IE 475 Advanced Manufacturing Costing Techniques

1. IE 475Advanced Manufacturing Costing Techniques Lecture Notes #1 Course Overview & Introduction

2. Course Overview • Instructor Information • Course Description • Course Learning Outcomes • Reference Material • Grading Criteria • Reading Assignments • Homework • Examinations • Attendance & Electronic Devices

3. Course Overview (cont.) • Classroom Conduct • Challenging Grades • Academic Integrity • Lecture Format • Tentative Schedule

4. Instructor Information • Instructor: Dr. J. David Porter • Office: 420 Rogers Hall • Phone: (541) 737-2446 • Email: david.porter@oregonstate.edu • Office hours: T R 3 – 4:30 PM • By appointment • Course’s URL: http://classes.engr.oregonstate.edu/mime/fall2014/ie475

5. Course Description • This course will explore several costing techniques applicable in advanced manufacturing enterprises • Some of the topics covered will include • Activity based costing • Japanese cost management techniques • Cost of quality • Others…

6. Course Learning Outcomes • All students successfully completing IE 475 should be able to: • Explain and distinguish relevant costing terminology in the context of advanced manufacturing. Examples include (but are not limited to) direct cost, indirect cost, cost assignment, cost allocation, cost driver, opportunity cost, and sunk cost. • Explain and distinguish the cost estimation methods high-low and regression analysis. • Explain the approach followed in activity based costing (ABC) and time-driven ABC and compare them to traditional volume-based costing systems.

7. Course Learning Outcomes (cont.) • All students successfully completing IE 475 should be able to (cont.): • Explain the philosophy followed in Japanese cost management techniques (JCMT) and describe how market price, desired profit, and value engineering are used to determine and achieve the target cost. • Explain the impact of costs of quality in the long term profitability of an organization. • Demonstrate the ability to communicate and document technical information in a professional, structured, timely, and effective manner.

8. Reference Material • No textbook required • Reference textbook • Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen. Cost Management: A Strategic Emphasis, 4th Edition, McGraw-Hill/Irwin, 2008

9. Grading Criteria • Homework 15% • Term Project 25% • Midterm Exam 25% • Final Exam (Comprehensive) 35%

10. Reading Assignments • Reading material has been assigned for each topic • You will be responsible to read a total of six articles • Articles provide an introduction to basic concepts related to the class as well as to the cost management techniques to be discussed • Articles are available through the course web site

11. Homework • Homework • Several homework assignments will be given • A random selection of problems will be graded • Each assignment is worth a total of 10 pts • Late assignments will not be allowed

12. Examinations • Exams • Exams are closed notes • Based on homework, lecture material, reading assignments • Midterm • Thursday, October 30th during class time • Final Exam (comprehensive) • Wednesday, Dec 10th @ 9:30am

13. Attendance & Electronic Devices • Attendance • Students are responsible for the material covered during class and are expected to attend lectures regularly • Attendance will be taken on a random basis during the term • Electronic Devices • Set cell phones to silent mode; no texting in class • The use of electronic devices is prohibited • Bring a calculator

14. Classroom Conduct • Students are expected to • Arrive to class on time • Be attentive throughout the class meeting • Refrain from rude or distracting behavior, and • Stay in class until dismissed by the instructor • The bottom line is use common sense • Notify instructor when absent from class as soon as possible • Before or immediately after the fact • Proper documentation may be requested to justify absence

15. Challenging Grades • Students have 72 hours to challenge a grade • Not including weekends and holidays • The 72-hour clock begins from the time any graded deliverable (e.g., homework assignment or an exam) is returned in class by the instructor • Regardless of whether or not the student was present to receive it • When challenging a grade, a student must submit to the instructor a word-processed description of the grading error attached to the graded homework assignment or exam

16. Academic Integrity • I take academic integrity very seriously • Therefore, there is a zero tolerance policy in effect for cheating in this class • All work must be the student’s own, unless collaboration is specifically and explicitly permitted • Any unauthorized collaboration or copying will at a minimum result in no credit for the affected assignment/exam and may be subject to further action as described in the Academic Dishonesty section of OSU’s Student Conduct and Community Standards (SCCS) web page • http://oregonstate.edu/studentconduct/

17. Lecture Format • The first part of class will be devoted to questions • Unreasonably long questions will be handled one on one • If I do not know the answer, I will get it for the class by the next lecture • Lecture • Ask questions • End of Class • Will try to leave time for questions • You may as well ask

18. Lecture Format (cont.) • Material will be delivered on PowerPoint slides using a Tablet PC • Material will be added to slides during class • There will be periodic in-class exercises • Minor changes to the slides may be made just before class • All added (hand written) material is your responsibility • Hand written material added by instructor will NOT be available on the website

19. Tentative Schedule • Week 1 • Course Introduction • Week 2 • Cost Concepts • Week 3 • Cost Concepts (cont.) • Cost Estimation • Week 4 • Cost Estimation (cont.) • Week 5 • Activity Based Costing

20. Tentative Schedule (cont.) • Week 6 • Activity Based Costing (cont.) • Week 7 • Activity Based Costing (cont.) • Japanese Cost Management Techniques • Week 8 • Japanese Cost Management Techniques (cont.) • Week 9 • Cost of Quality • Happy Thanksgiving! • Week 10 • Cost of Quality

21. Term Project • Objectives • The term project provides an opportunity to conduct independent research/analysis and promote life-long learning • Helps to fulfill learning outcome # 6: • Demonstrate the ability to communicate and document technical information in a professional, structured, timely, and effective manner • A student must attend at least 85% of the lecture sessions to be eligible to receive credit for the term project

22. Introduction

23. Module Learning Objectives After completing this module, IE 475 students should be able to: • Explain the need for advanced cost management in manufacturing • Recognize the relevance of cost management information in each of the four functions of management • Identify contemporary management techniques and explain how they have influenced cost management • Explain the different types of competitive strategies • Describe different techniques available to implement a competitive strategy

24. Deficiencies in Cost Management Systems – Historical Perspectives • A keen interest in cost management originated in the U.S. in the late 1980s and early 1990s • Surveys indicated dissatisfaction with product cost systems used at the time (Drury, 1989) • Allocation of overhead was the primary concern • Products were regularly overcosted or undercosted by 20% or more (Flentov and Shuman, 1991) • Complex products could be undercosted by as much as 500% (O’Guin, 1990) • 50% of the corporate controllers in the U.S. believed that their cost systems were obsolete, and 78% believed that their costs were misstated on some products (Farmer, 1991)

25. Cost Management Trends • 2012 survey of 153 senior executives of Fortune 100 companies directly involved with cost management • “Save to grow” trend • Significant shift in business strategy and mindset • Main barrier to effective cost management/reduction • Lack of understanding of the need for cost management/reduction and how proposed cost improvements can help the business Source:Deloitte Touche Tohmatsu Limited (2013), Deloitte’s third biennial cost survey: cost-improvement practices and trends in Fortune 1000

26. Cost Management Challenges • What factors make it difficult to manage costs in a modern manufacturing environment? • Increased global competition • Increased Product/Services Complexity

27. Cost Management Challenges (cont.) • What factors make it difficult to manage costs in a modern manufacturing environment (cont.)? • Advances in Manufacturing Technologies • Advances in Information Technologies

28. Cost Management Challenges (cont.) • What factors make it difficult to manage costs in a modern manufacturing environment (cont.)? • Greater Focus on the Customer • Changes in Management Organization

29. Strategicmanagement Planning anddecision making Management and operational control Preparation offinancial statements Four Functions of Management

30. Four Functions of Management (cont.) Development of a sustainable competitive position Involves budgeting and profit planning, cash flow mgmt and operations (i.e., recurring) related decisions

31. Four Functions of Management (cont.) Mgmt control: evaluation of mid-level mgrs by upper-level mgrs Ops control: mid-level mgrs monitor op-level mgrs and employees Requires management to comply with financial reporting requirements of regulatory agencies

32. Strategic Management • Strategic management requires: • Understanding the business and competitive environment • Anticipating changes • Ability to make changes quickly • Ability to identify and solve problems from a cross-functional view

33. Strategic cost management Involves the development of cost management information to facilitate strategic management What is “cost management information”? Information that the manager needs to effectively manage the firm or not-for-profit organization and includes both Financial information Relevant non-financial information Strategic Cost Management

34. Critical Success Factors • Critical Success Factors (CSFs) • Measures of those aspects of the firm’s performance essential to its competitive advantage and therefore to its success • Many of these CSFs are financial but many are non-financial • The CSFs for any given firm depend on the nature of the competition it faces

35. Critical Success Factors (cont.) • Examples Source: http://rapidbi.com/created/criticalsuccessfactors.html#ExamplesCSF

36. Types of Organizations Merchandisers Manufacturers Servicefirms Government and Not-for-profit Wholesalers Retailers

37. Contemporary Cost Management Techniques – A Sample • Activity Based Costing (ABC) • Parametric Cost Analysis (PCA) • Price-led Design (PLD) • Design-to-Cost (DTC) • Target Costing (TC) • Cost as Independent Variable (CAIV) • Strategic Management Accounting (SMA) • Functional Cost Analysis

38. Contemporary Management Techniques – Our Focus • Activity Based Costing (ABC) • Japanese Cost Management Techniques (JCMT) • Cost of Quality (CoQ) • Others (if time permits)

39. Activity Based Costing • Activity Based Costing focuses on indirect costs (overhead) • It tries to trace the significant activities of the business process to the product, service or customer that generates the activity • Basic assumption is that activities consume resources and that products (or services or customers) consume activities • Understanding this relationship is paramount towards controlling and ultimately reducing overhead

40. Japanese Cost Management Techniques • Cost systems used to influence activities which support the strategic plan such as quality, on-time delivery and low cost production • Not just “numbers” for senior management • Should be an indicator of long term competitive position, not just a quantification of present performance • Many of the Japanese cost management systems are actually quite simplified • Approaches - target costing, cost tables and decision support systems

41. Cost of Quality • Typically costs associated with making, finding, repairing, or preventing defects (Juran and Gyrna) • Internal failure costs • External failure costs • Appraisal Costs • Prevention Costs • “Quality is Free” (Crosby) • Taguchi Loss Function (Taguchi)

42. Strategies • A strategy is a set of policies or procedures to business that produce long-term success • Finding a strategy begins with determining the purpose and long-range direction, and therefore the mission, of the company • The mission is developed into specific performance objectives, which are then implemented by specific corporate strategies, to achieve the objectives that will fulfill the mission

43. Strategic Positioning • Firms arrive at one of two competitive strategies: • Cost leadership • Differentiation

44. Distinctive Aspects of the Two Competition Strategies Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen. Cost Management: A Strategic Emphasis, 4th Edition, McGraw-Hill/Irwin, 2008

45. Implementing Competitive Strategies • There are various means for implementing competitive strategies • Techniques that facilitate strategic analysis • Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis • Value Chain Analysis • Balance Scorecard • The firm might also choose to expand its competitive strategy to the broader social and environmental settings in which the firm operates

46. Value Chain Analysis • Strategic analysis tool used to • Better understand the firm’s competitive advantage • Identify where value to customers can be increased or costs reduced • Better understand the firm’s linkages • with suppliers, customers, and • other firms in the industry

47. Value Chain Analysis (cont.) • Focuses on the product’s total value chain • From its design to its manufacture to its service after the sale • The underlying concept of the analysis is that each individual firm occupies a selected part (or parts) of this entire value chain • The determination of which part (or parts) of the value chain to occupy is a strategic analysis based on the consideration of comparative advantage for the individual firm

48. Steps in Value Chain Analysis • Identify the value-chain activities • The firm identifies the specific value activities that firms in the industry must perform in the processes of designing, manufacturing, and providing customer service • Develop a competitive advantage by reducing cost or adding value • The firm determines the nature of its current and potential competitive advantage by studying the value activities and cost drivers identified earlier

49. Value-Chain for the Computer-Manufacturing Industry This figure explains how to “Identify the value-chain activities” Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen. Cost Management: A Strategic Emphasis, 4th Edition, McGraw-Hill/Irwin, 2008

50. Value-Chain Analysis for CIC Manufacturing Company This figure explains how to “Develop a competitive advantage by reducing cost or adding value” Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen. Cost Management: A Strategic Emphasis, 4th Edition, McGraw-Hill/Irwin, 2008