MBA SEMESTER 4 ASSIGNMENT Set 1

Name Registration No. Learning Center Learning Center Code Course Subject Semester Module No. Date of submission Marks awarded

:M.VIMAL.. :571110060. :TANDEM. :1524 :MBA. : SUPPLY CHAIN COST MANAGEMENT :4. :SC0009. :09 08 2013. :.

MBA (SUPPLY CHAIN MANAGEMENT) SEMESTER 4 SC0009SUPPLY CHAIN COST MANAGEMENT -4 CREDITS (BOOK ID B1664)

Q1. Explain Activity Based Costing with examples. (Concepts underlying ABC -2 marks; Activity based costs 2 marks; purposes -1 mark ; ABC as a key component of TCM2 marks; 2 stage dynamic process and examples-3 marks) 10 marks

The concepts underlying ABC shown in figure 4.4 using numbers 1 and 2 are as follows: 1) Activities performed to fulfill the needs of customers make use of resources that cost money. 2) Assign the cost of resources consumed by activities to cost objectives on the basis of the units of activity consumed by the cost objective. A cost objective is typically a product or service provided to the customer. The processes in a supply chain are based on a series of interconnected activities formulated to meet the requirements of the customer. Activity based costs Activity based costs are the costs that cannot be related to products. These costs are actually caused by the administrative activities performed during the course of manufacture and delivery of products to customers. The activity based costs differ from one organisation to another organisation and they arise from the organisational framework of a company. Organisations are trying to identify the manner in which they create costs for each other. They have also begun to plan collaborative measures to reduce the collective costs. ABC concept Strategic plans make use of technology as a tool to capture business opportunities. Opportunities reduce the costs and facilitate a consistent system in the management. This makes it easier to control the costs within the organisation and in the supply chain network, and they are known as Total Cost Management (TCM). The approach to TCM is: Find it - This involves assessment of the internal operations and the external business partnerships. Get it - This involves maintenance of effective sourcing, negotiations and business partner relationships. Keep it - This involves application and enforcement of electronically automated compliance rules and reporting measurements. ABC is the key component of TCM. Analysing the business process helps to improve the management accounting system. Organisations also use ABC to accumulate the cost of a given object that represents the total economic resources required or consumed by the object. These objects may be products, services, product lines, service lines, customers, customer segments or distribution channels. ABC does not include the costs of warehousing, distribution, sales and service. ABC is a simple method that accounts activities to benefit products, services and other cost objects. The goal of ABC is to map the causality with the resources, activities and cost objects while assigning the overhead costs. For example, salaries, facility costs

and computer costs may sometimes be spent on support supply chain planning activities that support individual products and services. The cost of the supply chain planning activity reflects the cost of the product and service that it supports. Q2. Before implementing the cost management strategy, an organisation needs to perform the certain tasks. Discuss the tasks. (Reviewing business plan and procurement/marketing strategy; Identifying initial participants for the cost management team; Selecting primary costs to be managed; Building the rest of the cost management team 10 marks . i.e 2.5 marks each) 10 marks Reviewing business plan and procurement/marketing strategy A business plan needs to include a summary of what the organisation's business does, how the business has developed and the future plans of the organisation. In general, a business plan must define the organisations strategy for improving existing revenues and the processes to achieve growth. A business plan must include the following components: Marketing goals and objectives - It defines the overall marketing strategy, sales methods and plans for extending the current market base. Operational information - It specifies the business operational plans such as where the business is based, who the suppliers are, and the facilities and resources needed. It defines the production methods, the inventory policies, the quality control processes, the suppliers and the required facilities to initiate the business. Financial information - It describes the profit and loss forecasts, cash flow details, sales details, and audited accounts. Summary - It outlines the business goals along with the targets and dates. Exit plan - It is included if the business is an owner managed business. It defines the succession plan, the selection of the method of exit and the accounting and tax structures that support the selection. Identifying initial participants for the team Most organisations use cross-functional teams to identify and manage supply chain costs. Cost management specialists can be a part of this team. These specialists use cost models to perform cost analysis. They are responsible for the identification, implementation and monitoring of the cost management initiatives. Depending on the scale of operations of the company, it is advisable to include supplier representatives in the team At IBM, Gene Richter, who served as the Vice President and Chief Procurement Officer from 1994-2000, created commodity councils and left it to the council leaders to identify the product or service suppliers required to initiate the process of writing a cost management strategy. Companies which deal with large and powerful customers often include representatives of the customer service and product development teams to improve cost management. Team goals can be established by involving all departments and activities. This increases the interest of all departments. Like any other strategic management, cost management also requires a team that is committed to monitor all cost management initiatives. The team needs to set goals that are realistic, focused, and quantifiable. The team must divide the goals into clear units of work which can then be assigned to each team. Selecting primary costs to be managed Supply chains face a lot of cost pressures today. Manufacturing costs are a major part of supply chain costs. Supply chain costs also include transportation cost and costs related to customer service requirements. The increasing price of energy resources impact manufacturing and transportation costs. There is also a great increase in logistics costs. Logistics costs include warehousing, transportation, and inventory costs. Other costs in the supply chain include labour, insurance, security compliance and regulatory costs.

By using supply chain measures and performance management, organisations can reduce direct overhead costs like transportation, administration, warehousing, and inventory. It is difficult to assign a team to manage the total cost of any product or service. Rather, there should be a number of smaller teams to manage the costs of different products or services. The cost that needs to be strategically managed can be identified by using the following ways: Pareto analysis - It is a statistical technique used for selecting certain costs that constitute a significant amount of the overall cost. This technique is also called as 80-20 rule which means that 80% of the project's costs result from 20% of the activities. For example, 80% of an organisations cost can result from 20% of its inventory. Significant competitive gap - A competitive gap is the significant share of the business achieved by selling similar products in the same market segment through similar distribution patterns. Analysing the competitive gap helps organisation to determine the cost line items on which the competitors are spending lesser amounts. Variation from the established standards - If a product is priced according to the standard cost system and the actual cost of few products has negative variations, then organisations need to manage these costs. Spend exceeds a hurdle amount - If a cost management team spends more than a specified amount on a project, then the team needs to have a written cost management strategy along with its negotiation strategy. Topic can be leveraged - Some successful ideas of cost management from other product development teams or departments of the company can be used by the cost management team. Building the rest of the cost management team After selecting a topic for written cost management strategy, the cost management team members need to focus on the other members who need to be included in the team. The decision on including other members in the team can be made in a step by step process. The steps are as follows: 1) Include decision makers - Decision makers from each link of the supply chain need to be included if suppliers are involved in the cost management team. 2) Include ten-metre managers - Ten-metre managers are people who are closest to the activities that lead to the costs which need to be managed. 3) Include standby consultants - Standby consultants are the professionals from within or outside the organisation who participate in the strategy session. The standby consultants may need to clarify or express an expert opinion even though they may be from outside organisation.

Q3. Briefly discuss Modern Cost Accounting System. (Activity Based Costing (ABC) explanation and steps 6 marks; Process Based Costing (PBC) -explanation, steps and features 4 marks) 10 marks Activity based costs Activity based costs are the costs that cannot be related to products. These costs are actually caused by the administrative activities performed during the course of manufacture and delivery of products to customers. The activity based costs differ from one organisation to another organisation and they arise from the organisational framework of a company. Organisations are trying to identify the manner in which they create costs for each other. They have also begun to plan collaborative measures to reduce the collective costs.

ABC concept Strategic plans make use of technology as a tool to capture business opportunities. Opportunities reduce the costs and facilitate a consistent system in the management. This makes it easier to control the costs within the organisation and in the supply chain network, and they are known as Total Cost Management (TCM). The approach to TCM is: Find it - This involves assessment of the internal operations and the external business partnerships. Get it - This involves maintenance of effective sourcing, negotiations and business partner relationships. Keep it - This involves application and enforcement of electronically automated compliance rules and reporting measurements.

Q4. Explain the commonly used criteria for risk-benefit analysis (Criteria explanation 10 marks) 10 marks The most commonly used criteria for risk-benefit analysis are: Financial Technological Quality Manufacturing Brand image Political Flexibility Environmental Delivery performance Other business issues

Financial When a strategy statement is considered, the first part of risk-benefit discussion focuses more on the monetary aspects. The cost management team needs to validate calculations for savings or costs. The following tips help to calculate the monetary benefits of a strategy statement: -Multiply the volume projected for a year by the savings per unit. -Ensure that the strategy that is used on other part numbers or projects extrapolates the savings on the extended volume. This constitutes the savings that can be leveraged. -Project the savings for the estimated volume over the next three years. Then discount the savings back to the present value using the companys cost of capital as the discount rate. For products with end -of-life less than three years, estimate the volume until the end of the products life. -Consider the cost of engineering change notice or requalification while calculating the cost of implementation of an option. Consider costs like training, excess inventory and other soft costs. Technological The cost management team needs to evaluate if the option being considered provides a new leading edge technology or whether it diverts the organisation from its planned technology roadmap. The cost management team also needs to consider the suppliers technology road map and make decisions that benefit both the organisation and the supplier in the long run. Quality Changing the specifications to save money can impact the quality of the product or service. Hence, the cost management team needs to discuss and then decide before changing specifications. The cost management team needs to consider the quality requirements only of the current application of the product.

Manufacturing can save money and shorten the manufacturing cycle. They can simplify the process and provide a better yield. But at times, the cost management team, in order to save money, may choose to use cheaper materials that can adversely affect the manufacturing process and damage the equipment. Hence, the cost management team must consult the manufacturing manager or the supplier before implementing a strategy. Brand image There are situations wherein a marketing team might reject the cost reducing strategies put forward, as it might drastically affect the brand image of the company. The cost management team needs to understand the marketing perspective of the company. They can conduct a customer survey to validate the claims of the marketing department and verify if the strategy affects the brand image. Political The goal of the AIM & DRIVE team is to remove cost out of the supply chain. But sometimes the cost management team may select a specific strategy due to political compulsions, although the savings expected are not significant. Flexibility A strategy that currently saves money can introduce constraints of operating in a particular market or using a particular technology. This lack of flexibility can adversely affect the company. Decisions that replace a customised process with a standardised one can increase the flexibility or responsiveness of the company. Today, most of the companies need to be flexible to respond quickly to the changes in the market-place. Environmental Todays world is more environmental conscious. Hence the cost management team needs to consider the impact on the environment while performing the risk-benefit analysis. Delivery performance Sometimes, companies seeking to save money, forget the importance of consistently delivering products on-time. Hence, the cost management team needs to carefully evaluate the strategy to outsource a product or service. Failure to deliver the quantity on time can reduce the market share of a company.

Q5. Explain the factors that need to be considered for successfully applying the lessons of mass retailing to healthcare costs. (Understand the complexity of healthcare 2.5 marks; Promote cost transparency-2.5 marks; Bundle services only when it improves efficiency and price 2.5 marks; Address regulatory barriers-2.5 marks) 10 marks

The factors that need to be considered for successfully applying the above discussed lessons of mass retailing to healthcare costs are:

Understand the complexity of healthcare Promote cost transparency Bundle services only when it improves efficiency and price Address regulatory barriers
Understand the complexity of healthcare The ultimate goal of any healthcare cost management system is to have the maximum impact on costs without affecting the quality of care. A healthcare system cannot source, supply or price everything as a commodity. Facilities such as high-risk medical processes, complex diagnostics and specialty healthcare systems cannot be commoditised. We can consider the standard healthcare products and services as feasible candidates for commodity-type pricing if they meet the following criteria:

Research must clearly identify the product or service and the method by which it is provided. This enables the provision of standardised sets of clinical guidelines and reduces provider variation. Customisation requirements need to be minimised. For example, oncology treatments are highly customised and require a specialty provider. Whereas, the treatment for a herpetic cold sores in a healthy person may not require such a customisation. The patients profile, comprising age or the accompanying conditions and its treatment m ust not have any complications or side-effects. The products and services must be available easily and delivered in large volume, cost-efficiently. Promote cost transparency According to the Boston Globe, most of the patients do not worry about payment done by the insurance company to hospitals and doctors. This is a main reason for insurance premiums getting increased by an average of $1,800 per family in the United States. Policies should motivate people to opt for less care service by making the true costs of care evident. One of the simplest ways is to have proof of the total costs, including the payments done by the third parties. Bundle services only when it improves efficiency and price It is sensible to bundle services and health products into an event of care, like the diagnosis and treatment for uncomplicated throat infection, only if they comprise a standard set of components. This standardisation allows price and quality comparisons of the bundle across different healthcare providers. Bundling of services must indicate the exact price and have quality transparency. Bundling of commodity-type health products and services with specialty or highly customised services can adversely affect the economic forces which gradually reduce the price of the commodity components. The objective of episode-of-care bundling must be to allow the application of commodity-type pricing to the entire bundle as a unit.

The episode-of-care bundling must not limit patients choices. For example, in the Unit ed States, prior to 2004, patients in some states were not permitted to purchase contact lenses from providers other than the doctor performing their vision exam. Later in 2004, a law was passed which stated that patients must be given a copy of their contact lens prescriptions. This enabled the patients to compare prices of contact lenses of different providers and make purchases Address regulatory barriers Some states laws accidentally create hurdles. For example, North Dakota restricted corporate -owned pharmacies from entering into the market. This prevented the mass retailers from introducing many generic drugs to the state. The reversal of this policy can save patients in North Dakota about $2 million annually. It is essential to carefully review such laws and regulations to prevent the excessive increase in the prices of healthcare products and allow competition for patients.

The Central Drugs Standard Control Organization (CDSCO) guidelines regulate the import, manufacture and sale of sterile devices in India. Q6. Explain the Classification of Buyer/Supplier Relationship. (Classification of Buyer/Supplier Relationship :table with classification, 10 marks Buyer/supplier relationships can create a competitive advantage for both the buyer and the supplier. It

Classification Exit system

Classification Dimension Information exchange

Voice system

Buyers commitment

Traditional relationship JIT relationship

Operational integration Technological integration

Description Traditional framework for buyer supplier relationships. The buyer shows low commitment to impose the threat of leaving. The buyer works with the supplier to solve the issues. Voice relationships may be imposed through reputation and/or partial financial ownership. Depends on pure market logic and adversarial price. Logistic aspects are highly integrated and design aspects are less integrated. Narrow scope and intensity. One objective only with marginal suppliers. Description The party with lower bargaining power incurs specific investments to minimise the overall cost in a limited area. Standardised product, highly competitive supply market, low switching costs. Complex product with mature technology, suppliers have proprietary technology and strong bargaining power. High supplier dependence High buyer dependence

Limited alliances

Range of services included in the alliance

Classification Focused alliances

Classification Dimension Extent of direct involvement by the parties

Market exchange

Level of buyer's specific investments

Captive buyer

Level of supplier's specific investments

Contractor dominated Subcontractor dominated

Supplier dependence upon buyer Buyer dependence upon supplier