The Process of Cost and Value Management - Boeing - Case Study Example

Section A The process of cost and value management implemented by Boeing certainly may a not be completely attuned to being advantageous or disadvantageous but one think it is; is that it is directly applicable to the organization and the product that is being produced. Boeing's program of the 767 plane was not really destined to end up in this shape as we have seen in our case study. It was only after 1977 that the plane was actually given a name and taken out from the development phase and put into the production plans of the company. This certainly shows the pragmatism of the firm with regards to its products in the sense that none of the products are rushed into production whatever the results these said products show on the testing phase. That is directly linked to the cost management practices of the firm i.e. the firm is willing to bear some short-term costs given that these cost can initiate the birth of products that are successful and long-lasting in the long run. In addition, the entire case of the Boeing 7X7 shows the commitment and drive of Boeing towards research and development. It says in the case study before the name was changed to 767, approximately $100 million had been spent on this project which were demarcated as costs for the on-going research and development. Therefore, we can see that the costs management practices of Boeing had a significant place in them for large scale research and development projects. Suffice to say, the cost management practices of Boeing are pragmatic yet expansive and directed towards the long run. [1] [2] [3] Now, after determining these facts, we will now look at the strengths and weaknesses of these practices of Boeing in light of the concept of earned value management. Before, I delve much deeper into this topic, it is critical to explain that contrary to popular belief, there is a world of difference between the factors that determine earned value and earned value management systems (EVMS). Earned value basically defines the mechanism which is used to critically analyze the performance of any project undertaken by a firm operating in any industry with the standards demarcated for management control systems being the necessary prerequisite in the use of the concept of earned value. Its importance vis--vis the mechanism can be gauged by the fact that large adapt ably priced military defense contracts have required the presence of these prerequisites in order to ascertain the reliability of the results given by the earned value metric as far back as 1967. It is important to note that despite the great important of these prerequisites, they are not essential for the workability of the earned value method. However, the presence of a management control system that fulfills at least part of the standards that have been demarcated by the prerequisites is extremely essential in this case. From here on, the term "earned value management process" will include the pre-requisites for both the earned value and the EVMS criteria. [4] [5] [6] I will first look at the strengths of these practices at Boeing. The earned value approach of Boeing is directly in line with the cost management practices that we have seen in the case study. Despite the very large initial expenditure that is related to the product, the project only went into productions when commitments to purchase were received from one foreign and two domestic airlines, and preproduction orders totaled at least 100 planes. This showed the risk management abilities of the company in the sense that they wanted to ascertain to the minimum a certain number of prospective clients which would be interested in their products. This also showed the strengths of the earned value management process of the business as they want to determine a flexible budget of costs which they would need to undertake in order to complete a theoretical number of orders. Now, this theoretical number would be based on the pre-posed number of prospective clients who had guaranteed their interest to purchase. Therefore, the entire project would be hedged for risk of consumer rejections which would inherently ascertain a specific value for the product before it is even marketed. This value would be pocketed by the producer hence, in pure financial terms it can be termed as the present earned value of the project. So, a major strength of these practices is that it helps ascertain added value for the firm even before the product is marketed. [1] Now, I look at the labour costing practices at Boeing. When the first 767 was being sent to production, the labour requirements for the project took a very important position. This was because the product was being produced for the first time; therefore, there was no frame of reference with regards to the production techniques that were to be implemented. However, the actual management practice of the firm was truly pioneering at the success of the project is contingent upon these cost allocations. Now, from the case study it was determined that the best practice adopted by Boeing was first forecasting the costs for the design characteristics of the plane. This was done in line with the process adopted for other models. Then labour hours were demarcated I accordance with the estimates that were derived from the previous successful projects that were undertaken by Boeing. Therefore, the management policy in this scenario was to determine a set of production practices for the new product which would be in line with the practices of the precious products which were successful. Therefore, if not in accounting term, economic value was being generated by this practice which shows the strength of applying this process in this specific case. [6] As for any argument, there is always a counter argument. Similar, there are some weaknesses that are attached to the process of earned value management. Risk of customer perceptions for the production process is considerably lessened by the process that is used by the people at Boeing; however, this process is not time friendly. In fact, this is the classic case for the debate of pro-active vs. ad-hoc decision making. Now, I have already shown the advantages of this process which were due to the process being ad-hoc. Now, the greatest weakness in this method is the fact that decision making is contingent upon triggers and these decisions are not made on rational future expectations. Holistically, it can be seen that managers who work on ad-hoc basis are always one step behind the game. Now, Boeing may was able to withstand these time lapses suffered whilst waiting for triggers as it operates in a market which not competitive and Boeing has a significant say in the happenings of the market, however, if a firm was operating in a competitive environment where it could not influence the price and the quantity being traded at the market equilibrium, then it would have had to suffer huge losses in the situation whereby the firm decides to wait for market trigger to make its decisions. [7] In addition, the best practices method that is employed by the management with regards to the labour appropriation and cost allocation section of the production process does certainly have its strengths but there are some major flaws attached to it as well. Best practices that have been appropriated for specific products which are different than the 767 are exactly that: practices specific to certain models of the airplanes that are manufactured by Boeing. Therefore, to consider them holistically applicable on the entire product range is certainly not a wise decision. Despite the fact that only forecasted measures are being used from other products, the actual production of the 767 would be directed by these forecasted method, therefore, as an example if process X in the other airplanes produced by Boeing requires a amount of labour hours, than the same must not be the case for the same process X but for the 767. So, these forecasts could give the wrong impressions to the overall production mechanism of the 767 which would misdirect the entire process of production as we can see from an example in the case study were Richard Ferris, the CEO of United Airlines, remarks that his utmost priority is not interior design or customer preference, rather it is merely the assurance of the seat-mile performance of the airplane. [8] Section B For comparison, I will now use the method of application of the earned value management system to the appraisals as conducted by the U.S Department of Defense. The concept of earned value finds in origin in the military industry and was basically developed as a mechanism for evaluating and reviewing the performance of defense acquisition contracts by the U.S Department of Defense. The fact that a military organization is applying this metric to analyze and differentiate the better performing investments from the others is indicative of the wide scale applicability and usability of this concept. In very simplistic terms, earned value is merely a device which is used to realize a consequential assessment with regards to the work that has already been finished and the wok that is still in the process of implementation. Therefore, one can say that this measurement is uncannily similar to the phenomenon which accountants worldwide have named as a 'flexible budget' i.e. where the original level of work that is budgeted before the start of that specific process is attuned to the actual level of production that is realized after the completion of the process at hand. Variability of cost is only realized in the instance whereby there is a significant difference between the cost of the process that is actually realized and the cost that was estimated in the flexible budget or, in line with our research, the earned value. Subsequently, the notable variances that are encountered are assessed in order to ascertain the inherent problems that are not visible on plain view before they become momentously worse than what they are at the current point in time. Given the similarities of the two concepts, there is a major difference in the concepts of earned value and flexible budget and that is the applicability of time dimensions with regards to the earned value concept. Before production commences, the amount of work demarcated o each project is divided further into sub-sections with each sub-section being appropriated requisite resources and each being appropriated a time line for production. As every stage of work is contingent upon time, a time line variance can be established in the instance that the work is finished at a time stamp different from the time stamp that was demarcated for his project in the time line that was set up for this part of the process in the original flexible budget. As each job has a dollar value assigned to it, the variability of cost due to variability in the time stamps of the time lines as discussed also has a dollar value attached to it. Therefore, proper variance analysis can be a very useful and applicable measure in determining and further managing cost and schedule difficulties that may prove to be a major stumbling block in the completion of any part of the production process. Unluckily, analysis of variance can be overtly unwanted or out of the time scope and may even play a major part in the eventual failure of a project by taking the attention of the managers away from more pressing issues. [9] [10] Conclusion: As with any matter, there are always pros and cons attached to it. Similar is the case in this matter as well. However, the immense gravity of both pros and cons render most of the researchers including myself unable to determine which position to finally take in the matter, which is why I would say that the jury is still out vis--vis the notion that earned value management system can replace the erstwhile value management systems present in the contemporary business landscape. Bibliography 1. David S. Christensen, David. S, (1998) " The Costs and Benefits of the Earned Value Management Process" Southern Utah University Cedar City, Utah Acquisition Review Quarterly 2. Abba, Wayne. October (1995). "Earned Value Management Rediscovered!" Office of the Under Secretary of Defense for Acquisition. 3. Christensen, David S. (1994). "Using Performance Indices to Evaluate the Estimate at Completion." Journal of Cost Analysis, pp.17-24. 4. Christle, Gary. (1994). "Implementation of Earned Value - A Model Program Approach." Office of the Under Secretary of Defense for Acquisition. 5. Cole, John R. and Fussell, Judson, M. (1997). "A Cost-Benefit Analysis of Earned Value Management Systems Criteria." Masters thesis. Air Force Institute of Technology. Wright-Patterson Air Force Base, Ohio. 6. Coopers & Lybrand and TASC. (1994). "The DOD Regulatory Cost Premium: A Quantitative Assessment." 7. Decision Planning Corporation. (1992). "The Cost of the Criteria." Costa Mesa, California. 8. Fleming, Quentin W. and Koppelman, Joel, M. (1996). "Earned Value Project Management". Upper Darby, Pennsylvania: Project Management Institute. 9. General Accounting Office. (1996). "Efforts to Reduce the Cost to Manage and Oversee DOD Contracts" NSIAD 96-106. Washington, D.C. 10. Lampkin, Eric D. (1992). "The Marginal Cost and Practicality of Cost/Schedule Control Systems Criteria Implementation." Aeronautical Systems Center. Dayton, OH: Wright-Patterson Air Force Base. Read More