Value Chain Model - Assignment Example

High-Tech Limited Contents Contents 1 Question 1. 2 Value Chain Analysis 2 Inbound and Outbound Logistics 2 Outbound Logistics 3 Sales and Marketing 4 Service 4 Firm Infrastructure 4 Research and Development 4 Question 2 5 Balanced Scorecard 5 Question 1. Value Chain Analysis The concept of Value chain was first given by Michael Porter. The figure below gives the framework of the value chain model. Figure 1. Value Chain Analysis. Source- Malek.C, 2009. The value chain consists of five primary activities and four support activities. This concept is based on the fact that each and every step adds value to a product. Inbound and Outbound Logistics According to the Council of Logistics Management has defined the term logistics as the process of implementing, planning and controlling the flow of goods and their storage from the origin point to the final delivery point. (Chan, JO, 2007). H-T has an efficient method of handling its inbound logistics. The production plant at Yorkshire traces all its costs directly to the product. The materials and labor are traced directly via bar codes. The material inputs are directly traced to their respective units. A disc is produced for each of the finished products which indicate the serial number, assembler ID number which are used to make the product. Outbound Logistics The company aims at increasing its profit margins by reducing the overhead manufacturing costs. This is because the price of labor and materials are fixed according to the market rates. The company believes that by reducing the throughput time it can increase its profit margins. Operations The productions in the company’s Yorkshire plant has a production cycle that is of three months. Approximately seventy five percent of the production cost is of materials. The company uses technologies like bar codes and other advanced operating systems in order to reduce the production time. The throughput time for the company’s operations is as follows. Figure 2. Throughput at H-T’s Yorkshire plant. Source- Kinsey, PJ. No date. Sales and Marketing H-T unlike its competitors has included retail dealers in its supply chain and distribution models. This strategy has its advantages as the customers get better after sales service as compared to its competitors. The disadvantage is that the profit margin of the company gets reduced as the supply chain becomes longer. Another disadvantage is that the company has a policy of giving dealers a discount over the products that are not sold after a fixed duration. This often serves as an incentive to the dealers as they intentionally keep an inventory of their products. This often erodes the company’s profit margins. Service The company provides it’s after sales service through its dealer network. The dealers provide door to door customer service to the customers. This servers as one of the USP of the company as all its competitors have eliminated the dealers from their supply chain and have a customer service cell which has limited reach. Firm Infrastructure The company has a good production and supply chain infrastructure and has assets worth 81,480 Pounds as of 2007. The current assets of the firm range up to 40780 pounds as of 2007. The company must improve its infrastructure to grow up in the value chain. It can employ techniques like six sigma tools in management for acquiring efficiency in production. Research and Development The company has efficient production and logistics techniques in manufacturing and logistics. The company uses sophisticated barcode technologies in its inbound and outbound logistics. The company has a research and development budget of 8900 million pounds as of 2007. The company intends to spend a higher amount on research and development in order to add value to its products as well as reduce operating costs. Question 2 Balanced Scorecard The concept of balanced scorecard was first proposed by Robert Kaplan and David Norton during the early 90’s. The concept is built on the premise that firms cannot gain competitive advantage by only developing tangible assets. The company must develop its intangible assets like intellectual property etc. This would help the company create a sustainable competitive advantage for itself in the industry. Figure 3. The balanced scorecard approach. Source- Kaplan and Norton, No date. The figure above shows the approach of the balanced scorecard for creating competitive advantage. The balanced scorecard contains four perspectives namely, 1. The growth and learning perspective 2. Business process perspective 3. Customer perspective 4. Financial Perspective (Balanced Scorecard, No date) Growth and learning perspective This perspective deals with employee training and development. As people are the main resources of a company hence this perspective assumes importance for the success of any organization. The balanced scorecard approach states the importance of learning as a more important factor than training. H-T must provide good training to its employees. It can also start the system of having mentors who would also promote learning among the employees. Business process perspective This perspective refers to a firm’s internal business processes. This perspective helps in determining whether the business is running perfectly. The company can design certain performance based metrics which would help the company determine whether the products are meeting customer specifications or whether the employees are performing their best. They should analyze the reason for any deviations that may occur in those metrics and take suitable actions. Customer Perspective Customers form the most important stakeholders in a firm. H-T must develop and design a metrics for determining the level of customer satisfaction. The customers must also be segregated and the policies should be taken accordingly. Financial perspective In this perspective the company can develop an automated and centralized accounting system. In addition to this the company must ensure that there is no overemphasis on the financial side so that the other factors are neglected. This may lead to an unbalanced situation. The company can also maintain a corporate database which would contain the financial data from all the business units of the company. 5. Activity based costing. Activity based costing is an accounting technique which assigns costs for the activities on the basis of the use of resources, and not on the basis of products or services. This technique helps a firm in using its resources and other costs more efficiently. This technique also provides information about the pattern of cost consumption. (Managers-net, n.d.). The use of activity based costing implies that all the individual based activities can be costed accurately. This technique also helps a firm in determining the cost and the profitability of individual services and products. H-T must use activity based costing in its plant at Yorkshire because of the following reasons namely, It would help the firm in evaluating the cost of the individual activities which would be based on the application of the resources of the firm. It would enable to make an accurate estimate of the costs of all the activities which are to be obtained from the organization. The use of this accounting technique would help the firm in identifying areas in production where in which low or high costs are incurred by the firm along with the cause of such a situation. This technique would help provide the firm with a valuable tool for improvement in both businesses and the processes. Activity based costing helps the firm in predicting the product planning for the future. For example H-T can determine the cost of all the activities based with a product before it is being launched into the market. This would help the company in determining the pricing and the other expenditures. The use of this technique would help the firm in determining product costs more accurately as the managers of the firm would be in a better position to assign overheads more efficiently to the products. (Brierley, JA. n.d.) H-T can reinvent its production units by applying Activity Based Costing techniques and using business process re-engineering and total quality management. This would help the company in reducing costs and at the same time improving its productivity at the Yorkshire plant. (Pineno, Charles J, 2008) Question 6 Accounting system H-T uses a normal costing system wherein the firm’s manufacturing overheads are used and the figures are estimated on an annual and a quarterly basis. Apart from this all the other costs are determined and recorded on an actual basis using the stand alone based weighted average accounting information and the inventory system. This system implies that the cost accounting system will not be integrated with the financial accounting, logistics ledger or finance. The company plans to implement SAP in its accounting system. As the cost accounting data is prepared on a standalone basis, a considerable effort is spent over integrating the cost data with the logistics and the financial data. The company can adopt the standard costing technique. This technique is based on the term known as standard cost. The standard cost for a unit of output is defined as the budgeted production cost for a particular unit. These costs are calculated by making use of the engineering estimates of the inputs in standard quantities and the budgeted price estimates of those particular inputs. This type of accounting system can be used by H-T as the initial journal entries which are related to the debit work in process, cost of goods and the finished goods are based on the actual quantity of the output produced rather than the budgeted quantities. (Caplan.D, n.d.) The advantages of using the standard costing method are as follows, This system would help in recording the budgeted amounts through the work in process, finished goods and the actual cost of goods. This difference between the budgeted and the actual costs would provide vital information to the firm with regards to the cost control measures. In this system the general ledger would track and provide all the information which is necessary for providing a report on the cost variances. Secondly this system of accounting would help in smoothing the effect of the short-term fluctuations that can occur in the direct costs. This is because the averaging of the direct costs would give a better picture of the overall business scenario of the firm. The firm can identify areas where attention is required and can take up appropriate damage control measures. Moreover, the differences in the costs of the materials used from the various suppliers of the company are not shown in COGS which comes under the standard costing techniques. Moreover with the use of an efficient accounting system, the programs would tend to become sophisticated to a greater extent as the costs would come down and a greater amount of real time information would be available to the company strategists. This would enable the managers of the firm to make the best possible business decision using the right information. Question 7 The company would have the following activities while following the Activity Based Costing. 1. Receiving goods or raw materials from the original equipments manufacturer. 2. Shipping the parts of the product to the shipping lane. 3. Transporting out the goods. The cost drivers for the receiving sections would be the head count, and the information systems (in hours), in case of shipping parts to the shipping lane the cost drivers would include the head count used and the information systems which would be on an hourly basis. The cost drivers for storage would include the floor space and the information systems based on an hourly basis. The cost drivers for the transporting out activity would be the head count in numbers, the information system in hours and the total scanning hours used in the activity. The tableau de bord concept states that the tableau which represents the dashboard of a car and the driver happens to be the manager of a firm. This concept states that the driver or the manager can have a good view of the operations and the other business activities of the organization in a similar fashion as the driver of a car looks at his dashboard. The cost drivers of an activity is very important in the sense that they are responsible for the production and operating costs which in turn affect the firm’s revenues by altering the operating profits. According to the concept of the tableau de bord, the manager can actually supervise all the cost drivers and can notice any discrepancies that may have occurred. The manager can also take corrective actions when needed so that the situation does not go out of control. The information about the cost drivers would enable the manager device strategies which would be designed in a manner so as to control the costs and enhance the profit margins of the firm. References Balanced Scorecard. No date. Balanced scorecard basics.[Online]. Available at http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx. [Accessed on October 28, 2009]. Bourguignon,A. 2001.Balanced Scorecard versus French tableau de bord: beyond dispute, a cultural and ideological perspective. [Online]. Available at http://www.hec.fr/var/fre/storage/original/application/b238ea034d08e3b258e080d334376553.pdf. [Accessed on October 28, 2009]. Brierley J, Christopher J, Drury C. No Date. Investigating activity-based costing in manufacturing industry. [Online] Available at http://aaahq.org/mas/mas2006/display.cfm?Filename=Manuscript01.pdf&MIMEType=application%2Fpdf. [Accessed on October 28, 2009]. Caplan,D. No date. Management accounting: concepts and techniques.[Online]. Available at http://classes.bus.oregonstate.edu/spring-06/ba422/Management%20Accounting%20Chapter%2010.htm. [Accessed on October 28, 2009]. Chan, O.J. 2007. Real-Time Value Chain Management. [Online]. Available at http://www.iima.org/CIIMA/10%20CIIMA%207-3-07%20Chan%2079-88.pdf. [Accessed on October 28, 2009]. Managers-net. No date. Activity based costing.[Online]. Available at http://managers-net.org/activityBC.html. [Accessed on October 28, 2009]. Pineno, Charles J. Should activity based costing or the balanced scorecard drive the university strategy for continuous improvement?[Online]. Available at http://asbbs.org/files/2008/PDF/P/Pineno.pdf. [Accessed on October 28, 2009]. Sim, KL, Koh, CH. 2001. Balanced scorecard: A rising trend in strategic performance measurement.[Online]. Available at http://www.cbpp.uaa.alaska.edu/afef/balanced_scorecard.htm. [Accessed on October 28, 2009]. Read More