Pan African SFM Lecture 5

PAN African eNetwork Project
MASTER OF FINANCE & CONTROL

STRATEGIC FINANCIAL MANAGEMENT
Semester - III
Mr. SURAJ PRAKASH
Copyright © Amity University

1
FINANCIAL ASPECT OF
SUPPLY CHAIN MANAGEMENT

A supply chain is a network of facilities and distribution options that
performs the functions of
1. Procurement of materials,
2. Transformation of these materials into intermediate and finished

products, and
3. The distribution of these finished products to customers.

The Supply Chain
A supply chain is a network of facilities and distribution
options that performs the functions of procurement of
materials, transformation of these materials into
intermediate and finished products, and the distribution
of these finished products to customers.
Supply chains exist in both service and manufacturing

organizations, although the complexity of the chain may
vary greatly from industry to industry and firm to firm.
Realistic supply chains have multiple end products with

shared components, facilities and capacities. The flow of
materials is not always along an arborescent network,
various modes of transportation may be considered, and
the bill of materials for the end items may be both deep
and large

Supply chain management is typically viewed to lie between
fully vertically integrated firms, where a single firm, and
those own the entire material flow where each channel
member operates independently.
Therefore coordination between the various players in the

chain is key in its effective management.
Cooper and Ellram [1993] compare supply chain management

to a well-balanced and well-practiced relay team. Such a
team is more competitive when each player knows how to
be positioned for the hand-off.
The relationships are the strongest between players who

directly pass the baton, but the entire team needs to make a
coordinated effort to win the race
SUPPLY CHAIN DECISION
We classify the decisions for supply chain management into two
broad categories –
strategic and operational.
As the term implies, strategic decisions are made typically over a

longer time horizon. These are closely linked to the corporate
strategy (they sometimes {\it are} the corporate strategy), and
guide supply chain policies from a design perspective.
On the other hand, operational decisions are short term, and

focus on activities over a day-to-day basis. The effort in
these type of decisions is to effectively and efficiently
manage the product flow in the "strategically" planned
supply chain.
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Supply Chain Decisions Th
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Copyright © Amity University m

Location Decisions
The geographic placement of production facilities, stocking points,
and sourcing points is the natural first step in creating a supply
chain.
The location of facilities involves a commitment of resources to a

long-term plan.
Once the size, number, and location of these are determined, so are
the possible paths by which the product flows through to the final
customer.
These decisions are of great significance to a firm since they
represent the basic strategy for accessing customer markets, and
will have a considerable impact on revenue, cost, and level of
service.
These decisions should be determined by an optimization routine

that considers production costs, taxes, duties and duty
drawback, tariffs, local content, distribution costs, production
limitations, etc.
Although location decisions are primarily strategic, they also
have implications on an operational level.
Production Decisions
 The strategic decisions include what products to
produce, and which plants to produce them in, allocation
of suppliers to plants, plants to DC's, and DC's to
customer markets.
 As before, these decisions have a big impact on the

revenues, costs and customer service levels of the firm.
 These decisions assume the existence of the facilities,

but determine the exact path’s through which a product
flows to and from these facilities.
 Another critical issue is the capacity of the manufacturing

facilities--and this largely depends the degree of vertical
integration within the firm.

Operational decisions focus on detailed
production scheduling. These decisions include
the construction of the master production
schedules, scheduling production on machines,
and equipment maintenance.
Other considerations include workload balancing,
and quality control measures at a production
facility.
Inventory Decisions
These refer to means by which inventories are managed.
Inventories exist at every stage of the supply chain as either raw

materials, semi-finished or finished goods.
They can also be in-process between locations.
Their primary purpose to buffer against any uncertainty that might exist
in the supply chain. Since holding of inventories can cost anywhere
between 20 to 40 percent of their value, their efficient management
is critical in supply chain operations.
It is strategic in the sense that top management sets goals. However,

most researchers have approached the management of inventory
from an operational perspective.

These include deployment strategies (push versus pull),
control policies --- the determination of the optimal levels of
order quantities and reorder points, and setting safety
stock levels, at each stocking location. These levels are
critical, since they are primary determinants of customer
service levels.
Transportation Decisions
 The mode choice aspect of these decisions are the more strategic
ones. These are closely linked to the inventory decisions, since the
best choice of mode is often found by trading-off the cost of using
the particular mode of transport with the indirect cost of inventory
associated with that mode.
 While air shipments may be fast, reliable, and warrant lesser safety
stocks, they are expensive. Meanwhile shipping by sea or rail may
be much cheaper, but they necessitate holding relatively large
amounts of inventory to buffer against the inherent uncertainty
associated with them. Therefore customer service levels, and
geographic location play vital roles in such decisions. Since
transportation is more than 30 percent of the logistics costs,
operating efficiently makes good economic sense.
 Shipment sizes (consolidated bulk shipments versus Lot-for-Lot),

routing and scheduling of equipment are key in effective
management of the firm's transport strategy.

Supply-Chain Management (SCM)
Another aspect of Advanced Planning and
Scheduling.
It administers the flow of supplies, logistics,
services and information through the supply-
chain, from suppliers, manufacturers, sub-
contractors, stores and distributors to customers
and end-users. It involves business strategy,
information flow and systems compatibility.

Benefits
• Improved visibility of information between
suppliers and customers: quicker response
to changes in demand.
• Shared knowledge: reducing waste and
inventories, improving product quality and
services throughout the chain.
• Development of a longer term “learning
network” for the benefit of customers,
suppliers and individuals.

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Physical v/s Financial Supply h
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Financial Aspects of the
Supply Chain
• Aim to give companies a real insight on the role the
supply chain plays to reduce costs in the wider company
business model.
• It focuses on how one can reduce costs and create value
without resorting to lowering supplier rates. To methods in
how through greater internal collaboration between
finance and logistics departments, cash flow and working
capital improvements can be realized. And in how greater
collaboration with partners within your supply chain will
result in lower total supply chain costs.

Supply Chain Financing Solution
• • Vendor (Supplier) Financing
• – Post Shipment Financing
• – Pre Shipment Financing
• – Inventory Financing
• • Distributor Financing
• • Receivables Financing and Risk
Management

TURBULANT BUSINESS ENVIRONMENT FINANCIAL
DIMENSION
OF DECISION MAKING

SUPPLY CHAIN DESIGN • P
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Copyright © Amity University ir
Improved collaboration between finance and other
business and supply chain functions is necessary to
facilitate the process to develop activity based costing.
This collaboration should help to overcome the

seemingly widespread inability of supply chain
managers to articulate the cost and benefit of supply
chain activities.
Capitalizing on these opportunities requires the ability to

plan for and measure supply chain performance and to
effectively communicate performance implication in
financial terms. The supply chain manager’s ability to
articulate the financial implications of exchange
between firms will become more important in future.
Activity Based Costing
What?
Why?
How?

Requirement of Cost Systems
• Valuation of inventory and measurement of
the cost of goods sold for financial reporting.
• Estimation of the costs of activities,
products, services, and customers.
• Providing economic feedback to managers

and operators about process efficiency.
Today’s businesses are working in an
increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
Composition of Cost
100
0
1 2 3 4
Direct Material Labour Overheads
Conventional Costing
• Total Cost = Material + Labour+ Overheads
• Overheads are allocated to the products on
volume based measures e.g. labour hours,
machine hours, units produced
Will this not distort the costing in the

new environment?
ABC provides an Alternative.

Conventional Costing AB Costing
Economic
Element
Expenses Resources
Work
Activities Performed
Cost Objects
Product or
Cost Objects service
Basics of A B C
• Cost of a product is the sum of the
costs of all activities required to
manufacture and deliver the product.
• Products do not consume costs directly
• Money is spent on activities
• Activities are consumed by
product/services
Basics of A B C (contd.)
• ABC assigns Costs to Products by tracing
expenses to “activities”. Each Product is
charged based on the extent to which it used
an activity
• The primary objective of ABC is to assign

costs that reflect/mirror the physical dynamics
of the business
Basics of A B C (contd.)
• Provides ways of assigning the costs of
indirect support resources to activities,
business processes, customers, products.
• It recognises that many organisational
resources are required not for physical
production of units of product but to provide a
broad array of support activities.
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ABC systems addresses
the following Questions:
• What activities are being performed by the
organizational resources?
• How much does it cost to perform activities?
• Why does the organization need to perform
those activities?
• How much of each activity is required for the
organization's products, services, and
customers?

Basics of A B C : How?
Cost pools are groups or
categories of individual
Steps: expense items
1. Form cost pools

2. Identify activities
3. Map resource costs to activities
4. Define activity cost drivers
5. Calculate cost
Identify Activities
In developing an ABC system, the

organisation identifies the activities
being performed: Activity Dictionary
• Move material • Respond to

customers
• Schedule • Improve products
production • Introduce new
• Purchase material products
• Inspect items • Explore new markets
Map resource costs to activities
• Financial accounting categorizes expenses
by spending code; salaries, fringe benefits,
utilities, travel, communication, computing,
depreciation etc.
• ABC collects expenses from this financial

system and drive them to the activities
performed.

Mapping
ABC Records
Activities Salaries DepreciationElectricity Supplies Travel Total
Accounting Records
Salaries 313,000 Business Development 20,000 25000 5000 5000 55,000
Depreciation 155,000 Maintianing Present Business 80,000 60000 50000 5000 10000 205,000
Electricity 132,000 Purhcasing Material 125,000 50000 20000 20000 60000 275,000
Supplies 25,000 Set up Machines 25,000 10000 2000 37,000
Running Machines 50,000 10000 50000 110,000

Travel 100,000
Resolve Quality Problems 13,000 5000 25000 43,000
Total 725,000
Total 313,000 155000 132000 25000 100000 725,000
Activities: Types
• Unit level: Performed each time a unit is
produced.
• Batch level: Performed each time a batch is
produced
• Product level: Performed to support production
of different type of product
• Customer Level: Performed to support servicing
customers
• Facility level: Residuary head
Define activity drivers • T
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Activitie s Drivers
Unit Leve l
Acquire and Use material for containers No. of Containers
Acquire and Use material for baby-care products
No. of products
Batch Leve l
Set up manually controlled machines No. of batches of conta
Set up computer controlled machines No. of batches of B. Pro
Product Level
Design and manufacture moulds No.of moulds required
Use manually controlled machines Product type (container
Use conputer controlled machines Product type (B.Produc
Customer Level
Consult customers No. of consultations
Provide warehousing for customers No. of cubit feet
Faciltiy Level
Manage workers Salaries
Activities Drivers Activity Cost Activity VolumeActivity Rate
Unit Level
Acquire and Use material for containers No. of Containers 40,000 1,000,000 0.04
Acquire and Use material for baby-care products No. of products 80,000 8,000 10
Batch Level
Set up manually controlled machines No. of batches of containers 3,000 10 300
Set up computer controlled machines No. of batches of B. Produst 12,000 20 600
Product Level
Design and manufacture moulds No.of moulds required 5,000 5 1000
Use manually controlled machines Product type (containers) 15,000 1 15000
Use conputer controlled machines Product type (B.Products) 40,000 1 40000
Customer Level
Consult customers No. of consultations 4,000 40 100
Provide warehousing for customers No. of cubit feet 2,000 10,000 0.2
Faciltiy Level
Manage workers Salaries 3,000 15,000 0.2
Use main building Square feet 48,000 16,000 3
Ascertaining Cost
Activities A. Rate A.Volume Containers Baby Product
Unit Level
Acquire and Use material for containers 0.04 1,200,000 48,000
Acquire and Use material for baby-care products 10 7,000 70000
Batch Level
Set up manually controlled machines 300 12 3,600
Set up computer controlled machines 600 16 9600
Product Level
Design and manufacture moulds 1000
1 1,000
4 4000
Use manually controlled machines 15000 1 15,000
Use conputer controlled machines 40000 1 40000
Customer Level
Consult customers 100
Containers 2 200
B.products 40 4000
Provide warehousing for customers 0.2
Containers 8,000 1,600
B.products 2,000 400
Faciltiy Level
Manage workers 0.2
Containers 4,000 800
Use main building 3
Containers 5,000 15,000
Total Cost 85,200 151,000
Building an ABC Model
Identify Identify Identify
Resources Activities Cost Objects
Define Define
Activity Resource
Drivers Drivers
Enter Enter Enter

Calculate
Resource Resource Activity
Costs
Costs Driver Qty. Driver Qty.
ABC: Where to Use?
• High Overheads
• Product Diversity or Multiple Products
• Customer Diversity
• Service Diversity
• Stiff Competition
TARGET COSTING
Target costing is a pricing method used by firms.
It is defined as "a cost management tool for reducing

the overall cost of a product over its entire life-cycle
with the help of production, engineering, research and
design".
A target cost is the maximum amount of cost that can

be incurred on a product and with it the firm can still
earn the required profit margin from that product at a
particular selling price.
In the traditional cost-plus pricing method materials,

labor and overhead costs are measured and a desired
profit is added to determine the selling price.
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Target costing involves setting a target cost by subtracting a desired profit margin
from a competitive market price.
A lengthy but complete definition is
"Target Costing is a disciplined process for determining and achieving

a full-stream cost at which a proposed product with specified functionality,
performance, and quality must be produced in order to generate the desired
profitability at the product’s anticipated selling price over a specified period
of time in the future."
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This definition encompasses the principal concepts:
products should be based on an accurate assessment of the wants and

needs of customers in different market segments, and cost targets
should be what result after a sustainable profit margin is subtracted from
what customers are willing to pay at the time of product introduction and
afterwards.
These concepts are supported by the four basic steps of Target Costing:
(1) Define the Product

(2) Set the Price and Cost Targets
(3) Achieve the Targets
(4) Maintain Competitive Costs.
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To compete effectively, organizations must continually redesign their products ( or
services) in order to shorten product life cycles.
The planning, development and design stage of a product is therefore critical to an

organization's cost management process. Considering possible cost reduction at
this stage of a product's life cycle (rather than during the production process) is
now one of the most important issues facing management accountants in industry.
Here are some examples of decisions made at the design stage which impact on
the cost of a product.
The number of different components Whether the components are standard or not
The ease of changing over too Japanese companies have developed target
costing as a response to the problem of controlling and reducing costs over the
product life cycle.
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Operations Management
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What is Operations Management?
The business function responsible for

planning, coordinating, and controlling
the resources needed to produce a
company’s products and services

What is Operations Management?
• It is a management function.
• Organization’s core function.
• Every organization has OM function
– Service or Manufacturing
– For profit or Not for profit

Typical Organization Chart

What is Operations Management
• O
Role?
M
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© Wiley 2007 54
Copyright © Amity University f

OM’s Transformation Process
© Wiley 2007 55

OM’s Transformation Role • T
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© Wiley 2007 56
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Goods & Services
• Manufacturing • Services
• Tangible product • Intangible product
• Product can be • Product cannot be
inventoried inventoried
• Low customer contact • High customer contact
• Longer response time • Short response time
• Capital intensive • Labor intensive
© Wiley 2007 57
On the other hand…
• Both use technology

• Both have quality, productivity, & response issues
• Both must forecast demand
• Both will have capacity, layout, and location issues
• Both have customers, suppliers, scheduling and
staffing issues
• Manufacturing often provides services
• Services often provides tangible goods
© Wiley 2007 58

Hybrid organizations
• Some organizations are a blend of

service/manufacturing/quasi-
manufacturing Quasi-Manufacturing
(QM) organizations
• QM characteristics include
– Low customer contact & Capital Intensive
© Wiley 2007 59

Improving Products • h
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Improving Services • h
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Copyright © Amity University /t

Trends in OM
• Service sector growing

to 50-80% of non-farm
jobs- See Figure 1-4
• Global competitiveness
• Demands for higher
quality
• Huge technology
changes
• Time based competition
• Work force diversity
© Wiley 2007
62
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OM Decisions ll
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OM Decisions • T
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OM Decisions

Plan of Book-Chapters link to Types of
OM Decisions
© Wiley 2007 66

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Why OM? o
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© Wiley 2007 e 67
Copyright © Amity University s

Historical Development of OM
• Industrial revolution Late 1700s

• Scientific management Early 1900s
• Human relations/Human Resources
1930s -
• Management science Mid-1900s
• Computer age 1970s
• Environmental Issues 1970s
© Wiley 2007 68

• Just-in-Time Systems (JIT) 1980s
• Total quality management (TQM) 1980s
• Reengineering 1990s
• Global competition 1980s
• Flexibility 1990s
© Wiley 2007 69

• Time-Based Competition 1990s
• Supply chain Management 1990s
• Electronic Commerce 2000s
• Outsourcing and
flattening of the world 2000s

• O
OM in Practice M
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Copyright © Amity University r

Business Information Flow
72
OM Across the Organization
• Most businesses are supported by the
functions of operations, marketing, and
finance
• The major functional areas must interact to
achieve the organization goals
© Wiley 2007 73

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Highlights M
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© Wiley 2007 at 75

STRATEGIC COST
MANAGMENT
PRODUCT LIFE CYCLE

PRODUCT LIFE CYCLE
77
Thank You
Please forward your query
To: Faculty email add.

CC: manoj.amity@panafnet.com
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PAN African eNetwork Project

MASTER OF FINANCE & CONTROL

Mr. SURAJ PRAKASH

Copyright © Amity University

Copyright © Amity University

2. Transformation of these materials into intermediate and finished

3. The distribution of these finished products to customers.

Supply chains exist in both service and manufacturing

Realistic supply chains have multiple end products with

Copyright © Amity University

Therefore coordination between the various players in the

Cooper and Ellram [1993] compare supply chain management

The relationships are the strongest between players who

strategic and operational.

As the term implies, strategic decisions are made typically over a

On the other hand, operational decisions are short term, and

Copyright © Amity University m

The location of facilities involves a commitment of resources to a

These decisions should be determined by an optimization routine

 As before, these decisions have a big impact on the

 These decisions assume the existence of the facilities,

 Another critical issue is the capacity of the manufacturing

Copyright © Amity University

Inventories exist at every stage of the supply chain as either raw

They can also be in-process between locations.

It is strategic in the sense that top management sets goals. However,

Copyright © Amity University

 Shipment sizes (consolidated bulk shipments versus Lot-for-Lot),

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

This collaboration should help to overcome the

Capitalizing on these opportunities requires the ability to

Copyright © Amity University

• Providing economic feedback to managers

Use of Advanced Technology

Product Life Cycle

Will this not distort the costing in the

ABC provides an Alternative.

• The primary objective of ABC is to assign

Copyright © Amity University

1. Form cost pools

In developing an ABC system, the

• Move material • Respond to

• ABC collects expenses from this financial

Copyright © Amity University

Supplies 25,000 Set up Machines 25,000 10000 2000 37,000

Running Machines 50,000 10000 50000 110,000

Enter Enter Enter

It is defined as "a cost management tool for reducing

A target cost is the maximum amount of cost that can

In the traditional cost-plus pricing method materials,

A lengthy but complete definition is

"Target Costing is a disciplined process for determining and achieving

products should be based on an accurate assessment of the wants and

(1) Define the Product

The planning, development and design stage of a product is therefore critical to an

Copyright © Amity University

The business function responsible for

Copyright © Amity University