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Fundamentals of Operations Mgmt Financial Cause & Effect February, 2013

Fundamentals of Operations Mgmt Financial Cause & Effect February, 2013. Four Factors Drive Margins. Return On Invested Capital (ROIC): Merging Margins w/Turns. * From Cachon, Matching Supply with Demand , Third Edition, McGraw Hill Irwin. Variable Costs. Costs that “vary” with Volume Labor

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Fundamentals of Operations Mgmt Financial Cause & Effect February, 2013

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  1. Fundamentals of Operations MgmtFinancial Cause & EffectFebruary, 2013

  2. Four Factors Drive Margins

  3. Return On Invested Capital (ROIC): Merging Margins w/Turns * From Cachon, Matching Supply with Demand, Third Edition, McGraw Hill Irwin

  4. Variable Costs • Costs that “vary” with Volume • Labor • Material • “Truly” Variable Cost (TVC) • Labor may not be “truly variable” • Difficult to account for volume discounts and learning, so material not “truly” variable Contribution Margin => (Selling Price – Variable Cost)

  5. Fixed Costs • Costs that do not vary with Volume • Indirect employees • Overhead • Depreciation • SG&A

  6. Break Even: At what volume do you REALLY start making $? Fixed Costs Break Even Quantity = Contribution Margin per Unit

  7. Impact of Volume on Profit Calculations are based on what is SOLD in a period of time (Day / Week / Month / Quarter / Year). They are not based on what is BUILT per period of time

  8. Creating ROIC (Value, KPI) Trees Setup Volume Growth Labor hours Training Manufacturing costs per unit Yield ROIC Value Job Indirect labor SG&A costs per unit Breaks WACC Material Invested capital per unit Develop value trees • Link financial measures to potential value drivers in operations • In operations, performance typically focuses on ROIC • Develop several versions as there is no “right answer” • Explore multiple sub-trees * From Cachon, Matching Supply with Demand, Third Edition, McGraw Hill Irwin

  9. Creating Value Drivers Typical value drivers: • If operation currently is capacity constrained (i.e. has high demand), everythingthat creates additional capacity is powerful utilization / downtime production yields set-up time / other improvement of overall equipment effectiveness (OEE) • If operation currently is demand constrained (i.e. has insufficient demand), everything that gets more $’s out of a customer is powerful variety / customization after-sales service / support => innovation • But: no general rule exists: your insight is needed * From Cachon, Matching Supply with Demand, Third Edition, McGraw Hill Irwin

  10. Operations Leverage on Break Even and ROIC Work the Numerator and Denominator of Cash Generated Cash Invested • Attack TVC • Reduce Variability • Align Production with Revenue • Focus on Speed and Responsiveness instead of Inventory • Influence Fixed Costs • Hiring • Plant & Property • Equipment

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