Session 8/Week 9 - The value-chain perspective: Accounting for customers & suppliers Flashcards
Open-book accounting
- often taken as an example of a MA technique that is outward looking, capturing factors external to the firm
- described as a situation where organisations that maintain commercial contacts also SHARE COST INFORMATION and use this information as part of their cost management.
- Most often in the form of a sub-set of SUPPLIERS and a focal customer opening their “books”, i.e. accounting ledgers, regarding some aspect of their operations related to the SUPPLY CHAIN of a main product line.
- In this manner both organisations (supplier and customer) obtain relevant management accounting information regarding the COSTS and PROFITABILITY of their products beyond the respective firm boundaries.
2 purposes of customer profitability profiles (SMA technique to inform about customers)
*realise that CPP is financial-oriented
Note: A CUSTOMER COST HIERARCHY lists costs related to customers into diff. cost pools
- customer output-unit-level costs
- customer batch-level costs
- customer-sustaining costs
^above 3 categories + COGS = customer-level costs
- distribution-channel costs
- corporate-sustaining costs
- To measure the profitability of a firm’s customers/customer groups
- to better understand which costs are related to which customers - To make more informed decisions with regards to sales & customer politics, eg. who will receive discount
^by identifying POTENTIAL AREAS OF INTERVENTION
Spring Distribution example for Customer profitability profiles
*realise that CPP is financial-oriented
- convert the customers’ Activity areas (eg. order taking, sales visits, deliveries) to Cost driver & rate
1. Do a PROFITABILITY RANKING for the diff. customers after calculating their Operating profit
2. However, this analysis is MISLEADING. What matters is how EFFICIENT the firm is in handling the customers, not the total profit.
3. Instead of looking at profitability ranking / % of cumulative op. profit to total op. profit, should instead calculate the PRODUCTIVITY RATIO operating profit/revenue
eg. the firm was LESS EFFICIENT in handling customer R despite being the second-most profitable customers
4. Then identify POTENTIAL AREAS OF INTERVENTION
eg. giving less discount to a customer & more to another, perhaps reduce no. of sales visits
5 non-financial aspects to consider with CPPs
- A customer might appear unprofitable but might be important for own org. in terms of future REPUTATION (eg. royalty)
- Future development of customer
- maybe a potential customer has just recently experienced an economic downturn but we can expect that the organisation recovers soon and places additional orders - Do all costs really disappear?
- only variable costs will disappear immediately
- some FIXED COSTS might be linked to existing products, eg. storage space {the costs just get borne by other customers) - Long-term strategic considerations
- maybe keep the customer for a market penetration strategy and foster our market growth - Political reasons for keeping unprofitable customers
eg. pressures from municipalities / local politicians
Assessing the value of CPPs - 6 pros + 4 cons
Pros
1. Helps profitability of business -> CUSTOMER centric, helps see where profits come from
- accounting would reinforce the IMPORTANCE of the customer
2. Helps managing customers better due to a HIGHER VARIETY of INFORMATION
3. INTEGRATIVE approach that combines customer data w/ existing acct. information
4. Not too complicated/expensive IF no. of customers is reasonably limited
5. Have more CONTROL & conscious decision-making on aspects like customer loyalty {eg. who to give discounts}
6. Could potentially REPLACE BOUNDARIES within the org.
Cons
1. COSTLY to implement IF many customers OR no clear customer segmentation (ie. if can’t bunch them tgt)
- only applicable to org.s that have a LIMITED amount of customers
2. A lot of information is not included in a CPP
& Hard to assess customer value based upon PROFIT ONLY
- still require STRATEGIC CONSIDERATIONS, which are not embedded in the tool (hence doesn’t automatically give answer to keep/drop customers)
3. Still too (short-term) profit oriented
4. OVERLAPPING in organisational responsibilities, eg. w/ marketing department
What is the “significance” of costs/pricing in the long run?
2 main techniques for long run pricing
In the long run, all costs are VARIABLE
- Target pricing & target costing
- Life-cycle costing (session 7)
Target costing + steps (SMA technique to inform about customers)
eg. Provalue, IKEA, Tata car (see below)
- Not a new costing technique, but a different way of thinking about costs by putting market prices at the centre of attention
1. Develop a product that satisfies the needs of potential customers
2. Choose TARGET PRICE & sales volume after market research
eg. Provalue sets its PCs to be lower than competitors
3. Decide the acceptable amount of PROFIT for the co. (eg. target ROI) and deduct from price -> TARGET COST
4. There may be a COST GAP, ie. target cost < current cost for same product/service
5. Find ways to bridge this cost gap to meet the target cost (performing Value engineering)
Method to calculate the Target cost per unit (numerical example)
Tip: always do in “Totals” then divide by no. of units b/c exams may give fixed costs. Q usually asks for “cost gap”
- Total target sales revenues
- Total target operating profit
- Target operating profit PER UNIT
- TARGET COST PER UNIT = target price - target op. profit per unit
- Total current cost of product X
- CURRENT COST PER UNIT of X
- Cost gap = current cost p.u. - target cost p.u.
How are target costs achieved using VALUE ENGINEERING?
Definition: value engineering is a systematic evaluation of all aspects of the VALUE-CHAIN business functions, with the objective of reducing costs while satisfying customer needs
1. Distinguish between VALUE-ADDED COSTS (costs that customers perceive as adding value/usefulness to a product/service) & NON-VALUE-ADDED costs
eg. VA - costs of assembly, design, machinery
eg. NVA - costs of rework, expediting, special delivery
- some costs are difficult to assign to these 2 categories, eg. testing cost, ordering
2. Form a value engineering project TEAM from diff. business functions to work jointly at reducing costs while leaving value untouched (or improved) <- CROSS-FUNCTIONAL
eg. marketing managers, product designers, manufacturing engineers
Target costing/pricing at Tata
In 2003, Mr Tata challenged his company to build a ‘people’s car’ for the Indian market that:
1. adheres to regulatory requirements
2. achieves certain performance targets
3. costs half the price of the cheapest existing car
The process involved extracting COSTS from traditional car development + revising long-term SUPPLIER RELATIONSHIPS
2 types of Cost of quality + 4 financial/costing measures of quality
(SMA technique to inform about customers)
eg. Braganza photocopying
- Quality of design
- how well the product/service matches the needs & wants of customers - Conformance quality
- performance of a product/service relative to its specifications
4 financial/costing measures of quality (focusing on conformance quality)
1. Prevention costs - incurred in preventing defectuous production
eg. R&D, design costs
- Appraisal costs - by testing of defectuous product
eg. inspection cost - Internal failure costs - incurred by failure before shipment
eg. reworking costs (mfg) - External failure costs - by failure after shipment
eg. customer support (marketing), Transportation costs (distribution), warranty repair (customer service)
3 steps in Cost of quality analysis
- Cost of quality report
- 3 techniques to VISUALISE quality problems
- Statistical quality control charts {Observations outside specified range are worth investigating}
- Pareto diagrams {indicate how frequently each type of failure occurs, to know what is the most frequently recurring problem}
- Cause-and-effect diagrams {identify potential causes of failures or defects} - How to respond?
eg. increase prevention & appraisal costs
For quality purposes, it is worth considering to adopt performance metrics which contains BOTH financial and non- financial information.
What are 2 NON-FINANCIAL measures of quality which may also cover both quality of design & conformance quality?
- Measures of customer satisfaction
eg. from survey results, no. of customer complaints, delivery delays - Measures of internal performance
eg. defect rates, employee turnover, employee satisfaction survey results
What are Inter-firm relationships?
A special form is a BUYER-SUPPLIER RELATIONSHIP
- often an asymmetrical relationship (an org. orders from the other, but who controls the relationship?)
- often a durable relationship (relationship is maintained in the long term b/c customer needs to rely on supplier)
- customer org. is usually the PRINCIPAL & supplier is the AGENT (or is it more interesting than this?)
Open-book accounting + example (SMA technique to inform about suppliers)
- OBA is where organisations share COST INFO as part of their cost management (inter-organisational cost mgmt)
- To identify opportunities for cost reduction along the SUPPLY CHAIN
eg. Sainsbury’s used OBA with its SUPPLIERS to identify extra costs & improve the efficiency of its product handling activities
