Managing suppliers and customers

Chapter 15Managing suppliers and customers 15-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineSupply chain managementManaging suppliersSupplier selection, supplier profitability, performance measuresManaging inventoryEconomic order quantity (EOQ)Just-in-time system (JIT)Managing customersCustomer profitability, performance measuresManaging time15-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSupply chain management (SCM)SCM is the management of key business processes that extend across the supply chain, from the original suppliers to final customersThe supply chainInterlinked customers and suppliers that work together to convert, distribute and sell goods and services among themselves, leading to a specific end productSCM can involve managing costs, accelerating time-to-market of new products, creating close relationships with customers and suppliers15-3(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSupply chain management (SCM) (cont.)Ecommerce—use of electronic transmission media to engage in the buying and selling of goods and servicesB2B—ecommerce activities between two businessesElectronic data interchange (EDI) links a firm’s computer system to suppliers/customers to allow electronic purchasing and buyingEnterprise resource planning (ERP) systems support different functional areas of a business and enable SCM15-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging suppliersImproved supplier relationships can reduce supplier and inventory-related costsSelecting suppliersBased on a range of criteriaPrice, quality, delivery, performance history, capacity, communications systems and geographical locationLong-term supply controls and preferred suppliers15-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Managing suppliers (cont.)Analysing supplier costs The total cost of ownership is the total cost of dealing with suppliers, includingPurchase price Costs of purchasing—ordering, receiving and inspectionCosts of holding inventoryCosts of poor qualityCosts of delivery failureActivity-based costing can be used to estimate total cost of ownershipHierarchy of supplier activities: unit-level, order-level, supplier-level15-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Managing suppliers (cont.)Evaluating supplier performanceSupplier performance index: the ratio of supplier costs to total purchase priceMeasures include ability of supplier to supply at the contract price, material quality, delivery performance, quality of relationships between employees, union and managementA buyer may also assess their own performance in relation to the management of the supplier15-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith15-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging inventoryWhy hold inventory?Cope with uncertainties in customer demand and in production processes Qualify for quantity discountsAvoid future price increases in raw materialsAvoid the costs of placing numerous small ordersConventional approaches to inventory management focus on balancingOrdering costs: incremental costs of placing an orderCarrying costs: the costs of carrying inventory in stockShortage costs (or out-of-stock costs)15-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEconomic order quantity (EOQ)The optimum order size for individual inventory items, to minimise the total ordering and carrying costs15-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithTiming of orders under EOQInventory re-order point (ROP)The level of inventory on hand that triggers the placement of a new order (or setup)Lead time- the length of time between placing an order and receiving the orderSafety stockThe extra inventory kept on hand to cover any above-average usage or demandMay be costly to maintain extra inventory15-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith15-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithAssumptions underlying EOQDemand is known and constantIncremental ordering costs are known and constant per orderAcquisition cost per unit is constantEntire order is delivered at one timeCarrying costs are known and constant per unitOn average, one-half of order is in stock at any time15-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithJust-in-time (JIT) systemsJIT inventory and production systemA comprehensive system for controlling the flow of manufacturing in a multi-stage production environmentThe underlying philosophy is the simplifying of the production process by removing non-value-added activitiesJIT can cover all aspects of the production processInventory management is crucialInventory is a major cause of non-value-added activities and cost15-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithKey features of JIT productionA pull method of coordinating production processesSimplified production processesPurchase of materials, and manufacture of sub-assemblies and products in small lotsQuick and inexpensive setups of production machineryHigh-quality levels for raw materials, components and finished productsEffective preventative maintenance of equipmentFlexible work teams15-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithJIT purchasingReduces the number of suppliersLong-term contracts with suppliersSpecifies quality standards in supplier contracts to reduce need for inspectionUse of e-commerce to place orders, and provide supplier on-line access to inventory files15-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCosts and benefits of JITCosts of JITSubstantial investment to change production facilities to minimise non-value-added activitiesAn increase in the risk of inventory shortages and the associated loss of production and salesBenefits of JITSavings in inventory-carrying and insurance costsFewer losses due to spoilage, obsolescence and theftNo opportunity costs of high inventoryEliminates non-value-added activitiesMeets customers’ needs more effectively15-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging customersCustomer relationship management (CRM)Collecting and analysing data to understand individual customers’ behaviour patterns and needsMay lead to improved customer service, customer retention, new customers, more effective and efficient marketing, increased sales and customer profitabilityE-commerce applications may allow customers to access interactive web sites and initiate and complete transactions over the internet15-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCustomer profitability analysisActivity-based analysis may be used Customer cost analysisAnalysis of cost of products purchased by customers and the costs of customer-driven activitiesCustomer profitability analysis Relative profitability of customers can be determined and used for a range of strategic decisionsHow do customers differ?Customisation of productsMarketing and selling activitiesDistribution channelsCustomer support activities15-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith15-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithWhy calculate customer profitability?To address a range of questionsWhich customers generate the greatest profits? And how do we retain them?Which customers generate the lowest profits? And how can we make them more profitable?What types of customers should we focus on to maximise profitability?15-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCalculating customer costsThree levels of customer-driven activities and costsOrder level activitiesCustomer level activitiesMarket level activitiesCustomer performance measuresMarket shareCustomer retentionCustomer acquisitionCustomer satisfactionCustomer profitability15-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith15-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging timeTime dictates the rate at which products are produced and revenue generatedTime determines how long resources are tied up in processes, and unavailable for other usesTime delays lead to inventory build-upsTime to develop new products and delivering products to customers may be key to innovation15-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithTime-based managementMeasures for developing new products and servicesNew product development time: time from identification of initial concept to release of product to the marketBreak-even time (BET): the time from identification of initial concept to when a product has generated enough profit to pay back the original investmentTime taken to fulfil a customer’s orderMeasures of customer response time, order receipt time, production lead time (cycle time) Reliability in meeting scheduled delivery dates15-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith15-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummarySupply chain management involves managing costs and creating closer relationships with suppliers and customers to increase efficiency and profitabilitySupplier management involves selecting the best suppliers, analysing supplier profitability and measuring and managing supplier performance Conventional inventory management, such as EOQ, focuses on optimising orders to minimise costs, whereas JIT involves working with suppliers to minimise inventory holdings and increase the efficiency of production and ordering processes15-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Summary (cont.)Customer management can involve creating customer relationship systems, analysing customer profitability, and measuring and managing customer performanceTime can be a driver of customer value and various time-based performance measures can be used to increase efficiency, manage cost and to increase customer satisfaction15-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith