. Targets that specifically consider competitive challenges: (These will be different for each division.) e Brewing: market share, cost per litre, sales volume e Newspaper: market share, share of advertising dollar, delivery on time e Cable television: cash flow, market share, growth in subscribers. There are several difficulties that may arise in implementing these changes: e If managers’ performance is based on average three-year performance, a decision needs to be made as to when the bonus will be paid. Waiting three years for a bonus may be far too long. e There are always unforeseen outcomes associated with bonus schemes, so care must be taken to ensure that the new system does not encourage opportunistic behaviour, or result in inequities between managers. e It is necessary to ensure that the non-financial measures selected flow through to improved financial performance. e The introduction of any change to bonus systems 1s often resisted, as managers become accustomed to the existing system and may not welcome introducing any uncertainty into their salary packages. e It may take time for managers to learn to change their orientation away from that encouraged by the previous bonus system. For example, managers may now have to consider the longer-term performance as well as short-term performance, and the impact of decisions on the division and broader company performance. Benchmarking will allow the business to set performance targets that are in line with the best performers in the industry, and can help each division to set in place improvement strategies to help minimise performance gaps. For the Newspaper Division this may entail research into how satisfied readers are with other similar tabloid newspapers and why, how quickly best newspaper firms deliver to newsagents and directly to customers and how that delivery performance is achieved and the extent of litigation experienced by other tabloid newspapers and how litigation is avoided. In researching ways to improve processes the division may also leamn from the experiences of companies in other industries who have achieved outstanding performances.
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SEUESUIRYY SELF-STUDY PROBLEM 1: Economic order quantity Alfred Wood operates a factory that manufactures bread and cakes. One of the major raw materials used is organic maize, which he buys for $5 per kilogram. The factory operates for 350 days each year. The following information has been provided: Annual usage of maize 80 000 kilograms Average time between placing and receiving order 4 days Estimated cost of ordering and receiving inventory (per order) $8 Estimated annual cost of carrying a kilogram of maize in stock $0.50 Required 1. Use the above data to calculate: (a) economic order quantity (EOQ) (b) number of orders per year. 2. Wood has recently heard of just-in-time (JIT) purchasing, and wonders whether he should use it in his business. However, he is very concerned that the cost of placing frequent orders Page 696 will be too high. Explain the advantages of JIT purchasing and address specifically his concerns about cost. 3. After a brief analysis of the cost of storing maize, including the cost of wasted space and inefficiency, you have discovered that the annual carrying cost can be reduced to $0.20 per kilogram. Wood has asked you to help him negotiate a JIT purchasing arrangement with a major supplier. After some discussion you have discovered that the cost of placing an order for maize can now be reduced to just $2 per order. Calculate: (@) newEOQ () new number of orders per year. SOLUTION TO SELF-STUDY PROBLEM 1 L@ 280000 x $8 $0.50 = V2560000 = 1600 kg per order EOQ \ () annual requirement _ 80 000 order quantity 1600 = 500rders Number of orders per year = 2. The main advantage of the JIT system is that inventory is not held in stock, but is ordered from suppliers so that it arrives just when it is needed for production. This will reduce storage costs. While the number of orders placed with suppliers under JIT increases, the costs per order can be reduced through ordering inventory on-line, requiring suppliers to deliver at a specified level of quality so that fewer inspections of deliveries take place, and allowing electronic ordering of inventory and payments with suppliers. 3. (a) 2 80000 x 52 $0.20 = V1600000 = 1265 kg per order EOQ (b) annual requirement _ 80 000 order quantity 1265 = 63orders Number of orders per year =
SELF-STUDY PROBLEM 2: Customer profitability analysis Softtowel Ltd manufactures towels for department stores and residential hotels. The financial controller is concerned that the profits for last year were 15 per cent below the previous ye to calculate the profitability of the three main customer groups: department stores, small hotels and large hotels. Last year the selling price and manufacturing costs for the three major products—bath sheets, bath towels and hand towels—and sales to customer groups, were as shown below. ’7 Bath sheets Bath towels Hand towels Selling price $ 40 $ 35 $ 20 Manufacturing cost $20 $ 15 $ 7 Sales units: Department stores 500 1 000 300 Small hotels 400 300 300 Large hotels __800 1 200 __ 850 Total sales units 1700 2 500 1 450 The customer-driven activities, cost per unit of activity driver, and activities for each customer group were as follows: Cost per unit of Department Activities activity driver stores Small hotels Large hotels Process sales order $80 per order 40 60 25 Deliver order $150 per delivery 60 60 28 Invoice customer $30 per invoice 38 60 30 N Process payment $20 per payment 45 58 25 Handle complaint $40 per complaint 10 7 8 Investigate bad debt $50 per investigation 6 4 10 Visit customers $120 per visit 30 26 20 Advertise in hotel $50 000 (to be shared equally maaazines between small and larae hotels)
Required 1. Caleulate the customer-driven costs for each customer group. 2. Prepare a profitability report in order to determine the contribution of the three customer groups to company profits. Within your report, include percentage contributed by each customer group to sales revenue, gross margin and contribution to company profits. 3. Contrast the relative profitability of the three tomer groups, and provide suggestions for improving perform: SOLUTION TO SELF-STUDY PROBLEM 2 Cost per unit o'— Department - Activities activity driver stores | small hotels Large hotels Order level | Process sales order $80 per order $ 3200 | $ 4800 $ 2000 Deliver the order $150 per delivery 9 000 [ 9 000 4200 Invoice customer $30 per invoice 1140 1800 \ 900 Process payment $20 per payment 900 1160 | 500 Customer level Handle complaint $40 per complaint 400 280 320 Investigate bad debt $50 per investigation 300 200 | 500 Visit customers $120 per visit 3 600 3120 \ 2400 Market level Advertising in hotel magazines Equal share to hotels 0 25 000 25 000 customer groups | | Total activity costs $ 18 540 $ 45 360 1 $ 35 820 Department stores Small hotels Large hotels Total Sales revenue: Bath sheets $20 000 $ 16 000 $32 000 - Bath towels 35 000 10 500 42 000 . Hand towels ) . 6 00!1 6 00077 - 17 00}37 . - - Total sales revenue $61 000 $ 32500 $91 000 $184 500 33.1% 17.6% 49.3% 100% Manufacturing cost: Bath sheets $10 000 $ 8000 $16 000 Bath towels 15 000 4 500 18 000 Hand towels 2100 2100 5950 Total manufacturing chtflN $27 100 - $ 14 600 $39 950 $ 81 650 Gross margin $33 900 $ 17900 $51 050 $102 850 33.0% 17.4% 49.6% 100% Customer-driven costs $18 540 $ 45360 $35 820 $ 99 720 _ 18.6% 45.5% 35.9% 100% Contribution to profits $15 360 $(27 460) $15 230 $ 3130 490.7% (877.3%) 486.6% 100% 2e above analysis indicates that the company is making modest profits from the department stores and large hotels, whereas small hotels are generating a loss. Each customer group ‘nerates about the same gross margin percentage on sales (55 to 56 per cent), so the reason for the difference in bottom-line profitabi istomer activities. Page 698 v lies in the differential consumption of + Small hotels contributed a loss of $27 460. While small hotels generated 17.6 per cent of the sales revenue and 17.4 per cent of the gross margin, they consumed 45.5 per cent of the customer costs. The customer-driven activity costs for this group were higher than those for the other groups, mainly due to the high number of sales orders, deliveries, invoices and payments. Clearly, if the company wants to continue selling to this group, then the company must look for ways of encouraging small hotels to order in larger order sizes. If this is not viable, the small hotels could be encouraged to purchase the products from department stores, with the department stores providing some form of discount. + Large hotels and department stores made a profit of $15 230 and $15 360, respectively. While large hotels earned significantly more gross margin than did department stores, they consumed more customer costs. This was largelv due to advertising costs in hotel magazines. To increase the vrofitabilitv of these two erouns. the comanv could consider various wavs of managing
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Ci5.47 Customer profitability analysis; product profital ity; customer performance measures: manufacturer L0 15,92, 15.10 % Waratah Ltd manufactures electronic devices, including PDAs, MP3 and MP4 players, for home and business use. Three years ago, It implemented an activity based costing (ABC) system. Both the management accountants and the manufacturing managers are very pleased with the results, as they now have accurate product costing information that they can use for a variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of Waratah’s major products are as follows: Activity PDA+ PDA/phone Designing $ 100 $ 110 $ 125 Purchasing 150 95 130 Assembling 890 1200 1400 Finishing 260 250 250 Total activity cost In July, Hannah Allen, the assistant accountant, noticed that over the last six months the spending In both the customer support department and the sales department had been steadily increasing. The previous month's costs had been 20 per cent above budget! The customer support supervisor, Bill Dominico, is able to explain exactly why this Is happening. He has had to employ new staff, there Is more overtime being worked, and some of the service calls have been outsourced to a third-party maintenance company. But all this was necessary, as he explains: If a customer has a problem, we have to fix it! And if we have spent more than our budget, then that s just too bad. It is important to keep customers happy. Why, only the other day the managing director was telling us how important our customers are and how customer satisfaction is critical to the company’s success. Hannah asks Bl If she can have access to the records of his department for the past three months (June quarter). She Intends to analyse the service calls to see exactly where the extra money is being spent. She also plans to analyse the selling expenses that have occurred during June quarter, The analyss reveals the following data: ‘The cost of selling and customer support activities, and selling price for each product, are as follows: PDA basic PDA+ PDA/phone Activities Selling $39 000 $33750 $ 9000 Customer support | 78 300 | 123750 | 20 200 selling price per unit 2000 2600 2800 = The company’s customers can be analysed into three main groups: educational institutions, business and home entertainment. The sales to these ~ Bage7is groups during the June quarter are detalled below: Customer groups PDA basic PDA+ PDA/phone. Educational institutions 150 40 5 Business 20 30 30 Home entertainment 130 _80 5 Total sales | 300 150 40 ‘The costs of customer support and selling activities for each customer group are as follows: T = e Required 1. Construct two Excel spreadsheats to calculate: () profitability of each product fine (b) profitability of each customer group 2. What can you conclude from your analysis in requirement 17 3. Would you recommend dropping the loss-making products or customers? Explain your answer. 4. Use your spreadsheet to answer the following questions: (a) 1f the selling price of the PDA basic decreased to $1 600 and customer support for the PDA+ was reduced to $80 000, which product would be the most profitable? (b) If sales of the PDA/phone to business customers increased to 40 and the selling price of the PDA/phone was increased to $3 200, which customer group would be the most profitable? 5 Explain the types of performance measures that could be introduced by Waratah to assist in understanding and managing its customers.
1 Following is the computation of profitability of each product line as per the given information: (a) A B C ) 1 PDA Basic| PDA+ |PDA/ Phone price/unit | $2000 [$2600 | $2800 cost/unit 1400 1655 1905 per unit 4 (O AB) Sales volume 300 150 40 6 (units) (D) Profit contribution| 180000 (141 750 35 800 7 |(C*D) Less: Selling 39 000 33750 9000 8 lexpenses Customer support 78300 (123750 20 200 9 Expenses 10 Profit $62 700 |15 750)| $6 600 (b) Following is the profitability of each customer group as per the given information: A c [ o Home 1 Educational | Business | entertainment $90 000 $12 000 $78 000 37800 28330 75 600 4475 26850 4475 contribution| 132275 | 67200 | 158075 5 (A+B=Q) Less: seling| 28000 | 25750 28000 6 espenses Customer support 86000 | 49750 86500 7 Expenses 8 Profit $18275 | S(8300)| $43575 $(2 000-1 400) x 150, $600 x 20, $600 x 130 *—$945 x 40, $945 x 30, $945 x 80 '-$895x 5, $895x 30, $895x 5
4 Product PDA+ is selling at a loss, while the remaining two products are profitable. At the profit contribution level all three products are profitable, generating between 30 and 36 per cent of sales revenue. The main reason for product PDA+ incurring a loss is due to high customer support costs; this product accounts for 30 per cent of the sales volume but attracts 56 per cent of the customer support costs and 41 per cent of the selling expenses. Product PDA Basic is very profitable, and while it accounts for 61 per cent of the sales volume, it attracts only 35 per cent of the customer support costs and 47 per cent of the selling expenses. The business customer group is generating a loss. This is due to this group purchasing a low proportion of the highly profitable PDA Basic product and higher proportions of the less profitable products. Thus, this customer group generates only about 19 per cent of the profit contribution, compared to approximately 44 per cent by the home entertainment group and 37 per cent by the educational customers. The loss-making products and customers should not be dropped, as this may have adverse effects on the sales of the remaining products. For example, some educational customers (e.g. schools) may prefer to purchase all three models of computer from the one supplier. If the unprofitable PDA+ was dropped, then the customers may take their whole business elsewhere. Using the Excel spreadsheets: (a) Product PDA+ becomes most profitable with profit of $28 000 B _] s c D 1 PDA Basic| PDA+ |PDA/ Phone price/unit 1600 $2 600 $2 800 cost/unit 1400 1655 1905 3 (B) Contributio n margin per unit 4 (O)(A-B) 200 945 895 volume 300 150 40 contribution| 60 000 |141 750 35 800 Selling 39000 33750 9000 support 78300 | 80000 [ 20200 9 Expenses 10 Profit 57300 [28000] S6600 The PDA Basic now makes a loss overall and the PDA+ has become the most profitable product. (b) The Home entertainment customer group is the most profitable with a profit of $45 575.
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(b) The Home entertainment customer group is the most profitable with a profit of $45 575. A B C D Home 1 Educational | Business | entertainment PDA Basic! w | so0000 |s12000 [ s78000 PDA+® 37800 | 28350 75 600 PDA/Phone s O 6475 | 51800 6475 Profit contribution| 134275 92150 160 075 5 (A+B+C) Less: selling| 28 000 25750 28 000 6 expenses Customer support 86 000 49750 86 500 7 Expenses 8 Profit 20275 16 650 45575 ' - $(2000-1400) x 150, $600 x 20, $600 x 130 *—$945 x 40, $945 x 30, $945 x 80 * —$(3200-1905) x 5, $1295 x 40, $1295x5 Business customers are now providing a profit but they are still the least profitable group. The five core customer measures that apply to all forms of organisations are market share, customer retention, customer acquisition, customer satisfaction and customer profitability. The measures are provided in Exhibit 15.15. It is important in discussions with students that they demonstrate an understanding of the relationships between measures both within each category and between categories of measures.