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lOMoARcPSD|113 754 43

Republic of the Philippines

COMMUNITY COLLEGE OF GINGOOG CITY (CCGC)
Don Restituto Baol Central School Complex
National Highway, Gingoog City
ccgcgingoog.2018@gmail.com

AGRIBUS 2
Managerial Accounting
BS IN AGRIBUSINESS

MODULE 3:
VALUE CHAIN, TECHNOLOGICAL CHANGE,
THEORY OF CONSTRAINTS, BALANCED CARD
AND JUST IN TIME PROCESSING

RICHAELE BRAGA-LICTAO, CPA

Instructor
Email: richaelebbl@gmail.com
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Content:

VALUE CHAIN:
Manufacturing companies create value by acquiring raw materials and using them to produce something
useful. Retailers bring together a range of products and present them in a way that's convenient to
customers, sometimes supported by services such as fitting rooms or personal shopper advice. And
insurance companies offer policies to customers that are underwritten by larger re-insurance policies.
Here, they're packaging these larger policies in a customer-friendly way, and distributing them to a mass
audience.

The value that's created and captured by a company is the profit margin:

Value Created and Captured – Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it is likely to be. And when you provide more
value to your customers, you build competitive advantage.

Understanding how your company creates value, and looking for ways to add more value, are critical
elements in developing a competitive strategy. Michael Porter discussed this in his influential 1985 book
"Competitive Advantage," in which he first introduced the concept of the value chain.

A value chain is a set of activities that an organization carries out to create value for its customers. Porter
proposed a general-purpose value chain that companies can use to examine all of their activities, and
see how they're connected. The way in which value chain activities are performed determines costs and
affects profits, so this tool can help you understand the sources of value for your organization.

Elements in Porter's Value Chain

Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on systems,
and how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter
described a chain of activities common to all businesses, and he divided them into primary and support
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activities, as shown below.

Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a product or
service. They consist of the following:

• Inbound logistics – These are all the processes related to receiving, storing, and distributing
inputs internally. Your supplier relationships are a key factor in creating value here.
• Operations – These are the transformation activities that change inputs into outputs that are
sold to customers. Here, your operational systems create value.
• Outbound logistics – These activities deliver your product or service to your customer. These
are things like collection, storage, and distribution systems, and they may be internal or
external to your organization.
• Marketing and sales – These are the processes you use to persuade clients to purchase from
you instead of your competitors. The benefits you offer, and how well you communicate them,
are sources of value here.
• Service – These are the activities related to maintaining the value of your product or service to
your customers, once it's been purchased.
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Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show that each
support, or secondary, activity can play a role in each primary activity. For example, procurement
supports operations with certain activities, but it also supports marketing and sales with other activities.

• Procurement (purchasing) – This is what the organization does to get the resources it needs
to operate. This includes finding vendors and negotiating best prices.
• Human resource management – This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
• Technological development – These activities relate to managing and processing
information, as well as protecting a company's knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
• Infrastructure – These are a company's support systems, and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage.

Companies use these primary and support activities as "building blocks" to create a valuable product or
service.

TECHNOLOGICAL CHANGE:
Technological change means the technical knowledge used in the production of capital and machinery.
The various changes in technology leads to an increase in the productivity of labor, capital and other
production factors. Technological progress comprises of creation of skill, new means of production, new
uses of raw materials and the widespread use of machinery.

The technology is the most powerful means of wresting power from nature in all possible ways. It
strengthens the facilities of man. “Technological change is not a mere improvement in the technical know-
how. It means much more than this. It should be preceded by sociological change also, a willingness and
desire on the part of community to modify their social, political and administrative institutions so as to
make them fit with new techniques of production and faster tempo of economic activity.”

Process of Technological Change:

Technological changes devise new goods and techniques of production. The development of new
technical knowledge can be defined as the growth of the new technique that can produce goods and
services at lesser cost of production.
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JUST-IN-TIME SYSTEM:

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from
suppliers directly with production schedules. Companies employ this inventory strategy to increase
efficiency and decrease waste by receiving goods only as they need them for the production process,
which reduces inventory costs. This method requires producers to forecast demand accurately.

The JIT inventory system contrasts with just-in-case strategies, wherein producers hold sufficient
inventories to have enough product to absorb maximum market demand.

• The just-in-time (JIT) inventory system is a management strategy that minimizes inventory and
increases efficiency.
• Just-in-time (JIT) manufacturing is also known as the Toyota Production System (TPS) because
the car manufacturer Toyota adopted the system in the 1970s.
• Kanban is a scheduling system often used in conjunction with JIT to avoid overcapacity of work in
process.
• The success of the JIT production process relies on steady production, high-quality workmanship,
no machine breakdowns, and reliable suppliers.

•
How Just-in-Time (JIT) Works
One example of a JIT inventory system is a car manufacturer that operates with low inventory levels but
heavily relies on its supply chain to deliver the parts it requires to build cars, on an as-needed basis.
Consequently, the manufacturer orders the parts required to assemble the cars, only after an order is
received.

For JIT manufacturing to succeed, companies must have steady production, high-quality workmanship,
glitch-free plant machinery, and reliable suppliers.

JIT production systems cut inventory costs because manufacturers do not have to pay storage costs.
Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled.

Just-in-Time (JIT) Inventory System Advantages

JIT inventory systems have several advantages over traditional models. Production runs are short, which
means that manufacturers can quickly move from one product to another. Furthermore, this method
reduces costs by minimizing warehouse needs. Companies also spend less money on raw
materials because they buy just enough resources to make the ordered products and no more.

Disadvantages of the Just-in-Time System

The disadvantages of JIT inventory systems involve potential disruptions in the supply chain. If a raw
materials supplier has a breakdown and cannot deliver the goods in a timely manner, this could
conceivably stall the entire production process. A sudden unexpected order for goods may delay the
delivery of finished products to end clients

Example of Just-in-Time:
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Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when it receives new car
orders. Although the company installed this method in the 1970s,2 it took 20 years to perfect it.3

QUALITY MANAGEMENT:
Quality management ensures that an organization, product or service is consistent. It has four main
components: quality planning, quality assurance, quality control and quality improvement.[1] Quality
management is focused not only on product and service quality, but also on the means to achieve it.
Quality management, therefore, uses quality assurance and control of processes as well as products to
achieve more consistent quality. What a customer wants and is willing to pay for it determines quality. It is
a written or unwritten commitment to a known or unknown consumer in the market. Thus, quality can be
defined as fitness for intended use or, in other words, how well the product performs its intended function.

THEORY OF CONSTRAINTS:
The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e.
constraint) that stands in the way of achieving a goal and then systematically improving that constraint
until it is no longer the limiting factor. In manufacturing, the constraint is often referred to as a bottleneck.

The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every complex
system, including manufacturing processes, consists of multiple linked activities, one of which acts as a
constraint upon the entire system (i.e. the constraint activity is the “weakest link in the chain”).

So what is the ultimate goal of most manufacturing companies? To make a profit – both in the short term
and in the long term. The Theory of Constraints provides a powerful set of tools for helping to achieve
that goal, including:

• The Five Focusing Steps (a methodology for identifying and eliminating constraints)
• The Thinking Processes (tools for analyzing and resolving problems)
• Throughput Accounting (a method for measuring performance and guiding management
decisions)

One of the appealing characteristics of the Theory of Constraints is that it inherently prioritizes
improvement activities. The top priority is always the current constraint. In environments where there is
an urgent need to improve, TOC offers a highly focused methodology for creating rapid improvement.

A successful Theory of Constraints implementation will have the following benefits:

• Increased profit (the primary goal of TOC for most companies)

• Fast improvement (a result of focusing all attention on one critical area – the system constraint)
• Improved capacity (optimizing the constraint enables more product to be manufactured)
• Reduced lead times (optimizing the constraint results in smoother and faster product flow)
• Reduced inventory (eliminating bottlenecks means there will be less work-in-process)
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The core concept of the Theory of Constraints is that every process has a single constraint and that total
process output can only be improved when the constraint is improved. A very important corollary to this is
that spending time optimizing non-constraints will not provide significant benefits; only improvements to
the constraint will further the goal (achieving more profit).

Thus, TOC seeks to provide precise and sustained focus on improving the current constraint until it no
longer limits output, at which point the focus moves to the next constraint. The underlying power of TOC
flows from its ability to generate a tremendously strong focus towards a single goal (profit) and to
removing the principal impediment (the constraint) to achieving more of that goal. In fact, Goldratt
considers focus to be the essence of TOC.

The Five Focusing Steps

The Theory of Constraints provides a specific methodology for identifying and eliminating constraints,
referred to as the Five Focusing Steps. As shown in the following diagram, it is a cyclical process.

The
Theory of
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Constraints uses a process known as the Five Focusing Steps to identify and eliminate constraints (i.e.
bottlenecks).

The Five Focusing Steps are further described in the following table.

Step

Identify Identify the current constraint (the single part of the process that limits the rate at which the
goal is achieved).

Exploit Make quick improvements to the throughput of the constraint using existing resources (i.e.
make the most of what you have).

Subordinat Review all other activities in the process to ensure that they are aligned with and truly supp ort
e the needs of the constraint.

Elevate If the constraint still exists (i.e. it has not moved), consider what further actions can be take n
to eliminate it from being the constraint. Normally, actions are continued at this step until th e
constraint has been “broken” (until it has moved somewhere else). In some cases, capital
investment may be required.

Repeat The Five Focusing Steps are a continuous improvement cycle. Therefore, once a constraint is
resolved the next constraint should immediately be addressed. This step is a reminder to
never become complacent – aggressively improve the current constraint…and then
immediately move on to the next constraint.

THE BALANCED SCORECARD:

The Balanced Scorecard essentially calls for organizations to create a set of internal metrics that will help
them to assess their business performance in 4 key areas (sometimes referred to as 'perspectives'):

Financial

Typical scorecard metrics might include cash flow, sales performance, operating income or return on
equity.

Customer

With scorecard metrics such as: % of sales from new products, on-time delivery, net promoter score or
share of wallet.
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Internal Business Process

This would include measuring things such as: unit costs, cycle times, yield, error rates, etc.

Learning and Growth

Examples of metrics being: employee engagement scores, retention rates of high performing staff, skill
increases of staff, etc.

What are the Benefits of Implementing the Balanced Scorecard?

The 4 perspectives of the Balanced Scorecard serve a number of purposes.

Firstly, they require organizations to 'balance' their activities between the main drivers of business
success. They also force organizations to assign tangible metrics to each perspective, increasing
accountability. Finally, they also serve as a framework for communicating the strategy of an organization
to broader stakeholders. E.g. 'We are doing x because it helps us to succeed in the Customer
perspective of our scorecard'.

Ultimately, the benefit of implementing the Balanced Scorecard is that it forces your organization into a
level of focus that spans both leading KPI indicators as well as lagging ones.

What are the problems with Implementing the Balanced Scorecard?

As with any popular strategic framework, the Balanced Scorecard has picked up its fair share of critics
over the years. The main criticisms of the Balanced Scorecard are that:

• It takes too much time to set up across your organization.

• People never fully understand it and therefore fail to benefit from it.
• It's too rigid and doesn't account for changes in the business landscape. Specifically, that it's too
focused on financial measures above all else.
• It's too internally focused, almost completely ignoring macro-economic or competitive aspects of
running a business.

The truth is that the Balanced Scorecard is an excellent tool that when properly implemented, and will
likely benefit most organizations. Many of the problems with implementing the Balanced Scorecard come
from the fact that it is so often viewed as a mere reporting framework rather than a true way of managing
your business. How to Effectively Implement the Balanced Scorecard

Before we dive into the detail of how to implement the Balanced Scorecard for your own organization, we
need to take a look at what people so often get wrong.
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The Big Mistake that People make when Implementing the Balanced Scorecard

A lot of people look at the Balanced Scorecard as 4 simple perspectives that you simply 'slot your goals'
into. When they visualize the Balanced Scorecard, they think of it like this diagram:

4 simple perspectives that link together to give you a Balanced Scorecard of your business performance.
Each perspective containing a list of Objectives, Projects and KPIs which you then go away and work on.
The end goal being to try and balance each perspective and therefore ensuring overall success.

This approach to implementing the Balanced Scorecard is however fundamentally wrong.

The Balanced Scorecard is not a series of equally weighted perspectives. It is rather a process
whereby, starting at the bottom, you work your way upwards through each perspective with a view to
delivering the topmost - Financial Gain.
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Each perspective unlocks your ability to deliver effectively against the one above it. So instead of the
diagram above, you need to visualize the Balanced Scorecard more like this:

If you follow the steps in the diagram, you'll see that the ultimate end of the journey is to increase
profitability (Financial).