Financial Measures Training for the Annual Self Assessments (ASAs)

1. Financial Measures Training for the Annual Self Assessments (ASAs) Office of Business Systems and Finance Office of Research Services National Institutes of Health August 2002

2. Agenda • Training Objectives • Unit Cost Measures • Asset Utilization Measures • Questions

3. Training Objectives • Understand unit cost and asset utilization measures • Discuss calculation of unit cost and asset utilization measures

4. Financial Perspective in the ASA Template Common Objectives and Measures The first common measure for the Financial Perspective is analyzing and understanding changes in the unit cost for each Discrete Service in your Service Group. The second common measure in the Financial Perspective is analyzing actual assets utilized compared to planned asset utilization for each Discrete Service.

5. Unit Cost Measures

6. Why Care About Unit Costs? • Consider this example…… • Spent about $14.00 on gas – was that good? It depends. • 9 gallons • 12 gallons • Require number of gallons to determine whether high or low price • 9 gallons @ $1.55 per gallon • 12 gallons @ $1.15 per gallon • Number of gallons is the unit of output • Without knowing the unit cost, customer cannot evaluate the price they are paying

7. FY2003 Forecast FY2004 Forecast Collect and dispose of recyclables $1,197 $1,913 Issue and track parking permits $ 143 $ 164 Plan and execute renovations $2,415 $1,923 Translate documents $ 268 $ 334 Perform veterinary surgery $ 774 $ 975 Change in Total Cost of Services

8. Analysis of Change in Total Cost • How much will be due to change in demand? • How much will be due to change in cost each time to perform the service? • ORS will use unit cost to understand why service providers’ total costs are changing • Due to changes in demand volume? • Or due to changes in the cost of one unit of service delivery?

9. Calculating Unit Cost Measures • Unit Cost = Total Cost / Number of Units of Output • “Output” means product and services generated from the consumption of resources • “Total cost” is the sum of all resources (direct and indirect) consumed • Use actual cost data if available, or • Use cost from the ORS Business Plan • Forecasted costs • Available for FY01, FY02, FY03, FY04

10. Choosing Unit Cost Measures • “Unit of output” is • Single quantity regarded as a whole • A determinate quantity adopted as a standard or basis for comparison • What constitutes one more unit of output? • On what dimension is one unit of the product or service equivalent to another? • Number of procedures • Most procedures are around the same number of hours or days • Number of procedure hours • Procedures can vary from one hour to one day • The number of hours drives the cost

11. Choosing Unit Cost Measures • May have multiple unit cost measures • One unit cost for each product • One unit cost for a group of products • One unit cost for all products • Select unit costs that are strategically important • Focus on the most important aspects of your business • Highlight areas of management focus

12. Collect and dispose of recyclables Number of tons [or pieces] [or pickups] Issue and track parking permits Number of permits Plan and execute renovations Dollar value of projects [or project days] [or square feet] Translate documents Number of documents [or pages] [or words] Perform veterinary surgery Number of procedures [or hours] Sample Units of Output

13. Sample Units of Output Plan emergency preparedness strategies Number of planning hours Coordinate and provide security for events Number of personnel hours [or event hours] Conduct collaborative physical science and bio-engineering research Number of collaborative hours Design and fabricate custom instruments Number of design hours Maintain scientific equipment and workstations Number of maintenance hours [or number of stations]

14. Sample Units of Output - A Tiered Approach Coordinate and provide security for events: Press conference Number of press conferences Employee social event Number of event hours Special public event Number of personnel hours

15. ExampleCalculating Unit Cost Measures • Service: collect and dispose of hazardous waste • Unit of output: number of metric tons = 250,000 in FY02 • Cost of resources in FY02:

16. Example (cont.)Calculating Unit Cost Measures • Service: collect and dispose of hazardous waste • Unit Cost = $5,690,520 / 250,000 • Unit Cost = $22.76 per metric ton

17. Example (cont.)Graphing Unit Cost Measures 250,000 280,000 $22.76 $23.21 Data might be displayed using bar chart to allow for comparisons.

18. Unit Cost by Quarter Example (cont.)Graphing Unit Cost Measures Data might be displayed using a run chart (shown) or control chart. Refer to the Data Analysis and Graphing Training for more information on how to construct this graph.

19. Analyzing Unit Cost Measures • Benchmarking • Compare unit cost to others in similar industry/business • Are your costs above or below others? Why? • Trend analysis • Study unit cost over time • Are your costs going up or down? Why? • Cost projection • Use unit cost data to make cost projections for the future • This year’s unit cost was $22.76. Assume that costs are expected to increase by 2% to $23.21 • Next year will process 280,000 metric tons • 280,000 x $23.21 = $6,498,800 • Increase in total cost of 14%

20. Steps to Prepare Unit Cost Measures • Step 1: Analyze need for unit cost information • Step 2: Choose unit cost measures • Step 3: Complete the unit cost measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance) • Step 4: Gather unit cost data • Step 5: Graph unit cost data and interpret findings. Possible techniques include • Analyzing trends (historical and forecasted) • Evaluating causes and cost drivers • Comparing to benchmarks • Identifying improvements

21. Asset Utilization Measures

22. Capacity and Asset Utilization • Who is responsible for capacity management? • How can we obtain more capacity without buying it? • What are the sources of idle capacity? • How much unused capacity is assigned to product/service cost? • Where will we find hidden, unused capacity?

23. Why Care About Asset Utilization? • To measure the difference between what an asset is capable of producing and what it actually produces • To calculate the “opportunity gap”

24. Causes of Loss in Asset Utilization • Standard operating procedures • Planned shutdowns • Sales demand • Raw materials shortages • Product quality • Equipment failure • Acts of nature

25. Calculating Asset Utilization • The ratio of actual output to the output that could be achieved if an asset operated at maximum capacity • Asset utilization = (actual output / maximum output capacity) • Opportunity gap = maximum output capacity – actual output • ORS is basing maximum output capacity on planned utilization

26. Determining Planned Utilization • Planned utilization can be based on • Theoretical capacity: asset at its maximum output capacity when operating for 365 days per year while producing 100% quality product • Practical capacity: allows for normal downtime • Historical capacity: risks institutionalizing inefficiencies

27. Determining Planned Utilization (cont.) • Practical capacity is attainable through reasonable, though highly efficient, efforts • Arbitrary estimate: specified percentage of theoretical capacity • Normal volume: May be used to approximate until evidence is available to obtain a better estimate. Only an issue when normal volume is substantially below practical capacity. • Time series analysis: review past activity levels and adjust for delays, poor quality, overtime, or other stresses • Analytical approach: deduct maintenance, repairs, startups, shutdowns, and protective (or surge) capacity from theoretical capacity

28. Example *Calculating Asset Utilization • Service: review extramural construction projects • Actual output = 128 reviews • Maximum output capacity • Assume each review takes one week (40 hours) when operating at maximum capacity with 100% quality product • Assume practical capacity of 1,840 hours per year per FTE • Assume 3 FTE • Maximum capacity = (3 x 1,840) / 40 = 138 reviews • Asset utilization = 128/138 = 92.8% * Example based on hypothetical data

29. Alternate Calculation Method • Traditional asset utilization ratio requires standard output measure • Some activities are difficult to measure in terms of standard outputs • Use of resources may vary significantly • May not have single quantity that can be regarded as a whole • Analysis may take place at an aggregated service level • May substitute inputs for outputs when standard output is not appropriate • Must separate productive from nonproductive inputs

30. Alternate Calculation Method (cont.) • Asset utilization = (actual productive input / maximum input capacity) • Opportunity gap = maximum capacity – actual productive input

31. Example * Alternate Calculation • Service: provide technical assistance in radiation safety • Maximum input capacity: • Assume 1,840 hours per FTE and six FTEs • Maximum input capacity = 6 x 1,840 = 11,040 • Actual nonproductive input • Assume 160 hours standby • Assume 192 hours duplication of effort * Example based on hypothetical data

32. Example (cont.)Alternate Calculation • Service: provide technical assistance in radiation safety • Asset utilization = (11,040 – 160 – 192) / 11,040 • Asset utilization = 10,688 / 11,040 • Asset utilization = 96.8%

33. Asset Utilization As Metric • Focuses improvement efforts on eliminating cause of business opportunity gaps • Minimizes the level of non-productive assets within regulatory and risk tolerance constraints • Measures ability of managers to invest in earning assets when measured as ratio of earning assets to total assets

34. ExampleGraphing Asset Utilization Data Discrete Service Benchmark January 75% 79% February 88% 93% March 67% 60%

35. Example (cont.)Graphing Asset Utilization Data

36. Asset Utilization: % Deviation From Capacity 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% Cumulative % Deviation (Line) % Deviation by Quarter (Bar) 0% 0% -5% -5% -10% -10% -15% -15% -20% -20% -25% -25% Q1 FY01 Q2 FY01 Q3 FY01 Q4 FY01 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 -13% -3% -6% -5% -8% -4% -2% -3% Deviation (Quarter) -13% -8% -7% -7% -7% -6% -6% -5% Deviation (Cumulative) Quarter ExampleRun Chart of Asset Utilization Data might be displayed using a run chart showing % deviation from capacity. Refer to the Data Analysis and Graphing Training for more information on how to construct this graph.

37. Asset Utilization Hierarchy Idle capacity Nonproductive capacity Productive capacity

38. Summary Model Specific Model Idle capacity Not marketable Off limits Marketable Nonproductive capacity Standby Waste Maintenance Setups Productive capacity Process development Product development Good product Capacity Model* * Excerpted from Consortium of Advanced Manufacturers-International (CAM-I) Capacity Model

39. Steps to Prepare Asset Utilization Measure • Step 1: Identify appropriate asset base to include in measure • Step 2: Determine planned capacity for FY02 if not already established • Step 3: Complete the asset utilization measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance) • Step 4: Gather asset utilization data • Step 5: Graph asset utilization data and interpret findings. Possible techniques include • Analyzing trends (historical and forecasted) • Evaluating causes and cost drivers • Comparing to benchmarks • Identifying improvements • Step 6: Determine planned capacity for FY03

40. Conclusion • ASA Teams will determine how to implement the two common financial measures • Unit cost • Asset utilization • This data will be used both by ASA Teams and ORS-wide to gauge our performance • Work with the financial people in your area to clarify your measures and obtain data • For more assistance, please contact: • Amy Vandenburg (OBSF) • (301) 402-3827 • vandenba@ors.od.nih.gov