Individual Assignment of Advanced Management Accounting

Transcription

1 Question 1: What are advantages of the total ownership (TCO) approach? 1. The most important advantage of this approach that can obviously be seen is the potential saving improvement for the company because the system may help to identify the relative importance of different components which allows the company to design strategies to reduce/eliminate the different driver rates. This is in accordance with an application of activity-based management in the TCO, where it tries to determine the according to every activity conducted. Hence, the purchasing company (Usinor) may attempt to influence estimated units of drivers by reducing or removing some of the non-added value activities. 2. Another important advantage of this approach over other methodologies exists in objective measures in a systematic way and reduces the subjectivity in the supplier selection process. It has been confirmed by previous research studies that mathematical programming models approach the problem in a more objective way than rating model subjectively by optimising an explicitly stated objective function, such as price. Good supplier selection is important given the high value expenditures of many companies on purchased goods and services. 3. The system will enable companies to develop inter-organisational activity-based management opportunities given the importance of close relationships between the purchaser and a limited number of reliable suppliers. Modern production philosophies emphasise the importance of a close long-term working relationship between the purchaser and a fewer source-reliable suppliers. Knowledge of the several criteria and their relative importance gives the supplier an incentive to reduce his/her score. The purchasing company that can document the s of suppliers service and applying this TCO can use its output information as a basis for negotiation with them (as excellent data for negotiations). 4. The purchasing company may use TCO to conduct a sensitivity analysis dealing with management, strategic decision making, and analysing, such as the impact on improvement by choosing different supplier and the performance improvement by suppliers with respect to different important criteria. This kind of analysis is very important in order to know the effect of some actions before they are really applied into the company. Therefore the mistaken decisionmaking can be avoided and furthermore it will minimise the risk of having strategic-decision failure in the future. Centre of Industrial Management-Katholieke Universiteit Leuven

2

3 Question 2: What are disadvantages of the total ownership (TCO) approach? 1. Accurately identifying and tracking s can be challenging since definitions vary between TCO models, multiple departments incur s, and some s may not be obvious. Furthermore, accounting mechanisms typically are not in place to capture both the identifiable and hidden s within the company. In other words, determining the TCO of selecting a supplier for the delivery of a certain item based on ABC information requires an extensive and ly management accounting system that captures the relevant s of the activities by supplier and item purchased. Thus, it considers as the importance of the incremental s of developing, installing and maintaining such an ABC system. Earlier research shows that most companies overestimate these s. 2. The application of TCO is too theoretical and full of mathematics algorithm (lack of common terminology). The determination of some activities into its mathematics variables will become barriers for management to use TCO as its background for suppliers selection decision making. Even if the mathematics approach has already developed, it still leaves the management with such algorithm that difficult to understand and recognise. In addition, this complexity will affect further to be disruptive, ly, and time-consuming matter, where the development idea to utilise a user-friendly system and define the scope of TCO modelling may be difficult in the real condition. 3. The mathematical model must be ever changing to be applicable because s that drive model are constantly changing as well. This is a common case in the business environment that every company tries to improve their s dependent on the basis of efficiency and effectiveness. Thus, these changes may bring the company to develop the mathematics model more frequently and the problem may appear if they are lack of user expertise. 4. Last barrier is related to the organizational culture issue where it is rather hard to convince the management to get away from the "price" mentality (resistance to change). Most of the companies nowadays are still using the easy-and-fast price judgement to decide which vendor they want to have, for how many periods, and for what kind of products. This habit has long way been applied and will be difficult to persuade them with a very mathematical solution suggested by the application of this TCO. Centre of Industrial Management-Katholieke Universiteit Leuven 3

4 Question 3: Fill in other s in the different levels in TCO matrix! Supplier Product Order Product Order Unit Acquisition Reception Possession Utilisation Elimination Other Late order Partial shipment Credit administration Invoice adjustment Quality audit Cost of return rejected parts Initial orientation Internal failure External failure Dispose of scrap Cost of maintain supplier relations Cost of training of purchasing personnel Rework Additional research and development s Centre of Industrial Management-Katholieke Universiteit Leuven 4

5 Question 4: For what kind of production this TCO still can be used? Discuss and give also the new TCO matrix! As already known that TCO is a powerful tool instead of ad hoc tools to deal with vendor selection decisions where it uses ing information to select several suppliers for several orders over a specific time horizon in multi-objective nature. By a combination with ABC system, which uses a net adjusted income s figure based on activity and driver information taking into account supplementary s caused by the supplier, it should not be a problem if TCO is applied in the more modern and complex either discrete or process production environments that are applying such systems as Just-in-Time (JIT), Total Quality Management (TQM), and even Flexible Manufacturing Systems (FMS), such as automobile manufacturer, pharmacy, and supermarket. Even more, by using such a mathematical optimisation model programming that has already developed by some researchers recently (e.g., Roodhooft, Degraeve, etc) makes the approach able to eliminate the bias probability that may appears by using traditional subjective-tools. In the following will be introduced a TCO matrix that is likely to be applied in the automobile manufacturer. For sure it will not be sufficient enough to be used to reflect the real condition in such company since the real application of TCO needs more intense research and collaboration among the management and engineers to develop some criteria that should be put inside. Thus, some and activities there are subject to change dependent on the future study, real condition, and ongoing improvement by the company. To be noted that the matrix still uses three dimensions as the framework of TCO development, similar format with the previous figure developed for Usinor Company. Centre of Industrial Management-Katholieke Universiteit Leuven 5

6

7 Sales discount Acquisition Reception Possession Utilisation Elimination Other Supplier Product Order Product Order Unit Negotiation/con-tract Supplier selection Payment delay Ordering Late order Cost of ordering parts for warranty repairs Cost of updating forecasts Price Product discount Product testing Service Transportation Partial shipment Credit administration Invoice adjustment Accept delivery Quality audit Cost of return rejected parts Cost of Inspect incoming materials Initial orientation Cost of personnel training Cost of maintaining inventory General trouble shooting Dispose of scrap Cost of quality control Installation Maintenance Rework Cost of maintain supplier relations Additional R&D Cost of professional development Cost of training of purchasing personnel Additional R&D s Centre of Industrial Management-Katholieke Universiteit Leuven 7

8 REFERENCES Degraeve, Z., E. Labro and F. Roodhooft, An evaluation of vendor selection models from a total of ownership perspective, European Journal of Operational Research, 2000, Vol. 125, Degraeve, Z., and F. Roodhooft, Determining Sourcing Strategies: a Decision Model Based on Activity and Cost Driver Information, Journal of the Operational Research Society, 1998, Vol. 49, Nr. 8, Degraeve, Z., and F. Roodhooft, Improving the Efficiency of the Purchasing Process Using Total Cost of Ownership Information: the Case of Heating Electrodes at Cockerill Sambre S.A., European Journal of Operational Research, 1999a, Vol. 112, Nr. 1, Ellram, L. M., Siferd, and S. Perrott, Purchasing: The Cornerstone of the Total Cost of Ownership Concept, Journal of Business Logistics, 1993, Vol. 14, Issue 1, 163 Ellram, L. M., A Taxonomy of Total Cost of Ownership Models, Journal of Business Logistics, 1994, Vol. 15, Issue 1, 171 Ellram, L. M., Total Cost of Ownership, International Journal of Physical Distribution and Logistics Management, 1995, Vol. 25, Issue 8, 4 Roodhooft, F. and J. Konings, Vendor Selection and Evaluation: An Activity Based Costing Approach, European Journal of Operational Research, 1997, Vol. 96, Centre of Industrial Management-Katholieke Universiteit Leuven 8