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3rd-chap8.ppt

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    • 1. Cost Advantage
      • Economies of experience curve and the benefits of market share.
      • Sources of cost advantage.
      • Using the value chain to analyze costs.
      • Cost cutting in the 1990’s.
      OUTLINE
    • 2. Examples of Experience Curves The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 1982 1984 1986 1988 1990 1992 1994
    • 3. Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated unit (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
    • 4. The Importance of Market Share If all firms in an industry have the same experience curve, then: relative costs = f (relative market share) This supported by PIMS data: BUT : - Association does not imply causation - Costs of acquiring market share tend to offset the returns to market share ROS (%) -2 0 5 10 0-10 10-20 20-30 30-40 over 40 Market Share (%)
    • 5. Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE
      • Organizational slack
      • Ratio of fixed to variable costs
      • Costs of installing and closing capacity
      • Location advantages
      • Ownership of low-cost inputs
      • Bargaining power
      • Supplier cooperation
      • Design for automation
      • Designs to economize on materials
      • Mechanization and automization
      • Effiecient utilization of materials
      • Increased precision
      • Increased dexterity
      • Improved coordination/ organization
      • Indivisibli ies
      • Specilaization and division of labor
    • 6. Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
    • 7. The Costs of Product Development: New Autos of the 1990s
      • $ billion
      • Ford Escort (new model) 2
      • Ford Mondeo/ Contour 6
      • Ford Taurus (1996 model) 2.8
      • GM Saturn 5
      • Chrysler Neon 1.3
      • Honda Accord (1997 Model) 0.6
      • Renault Clio (1999 model) 1.3
      • Rolls Royce (Silver Seraph) 0.33
    • 8. Scale Economies in Advertising: U.S. Soft Drinks Despite the massive advertising by brand leaders Coca Cola and Pepsi Cola, it is the smaller brands which incur the highest advertising costs per unit of sales: 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper
    • 9. Cost Advantage in Short-Haul Passenger Air Transport Costs per Available Seat-Mile (1993) Southwest Airlines United Airlines (cents) (cents) Wages and benefits 2.4 3.5 Fuel and oil 1.1 1.1 Aircraft ownership 0.7 0.8 Aircraft maintenance 0.6 0.3 Commisions on ticket sales 0.5 1.0 Advertising 0.2 0.2 Food and beverage 0.0 0.5 Other 1.7 3.1 Total 7.2 10.5
    • 10. Key Stages in Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES STAGE 2. ALLOCATE TOTAL COSTS PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT
    • 11. Applying the Value Chain to Cost Analysis (continued) PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capaciity utilization under warrenty Prices paid depends -- Size of commitment -- Plant scale -- Cyclicality / predictability of sales depends on: -- Productivity of R&D/design -- No. of models per -- Flexibility of productions -- Order size -- No. & frequency of new plant -- Customers’ willingness to wait -- Putchases per models -- Degree of supplier -- Sales / model automation -- Bargaining power -- Wage levels -- Supplier location -- Capacity utilization STAGE 3. IDENTIFY COST DRIVERS
    • 12. Applying the Value Chain to Cost Analysis (continued)
      • PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
      • INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
      Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES
    • 13. Dynamic vs. Static Approaches to Manufacturing
      • Artisan mode: Scientific Management Mode:
      • - problem solving - quest for “one best way”
      • - employee knowledge creation - people matched to tasks
      • - employee control over product - incentives and penalties to
      • - product and customer ensure conformity to objectives
      • orientation - planning and control by staff
      • - continuous incremental - science driven
      • improvement - focused around corporate R&D - market needs pull technology departments
      • - product and process innovation- emphasis on product Innovation
      • - teamwork and cross-functional and big projects collaboration
      PRODUCTION SYSTEM MANAGEMENT OF TECHNOLOGY DYNAMIC STATIC
    • 14. Recent Approaches to Cost Reduction
      • Dramatic changes in strategy and structure
      • to adjust to the business conditions of the 1990’s
      • Key elements:
      • Plant closures
      • Outsourcing
      • Delayering and cuts in administrative staff
      • The fundamental rethinking and radical
      • redesign of business processes to achieve
      • dynamic improvements in performance. e.g.:-
      • Several jobs combined into one
      • Steps of a process combined in natural order
      • Minimizing steps, controls, and reconciliation
      • Use case managers as single points of contact
      • Hybrid centralization/ decentralization
      CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING