Chapter 6
Cost
Chapter Overview
Chapter 6 provides an overview of cost and its importance to profitability and operations decisions. Cost has a significant impact on value in two ways. First, price is also dependent on costs, and price contributes to a customer's perception of value, cost affects demand by its impact on the way customers view value relative to competitors. Second, in determining net income, costs of goods sold are subtracted. the greater the costs, the lower the net income. Increasing costs result in the reduction of net income and the corresponding reduction in profitability.
Businesses frequently seek to increase productivity, and that often falls within the charges of the operations function. Productivity measures are created as a ratio of outputs to inputs. Inputs include costs. As costs go up, productivity goes down.
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Chapter Resources |
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Esources |
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| Esource 6.1 | IT Outsourcing, Inc. provides a variety of information-related services. The company promotes its ability to provide these services in a cost effective manner. Explore their website to find out how they are able to offer these services at low costs. |
| Esource 6.2 | Internet retailers have been criticized for surprising customers with the total cost of a purchase late in the purchasing process after the customer has filled out several screens of checkout information. Customers want that information early, so they can make an intelligent purchase decision. Examine L.L. Bean, Lands End, and Eddie Bauer to see how early in the the purchasing process they inform their customers of the total cost. |
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Reel Operations Video Clips |
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| Reel Operations Video 6.1 | Lean Production Provides a Structured Cost Reduction Methodology In Chapter 6, the concept of "lean" production is introduced as a broad approach to minimizing costs associated with processes. Caterpillar's approach to leanness has had broad implications for their business. In Reel Operations 6.1, Caterpillar's approach is examined. |
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Interactive Models |
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| Interactive Model 6.1 |
Variance
Analysis Interactive Model |
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Excel Tutors |
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| Excel Tutor 6.1 | Excel Tutor 6.1 Using Excel Spreadsheets for Variance Analysis. |
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Supplementary Readings |
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| Supplementary Reading 6.1 | It is often difficult to understand the linkages between such mundane issues as the cost of producing a product and such complex and far reaching threats on a company as an unwelcomed takeover. Honda is able to provide a direct link between the two, however. In Honda's Independent Streak, Business Week, October 2, 2000, the link between the efficiency of the automaker and its ability to fend off takeovers is addressed. |
| Supplementary Reading 6.2 |
In Think Lean (Fast Company, February 2002, the concept of lean thinking is evaluated and one approach to a gaining a lean perspective is discussed. |
| Supplementary Reading 6.3 |
The concept of lean production means minimizing costs and minimizing resources required to produce. In Boeing Goes Lean (Business Week, June 4, 2001) a success story provides an excellent overview of the impact of leanness. |
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Links to Operations On Site Companies |
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| Operations On Site 6.2 | UAL corporations United
Airlines website is recognized as one of the best in the industry. The IRS website provides another example of cost reduction through the use of technology. |
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OM Exploration |
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Check it out: Internet Reference Sites |
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| Cost is a motivator form many business decisions. The following resource sites provide a broad spectrum of cost-related information. | |
| BPR Online Learning Center,Activity Based Costing (ABC): What is it and how can reengineering teams use it? | The Balanced Scorecard Institute |
| Balanced Scorecard Collaborative | The Outsourcing Institute |
| The Lean Enterprise Instititute | |
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OM in Action |
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| OM in Action 6.1 | Price is the critical factor in purchasing decisions for
"commodity" type products. Commodities are products that are
standardized and producers have no real way to differentiate themselves other
than with price. Web sites, known as shopping bots, provide services for
these types of items to help potential purchasers identify the low price
producer. Visit Pricewatch to see how
this process works. Compare the Pricewatch
service to that of NexTag. a. What are your reactions to
the Pricewatch site? |
| OM in Action 6.2 | Price competition is critical for typical consumer
products as well as computer peripherals. bSilly,
for example is a shopping bot just for kids' products. Streetprices
provides shopping bot services for computers and other electronics. Try out
bSilly or Streetprices by searching for the lowest price on a product of
interest to you. a. How does the price compare to other sources? b. Is the cost of using the service (your time) reasonable enough that you think it provides a value? Would you use the site next time you are shopping on line? |
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Online Business Tour |
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| Online Business Tour 6.1 | Take the Uinta
Brewing Company Tour.
a. Based on what you know about the brewing process from taking
Uinta's tour,
what types of activities account for the costs incurred by Canadian
Stprings? |
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Letter from the Top |
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| Letter from the Top 6.1 | In his 2001
Chairman's Message, John
Deere CEO Robert W. Lane focused on asset and cost reduction. Read the
letter describing Deere's year and its plans for the future. a. What assets does Deere plan to reduce or eliminate? How will this impact costs and profitability? b. Which specific costs does Deere intend to reduce? How will these cost reduction efforts impact profitability? c. What are the risks associated with Deere's cost reduction plans? |
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Putting It All Together: Virtual Case Studies |
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| Putting It all Together 6.1: | In Ford:
Why It's Worse Than You Think,
(Business Week, June 25, 2001),
several of Ford's quality and productivity problems are discussed. The
chairman of Ford briefly mentions some of these problems in his letter to
the shareholders in the 2000
annual report. Clearly, the costs born by Ford to resolve the
Firestone tire recall were huge. Costs are relative, however. a. What were Ford's alternatives? Was the recall Ford's only real option or were other alternatives available? b. Do you think Ford selected the low cost alternative? Why or why not? |
| Putting It all Together 6.2: Comparing Contract Manufacturing Services |
The concept of an "electronics manufacturing
service" (EMS) didn't exist prior to the late 1990's. Many firms are motivated to
outsource manufacturing, particularly when changing technology can make a
component obsolete in mere months. The
Barons of Outsourcing, (Business Week, August 28,2000) and The
Chips are Down. Way Down (Business Week, August 7, 2000), provide
perspectives on this trend from two distinctly different segments of the electronics
industry. Two key players
in the in the broader electronics
manufacturing arena are Flextronics
and Solectron . In the more
narrow chip design and production arena, key players include
Taiwan Semiconductor Manufacturing Corp. and United
Microelectronics Corp. Select one pair of competitors in the same
arena and explore the website for each firm. a. How do the firms in each pair compare? What capabilities do they offer? Do they each have distinctive advantages over the other? What are they? b. Who are the major customers of each? Does the customer list overlap? How do the costumers differ? What are the customer characteristics? Do the needs of the customers appear to match the capabilities of the supplier? c. Summarize the strengths and weaknesses of each supplier. |
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Additional Reading |
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| Additional Reading 6.1 |
The concept of lean production means minimizing costs and minimizing resources required to produce. In Boeing Goes Lean (Buiness Week, June 4, 2001) a success story provides an excellent overview of the impact of leanness. |
| Additional Reading 6.2 |
Costs have a way of sneaking up on companies and can create unexpected impacts. In Ford: Why It's Worse Than You Think, (Business Week, June 25, 2001), Ford's difficulties with increasing costs and decreasing efficiencies are examined. |
| Additional Reading 6.3 |
Manufacturers and services have begun to master the use of ABC to aid in making productivity decisions and help their customers pin down costs and value. Read Manufacturing Masters Its ABCs (Business Week, August 7, 2000) to find out about gains made by Alcoa in their efforts in incorporate ABC into their business. |
| Additional Reading 6.4 |
"The Danger of Relying on Accounting Numbers Alone," Journal of Management Accounting, fall, 1999, provides a great example of how numbers can be manipulated for management gain. |
| Additional Reading 6.5 |
Business processes produce value, but can also produce a significant amount of waste. Reducing costs by eliminating waste is almost impossible without the collection of specific information related to those processes. Collecting relevant data can often lead to cost reductions. Beer with a Good Head on its Shoulders (Business Week, Sept. 18, 2000) provides an excellent overview of the results Miller Brewing Company obtained through this approach. |