ENTERPRISE OPERATIONS

CHAPTER 9: How the finance function interacts with Operations

Admin

Assessment Opportunity 2:

Date: 12 May 2023

Duration: 2 hours, 80 marks
Chapters: 7-11
Venues and Time: TBA

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Lecture Outline
UNIT 5- Finance interacting with the organisation

Chapter 9 How the finance function interacts with operations

Chapter 10 How the finance function interacts with sales and marketing

Chapter 11 How the finance function interacts with human resources

Chapter 12 How the finance function interacts with IT

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Learning Outcomes
Describe how finance plays its role by interacting with rest of the organisation such as
operations.
• Describe how the use of KPIs influence these interactions and how the KPIs of finance and these
areas can be aligned to ensure that they work effectively together.
• Describe:
• Main role of operations
• Areas of interface with finance
• Key Performance Indicators

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 Finance Role
Stages to Value Creation and Preservation

Finance
Macro Environment (O, T)

Macro Environment (O, T)

Sales &
Micro Environment (O, T)

Micro Environment (O, T)

Operations
Marketing

Strategy
A plan to achieve
a desired goal

Human Information
Resources (S, W)
Technology

Finance professionals prepare valuable information on the outcomes achieved from different initiatives to help inform future proposals.

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 Finance Role
Stages to Value Creation and Preservation
Data from Internal and
External.
o Communicates insights
o Influence decision making

o Make better
future decisions
o Enhance
operational
efficiency
o Better
Financial & Non-Financial data, Supports implementation(solutions): understand the
Quantitative, Qualitative o Strategic Plans customer
Provide insights to USERS o Resource allocation and budgeting
o Performance measures
o Performance reviews

Finance professionals prepare valuable information on the outcomes achieved from different initiatives to
help inform future proposals.

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 Finance Role
Stages to Value Creation and Preservation

Data Information
o Raw facts of things o Data with exact meaning
o No contextualized to the receiver
meaning o Processed data and
Insight
o Just numbers and text organized context
o Contain valuable o Can be used to aid
information if analysed decision making
effectively Knowledge

Information

Data

Finance professionals prepare valuable information on the outcomes achieved from different initiatives to help inform future proposals.

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Data Requirements And Stakeholders

o Other departments and

Stakeholders (USERS) managers

o External
stakeholders

o Directors
Feedback (Needs)
o Employees

Data Strategy

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Business Focused Data
Data scientists are individuals with the ability to extract meaning from and
interpret data, which requires both tools and methods from statistics and
machine learning.

MANAGEMENT ACCOUNTANTS Partners with DATA SCIENTISTS

MAs provide direction to data scientists & translate insights back to stakeholders.
(Interface)
Data scientists are individuals with the ability to extract meaning
from and interpret data

Ensure the work they undertake is deliberate and targeted

with clear objectives to ultimately support or enhance
the business performance.

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Business Focused Data
MAs will act as an INTERFACE between the BUSINESS FUNCTIONS and the DATA
SPECIALISTS because:

o All activities have a financial consequence, and the finance function has a unique

overall understanding of entire business.

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Operations Management

Strategy
A plan to achieve Satisfying customer needs
a desired goal

Effectively and efficiently

Finance
o The ‘Doing’ part of an organisation
o Carry out the essential tasks to satisfy the customer.
o Activities include designing, manufacturing and
Operations developing and delivering products to serve
customers.
o Ensuring that the tasks are carried out effectively and
efficiently is the aim of OM.

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 Operations

Cost Quality Speed Flexibility

Increase More
Minimise Achieve perfectly

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The Characteristics of operations management
Operations may vary according to:

Volume

Visibility Variety

Variation

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Process Design
Process design- Method by which individual specialists seek to understand business processes and
ensure that these processes are designed to be as efficient and effective as possible.
The design of processes will go hand in hand with the design of new products and services
- Should be aligned to the organisation's mission, goals and customer needs

Process map- a visual representation of the steps and decision by which a product or transaction is
processed
Advantages of Process Maps
o Management understanding
o Role understanding
o Standardisation
o Highlights inefficiencies
o Support corporate initiatives

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Product and Service development

Understand
Concept Time to market
needs of Design process Product Testing
screening
customers

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Areas of Interface with finance
Operations and finance work together to ensure efficiency and effectiveness

Purchasing Production Services

(placing and following (production of Characteristics of services, Input from finance

up on orders) goods) important for managing on:
performance of service: o Charge-out rate
o Establishing credit o Cost • Intangibility o Estimating cost
terms measurement, o Problems
o Prices allocation, • Inseparability measuring
o Payment absorption • Perishability benefits
o Data o Budgeting
capture(orders) o Cost v Quality • Variability
o Inventory o Inventory
o Budgeting

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SUPPLY CHAIN MANAGEMENT
Supply Chain Management

ØSupply chain management

ØThe Strategic supply wheel
ØRelationships with suppliers
ØMaterials Requirements Planning
ØQuality Management
ØOperational/Supply chain improvements
ØSupply Chain Management interface with finance
ØKey Performance Indicators
Ø Managing operations using KPIs

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Supply Chain Management and Operations with Ease…

Operations Supply Chain

Quality
Management

o Quality
Management
o Processes Techniques o MRP
-Process maps o MRP II
o Product and service o ERP
development o Reverse Logistics

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The Value Chain
Sequence of business activities by which in the perspective of the end
user, value is added to the products or services produced by an entity.

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Supply Chain Management
Supply Chain Management:
Concerned with the flow of goods and
Objective: Save costs
services through the supply chain, with
while adding value.
the ultimate goal of customer
satisfaction.
Supply Chain consists of a network of
organisation. Together they provide
and process the necessary raw
Supply Chain materials firstly into work in progress
and then into finished goods for
distribution and sale to the end
customer.
Supply Chain Management (SCM)
involves the coordination of the
activities from the supplier(s) of raw
material at one end of the supply
chain to the customer at the other
end.
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Supply Chain Management: Cousins- Supply Wheel

Organisation
structure

Performance
Measures Relationships
with suppliers

Corporate
and supply
strategy

Competencies Cost/Benefit

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Relationship with Suppliers

Competitive (Contractual)
o Sought the lowest price supplier through tendering
o Use of power and the constant switching of supply sources to prevent getting too close
to any individual
o Contracts feature heavy penalty clauses
o Supplier contracts drawn up in a spirit of general mistrust of all external providers.
o Prevents the knowledge and skills of the supplier from being exploited effectively.
o Information withheld from supplier in case the supplier used it to gain power during
negotiations .
o Supplier never knew enough about the end customer to suggest ways to improve the
cost effectiveness and quality of the end offering.

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Relationship with Suppliers
Collaborative (Relational)

o Organisations enter into relationship with key suppliers and customers to better
understand how to provide value and customer service.
o Product design processes include discussions that involve both the customer and the
suppliers.
o Design departments and supply problems are opened to selected suppliers results in
synergy, generation of new ideas, solutions and innovative products.
o Long term sole sourcing agreements are used to enhance relationship with suppliers
to enhance greater level of support to the business and a commitment to on-going
improvements of materials, deliveries and relationships.
o The nature of collaboration shifts to reflect the constant change in the environment.

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Improving Supply Chain Management Techniques:

Quality

Materials

Statistical process control

Operational
Total Quality Management (TQM)
Improvements
Kaizen

Six Sigma

Lean Thinking

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Quality Management
Quality is a key part of strategic supply chain management (SCM).
Quality can be defined in a number of ways:
o Is the product/service free from errors and
does it adhere to design specifications?
o Is the product/service fit for use?
o Does the product/service meet customers
needs?
Japanese definition of quality:
o Focus on user- user satisfaction
o Customer requirements and customer
satisfaction are the main factors
Key Writers on Quality:
Edward Deming
Managers should setup and continuously improve
the systems in which people work.
Joseph Juran
States that 85% of quality problems are due to the
systems that employees work within rather than
the employees themselves.
Phillip Crosby
Introduced the concept of zero defects and
believed prevention is key.
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Material Planning
Systems available to
ensure materials are
ready when needed

Manufacturing
Material
Resource Planning Enterprise Resource
Requirement
(MRPII) Planning
Planning (MRP)
An extension of MRP The next evolution of
A computerized MRP integrating
and includes steps
system for planning information from
beyond MRP such as
requirements for raw operations with that
production planning,
material, work in of other functions into
demand planning
progress and finished one single system
and productivity
items.
tracking.

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Quality Management : Costs of Quality
Type of Quality costs- needs to
set targets and monitor these

Conformance cost Non-conformance cost

External failure costs

Prevention Costs Internal failure costs Cost arising from
Appraisal Costs Cost arising from
Cost of failure to meet
Cost of quality failure to meet
preventing quality standards.
inspection and quality standards.
defects before Occurs after product
testing Occurs before
they occur has reached
product has customer
reached customer

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Improving Supply Chain Techniques:
Statistical Process Control
A method for measuring and controlling quality during a process.
ØQuality data is obtained in real time and plotted on the graph with a pre-determined target and
control limits
ØData that falls outside control limits must be investigated and corrective action taken before defects
occur.

Total Quality Management (TQM)

The continuous improvement in quality, productivity and effectiveness obtained by establishing
management responsibility for processes as well as outputs.
Fundamental Features of TQM:
ØPrevention od errors before they occur
ØContinual improvement
ØReal participation by all
ØCommitment of senior management

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Improving Supply Chain Techniques:

Kaizen
The philosophy of continuous improvements in performance via small, incremental steps.

Characteristics:
o Involves standard setting and then continually improving these standards to achieve long term
sustainable improvements
o The focus is on eliminating waste, improving processes and systems and improving productivity
o Involves all areas of the business
o Employees work in teams and are empowered to make changes. Employees viewed as source of
ideas on how to reduce costs
o Allows organisation to respond quickly to changes in competitive environment

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Improving Supply Chain Techniques:

Six Sigma
Aims to achieve a reduction in the number of faults that go beyond an accepted tolerance limit.

Key requirements of Six Sigma:

o Focused on customer and based on the level of performance acceptable to the customer.
o Targets for the process should be related to the main drivers of performance

o Needs to be part of a wider performance management programme which is linked to the strategy
of the organisation
o Process driven by senior managements

o Training and education about the process is essential throughout the organisation

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 Improving Supply Chain Techniques:

Lean Thinking
Lean aims to systematically eliminate waste through the identification and elimination of all non-value
adding activities.
The Lean Supply Chain: Criticism of lean:
Waste to be eliminated: Characteristics of lean:
o Improved production o Reduced inventories o High initial outlay
o Inventory
scheduling o Shorter lead times o Requires change in
o Waiting
o Small batch o Few bottlenecks and culture
o Defective units
production or better utilisation of o Part adoption
o Effort or motion
continuous production resources o Cost may exceed
o Transportation
o Economies of scope o Few quality problems, benefit
o Over processing
o Continuous less re-work, lower
o Over production
improvement costs of quality
o Zero inventory features and happier
o Zero waiting time customers

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Improving Supply Chain:
Just In Time (JIT) (Element of Lean)
Procures inventory and produces products as they are required by the customer for use rather than for
inventory.

Requirements for operation of JIT JIT and supplier relations

system:
Supplier relationships is important for an
organisation operating JIT system
o High quality and reliability
o Elimination od non-value-added o No rejects/ returns
activities o On time deliveries
o Low inventory
o Speed of throughput o Close proximity
o Flexibility
o Lower costs

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Improving Supply Chain Techniques:

Reverse Logistics
The return of unwanted or surplus goods back to the organisation for reuse, recycling or disposal.

Main reasons for returns: Dealing with Reverse logistics in SCM

o Unsatisfied customer Objective: Minimise returns & ensure possible reuse or

o Installation of usage problems recycling of material in order to reduce costs, improve
o Warranty claims customer service and increase revenue.
o Unsold stock
o Manufacturer recall program due to o Root cause analysis of reasons for returns
faults o Creation of profit centres around returns
o Separation of SC into separate forward and reverse
logistics
o Centralising the returns centre
o Outsourcing the returns process to a competent and
dedicated provider
o Use of technology such as ERP

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Key Performance Indicators (KPIs)

Critical Success Key Performance

Strategic
Factors Indicators
Objectives

Statements that indicate what
is critical or important in your
organizational strategy. They
are goals the organisation is
trying to achieve in a certain
period of time—typically 3-5
years.
Reduce product return rate
to less than 3% by 1st Jan
2023
Vital areas ‘where Measures which indicate
things must go right’ for whether or not the CSFs
the business in order for are being achieved.
them to achieve
strategic objectives.
Quality products Percentage of products returned in 2022

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Key Performance Indicator
oCascades from strategy oShould be challenging but achievable.
oShould cover various perspectives: oShould be SMART

o Cost o Specific

o Quality o Measurable

o Flexibility o Achievable

o Resource utilization o Relevant

o Innovation o Time Bound

o Sustainability oShould include supply chain

o Competitiveness partners.
oShould cover:
o Internal and external performance
o Short and long term performance
o Financial and Non-financial performance
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Finance function interacting with the operations using KPIs

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Finance function interacting with the operations using KPIs

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Key Performance Indicators : Operations Examples

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