MANAGEMENT DECISION MAKING

Name Yashwanth Kumar Basanapally

Student ID @00589563

Module Management Decision Making

Module Code N295T

Course MSc Management

Date of submission 06-11-2020

Word count 2,478

Module Tutor Fateh Shaheen

University
of Salford

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Critically evaluate the impact of covid 19 pandemic on the management decision making process, given that
the UKM senior management has ignored such impact on their planning for 2020 & beyond.

Manufacturing industry has been hit in many ways due to the corona pandemic. To begin with, it can
be lower production, due to lower offtake. More and more employees stop coming to work, due to
government directives, thereby reducing the scale of operations, with consequent effect on quality, cost and
production volumes. Over a period, this adversely affects the turn over which slows down to a trickle. The
uncertainties in the logistics leads to a cascading effect transporters struggle to not only place vehicles to not
only place vehicles for loading, they also are under pressure to adjust their quotes for carrying goods, as they
face lower attendance ,with their operational risks increasing steeply.

UKM management felt each business unit needed flexibility and independence to react to rapidly changing
market conditions. UKM believed that if its business units were profit centres, they would be more
accountable for their own financial success. Their strategies and annual performance would be more visible
and measurable as well. This change meant they could sell their devices to external customers using available
manufacturing capacity. UKM could also recover the large development costs for future products and control
their destiny. But due to pandemic situation we cannot estimate the company to be profitable throughout
2020 .
The disruption on manufacturing caused by COVID-19 has severe operational, social and financial
consequences. It is forcing manufacturers to rethink risk management and contingency plans, workforce safety
protocols, manufacturing operations and new ways of working opportunities, all at the same time. So far,
manufacturing leaders have concentrated on solving the immediate challenges required to keep the business
as stable as possible. They’ve formed rapid response teams to gain a better understanding of their production
demand changes, labour support challenges and supply chain ecosystem constraints.

Simultaneously, they need to focus on building a business that is as future-proof as possible using new
technology solutions. This strategy will not only increase resilience, protect operations, and support workers
through the crisis, but will also help sustain a competitive advantage to accelerate business growth once
economies start to rebound.

What caused the 2019 SPx512 product cost to drop by £227 after reflecting the ABC review and the new
costing approach? Did spending decrease or just shift?

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost
of each activity to all products and services according to the actual consumption by each. This model assigns
more indirect costs into direct costs compared to conventional costing.

According to Nehler ABC provides a company with following criteria:

 Better understanding of cost in the organization.
 improved communication among units
 Constructors become more aware of costs which lead to a cost effective construction and cost
reduction initiative from operative staff.

For the SPx512 developed and manufactured, Sarah, head of UKM new marketing department, believed the
market would require similarly timed price / performance offerings .

As product development was no longer working on any SPx512 performance improvements, Sarah computed
the essential price reductions on the SPx512 following the industry model. The SPx512 would continue at the
£850 price through Q1 2019, then drop to £637.50 at the start of Q2 2019, drop to £425.00 at the start of Q1

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2020 and to £318.75 at the start of Q4 2020. Simon Smith, UK manufacturing’s (UKM) director of operations ,
felt the current standard cost system did not properly capture the complexity of UKM’s production process. He
felt an ABC analysis could provide the insight necessary to reduce the SPx512 product cost by the £166
marketing had requested.

The team mapped the processes of the entire operation and then reassigned costs to the newly defined
activities. The manufacturing support organisations were also better understood. Their key activities were
costed, and then each was aligned to the manufacturing operation it supported. UKM’s ABC team reset the
SPx512 product cost in line with the true practical capacity of the manufacturing process. The team saw
capacity utilisation as a major driver of product cost. The old product costing methodology was based on the
planned utilisation of each manufacturing process with underutilised manufacturing costs absorbed into
product costs.

Here spending had decreased for SPx512 because the team believed significant cost reductions would be
necessary to maintain profitability .The revised SPx512 product cost was pleasing, but not very surprising to
Smith. It confirmed his belief in the inaccuracies of the old costing method. The new SPx512 product cost of
£437.50 was £227.61 lower than the £665.11 original cost shown by the old system. It did not make sense to
charge the SPx512 for the costs of resources it did not consume. Smith felt he could commit immediately to
Sarah's 2019 product cost reduction request of £166.

What is the impact of using the full utilization approach to product costing versus applying manufacturing
cost to the amount produced?

When the product is successful, you can reach full capacity utilization, leading to high profitability and a
streamlined manufacturing plant that turns out high quality products. If planning has correctly forecast the
trend towards the use of all your capacity, we can expect to have new capacity coming online to take over new
demand. Profitability will drop as total utilization decreases temporarily, but increasing demand will bring
profits back up to higher level as level as we approach full utilization of the new capacity.

Capacity utilization is a measure of the extent to which the productive capacity of a business is being used.
Production cost reflect all the expenses associated with a company conducting its business .While
manufacturing cost represent only the expenses necessary to make the product. Both of these figures are used
to evaluate the total expenses of operating a manufacturing business. The revenue that a company generates
must exceed the total expense before it achieves profitability. Capacity utilization depends on market demand
and on scheduling production for the most efficient use of facilities. A structured approach to capacity
planning use capacity utilization rates to determine when need to expand capacity to satisfy increasing
demand of products. Average production costs tend to fall as output rises- so higher utilization can reduce unit
costs, making a business competitive. The main reason is that total fixed costs in the short run can be spread
over a higher level of sales/output.

Cost of production include many of the fixed and variable costs of operating a business. Raw materials and
labour are production costs. Variable costs increase or decrease as production volume changes.

Manufacturing costs can be defined as a representation of only the expenses incurred in making a product and
therefore do not include things like administrative expenses. The manufacturing cost has three major
elements: Direct material, Direct labour, Manufacturing overhead
Direct materials– These are the raw materials that go directly into a final product.
Direct labour– This encompasses labour that can be traced to individual units produced.
Manufacturing overhead– All manufacturing costs that are not direct labour or direct materials are overhead.

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Manufacturing costs are sensitive to changes in production volume. Total manufacturing expenses increase as
production increases. The opportunity to achieve a lower per-item fixed cost motivates many businesses to
continue expanding production up to total capacity. The per-item cost does not change substantially.
Nonetheless, additional production always generates additional manufacturing costs.

What are the drivers of manufacturing cost ?of product cost ?

A cost driver is the direct cause of a cost and its effect is on total cost incurred. Activities consume resources
while customers, products and channels of product consume activities. The profitability of each customer can
also be easily evaluated using cost drivers, and in cases of resources constraints, the less profitable order can
be eliminated. Resources should be allocated to the most profitable activities or in proportion to profitability.

Capacity utilization as a major driver of product cost in UKM. Capacity utilization refers to the manufacturing
and production capabilities that are being utilized by a nation or enterprise at any given time. It is the
relationship between the output produced with the given resources and the potential output that can be
produced if capacity was fully used. Capacity utilization can also be defined as the metric used to calculate the
rate at which the prospective levels of output are being met or used. The rate is displayed as a percentage and
provides an insight into the total utilization of resources and how a company can increase its output without
increasing the costs associated with production. The capacity utilization rate is also called the operating rate.

Wafer fabrication was the largest area of manufacturing cost for UKM. Wafer fabrication is a procedure
composed of many repeated sequential processes to produce complete electrical or photonic circuits on
semiconductor wafers. Wafer fabrication is used to build components with the necessary electrical structures.
Four factors or drivers affect a manufacturer’s price-Materials, Factory overhead, Packaging construction,
Printing.

Machine drives constitute the single largest end use of electricity in manufacturing sector. Machine hours,
maintenance hours, production runs, scheduled production jobs, number of new products introduced ,
machine setups etc. are the cost drivers of manufacturing industry.

Was it practical or plausible to reduce direct wafer fabrication by 34 per cent or £23m?

The product cost goal of UKM 2020 is to achieve £332.50 for SPx512. The entire team looked into the activity
based costing results. Smith, UK Manufacturing’s director of operations , computed that if SPx512 wafer cost
was reduced from the 2019 level of £3,000/wafer to £1,866/wafer, then total product cost would be lowered
by £105, achieving the desired £332.50. To obtain a wafer cost of £1,866 , spending reductions of £25.5m or 38
per cent in wafer fabrication would have to be achieved.

It is plausible to reduce direct wafer fabrication by 34 per cent or £23m according to spencer plan. His team
found nominal spending opportunities by:
 Reducing monitor wafer usage,
 Redesigning wafer lot handling procedures and
 Better placement of inspection stations.

Spencer's most significant discovery was the 64 per cent increase in capacity attained by increasing
equipment uptime (the time equipment is not undergoing repair or preventive maintenance).

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Higher uptime, however, required an annual investment of £1.8m in additional equipment engineers.
While this investment would increase wafer fabrication spending to £69.2m, wafer fabrication capacity
would increase from 26,000 to 42,700 in annual wafer starts. The increased capacity actually decreased the
cost / wafer to £1,845, which was £21 lower than Pound had requested.
Simon Smith dismissed Spencer's alternative plan outright. According to smith 'Spending needed to
decrease, not increase' Smith reiterated his request to reduce fabrication spending by 38 per cent. He was
certain Scott would approve a revised SPx512 price and be receptive to a higher price for the SPx256, which
could offset the remaining projected 2020 loss. Smith felt it would take a combination of his cost reduction
efforts and higher prices to maintain UKM's profitability.

Should smith have looked at areas other than wafer fabrication to identify further cost reductions?

According to Simon Smith ,UK Manufacturing director of operations 'Spending needed to decrease, not
increase!' Smith reiterated his request to reduce fabrication spending by 38 per cent. Smith then focused his
team's cost reduction efforts on packaging costs, another major cost component of the SPx512. So packaging
cost is another component identified for cost reduction. UKM had spent close to £8.8m annually on chip
packages. So, UKM’s purchasing manager, Zoe, pressurized UKM’s 339 PGA supplier to lower their £50 price.
Zoe had already made this request and was reminded by the vendor that the 339 PGA was a unique design,
used only by UKM for the SPx512. With order volumes declining by 50 per cent in a year, Zoe said it would be
difficult to keep the £50 package price from increasing.

What pricing advantages does UKM competitor ,Top Telecommunicating plc, have , knowing their TT256 has
33 percent more die/wafer than the SPx256?(Assume the same wafer probe, assembly and test costs and
yields as the SPx256)

Top Telecommunications (TT) Plc., is the market leader in the 384 -micron integer-only microprocessors. The
SPx256 is targeted as entry device for AHS's personal computer business. TT256 CPU (also 256 MHz, 20
nanoseconds) has announced with volume shipments to coincide with the beginning of UKM’s FY2019. UKM’s
new marketing department estimates the demand for the SPx256 from AHS and potential new external
customers could easily exceed 1,000 units per year. To break SPx256 into market, Sarah , head of UKM’ new
marketing department recommended heavy market promotion and a price / performance two times the
competitions.

So pricing advantages of Top Telecommunicating plc. are:

 No heavy market promotions and advertising:
SPx256 is newly developed product, in order to sell according to company’s
estimation it need huge market promotion and advertisement to click the product in the market.
Being a market leader, Top Telecommunication plc. does not require promotions or advertisement.
 low cost strategy:
A pricing strategy in which a company offers a relatively low price to stimulate demand
and gain market share. For example if two companies make essentially identical products that sell at
same price in the market place , the one with lower costs has the advantage of a higher level of profit
per sale.
 Promotes brand loyalty:
It brings brand loyalty into the picture. When a company efficiently differentiates
its products, and a few essential products stand out, it usually brings out brand loyalty on the

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consumer’s part. This is because once a consumer is satisfied with a few products of a brand, they
tend to just start buying other products from that one particular brand. The consumer believes that
the company’s other products are as good and stand out just as much as the ones they use.
 Provides economic benefits:
Product differentiation is economically advantageous to a company. It provides a
reason for consumers as to why their product is worth investing in, as opposed to all the other
substitute products available in the market. A successful differentiation campaign boosts sales for a
company by a significant margin and gives it a competitive advantage in the market as to why they
deserve a consumer’s investment more than the others.
 Helps achieve a higher price point:
In addition, product differentiation helps a company operate at a higher price
point just because of that additional benefit or feature introduced in a product. When that one
distinct feature or difference introduced in the product makes it better than its substitutes,
consumers more often than not perceive it to be worth the increased price.

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