The Finance Function’s Relationship with Operations

Question 1

Describe and provide examples of inputs, transformation process and outputs

Answer 1

Transforming inputs - ie resources
Examples:
Labour, facilities
Transformed inputs
Examples:
Materials, information, customers, design

Transforming inputs and transformed inputs can undergo the transformation process to provide an output

Transformation process is an area that has been significantly impacted by development in technologies - eg airline check in, fast foods ordering, clothes selection

Output
Examples:
Products, services

FULL EXAMPLE: Labour (transforming input) and materials (transformed input) undergo transformation process to become a product/clothes (output)

Question 2

Four Vs of process

Answer 2

Volume - the process will be affected by the number of inputs and outputs
Variety - the process will be affected by the number of different inputs and outputs
Variation - the process will be affected by when the outputs are required (eg more trains required at peak times)
Visibility - the process will be agreed by whether customers view it or not (eg closed vs open restaurant)

Question 3

Describe the primary activities in Porter’s support value chain

Answer 3

They are directly related with each step of the process from the input of materials to the after sales service of the finished goods
Inbound logistics - activities involved with the receipt and storage of inputs eg warehousing, transport and stock control
Operations - conversion of inputs into finished goods in the factory eg assembly and packaging
Outbound logistics - safe storage and final distribution of product to customer
Marketing and sales - the advertising and promotion of product
Service - customer support and after service

Question 4

Describe the support activities in Porter’s value chain

Answer 4

These are functions that improve efficiency and effectiveness of the primary activities
Procurement - purchase of materials, spare parts, machines, etc
Human resource management - recruitment, development and retention of staff
Technology development - research and development and design
Firm infrastructure - General management, legal, finance, accounting

Question 5

Benefits of manufacturing resource planning

Answer 5

MRP II
Reduced stock holding
Improved ability to meet orders
Reliable quotations of delivery times
Improved facilities utilisation

Question 6

Benefits of manufacturing resource planning

Answer 6

MRP II
Reduced stock holding
Improved ability to meet orders
Reliable quotations of delivery times
Improved facilities utilisation

Question 7

What are the different inventory management systems

Answer 7

Continuous inventory system
Periodic inventory system
ABC system
Just in time system

Question 8

Features of continuous inventory system

Answer 8

Inventory is continuously monitored always known. When it falls below a predetermined level a fixed amount may be ordered to replace it
May incorporate the use of EOQ that determine optimal size of order to place

Question 9

Features of periodic inventory system

Answer 9

Checking stock in regular basis and placing a variable order depending on usage during the period

Question 10

Features of ABC system

Answer 10

Classification of stock based on Pareto principle whereby 20% of items are likely to account for 80% of such value ands focus on items that are the most expensive/important and therefore need careful monitoring
A - high value
B - less important
C - negligible value

Question 11

Features of just in time inventory management

Answer 11

Goods are produced only when needed eliminating large stocks of material
High quality production
Speed - rapid throughput to meet customer needs
Reliability - computer aided manufacturing technology will assist
Flexibility - small batch sizes and automated techniques

Question 12

Five elements of Cousins approach to supply

Answer 12

Supply wheel - spokes in a wheel
Elements need to be coordinated and not considered in isolation
Organisation structure - how supply interacts with other functions eg centralised or decentralised purchasing
Portfolio of relationships - how much collaboration with suppliers and how many suppliers used
Cost/benefit analysis - how much effort/time is spent on purchasing
Skills and competences - whether staff need training on how to build relationships with suppliers
Performance measures - not just cost, consider quality too

Question 13

Different sourcing strategies

Answer 13

Single sourcing - each product is purchased from one supplier, can be sure to scarcity or mutually beneficial relationship
Multiple sourcing - company costs several suppliers reducing the power of each one, prices fall but relationship is less stable
Delegated sourcing - sourcing task is delegated to external organisation
Parallel sourcing - sourced from separate supply systems, a local supplier and separate on line supplier

Question 14

What are the different approaches to quality management?

Answer 14

Total quality management
Kaizen
Six sigma
Lean thinking

Question 15

Total quality management

Answer 15

TQM - Deming created it
The continuous improvement in quality, productivity and effectiveness through a management approach focusing on both process and product
Prevention of errors
Elimination of waste
Right first time
Full participation of employees
Everybody’s concern
Continuous improvement needed
Teamwork

Question 16

Kaizen

Answer 16

Continuous improvement
Through small incremental steps
A long-term approach to quality improvement
Provide workforce with the appropriate tools and techniques to achieve desired quality
Often incorporated in to other broader theories

Question 17

Six Sigma

Answer 17

Statistical approach to quality management
aims to reduce defective output from business processes
Statistically, six sigma/six standard deviations from the mean equates to 3.4 defects in a million and this is the benchmark for perfect output

Question 18

Lean thinking

Answer 18

Aims to systematically eliminate waste in all areas of the organisation.
Waste is any activity which absorbs resources without adding value

Question 19

Four categories of costs associated with quality management

Answer 19

Prevention cost - actions taken to prevent defects, quality assurance
Appraisal cost - cost of quality inspection and testing, quality control
Internal failure cost - cost of detection and rectification of defective items arising before transfer to customer, rework cost
External failure cost - arising after transfer to customer, repairing returned goods

Question 20

Ways finance interacts with operations

Answer 20

Finance can help enhance operation efficiency by analysing and providing data
Finance interacts with operations through product and service management
Finance interactions with operations through supply chain management

Question 21

Key performance indicators relating to operational performance

Answer 21

Benchmarking - comparison of a company’s service with another party
Internal benchmarking - comparison against the best elsewhere in the organisation
Competitive benchmarking - comparison against the best elsewhere in the same industry
Best practice - comparison against the best functional area in any industry

Inventory turnover %
Wastage %
Returned items %
Supplier payment days

Question 22

What is capacity planning and control

Answer 22

An area of interface with finance
Concerned with balancing customer demand with company supply of product
Over capacity - resources not fully utilised
under capacity - organisation unable to product quantity demanded

Question 23

Capacity planning and control strategies

Answer 23

Level capacity strategy - maintain activity at constant level over the planning period ignoring fluctuations in forecast demand
Chase demand strategy - match production capability as closely as possible to forecasted demand
Demand management strategy - attempt to manipulate demand levels

Question 24

Manufacturing resource planning (MRP II)

Answer 24

Method for the effective planning of all resources of a manufacturing company
Identify and forecast orders, determine capacity, determine quantities and timings of materials required, calculating POs based on stock levels, automatically placing POs, scheduling labour and materials for future production

Question 25

Optimised Production Technology (OPT)

Answer 25

A computer based method for scheduling production requirements. Uses known capacity constraints to eliminate bottlenecks
Identifies capacity constraints, schedules production accordingly, identify production routes that overcome capacity constraints, repeat for every capacity constraint

Question 26

Enterprise Resource Planning (ERP)

Answer 26

ERP software integrates all departments and functions of an organisation in a computer system able to meet the needs of all organisational users.
Includes a number of integrated modules that support all activities including production planning, purchasing, inventory control, order tracking and customer service, etc…

Question 27

Reck and Long model of procurement

Answer 27

Shows the evolution of the procurement function within an organisation
Passive - purchasing is a clerical function with focus on efficient transaction processing and no attempts at cost saving
Independent - Increasing awareness of the financial importance of procurement, some attempt to find the best prices
Supportive - Increasing importance on the role of purchasing, now company has a centralised purchasing department. Recognition that careful supplier selection is important
Integrative - Purchasing is now part of the firms strategic planning process. Suppliers are considered ‘partners’

Question 28

What is the aim of inventory management

Answer 28

To minimise the costs of:
Ordering costs - costs associated with placing the order and receiving the goods, eg transport costs
Holding costs - cost of storage and stores operations. Ties up cash in inventory. Higher value inventory can mean higher insurance premium, so also includes insurance costs. Also, costs of deterioration and obsolescence
Stock out costs - Lost contribution on unfulfilled orders, loss of customer goodwill and lost repeat business, cost of production employees idle time, admin costs associated with dealing with customer queries and complaints

Question 29

Quality control vs quality assurance

Answer 29

Quality control involves inspecting product after, assurance is a more proactive approach and focuses on the production process