Ch3: Cost Concepts

Ch3: Cost Concepts Joseph Bao Stanley Htun Stanley Chan Sarah Lehman

Case 3.1 – The Cappuccino ExpressQuestion 1: What is the Competitive Strategy of Vincent’s business? According to Michael Porter, there are three generic competitive strategies • Cost Leadership – target market very broad, goal is to have the lowest price. Products not specialized, try to appeal to consumers due to their low prices. • Differentiation – products or services offered with unique features that customers want, typically a more specialized niche. Able to charge higher prices due to these added features. • Focus Strategy – either a cost leadership or a differentiation strategy, but targeted for a narrow, focused market.

The Cappuccino ExpressCompetitive Strategy • Focus Strategy - We believe that Vincent’s business uses a Focus Strategy. The Cappuccino Express was founded with the belief that due to people’s changing lifestyles, convenience would be key – providing quick and convenient coffee to busy people.

Question 2: What are the critical success factors of The Cappuccino Express? Which of these are controllable by Vincent? • Critical Success Factors are defined as the strategic financial and non-financial measures of success. Put another way, the CSF’s are aspects of the firm’s performance that are essential to its competitive advantage.

The Cappuccino ExpressCritical Success Factors • Quality and price of existing products • New locations – near businesses? Malls? Schools? • New Products – stick with two products? Expand product line? • Customer Turnover – ability to keep lines short, cars moving through line • Customer satisfaction / loyalty – help keep marketing and advertising costs down • Customer Service • Financial data – profitability, etc. • Most of these Vincent will be able to exhibit some control over whether it is adjusting prices, products, targeting different locations or creating training programs. On the other hand, if Vincent’s basic assumption no longer holds true, no matter what he does he may not be able to break even, let alone turn a profit.

Question 3: What major tasks does Vincent have to undertake in managing The Cappuccino Express? • Making future growth plans for new sites and equipment purchases • Setting objectives for site managers and monitoring their performance • Monitoring financial performance - budgeting cash flow • Implementing/monitoring/changing procedures and processes for customer service. • Looking for better quality or cheaper supplies.

Question 4: What are the costs of operating the Cappuccino Express?

Question 5: What measures should Vincent use to monitor the performance of each site manager? • There are two views of the importance of controllability in the context of employee and manager motivation. • One view holds that the manger should be responsible only for the costs he or she controls. • The second view is that many “uncontrollable” costs, such as administrative costs, are in fact controllable by the manager taken as a whole. Vincent should use the 2nd measure to monitor performance. • For example, salaries can become controllable in the sense of how many employees should be hired. If the site manager sees that business is growing rapidly, he can hire more hands. The salary itself is uncontrollable but the extra hands will increase salary expenses offset by increased business. If the site manager can look at the big picture, he can “control” many “uncontrollable” costs.

Question 5: What measures should Vincent use to monitor the performance of each site manager? • Sales & Profit Growth, Margins • Customer Satisfaction/Complaints • Average waiting time to serve each customer • Safety/Workplace injuries, Employee Satisfaction

Case 3.2 - Joe’s SupermarketCritical Success Factors • Specialization in Organic and Specialty Foods • Differentiation Strategy • Customer Loyalty

Joe’s SupermarketCost Drivers

Joe’s SupermarketStrategy • Focus on Product Quality, Uniqueness, & Freshness, and Customer Service; rather than on lowest prices • Cost Savings through Limited Selling/Marketing • Cost Savings through Inventory Management (JIT, Higher Turnover Rate, Supply Chain)

Reading 3, Question 1: Why does product complexity lead to increased costs? • more complexity (variety) means more unique parts • higher inventory costs • increased lead time • more manufacturing processes • makes quality control more difficult

Question 2: Explain 3-4 useful measures of product complexity. • % of standard components, to determine if parts can easily be purchased (off the shelf). This helps reduce inventory costs and possible lead time problems by using standard parts • % of unique components, to determine the degree of common components used in the products, This helps promote the use of common components in different models. • % of parts that are certified, to determine the level of confidence in suppliers. The higher the confidence in suppliers the more reliable the parts are. This helps quality and reduces material inspection costs.

Question 3: Identify and explain 2-3 techniques for reducing product complexity and cost. • Just-in-time (JIT) production and inventory system plans and schedules parts based on production needs on an as needed basis. Parts are scheduled just-in-time for that particular stage of production. The financial benefits include: • Reducing cycle time, raw material, work-in-process inventories, storage space requirements • Standardization of parts is encouraged to reduce complexity by using more common parts and manufacturing processes. This is encouraged at the design stage where a preferred part list is targeted to promote the use of more common parts. This in turn minimizes the proliferation of new parts and helps control product-sustaining costs.

Ch3: Cost Concepts