Session 8: The value-chain perspective: Accounting for customers and suppliers

Question 1

What are SMA which helps us to understand and inform about customers, who form about the value chain?

Answer 1

Customer profitability profiles
Target costing
Cost of quality.

Question 2

What are SMA which helps us to understand and inform about suppliers who form about the value chain?

Answer 2

Industry roadmaps
Supplier scorecards
Open book accounting

Question 3

What are customer profitability profiles ?

Answer 3

As customers are not all the same, costs vary with customers, so customer profitbaility analysis allows us to better understand which costs are related to which customers.

Question 4

What is the customer cost hierachy?

Answer 4

Question 5

Work out income statement for all customers

Answer 5

Notice actual selling price means the price customers were able to negoitate down for their orders.

Question 6

What can we see that we were never able to see?

Answer 6

We can see what customers are valuable to us, so despite R being the biggest customer they don’t give us the biggest profit. Selling to S is losing us money, so keeping this customer is not valuable.

Question 7

If we do a culumative analysis of spring distubtion what can we see.

Answer 7

We can see the 2 customers have have the highest operating profit, contribute up to 89% of my profit.

Question 8

So it looks like it would be sensible to draw a line here on the 2 least profitable customers but why is that stupid?

Answer 8

You havent worked out how much revenue you are getting per bottle.
From a financial side different measurements yield different results.

Question 9

What can we say here for areas of intervention? Look at T tooo?>

Answer 9

Maybe we negoitated as a bussiness a too high low price
Perhaps bigger batches of purchases too
Do they need 60 deliveries????
So with CPP we can look at focus areas for improvement

T has a very big discount, which they are unprofitable

Question 10

What are other aspects which of CPPs?

Answer 10

1) Although T might be unprofitable that customer might be important for us in terms of reputation.
2) A customer might be unprofitable now e.g. economic downturn but will be profitable in the future.
3) Political considerations ( e.g. you have to keep, so like students getting student loan, so that in the future they will contribute to economic growth. )

Question 11

What are 2 strengths of CCPS?

Answer 11

1) Helps to manage customers due to high variety of information
2) Improve marketing.

Question 12

What are 2 weaknesses of CCPS?

Answer 12

Based on purely quanititative analysis
For high volume firms it wouldn’t make sense to do this.
Overlapping in organisational responsibilities( e.g. with marketing department)

Question 13

What are 2 main techniques that exist for long run pricing?

Answer 13

1) Target pricing and target costing

2) Life-cycle costing

Question 14

What is target costing?

Answer 14

Originally, firms will find out cost of making a product, then charge a markup on top for its selling price, However, target costing, does the reverse and sets a selling price first, then works to internally reduce this the costs to satisfy this price.

Question 15

What are the steps for Target costing?

Answer 15

Question 16

How much does TargetCo have to reduce its per unit cost of x by?

Answer 16

$180000

Question 17

Give an example of target costing?

Answer 17

The pricing at Tata, the introduction of the words cheapest car, which was basic, he was influenced by seeing a family driving a motorbike but it was unsafe, so the car reflected

Question 18

What is cost of quality analysis?

Answer 18

A company can measure the cost of providing a quality cost or service.

Question 19

What are the 4 costs of quality?

Answer 19

1) Prevention costs - costs of preventing defects from ever happening to begin with, we train workers so defects dont happen|=)
2) Appraisal costs ( testing of defectouous product ( e.g. testing if brakes of a car work.)
3) Internal failure costs ( cost of repairing defects, prior to delivery)
4) External failure costs ( costs incurred after delivery e.g. warranty costs ( engine blows of a car, this is expensive)

Question 20

Lets say for cost of quality, you map out common problems such as the frame of bike not working so well, so there are 2 options to solve this, 1) Further inspect incoming frame( prevention cost) or Redesign frame( internal failure costs, what will a company do?

Answer 20

You list out the relevant costs, which will change with different options, then you pick the one that will say you more money.

Question 21

What are various techniques that allow buyers to account for and control suppliers?

Answer 21

1) JIT purchasisng and open-book accounting
2) Supplier scorecards
3) Industry roadmaps.

Question 22

What is value engeering ( linked to target costing)?

Answer 22

a systematic, organized approach to providing necessary functions in a project at the lowest cost.

Question 23

What is open book accounting?

Answer 23

Bascially, business transfer with suppliers information about their internal organisation cost management.
Purpose: to spot additional opportunities for cost reduction along
the supply chain.

Question 24

Give an example of open book accounting.

Answer 24

Starting in 1996, Sainsbury initiated a collaborative cost management system with its suppliers
• By sharing cost information, Sainsbury realised that, for middle size suppliers, transferring the products to one of Sainsbury’s regional distribution centres was a significant cost
• To improve the situation, Sainsbury developed a centrally located primary consolidation centre (PCC) and suppliers transferred products to the PCC and
were distributed from there by Sainsbury

Question 25

What is a benefit of open book accounting and what is a issue?

Answer 25

1) Good way to improve trust with supplier and help to reduce costs within a firm as we see with sainsbury.
2) You may be a big firm using ABC costing but your suppliers are small and they use TBS so its hard to compare cost systems.

Question 26

What is a supplier scorecard and what is an example of a company that uses Supplier scorecard?

Answer 26

is a document businesses use to rate their vendors or suppliers on a specific scale for their performance.
HTC has over 1,000 suppliers and managing them is critical to meet
customers requirements

Question 27

What is JIT?

Answer 27

a system in which materials arrive exactly when they are needed

Question 28

What is an advantage and disadvantage of JIT?

Answer 28

Lower stocks; carrying and handling costs; obsolescence of stocks;
investment in plant space; waste and spoilage; paperwork etc.

Just-in-time requires a high degree of coordination, in terms of
transportation and delivery, work skills, quality control, rapidity,
information systems…