MGSC07H3 Study Guide - Final Guide: Oven, Balanced Scorecard, Purch Group

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ost Management: quality, Time, & the Theory ot
onstraintS
ecusing on Quality will:
enerally build expertise in producing it, lower the costs of
raking it, create & increase customer satisfaction,
enerate higher future revenues for the company selling
,uality of design: refers to how closely the characteristics
f a product or service to meet the needs & wants of
rstomers / conformance quality: refers to the
erformance of a product or service relative to its design &
roduct specifications
techniques for identifying & analyzing quality problems:
, Control charts - used to map random & non random
lriation in operation process, pareto diagrams - used to
row frequency of defect by type, cause & effect diagrams
used to identify the roots of problems
me: two operational measures of time: customer-
:sponse time; on-time performance. Time drivers:
ncertainty; bottlenecks
mple time management techniques: when demand
ncertainty is high, some unused capacity is desirable;
creasing capacity of a bottleneck resource reduces manu
ad times & delays; reduce set-up times; invest in new eq;
steps to managing bottleneck operations: bottleneck
etermines overall gross margin; lD bottleneck operation;
o not let it idle; increase efficiency. Relieve by removing
le time; reduce process and set up time at operation
-'rform a nce Eva luation
)l includes all major parts of profitability: revenue, costs,
rd investments. Use it to measure
11 = profit margin x turnover. Profit margin = operating
:ome / sales. Turnover = sales / avg. operating assets.
)l may be biid because managers may: not know how to
ROI; often inherit many commited costs which they
ve no control; managers evaluated on ROI may reject
)fitable investment opportunities
;idual lncome - another measure of performance. Rl =
:rating income - (avg. op. assets x min. RR). Favoured
:ause it uses absolute value of return, however it cannot
compared with different
entory Management, and JIT
naging inventories to increase net income requires
:ctively managing these five categories: purchasing,
ering, carrying, stockout, quality costs
nomic order quantity model (EOQ): decision model that
ulates the optimal quantity of inventory to order undr a
n set of assumptions
t.= l2DP lCl^(llz) where D = demand, C = costs, P =
tring costs
: assumptions: only ordering and carrying costs; the
3 quantity is ordered at each reorder point; D P C are
vn with certainty: purchasing costs per unit are
fected by the quantity ordered: no stockouts occur:
ignores purchasing costs, stockout costs, and quality
i
rtory model
Reorder point: the quanfity level ot inventory on hand that
triggers a new purchase order
Reorder point = number of units sold / unit of time X
purchase order lead time
JIT purchasing: the purchase of materials or goods so they
are delivered jus as needed for productlon: good if carrying
costs is large; reduces the cost of placing a purchase order:
long term purchase. Benefits: lower overhead costs; lower
inventory levels; heightened emphasis on improving
quality by eliminating the specific causes of rework; shorter
manu. Lead times. lt hinges on the speed of information
flows from customers ot manufacturers to suppliers
lnventory Management and Materials requirements
planning (MRP): push through system that manufactures
finished goods for inventory on the basis of demand
forecasts.
Cash: effective management of the level of cash can boost
the bottom line. High interest rates, companies can offer
cash discounts to encourage customers to pay earlier; low
interest rates, the supplier would not offer discounts.
A/R: factoring arrangements is feasible if it is more cost
effective.
lnventories: Pro: take advantage of large volume discounts;
reduce probability of production disruptions; minimize lost
sales due to stock outs. Con: financing costs with inventory
investment; storage.
A/P: paying invoices before they are due is incurring
unnecessary cost. Company should take advantage of cash
discounts if they are offered
Decision making: one time only special order: accept the
order if incrernental revenues exceed incremental costs
subject to qualitative analysis. Constraint resources:
limited resources; company should select product mix that
maximizes the total contribution margin earned.
Make or buy: advantages: smoother flow of parts and
materials; better quality control; realize profits, Con:
companies may fail to take advantage of suppliers who can
create economics of scale advantage bV pooling ddemand
from numerous companies
Keep or drop decisions: managers must determine whether
to keep or eliminate business segments that appear to be
unprofitable. Keep the business segment if its contribution
margin covers its avoidable fixed costs
Financial statement analysis:
@ n.a profit margin x asset turnover x financial
Ieverage where:
RoE = net income / average share holder's equity.
Net profit margin = net income / net sales
Asset turnover = net sales / average total assets
Financial leverage = average total assets / average
shareholder's equity
Profit drivers and business strategy:
Porter's competitive strategies: deals with competitive
advantage and competitive scope
Low-cost leadershio strategy involves techniques for
excelling at cost reduction and efficiency, with broad
competitive scope; differentiation strategy strives to create
and market unique products by innovative product
characteristics and advertising. Focus strategkies
concentrate on a narrow marl(et or buyer group; the
company tries to achieve either a focused low cost or a
focused differentiation advantage iwthin a narrowly
defined market
Miles and Snow's Strategy Typology: relationship betweer
strategies and external environment:
Prospector strategy involves innovation, taking risks,
seeking out new opportunities and growth. Defender
strategy may involve retrenchment, beyond just stability,
seeking to keep current customers without innovation or
growth. Analvzer strategy lies between prospector and
defender by efficiently maintaining a stable business for
current product lines, while at the same time innovating to
develop new product lines; reactor approach is to respond
to an ad hoc manner to environmental threats and\f
opportunities, without a long range plan. {*
\
Tests of profitability qY
c.
ROE = income / average owner's equity
ROA = (income + interest expense (net of tax)) / average
total assets. Considered to be the overall best measure of
profitability
Financial leverage = ROE - ROA. The advantage or
disadvantage that occurs as a result of earning a return on
equity that is different from the return on assets
EPS = income available to common shareholders /
weighted average number of common shares outstanding
Quality of income = cash flow form operating activities /
net income. Ratio higher than 1 indicates higher-quality
ea rnings
Profit margin = income (before ex. ltems) / net sales.
Ability to earn from sales
Fixed Asset Turnover = Net sales revenue / average net
fixed assets
Test of liquidity
Cash ratio: cash + cash equivalents / current liabilities
Current ratio = current assets / current liabilities. Ability of
the company to pay current debts as they become due
Quick ratio - quick assets / current liabilities. Cash, A/R,
N/R, ST investments
Receivable turnover = net credit sales / avg. A/R. avg age o
receivables = days in year / receivable turnover
lnventory turnover = COGS / avg. inventory
Payable turnover = net credit purchases / AVG. A/P
Tests of solvency
Times interest earned = (net income + interest expense +
income tax expense) / interest expense. Ratio indicates a
margin of protection for creditors
Cash coverage = cash flow from operating act. Before
interest and taxes / interest paid
Quality of income = cash flow from operating act. / net
income
Debt to equity ratio = total liabilities / owne/s equity
Market tests
P/E ratio = market price / EPS
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