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  • 1. Hyperion Business Modeling ®Release 3.0Solutions Guide Hyperion Solutions Corporation P/N: D503530000
  • 2. © 2000-2002 Hyperion Solutions Corporation. All rights reserved.Hyperion, Essbase, Hyperion Analyzer, Hyperion Business Modeling and the “H” logo areregistered trademarks of Hyperion Solutions Corporation. Hyperion Solutions is a trademarkof Hyperion Solutions Corporation.Economic Value Add (“EVA”) is a registered trademark of Stern Stewart & Co. All otherbrand and product names are trademarks or registered trademarks of their respective holders.No portion of this manual may be reproduced or transmitted in any form or by any means,electronic or mechanical, including photocopying, recording, or information storage andretrieval systems, for any purpose other than the purchaser’s personal use, without the expresswritten permission of Hyperion Solutions Corporation.Notice: The information contained in this document is subject to change without notice.Hyperion Solutions Corporation shall not be liable for errors contained herein orconsequential damages in connection with the furnishing, performance, or use of this material. Hyperion Solutions Corporation 1344 Crossman Avenue Sunnyvale, CA 94089
  • 3. ContentsPreface ......................................................................................................................... vii Who Should Use This Guide .................................................................................... viiDocument Structure ........................................................................................................ viiiConventions ....................................................................................................................... ixRelated Documentation ...................................................................................................... xOnline Help ....................................................................................................................... xi Viewing the Online Guide ......................................................................................... xi Printing the Online Guide ....................................................................................... xiiiAdditional Support .......................................................................................................... xiv Documentation ......................................................................................................... xiv Education Services .................................................................................................. xiv Consulting Services .................................................................................................. xv Technical Support ..................................................................................................... xvChapter 1: Introduction ....................................................................................... 17What You Gain ................................................................................................................. 17Before You Start ............................................................................................................... 18Using the Case Studies ..................................................................................................... 18 How the Case Studies are Organized........................................................................ 18 How to Use the Case Studies .................................................................................... 19The Case Studies .............................................................................................................. 19Chapter 2: Your Business Issues ................................................................... 21Managing Capacities and Constraints .............................................................................. 21Measuring Customer and Product Profitability ................................................................ 22Controlling Costs .............................................................................................................. 22Hyperion Business Modeling Solutions Guide s iii
  • 4. Justifying Investment and Re-engineering ....................................................................... 23Planning Process Improvements ...................................................................................... 23Introducing a New Product ............................................................................................... 24Where to Find the Case Studies ....................................................................................... 24Chapter 3: The Model Approach ..................................................................... 25Step 1: Defining the Project Scope................................................................................... 26Step 2: Identifying Activities, Resources, and Measures ................................................. 26Step 3: Developing the Schematic.................................................................................... 27Step 4: Collecting Data and Rules .................................................................................... 28Step 5: Building the Model .............................................................................................. 29Step 6: Validating the Results .......................................................................................... 29Step 7: Interpreting the New Activity-Based Information ............................................... 30Step 8: Performing Activity-Based Management ............................................................ 30Chapter 4: Product Profitability Case Study ............................................ 31Business Issue ................................................................................................................... 32 Marketing Analysis ................................................................................................... 32 Cost Analysis ............................................................................................................ 33Activity Based Management Solution Result .................................................................. 33 Activity-based Costing (ABC) Results ..................................................................... 33How the Solution was Developed .................................................................................... 34 Supporting The Model Approach ............................................................................. 34 Step 1: Defining the Project Scope ........................................................................... 35 Step 2: Identifying Activities, Resources, and Measures ......................................... 35 Step 3: Developing the Schematic ............................................................................ 36 Interpreting the OK Plastics Schematic .................................................................... 40 Step 4: Collecting Data and Rules ............................................................................ 42 Step 5: Building the Model ....................................................................................... 51 Step 6: Validating the Results ................................................................................... 55Activity-Based Cost Analysis .......................................................................................... 60 Step 7: Interpreting New Information ....................................................................... 60Activity-Based Management ............................................................................................ 64 Step 8: Performing Activity-Based Management ..................................................... 64 Finding a Solution to Product Profitability ............................................................... 64iv s Hyperion Business Modeling Solutions Guide
  • 5. Calculating the Scenario ........................................................................................... 73 Next Steps ................................................................................................................. 73Chapter 5: Customer Profitability Case Study ........................................ 75Business Issue .................................................................................................................. 76 Market Conditions .................................................................................................... 77 Current Costs ............................................................................................................ 77 Profit/Loss Projection ............................................................................................... 78ABM Solution Result ....................................................................................................... 78 Activity-based Costing (ABC) Results .................................................................... 79 Activity-based Management Strategy ...................................................................... 80How the Solution was Developed .................................................................................... 80 Supporting The Model Approach ............................................................................. 80 Step 1: Defining the Project Scope ........................................................................... 81 Step 2: Identifying Activities, Resources, and Measures ......................................... 81 Step 3: Developing the Schematic ............................................................................ 82 Step 4: Collecting Data and Rules ............................................................................ 87 Step 5: Building the Model ...................................................................................... 95 Step 6: Validating the Results ................................................................................ 101Activity-Based Cost Analysis ........................................................................................ 105 Step 7: Interpreting New Information .................................................................... 105Activity-Based Management .......................................................................................... 111 Step 8: Performing Activity-Based Management................................................... 111 Calculating the Scenario ......................................................................................... 117 Next Steps ............................................................................................................... 120Chapter 6: Improving Economic Profit Case Study ........................... 121Economic Profit Concepts.............................................................................................. 121Business Issue ................................................................................................................ 123Company Profile ............................................................................................................ 124 Product Lines .......................................................................................................... 124 Strategy ................................................................................................................... 125EP Solution Results ........................................................................................................ 126 Business Modeling Strategy ................................................................................... 126Hyperion Business Modeling Solutions Guide s v
  • 6. How the Solution was Developed .................................................................................. 128 Supporting The Model Approach ........................................................................... 128 Step 1: Defining the Project Scope ......................................................................... 128 Step 2: Identifying Activities, Resources, and Measures ....................................... 129 Step 3: Developing the Schematic .......................................................................... 130 Interpreting the OK Plastics’ Schematic ................................................................. 134 Step 4: Collecting Data and Rules .......................................................................... 136 Step 5: Build the Model .......................................................................................... 146 Adding Changes to Model EP ................................................................................ 149 Step 6: Validating the Results ................................................................................. 163Activity-Based Cost Analysis ........................................................................................ 167 Step 7: Interpreting New Information ..................................................................... 167Activity-Based Management .......................................................................................... 172 Step 8: Performing Activity-Based Management ................................................... 172 Evaluating the Impact of New Process Technology on Economic Profit .............. 174 Calculating the Scenario ......................................................................................... 177 Next Steps ............................................................................................................... 178Chapter 7: Next Steps ........................................................................................ 179Appendix A: Concepts ....................................................................................... 181Activity-Based Costing and Management ...................................................................... 181 The Problem of Indirect Costs ................................................................................ 181 Activity-Based Costing ........................................................................................... 182 Process Modeling .................................................................................................... 182 Activity-Based Management .................................................................................. 183Solution .......................................................................................................................... 184Index ............................................................................................................................ 185vi s Hyperion Business Modeling Solutions Guide
  • 7. Preface This guide introduces you to building Hyperion Business Modeling models and using them to solve business issues. It explains the Hyperion Business Modeling features and options and contains case studies that implement the model building method, The Model Approach®. This preface includes the following topics: q “Who Should Use This Guide” on page vii q “Document Structure” on page viii q “Conventions” on page ix q “Related Documentation” on page x q “Online Help” on page xi q “Additional Support” on page xivWho Should Use This Guide This guide is intended for developers of activity-based management models, activity-based costing project leaders, and managers who are looking for a solution to their business problems.Hyperion Business Modeling Solutions Guide s vii
  • 8. PrefaceDocument Structure This document contains the following information: q Chapter 1, “Introduction,” provides an overview to the entire guide, including how to use the guide, the benefits of following the case studies, and a brief description of the enclosed case studies. q Chapter 2, “Your Business Issues,” describes some of the financial and operational problems organizations commonly face in today’s business environment. q Chapter 3, “The Model Approach,” describes the eight-step methodology for building models using Hyperion Business Modeling to solve common business problems. q Chapter 4, “Product Profitability Case Study,” is a case study of a manufacturing company and how it uses The Model Approach and Hyperion Business Modeling to address product profitability issues. q Chapter 5, “Customer Profitability Case Study,” is a case study of a service company and how it uses The Model Approach and Hyperion Business Modeling to address customer profitability issues. q Chapter 6, “Improving Economic Profit Case Study,” is a case study demonstrating the application of Economic Profit (Economic Value Add or EVA) to evaluate proposed initiatives on the profitability of a manufacturing company. q Chapter 7, “Next Steps,” directs you to sources of support and information to help you launch your own activity-based management project. q Appendix A, “Concepts,” describes the underlying principles of the product.viii s Hyperion Business Modeling Solutions Guide
  • 9. PrefaceConventions The following table shows the conventions used in this document: Item Meaning ➤ Arrows indicate the beginning of a procedure that consists of sequential steps. Bold Bold text indicates words or characters that you type exactly as they appear on the page. Bold in procedural steps highlights major interface elements. CAPITAL LETTERS Capital letters denote commands and various IDs. (Example: CLEARBLOCK command) Ctrl + 0 Keystroke combinations shown with the plus symbol (+) indicate that you should press the first key and hold it while you press the next key. Do not type the + symbol. Courier italics Courier italic text indicates a variable field in command syntax. Substitute a value in place of the variable shown in Courier italics. Ellipses (...) Ellipsis points indicate that text has been omitted from an example. Example text Courier font indicates that the material shown is a code or syntax example. Italics Document titles are shown in italics. Mouse orientation This document provides examples and procedures using a right-handed mouse. If you use a left-handed mouse, adjust the procedures accordingly. Menu options Options in menus are shown in the following format: Menu name > Menu command > Extended menu command For example: File > Desktop > Accounts n, x The variable n indicates that you must supply a generic number; the variable x indicates that you must supply a generic letter.Hyperion Business Modeling Solutions Guide s ix
  • 10. PrefaceRelated Documentation Hyperion Solutions provides the following related documentation for this product: q The Hyperion® Business Modeling Installation Checklist provides a high-level list of tasks required to install Hyperion Business Modeling. The checklist also supplies information regarding additional templates that are shipped with Hyperion Business Modeling, and identifies other available product-related tools and documentation. q The Hyperion® Business Modeling New Features describes the new or enhanced features for this release. q The Hyperion® Business Modeling Model Builder’s Guide explains the features and options of Hyperion Business Modeling, and contains the concepts, processes, procedures, formats, tasks, and examples that you need to use the software to build a model or enterprise model. q The Hyperion® Business Modeling Results Analysis and Reports Guide discusses saving and analyzing reports, and contains an explanation of how to access calculated results and project information reports for models and enterprise models. q The Hyperion® Business Modeling Solutions Guide provides information about building models and using them to solve business issues and maximize profitability. The guide explains the Hyperion Business Modeling features and options, and contains case studies that implement the model building method, The Model Approach®. q The Hyperion® Business Modeling Hyperion Analyzer Views Guide explains how to view Hyperion® Business Modeling results using Hyperion® Analyzer. q Hyperion® Business Modeling Database Tables Reference is a reference guide for Database Administrators that describes the Hyperion Business Modeling database schema. All documentation for the software is available from the Hyperion Business Modeling Information Map. To access the Information Map, select Help > Information Map.x s Hyperion Business Modeling Solutions Guide
  • 11. PrefaceOnline Help The Hyperion Business Modeling Solutions Guide is available in an online PDF format, which can be used to view the guide online, or print the document, as outlined in the following procedures: q “Viewing the Online Guide” on page xi q “Printing the Online Guide” on page xiiiViewing the Online Guide The PDF version of the Hyperion Business Modeling Solutions Guide is available from the Information Map in the application. ➤ To display the online guide: 1. Select Help > Information Map from the main menu of the application. The Hyperion Business Modeling Information Map is displayed.Hyperion Business Modeling Solutions Guide s xi
  • 12. Preface 2. Double-click Solutions Guide. The online PDF version of the Solutions Guide is displayed. The cover of the online manual is displayed in the right frame, and a list of all topics and sub-topics is presented in the Bookmarks tab in the left frame. The PDF version is fully hyperlinked and indexed to make it easy to find and jump to related topics. 3. In the Bookmarks tab, click the topic that you want to view. The first page of the selected section displays in the right frame.xii s Hyperion Business Modeling Solutions Guide
  • 13. PrefacePrinting the Online Guide ➤ To print the guide or a range of pages: 1. Select Help > Information Map from the main menu of the application. The Hyperion Business Modeling Information Map is displayed. 2. Double-click Solutions Guide on the Information Map. The PDF version of the guide is displayed. 3. Select File > Print. The Print window displays. 4. Select your requirements for the print job, such as the portion of the document that you want to print, whether you want to print double-sided, and so on. 5. Click OK to submit the print job. Tip: Screen shots are a low resolution image type. If the printed screen shots are unreadable and you are using a non-PostScript printer, upgrade to an Acrobat 4.0 viewer. If you do not have Adobe Acrobat Reader, you can download the most current version free from Adobe’s Web site at www.adobe.com.Hyperion Business Modeling Solutions Guide s xiii
  • 14. PrefaceAdditional Support In addition to providing the documentation and online help, Hyperion offers the following support for product information.Documentation A complete set of documentation is included in PDF or HTML format, or in the form of online help as part of the installed product. For more information on how to order printed documentation, visit our Web site at http://www.hyperion.com, call Customer Service at 877-901-4975, or contact your local support office.Education Services Hyperion offers a variety of training options, including instructor-led training, custom training, and eTraining. This education covers all Hyperion applications and technologies and is geared to administrators, end users, and information systems (IS) professionals. Instructor-led training is delivered in formats and in locations suited to Hyperion’s diverse, global customers. Hyperion Authorized Training Centers are certified to deliver courses developed by Hyperion. Custom Education Services—training on the configured and tailored applications that employees use on the job—is another option to enhance user productivity and to ensure smooth day-to-day operations. eTraining—including computer-based training, Web-based training, and interactive Virtual Classroom training—provides a cost-effective means of giving users a hands-on introduction to product features and functions. Computer-based training (CBT) and Web-based training (WBT) provide high-quality, self-paced training at the user’s convenience, regardless of location. For more information about training, contact your Regional Education Manager or visit our Web site at http://www.hyperion.com to see a list of all training classes.xiv s Hyperion Business Modeling Solutions Guide
  • 15. PrefaceConsulting Services Hyperion Consulting Services assists customers in maximizing the use of, and the return on investment in, Hyperion products. Experienced Hyperion consultants and Hyperion Alliance Partners assist organizations in tailoring solutions to their particular requirements, such as reporting, analysis, modeling, and planning. Specific services include implementation consulting, custom business solutions, data integration, and technical consulting. Additionally, Hyperion offers a variety of Services Packages and Reviews. For more information about Consulting Services, Services Packages, and Reviews, as well as the services offered by Alliance Partners, contact your local consulting services representative or visit our Web site at http://www.hyperion.com to see a list of all Hyperion Alliance Partners.Technical Support Hyperion provides telephone and Web-based support to ensure that clients resolve product issues quickly and accurately. This support is available for all Hyperion products at no additional cost to clients with a current maintenance agreement. q For Hyperion Solutions Customer Service, call 877-901-4975. A complete list of all local Customer Service numbers is available on the Information Map under Contacts. q For Web-based support or to see complete information on available support options, visit our Web site at http://www.hyperion.com. When standard support does not meet specific requirements, a Hyperion support package that meets your needs can usually be designed. For more information, contact your local Customer Service office.Hyperion Business Modeling Solutions Guide s xv
  • 16. Prefacexvi s Hyperion Business Modeling Solutions Guide
  • 17. Chapter Introduction 1 This guide demonstrates how Hyperion® Business Modeling can provide solutions to the challenges facing your business. Realistic case studies illustrate and address contemporary business issues using activity-based management models. Each study gives the vital statistics used to build the model in the case and describes how the model is built using a proven, industry-tested methodology, The Model Approach® (TMA). The following sections introduce you to the Solutions Guide, describe how to use the guide to its fullest advantage, and what to expect from the case studies inside: q “What You Gain” on page 17 q “Before You Start” on page 18 q “Using the Case Studies” on page 18 q “The Case Studies” on page 19What You Gain At the end of a case study, you will understand the following concepts: q The typical business issues Hyperion Business Modeling can address q The kinds of solutions Hyperion Business Modeling can provide q The process of developing a model using Hyperion Business Modeling q The value of scenario-playing in planning the future of your business q The ability to apply the concepts of Economic Profit to the models that you createHyperion Business Modeling Solutions Guide s 17
  • 18. IntroductionBefore You Start Familiarity with some common business challenges will help you better understand the problems in the case studies and their solutions. q Business Issues Read Chapter 2, “Your Business Issues,” to grasp the kinds of situations that businesses are frequently forced to address, such as operational capacities, profitability, market growth, and cost control, to name a few. q The Model Approach® The Model Approach (TMA) is an eight-step methodology for constructing models using Hyperion Business Modeling. It shows you how to build effective models, use results to support decisions, and play scenarios using the program. For an introduction to TMA, see Chapter 3, “The Model Approach.”Using the Case Studies The case studies represent a subset of Hyperion Business Modeling’s capabilities. We encourage you to take your time to understand the details of the models, but an in-depth study of the data provided is not essential to understand the management value of the software. You will learn more from the case studies if you understand how the studies are organized. How the Case Studies are Organized Each case study is presented in the following sections: q Summary: Brief statements of the business issue and solution q Business Issue: A brief profile of the company and a description of its business challenges q Business Modeling Solution Result: A description of how activity-based costing located the real problem and how activity-based management found the solution q How the Solution was Developed: A detailed description of how the solution was found using TMA18 s Hyperion Business Modeling Solutions Guide
  • 19. Introduction 1 How to Use the Case Studies q Highlight the case study that most interests you and follow its story to see how the eight steps outlined by TMA are applied. q Using the software, play the scenarios described in the case study. It takes about 45 minutes to work through a case study. q Use the scenario tutorial to evaluate suggested management and operational strategies. Or, test some of your own.The Case Studies Each case study contains a company description, an issue, and a management resolution: Case Study Business Issue Description Manufacturing: Product Competition for one of OK Plastics’s OK Plastics Profitability product lines calls for a review of product and pricing mix. Service: Customer OK Service Bureau management OK Service Profitability wants to understand the effects of Bureau increased demand for its billing services and aggressive competition. Manufacturing: Economic Profit Management needs to evaluate the OK Plastics impact that purchasing new process technology will have on the organization.Hyperion Business Modeling Solutions Guide s 19
  • 20. Introduction20 s Hyperion Business Modeling Solutions Guide
  • 21. Chapter Your Business Issues 2 Hyperion Business Modeling can help you address important challenges faced by most industries today, such as: q “Managing Capacities and Constraints” on page 21 q “Measuring Customer and Product Profitability” on page 22 q “Controlling Costs” on page 22 q “Justifying Investment and Re-engineering” on page 23 q “Planning Process Improvements” on page 23 q “Introducing a New Product” on page 24 See “Where to Find the Case Studies” on page 24 to locate where each of the previous business issues are addressed in the case studies.Managing Capacities and Constraints To respond to increased demand, companies must know where their capacity limits exist, what the limits are, and options for improving capacity. Capacity planning helps managers foresee the need for replacing or improving their human and physical resources. It also helps them plan for outsourcing on a temporary or seasonal basis when internal improvements and expansion are not feasible. Using Hyperion Business Modeling, you can efficiently maximize revenues, avoid bottlenecks from increased workloads, and plan for demand variations.Hyperion Business Modeling Solutions Guide s 21
  • 22. Your Business IssuesMeasuring Customer and Product Profitability A large part of business success is knowing your customers and product lines. How profitable are they? Could they be more profitable? Knowing the answers enables you to manage your customers, products, and, as a result, your operations and your profits. As both a process modeling and costing application, Hyperion Business Modeling can: q Calculate customer and product revenues, costs, and profits from the activities and resources of your operation. q Identify process costs and cost drivers on activities that are associated with products and customers. q Make direct financial comparisons among customers or products, uncovering weak product lines or customers who cost more than they are worth to service. Hyperion Business Modeling can also model profitability by region, channel, and facility.Controlling Costs Effective cost control relies on knowing what your true costs are and what part of your business operation will be affected by resource and supply price increases. Modeling your business and testing cost initiatives can reveal savings in unexpected places. Hyperion Business Modeling lets you model your business and test cost strategies to support your cost control initiatives.22 s Hyperion Business Modeling Solutions Guide
  • 23. Your Business IssuesJustifying Investment and Re-engineering Managers must weigh the costs and benefits of increasing capital and staff before making the costly decision to proceed. Modeling the changes can help make that 2 decision. Similarly, modeling the changes makes Economic Profit (EP) analysis possible. Economic Profit (also known as Economic Value Add or EVA) accounts for the cost of capital for investment and the returns from that investment, thus amortizing the expense over the period of time in which the benefits are reaped. EP is also associated with shareholder wealth. If your business earns a rate of return higher than the cost of capital, the value of the company increases. You can use Hyperion Business Modeling to take a longer view of an investment, showing bottom-line impacts beyond the investment year. Applying economic profit formulas to existing models enables you to evaluate business decisions in terms of creating or keeping value for the company, based on the capital costs involved in implementing business strategies.Planning Process Improvements Activity-based management can uncover the hidden costs of two kinds of activities: q Those that do not add value to either the company or its customers q Those that could be carried out with greater efficiency Process improvement initiatives, performance innovations, and the introduction of new products and services can make companies more responsive to market demands and create the conditions for long-term growth and profitability. With Hyperion Business Modeling, you can develop and test multiple scenarios without risk. You can compare potential performance improvements and evaluate the operational and financial impact of various production and management strategies by making changes to: q The model’s data (for example, costs, revenues, capacities) q The model itself (for example, adding a resource)Hyperion Business Modeling Solutions Guide s 23
  • 24. Your Business IssuesIntroducing a New Product Hyperion Business Modeling can predict the ripple effect of introducing new products throughout an organization. A modestly profitable product might strain production capacities and inhibit expanding production of a more profitable product. Or it might, in fact, increase overall profitability by sharing more of the company’s overhead costs.Where to Find the Case Studies The check marks in the following table show which business issues are addressed in each of the case studies in this guide: Service: Manufacturing: OK Service Economic Profit: OK Plastics Bureau OK Plastics Business Issue Chapter 4 Chapter 5 Chapter 6 Managing Capacities and Constraints ✔ ✔ ✔ Measuring Customer and Product Profitability ✔ ✔ ✔ Controlling Costs ✔ ✔ Justifying Investment and Re-engineering (Economic ✔ ✔ Profit) Introducing a New Product ✔24 s Hyperion Business Modeling Solutions Guide
  • 25. Chapter The Model Approach 3 The Model Approach® (TMA) is an established eight-step process used to implement an activity-based management project. Successful activity-based management projects have been completed in manufacturing, service, finance, health care, and other sectors. The steps of the process are briefly described in this chapter: q “Step 1: Defining the Project Scope” on page 26 q “Step 2: Identifying Activities, Resources, and Measures” on page 26 q “Step 3: Developing the Schematic” on page 27 q “Step 4: Collecting Data and Rules” on page 28 q “Step 5: Building the Model” on page 29 q “Step 6: Validating the Results” on page 29 q “Step 7: Interpreting the New Activity-Based Information” on page 30 q “Step 8: Performing Activity-Based Management” on page 30Hyperion Business Modeling Solutions Guide s 25
  • 26. The Model ApproachStep 1: Defining the Project Scope Define the parameters of your project by identifying: q The area or areas of the organization to be modeled q The major services or products that this area provides (in other words, the demands) q The length of time and number of people needed to complete the projectStep 2: Identifying Activities, Resources, andMeasures To find out what processes and resources the organization uses to deliver services or products, this step requires you to conduct interviews and activity analysis to identify: q The major activities of the area or areas being studied q The resources needed to perform these activities q An appropriate unit to measure each activity and resource26 s Hyperion Business Modeling Solutions Guide
  • 27. The Model ApproachStep 3: Developing the Schematic You create a schematic or graphical representation of the activities and resources identified in Step 2. This schematic depicts and clarifies the relationships among the demands, activities, and resources of the project area. Schematic Symbols The schematic uses eight symbols (boxes and their connectors) to represent the 3 components of the area being studied. Supply Boxes These symbols represent supply of a variable resource (for example, raw materials). Resource Boxes Resource boxes represent resources that are consumed in fixed amounts within a time period. They may be resources whose costs are committed for the time period being modeled (such as a machine or a labor pool). Fixed resources have period costs associated with them. Activity Boxes These symbols represent activities performed to support the delivery of the area’s product or services (such as order processing, assembling products, supervising employees). Activities do not have costs associated with them. Route Boxes These symbols represent a choice of inputs to an activity or final outputs, such as a product or service. For example, you can choose regular or overtime labor hours to support an activity and decide how much of each you use.Hyperion Business Modeling Solutions Guide s 27
  • 28. The Model Approach Summary Boxes These symbols group activities and resources that are always used together. Inventory Boxes These symbols are used to carry items (and their costs) forward from one period to the next. For example, finished goods can be assembled in one period and sold in another period. Demand Boxes These symbols represent the outputs of the area of study. For example, producing a manufactured product, or providing an internal or external service. Connectors Although not modeling symbols, connectors are used to simplify the presentation of the schematic. A connector is used to show where a link (in other words, a relationship) exists between boxes in the schematic.Step 4: Collecting Data and Rules During this step, you gather the relevant operational and financial data. The schematic developed in Step 3 serves as the roadmap to identify the data required. Required data includes: q Demand volumes: The amount of output produced for the period of the model q Factors: For example, the amount of a resource that is required to generate a unit of activity q Capacities: The maximum units of output actually available from a resource for the time period of the model q Financial Data: Costs and/or revenues that are associated with a resource28 s Hyperion Business Modeling Solutions Guide
  • 29. The Model ApproachStep 5: Building the Model Using the schematic developed in Step 3 and the data collected in Step 4, you create a model that includes the following types of information: Type of Information Includes Project Information Model title Time period 3 Global Data Units of measure Variables Revenue and cost categories Boxes (graphical symbols) Name and Box ID (identifier) Unit of measure Operational and financial data as identified on the schematic The software confirms that the data used to define the model conforms to the rules of process model building. Once verified, the model can be used to produce operational and financial results.Step 6: Validating the Results After the model is verified for logical flow, the model must be validated for accuracy. Operational validation is done before financial validation, because the financial results are based on the operational flow. q Operational Validation: Operational results generated by the model reflect the historical experience of the project area for the period being modeled. q Financial Validation: After any operational inconsistencies in the model are corrected, total costs and revenue generated by the model are compared to the actual experience of the project area. Financial validation ensures consistency.Hyperion Business Modeling Solutions Guide s 29
  • 30. The Model ApproachStep 7: Interpreting the New Activity-BasedInformation The validated model provides new information about the project area. q New Operational Information: The model provides the utilization rates for resources. These rates help identify inefficiencies, bottlenecks, and idle capacity issues. q New Financial Information: You can use the model to cost products, services, or any activity in the project area. The results can reveal hidden losses and profits. q Improvement Opportunities: Combining financial and operational data enables you to identify non-value added activities and to prioritize areas for process improvement.Step 8: Performing Activity-Based Management After the model is verified and reviewed, you can use it to evaluate what-if scenarios. These scenarios let you evaluate different possibilities within the project area before implementing them. Typical uses of what-if scenario-playing include: q Preparing activity-based budgets q Evaluating opportunities for improving productivity and reducing costs q Identifying ways to improve customer, product, and channel profitabilities q Testing potential scenarios and evaluating their consequences30 s Hyperion Business Modeling Solutions Guide
  • 31. Chapter Product Profitability Case 4 Study OK Plastics Inc. took operational, financial, and marketing initiatives to reverse the sagging profitability of its three product lines. Using The Model Approach, the firm uncovered cost, revenue, and profit distortions created by its standard accounting system. OK Plastics introduced activity-based management techniques to target greater efficiencies, plan marketing strategies, and shift and expand existing resources. One scenario suggested a 240% increase in overall profitability, pointing the company to a more promising direction. The case study is broken down into the following sections: q “Business Issue” on page 32 q “Activity Based Management Solution Result” on page 33 q “How the Solution was Developed” on page 34 – “Step 1: Defining the Project Scope” on page 35 – “Step 2: Identifying Activities, Resources, and Measures” on page 35 – “Step 3: Developing the Schematic” on page 36 – “Step 4: Collecting Data and Rules” on page 42 – “Step 5: Building the Model” on page 51 – “Step 6: Validating the Results” on page 55 q “Activity-Based Cost Analysis” on page 60 – “Step 7: Interpreting New Information” on page 60 q “Activity-Based Management” on page 64 – “Step 8: Performing Activity-Based Management” on page 64Hyperion Business Modeling Solutions Guide s 31
  • 32. Product Profitability Case StudyBusiness Issue The OK Plastics company manufactures three lines of products: q Product A: High volume, simple products produced in large batches q Product B: Medium volume, more complex products q Product C: Low volume, small order, highly complex products OK Plastics has lost total market share. Product analysis reveals that stagnant growth among some products cannot compensate for the market share decline in others. In response to this problem, OK Plastics has ordered the following business studies for each of its product lines: q Marketing Analysis q Cost Analysis Marketing Analysis A summary of the Marketing Department’s report on the three product lines appears below: Product Line A q The market share for Product Line A dropped from 50% to 25% over a two-year period. A major competitor has consistently priced its comparable products 5% below the Product Line A equivalent. q Sales volumes for Product Line A will continue to decline unless a lower price can be offered. q Current product profitability analysis shows that the company cannot afford to drop the price for Product Line A. Product Line B q OK Plastics maintained a consistent market share of 15% over the past two years, experiencing only minor fluctuations in a relatively stable economy. q Not enough product cost data exists to make price changes.32 s Hyperion Business Modeling Solutions Guide
  • 33. Product Profitability Case Study Product Line C q A high profit margin in this product line gives OK Plastics room to increase sales volumes and market share through a 10% price discount. q One study suggests that the market is so elastic that such a price discount could double sales. Cost Analysis Using standard costing, the Accounting Department prepared a profitability analysis by product line using the current year’s data. Current Year Product Line A Product Line B Product Line C 4 Volume (000) pieces 1000 500 150 Selling price/piece $2.450 $3.550 $5.900 Total cost/piece $2.269 $3.163 $4.501 Income/piece $0.181 $0.387 $1.399 Total profit ($000) $181 $193 $209Activity Based Management Solution Result The activity-based management solution begins with determining the activity-based costs of OK Plastics and continues with a what-if scenario played in the OK Plastics model. These scenarios point the company in a more profitable direction. Activity-based Costing (ABC) Results The activity-based management project revealed that Product Line C was undercosted. Costs that should have been charged to Product Line C were, in fact, carried by the other product lines, making them appear less profitable than they really were. So, the pricing strategies suggested by the standard costing method seemed now irrelevant with more accurate costing methods.Hyperion Business Modeling Solutions Guide s 33
  • 34. Product Profitability Case Study The table below compares standard costs to activity-based costs (ABC) for all product lines: Current Year Product Line A Product Line B Product Line C Standard ABC Standard ABC Standard ABC Volume 1000 1000 500 500 150 150 Price/piece $2.450 $2.450 $3.550 $3.550 $5.900 $5.900 Cost/piece $2.269 $1.891 $3.163 $2.854 $4.501 $8.064 Income/piece $0.181 $0.559 $0.387 $0.696 $1.399 $-2.164 Total Profit $181.00 $559.48 $193.00 $348.13 $209.00 -$324.54How the Solution was Developed This section describes the journey taken by the activity-based management team using The Model Approach as its map. You will see how the solution unfolds from defining the project scope in step 1 to revealing new possibilities in step 8. Supporting The Model Approach The management in OK Plastics has given full support to a multi-disciplinary team assigned to develop an activity-based management model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology. Before starting the project, the team secured management’s commitment to providing project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully.34 s Hyperion Business Modeling Solutions Guide
  • 35. Product Profitability Case Study Step 1: Defining the Project Scope The OK Plastics’s activity-based management team performed the following tasks for Step 1 of The Model Approach: 1. Identify the areas of study. 2. Select the model time period. 3. Determine the project demands. 4. Identify the activities required to complete the project. 5. Identify available resources to assist in the project. 6. Establish the time frame to complete the project. 7. Find a reliable reporting mechanism for distributing and analyzing the results. 4 For this activity-based costing study, the project team decided to focus on the cost and profitability of the products produced by OK Plastics. Therefore, the three product lines became the model’s demands. The study decided that the model should take a macro view of the organization and include all the operations and resources of the company. The multi-functional team believes it can obtain meaningful results in six weeks. Step 2: Identifying Activities, Resources, and Measures The team identified the resources, associated activities, and units of measure required to deliver the services or products identified by the project scope. After interviewing the appropriate representatives from operations, the team identified the following activities, resources, and units of measure: Activities/Resources Unit of Measure Operators Operator Hours (OperHrs) Maintenance Mechanics Mechanic Hours (MechHrs) Supervision People (#People) Building (Occupancy Costs) Square Feet (SqFt) Molding Machines Machine Hours (MchHrs) Raw Materials (Resin & Additives) Thousand Pieces (Pcs [000])Hyperion Business Modeling Solutions Guide s 35
  • 36. Product Profitability Case Study Activities/Resources Unit of Measure Energy Megawatt Hours (MWh) Machine Supplies Machine Hours (MchHrs) Molding Process Machine Hours (MchHrs) Set Ups Setups (#Setups) Sales and Marketing Calls (#Calls) Order Processing Orders (#Orders) Computer Services Orders (#Orders) Advertising Ads (#Ads) Step 3: Developing the Schematic At this stage, the team prepared an operational schematic, a diagram which represents the interrelationships among an organization’s resources, activities, and demands. The following pages show the operational schematic developed for OK Plastics from the findings of Step 2. For the schematic containing all the model data up through Step 3, see “OK Plastics Schematic 1” on page 39. A description of how to interpret the model follows the schematic.36 s Hyperion Business Modeling Solutions Guide
  • 37. Product Profitability Case Study OK Plastics Schematic Box Definitions Each box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Plastics schematic to represent the demands, activities, and resources identified in Step 2: Demand Boxes Box ID Box Name Description DEMA Demand A Demand for product line A DEMB Demand B Demand for product line B DEMC Demand C Demand for product line C 4 Activity Boxes Box ID Box Name Description MLDPRO Molding Process Process of manufacturing pieces ORDPRO Order Processing Activities for processing orders SALMKT Sales & Marketing Activities for sales and marketing SETUP Setting up Activities to set up machinesHyperion Business Modeling Solutions Guide s 37
  • 38. Product Profitability Case Study Resource Boxes (Fixed) Box ID Box Name Description MAINMCH Maintenance People keeping machines in good repair Mechanics MCAP Machinery Capital Capital charges for machinery Charge MLDMC Molding Machines Machines for product manufacturing OCCY Occupancy OK Plastics’s building facility OPRL Operators People handling the machines ORDDEPT Order Processing Resources for processing orders Department SPVN Supervision All supervisors Supply Boxes (Variable) Box ID Box Name Description ADVT Advertising Advertising for product lines A, B, and C COMP Computer Computers used by order processing ENERGY Energy Energy to run the machines MTLA Material A Raw materials required for product lines A, B, and C MTLB Material B MTLC Material C OPEROT Operator Overtime Overtime hours performed by operators SUPL Machine Supplies Consumable supplies for the molding process38 s Hyperion Business Modeling Solutions Guide
  • 39. Product Profitability Case Study OK Plastics $ OCCY c= $ COMP Schematic 1 Sq #Orders $ c= $ MLDMC c= $ $ SALDEPT c= MCAP c= ORDDEPT Molding Machinery Sales & Order Machines Capital MchH MchH #Call #Orders MLD MCA $ SALMKT c= $ $ ORDPRO c= Sales & $ Order $ #Call #Orders SPVN c= SLM Supervision ORDP $ c= OPEROT #Peop Operator Oper c= $ $ MAINMC c= ENERGY $ OPRL Operators H Energy MWh 4 MechHrs ENER Oper $ c= OPERCH $ ADVT SUPL Operator Choice Machine Advertising Oper #Ads Mch MLD ENER MLD ENER ADV MLDPRO SETUP Molding Mch #Set MLDP SET $ MTLA $ $ MTLB MTLC Pcs(000) Pcs(000) Pcs(000) MLDPRO SETUP SLMKTORDPROADVT SLMKT ADVT MLDP SETUP SLMKT ORDPRO ADVT MLDP SET ORDPRO PRSA SASA PRSB PRSC SASC SASB Production Sales & Admin Production Sales & Admin Production Sales & Admin $ v= v= $ v= DEMA $ DEMC DEMBHyperion Business Modeling Solutions Guide s 39
  • 40. Product Profitability Case Study Interpreting the OK Plastics Schematic Since the requirements for activities are demand driven, the operational results of the OK Plastics model will be calculated using a bottom-up approach. The schematic illustrates the relationships among the resources and activities required to support the production of, for example, Product Line A. At the bottom of the schematic, you find the symbol for Demand A (DEMA) which represents the total of all activities and resources required for the production of Product Line A. Follow the flow upwards, as detailed on the following table. The logic of the model reflects the logic of OK Plastics’s operations. Activities and resources are involved in the creation of products. As you move up through the schematic, you see how the activities and resources draw from others in the organization. Follow the Flow Upwards Box Requires Box ID Demand A (DEMA) Production Support PRSA Sales & Administration SASA Production Summary A Molding Processing MLDPRO (PRSA) Raw Material: Product Line A MTLA Setting up activities SETUP Machinery Capital Charges MCAP Sales & Administration Sales & Marketing SALMKT (SASA) Order Processing ORDPRO Advertising ADVT Molding Process (MLDPRO) Machine Supplies SUPL Molding Machine MLDMC Energy ENERGY Operator Choice OPERCH Maintenance Mechanic MAINMCH Setting up (SETUP) Maintenance Mechanics MAINMCH Energy ENERGY Molding Machine MLDMC Operators (OPRL) Supervision SPVN40 s Hyperion Business Modeling Solutions Guide
  • 41. Product Profitability Case Study Follow the Flow Upwards (cont’d) Box Requires Box ID Mechanics (MAINMCH) Supervision SPVN Order Processing (ORDPRO) Order Processing Department ORDDEPT Molding Machines Building space OCCY (MLDMC) Sales & Marketing Sales & Marketing Department SALDEPT (SALMKT) The schematic can be used similarly to describe the activities and resources required to support product lines B and C. 4Hyperion Business Modeling Solutions Guide s 41
  • 42. Product Profitability Case Study Step 4: Collecting Data and Rules The team gathered the relevant operational and financial data needed to complete the model. Through a process of interviews with OK Plastics staff, the team gathered data on the processes and activities. It is summarized in the following statements: Report Content OK Plastics Income An income statement for the current year Statement Operational and Detailed information about each product line Financial Data Costs of Services and Costs of internal and external variable supplies Consumables Resource Availability Resource availability and utilization for the current year and Utilization Variable Data A description of the variables used in the model Financial Accounts A list of all revenue and cost categories used in the model. Fixed Resource Costs Resource financial, volume, and unit data Occupancy Data Square footage use of building by resource Note: Not all data items in the model are contained in the above tables.42 s Hyperion Business Modeling Solutions Guide
  • 43. Product Profitability Case Study OK Plastics Income Statement Revenue Sales of Product Line A $2,450 Sales of Product Line B 1,775 Sales of Product Line C 885 Total Revenue $5110 Cost of Sales Raw Materials $1,865 Operators 690 4 Shared Production Costs Maintenance Mechanics $60 Supervision 90 Machine Depreciation 390 Production Overhead 669 $3764 Gross Margin $1,346 Selling & Administration Expenses Sales & Marketing $190 Office Salaries 120 Rent & Insurance 270 Advertising 85 Computer Costs 73 Other Expenses 25 Total SG & A $763 Income Before Taxes $583Hyperion Business Modeling Solutions Guide s 43
  • 44. Product Profitability Case Study Operational and Financial Data These spreadsheets contain detailed operational and financial data gathered by the company for each member of the three product lines. Each product line consists of several different products of varying units and resource requirements. A summary of the data to be used for each of the product lines in the activity-based costing model appears below: Table 1: Product Analysis Detail for Product A Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders A110 500 1181 499 8970 950 5 15 A120 200 498 210 3635 394 4 8 A130 120 304 131 2189 252 3 7 A140 80 204 92 1476 172 4 8 A150 50 129 59 950 115 5 6 A160 50 134 59 881 117 4 6 Total A 1000 2450 1050 18200 2000 25 50 Unit A 2.45 1.05 18.20 2.00 .025 .050 Table 2: Product Analysis Detail for Product B Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders B201 100 331 112 3033 330 5 16 B202 70 242 79 2174 238 4 12 B203 50 174 57 1560 173 3 10 B204 50 175 58 1565 175 6 8 B205 40 142 46 1256 140 6 6 B206 40 144 46 1264 140 6 7 B207 30 110 35 948 108 7 844 s Hyperion Business Modeling Solutions Guide
  • 45. Product Profitability Case Study Table 2: Product Analysis Detail for Product B (cont’d) Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders B208 30 113 35 959 110 6 6 B209 25 94 30 806 93 6 6 B210 25 96 30 817 93 7 7 B211 20 77 24 699 76 7 7 B212 20 78 24 720 76 7 7 Total B 500 1775 575 15800 1750 70 100 4 Unit B 3.55 1.15 31.6 3.50 .140 .20 Table 3: Product Analysis Detail for Product C Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders C301 23 122 35 938 104 5 18 C302 16 86 25 660 74 4 12 C303 12 68 19 501 56 3 15 C304 10 57 16 423 47 4 14 C305 8 47 13 342 38 6 13 C306 7 42 11 302 34 6 15 C307 7 42 11 302 34 5 16 C308 7 43 11 303 34 6 13 C309 6 36 10 259 29 6 14 C310 6 38 10 259 29 5 17 C311 6 38 10 259 29 5 15 C312 5 31 8 219 25 5 11 C313 5 32 8 221 25 4 12 C314 5 32 8 226 25 3 14Hyperion Business Modeling Solutions Guide s 45
  • 46. Product Profitability Case Study Table 3: Product Analysis Detail for Product C (cont’d) Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders C315 5 32 8 229 25 4 12 C316 4 26 7 183 20 3 11 C317 4 26 7 183 20 6 8 C318 4 26 7 184 21 4 12 C319 3 19 5 138 16 6 10 C320 2 13 4 91 11 7 8 C321 1 6 2 47 5 6 6 C322 1 6 2 47 5 6 10 C323 1 6 2 48 6 7 7 C324 1 6 2 49 6 7 8 C325 1 5 2 49 6 7 9 Total C 150 885 240 6460 720 130 300 Unit C 5.90 1.60 43.07 4.80 0.867 2.0 Table 4: Product Analysis Detail for All Products Sales Sales Material Product Units Revenue Costs Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders Total 1650 5110 1865 40460 4470 225 45046 s Hyperion Business Modeling Solutions Guide
  • 47. Product Profitability Case Study Costs of Services and Consumables The team also collected the following on internal and external costs: Service Cost Advertising $8.5 per advertisement Computers $0.05 per order Energy $0.0048 per megawatt hour (MWh) Machine Supplies $0.025 per machine hour Material C $1.60 per Product Line C piece Material A $1.05 per Product Line A piece 4 Material B $1.15 per Product Line B piece Resource Availability and Utilization Max. Used Last Resource Availability/Year Year Utilization% Maintenance Mechanics 3200 hours 2876.3 90 Molding Machines 5928 hours 5595.25 94 Occupancy 100,000 sq. ft. 100,000 100 Operators 45,000 hours 40,460 89 Occupancy Data Occupancy Square Feet Molding Machines 60,000 Sales and Marketing 15,000 Order Processing 25,000 Total 100,000Hyperion Business Modeling Solutions Guide s 47
  • 48. Product Profitability Case Study Financial Accounts Number Name Number Name 10 Revenue from Product A 600 Occupancy Costs 20 Revenue from Product B 610 Rent & Insurance 30 Revenue from Product C 700 Selling/Administration Expense 100 Cost of Sales 710 Order Processing Salaries 101 Raw Materials 720 Sales/Marketing Salaries 102 Operators 725 Office Supplies Costs 500 Shared Production Costs 750 Computer Costs 510 Maintenance Mechanics 760 Advertising 520 Supervision 790 Other Expenses 550 Machine Depreciation 560 Machine Supplies 570 Energy48 s Hyperion Business Modeling Solutions Guide
  • 49. Product Profitability Case Study Fixed Resource Costs The financial value is the user-assigned value, multiplied by the appropriate variable. Financial Resource Financial Category Value Variable Maintenance Maintenance Mechanics $30.00 #mnt Mechanics Salaries Molding Machines Machine Depreciation $130.00 #mch Occupancy Rent and Insurance $675.00 Operators Operator Salaries $22.30 #opr 4 Order Processing Computer Costs $50.50 Order Processing Salaries $24.00 #ord Other Expenses $5.00 #ord Sales & Marketing Sales & Marketing Salaries $23.75 #sal Supervision Supervisor Salaries $45.00 #spv Variable Data To make the model more flexible, some of the data collected is defined in the model as variables. For another operator, you change the variable. Variable Represents Value efmc Machine efficiency rate 0.95 #mch Number of machines 3 #mnt Number of maintenance staff 2 #opr Number of operators 30 #ord Number of order processors 5 #sal Number of sales people 8 #sft Number of shifts 1 #spv Number of supervisors 2Hyperion Business Modeling Solutions Guide s 49
  • 50. Product Profitability Case Study 610 $675 c= 750 $.05 OK Plastics OCCY Occupancy COMP Computer Schematic 2 SqFt #Order cf= 550 cf=60,000$f(130*mch) 702 23.75*#sal SALDEPT 710 $ƒ(24*#ord) MLDMC c=f 2080*#mch MCAP Sales & Molding *#sft*efmc Machinery Marketing 750 $50.5 ORDDEPT Machines Capital 790 $ƒ(5*#ord) Order MchHrs #Calls Processing MchHrs cf=15,000 #Order MCAP MLDM c=ƒ(110*#o 720 $ƒ(23.75*#sal) SLMKT c=ƒ(250*#sal) Sales & Marketing ORDPRO 520 $ƒ(45*#spv) Order Processing SPVN c=ƒ(20*#spv) #Calls Supervision SLMK #Orders $ c= ORDPRO OPEROT #People Operator OperHrs cf=ƒ(1*#opr) 510 $ƒ(30*#mnt) c=ƒ(1600*#mnt) 102 MAINMCH $ƒ(23*#opr) OPRL Maintenance c=ƒ(1500*#opr) Mechanics Operators MechHrs ENERGY OperHrs 570 $.0048 Energy f=9 560 MWh$.025 OPERCH ENERGY SUPL Operator Choice Machine OperHr MchHr MLDMC ENERGY ENERGY 760 $8.5 ADVT MLDMC f=.14 f=10 f=5 f=15.75 Advertising f=6.3 #Ads MLDPRO SETUP ADVT Molding Process Setting up MchHr #Setups MLDPRO SETUP 101 $1.15 101 $1.6101 $1.05 MTLA MTLB MTLC Material A Material B Material C Pcs(000) Pcs(000) Pcs(000) ORDPRO ORDPRO ORDPROMLDPRO MCAP SETUP SLMKT ADVT MLDPRO MCAP MLDPRO MCAP SETUP SLMKT SETUP SLMKT ADVT ADVT f=4.8 f=.1 f=.867 f=10 f=2 cf=8 PRSA SASA PRSB PRSC SASC Production Sales & Admin SASB Production Sales & Admin Production Sales & Admin Summary A Summary A Summary B Summary C Summary C Summary B 10 ƒ $2.45 20 ƒ $3.55 30 ƒ $5.9 DEMA DEMC Demand A DEMB v=1000 pcs (000) Demand B v=500 pcs (000) Demand Cv=150 pcs (000)50 s Hyperion Business Modeling Solutions Guide
  • 51. Product Profitability Case Study Step 5: Building the Model The team created a computer-based model using the schematic from Step 3 and the data collected in Step 4. The operational values and financial amounts have been applied to the boxes in Schematic 2, including factors, capacities, financial categories, and so on. This section reviews some of the components in the pre-calculated OK Plastics model as built by the activity-based management team. The next three TMA steps discuss the model results. OK Plastics Product Profitability Model If you have not done so, install and start the Hyperion Business Modeling software. 4 ➤ To open the OK Plastics Product Profitability Model: 1. Click Project > Open to display the Open Project dialog. 2. Ensure the Local Storage Area folder is selected in the Containers frame, and double-click okplastics. The OK Plastics Product Profitability model opens. Workspace Toolbar Tabs Project Window Display Window: Schematic and Detail views Edit WindowHyperion Business Modeling Solutions Guide s 51
  • 52. Product Profitability Case Study Following is a description of the model details in the workspace areas: q The Projects & Time tab contains the model name, time period, and any saved scenarios. The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, details for a selected box are displayed, including: q Box ID q Box Type and Name q Unit of Measure Depending on the type of box you selected, you can scroll to view some of the following frames that might also be available: q Capacity q Financial category data q Input and output links q Volume q Route policy q Notes q Tags The Hyperion Business Modeling Model Builder’s Guide contains information about global data, and model components. q The Global Data tab in the Project window shows all the Units of Measure, Financial Categories, and Variables used in the model. q The Display window contains a high-level, or schematic, view of the model and a box level Detail view. A third tab offers the Flow View for a selected box. q In the Schematic view, you create the model by adding boxes and building links between them. q The Toolbar contains buttons to calculate the model, save changes, open existing models, and create new ones. q From the Toolbar, you can select the EP View button or the Regular View button to toggle between the two views.52 s Hyperion Business Modeling Solutions Guide
  • 53. Product Profitability Case Study q On the right side of the Toolbar, you can navigate to report, results and print workspaces: q The Reports tab opens a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model. q The Results tab opens a workspace where you can create model results tables. You can display cost, net cost, net profit, and utilization results by box type and specific boxes. Note: The Results button is activated only after you have calculated the model. q The Print tab takes you to a workspace where you can print single and multiple copies of your model data and results. 4 Reviewing a Resource Box A resource box shows the kinds of data used to create a model using Hyperion Business Modeling. ➤ To review a resource box: 1. From the Model workspace, select the Detail tab to view individual boxes and the data associated with them.Hyperion Business Modeling Solutions Guide s 53
  • 54. Product Profitability Case Study 2. Click the Operators (OPRL) resource box in the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines. The following characteristics can be viewed on the Operators resource box: q The input link from the SPVN box shows that the supervisors manage 30 operators. q Operators’ hours pass to the Operator Choice (OPERCH). q Operators’ wages are determined by the Financial Category, 102 Operators. To see the breakdown of the financial total, wages formula, click the Financial Total button. To see the wages formula, click the Formula button in the Financial pane of the Edit window. Wages are calculated by the number of operators (#opr) multiplied by $22.30. q The Capacity label on the right side of the box shows a total Operators capacity of 45000 hours. When the model is calculated, the value for A= represents the actual number of hours used; the value for U= represents the utilization percentage of the total capacity.54 s Hyperion Business Modeling Solutions Guide
  • 55. Product Profitability Case Study Reviewing a Demand Box ➤ To review a demand box: 1. From the Model workspace, select the Detail tab to view individual boxes and the data associated with them. 2. Click DEMA in the Building Blocks tab under demand box types. 4 The following characteristics can be viewed on this demand box: q It has two input links (SASA and PRSA), and no output links. (Demand boxes can have more than one input link, but never an output link.) q The volume of demand (1000) is displayed within the graphic symbol. q The unit of measure used for this box (Pcs[000]) is displayed beside the volume value. q The Financial Total ($2.45) is displayed on the left side of the symbol. Step 6: Validating the Results The activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modeled.Hyperion Business Modeling Solutions Guide s 55
  • 56. Product Profitability Case Study The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4. Operational Validation Before validating the figures, the team verified and calculated the model. ➤ To validate operational data in the OK Plastics model: 1. Ensure okplastics.md is open. 2. On the toolbar, click the Verify button , if your model is unverified. A dialog tells you that you have successfully verified the model. 3. On the toolbar, click the Calculate button . The Calculation indicator appears. When it disappears, the model has been successfully calculated. 4. Select the Detail tab for DEMA to see the results available in the Detail view. The flow from SASA and PRSA is 1,000,000 pieces (displayed as 1,000 Pcs(000)). 5. Click the Results workspace tab. 6. From the Results drop-down list, select % Utilization. All the utilization levels for the model’s resources with a defined capacity are displayed. 7. Compare the utilization level for Molding Machines calculated by the OK Plastics model and the level from “Resource Availability and Utilization” on page 47. The levels for both are 94%. Other operational comparisons:56 s Hyperion Business Modeling Solutions Guide
  • 57. Product Profitability Case Study – Occupancy is fully utilized – Maintenance mechanics are both 90% utilized – Operators are 87% (from report) to 89% (from model results) utilized Using other reports and results workspace data, the project team compared other operational results generated by the model to the company’s historic results. It found that the model’s results accurately reflected company experience. 4Hyperion Business Modeling Solutions Guide s 57
  • 58. Product Profitability Case Study Financial Validation With full confidence in the operational data generated by Hyperion Business Modeling, the project team compared standard financial data with the data generated by the model. The team looked at the model’s financial reports and compared their results to the standard costing figures. ➤ To generate a profit and loss financial report: 1. From the toolbar, select the Reports workspace tab in either the Results or Model workspace. The Reports workspace is displayed. 2. From the first drop-down list, choose Calculated Results. 3. From the Type drop-down list, choose Model Report. 4. From the Report drop-down list, choose Flows and Financials - by category.58 s Hyperion Business Modeling Solutions Guide
  • 59. Product Profitability Case Study 5. Click the Generate Report toolbar button . In the Display window, the report shows costs and revenues by financial category and overall net income. 4Hyperion Business Modeling Solutions Guide s 59
  • 60. Product Profitability Case Study 6. Compare the financial results from the model to the data collected in Step 4. – The total revenue of the three product lines is $5,110,000. – The cost for raw materials is $1,865,000 and operators is $690,000. – The total net profit for OK Plastics is $583,060. The model’s results match the financial experience as shown in the income statement. For further information, see “OK Plastics Income Statement” on page 43. 7. Select the Model workspace tab to return to the Model workspace.Activity-Based Cost Analysis When the project team validated the operational and financial results of the OK Plastics model with the standard costing results, they could confidently interpret the new information. Step 7: Interpreting New Information In this step, the team used Hyperion Business Modeling to obtain a better understanding of the organization’s operational and financial performance. The project team decided to look at the company’s least profitable product line first. Note: Before you follow the team’s procedures, make sure that you have the OK Plastics model open and calculated, as outlined in “OK Plastics Product Profitability Model” on page 51. ➤ To examine cost and operational requirements for Product Line A: 1. From the Model workspace, select the Building Blocks tab in the Project window. 2. Scroll to the Demand boxes and click DEMA Demand A.60 s Hyperion Business Modeling Solutions Guide
  • 61. Product Profitability Case Study 3. Select the Detail tab in the Display window. 4 The Detail view presents new information summarizing cost and operational requirements for the support of Product A. From this view, the OK Plastics team discovered that: – The total cost to produce 1000 (000) pieces of Product A this year was $1,890,522. – Machine and material costs accounted for about $1,822,869 of the total. – Sales and administration costs accounted for about $67,652 of the total. – The average cost to produce one Product Line A piece was $1.89. The team was surprised by the average cost of Product Line A. The standard per unit cost was much higher at $2.269. (See “Cost Analysis” on page 33.) The $0.37 difference per piece signalled to the team that with operational and financial results properly validated between the standard costing reports and activity-based costing model, there must be other significant differences in costs, revenues, and net profits among all three product lines. ➤ To examine the costs, revenues, and net profits for all product lines: 1. Select any Demand box.Hyperion Business Modeling Solutions Guide s 61
  • 62. Product Profitability Case Study 2. Click the Results workspace tab. The Results workspace opens. The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Net Profit for each Demand type. Again, the net profit of each of the product lines is noticeably different from the company’s standard calculations. (See “Cost Analysis” on page 33.) The project team observed the following: q Product Line C was seen as the Division’s most profitable family of products ($209,000), but activity-based costing shows that it, in fact, generates a loss of $324,540. q Product Line A was perceived as the least profitable ($181,000), but Hyperion Business Modeling revealed it is a profit leader at $559,480. q Product Line B was always considered profitable at $193,000, but it contributes $348,130 to OK Plastics’s bottom line—much more than previously thought.62 s Hyperion Business Modeling Solutions Guide
  • 63. Product Profitability Case Study Other Situations to Analyze Try analyzing the model yourself. As you go, you will delve more deeply into the OK Plastics model. Answers to the questions below informed the project team’s activity-based management decisions. q In the Results workspace, view the following results: – Results: Flow - Costs – Type: Demand – Box: All What do you notice about per unit costs for each of the Product Lines? How do they compare to the standard costing? (See “Cost Analysis” on page 33.) 4 q The per unit cost of the Molding Process or Setup activities are calculated by dividing the total cost of the activity ($1,670.70) by the total outflow ($4,470.00) to calculate the per unit cost of $0.37. This figure is the same for Summary boxes PRSA, PRSB, and PRSC, as shown in the Detail view of these boxes. If the per unit cost of the activities Molding Process and Setup are the same, why are the per unit costs of the demands so different? What elements in the model account for such differences? q Generate the following report of Calculated Results: – Type: Box Report – Report: Flows and Financials - by Resource – Type: Demand – Boxes: All How much, for example, does Operator time cost for each unit of Product Lines A, B, and C? (Product Line Operator Cost / Volume = Operator Cost Per Unit.)Hyperion Business Modeling Solutions Guide s 63
  • 64. Product Profitability Case StudyActivity-Based Management The final step in The Model Approach is where you begin to manage the success of your organization by testing business strategies. Step 8: Performing Activity-Based Management The project team used Hyperion Business Modeling to evaluate the financial and operational impact that a proposed change has on the organization. Finding a Solution to Product Profitability The Model Approach leads naturally to finding management solutions to OK Plastics’s product profitability issues. Because Hyperion Business Modeling examines how the entire organization is involved with creating products/services or serving customers and channels, the OK Plastics activity-based management team has a wide scope for introducing improvements to OK Plastics. The project team has taken initiatives in the following areas: q Marketing q Operations q Purchasing You must first create a new scenario, as described in the following procedure. Note: The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with the okplastics.md model open.64 s Hyperion Business Modeling Solutions Guide
  • 65. Product Profitability Case Study ➤ To create a new scenario: 1. From the Projects & Time tab in the Model workspace, click Scenarios. 2. In the Edit window, click New. The New Scenario dialog opens. 4 3. Type Scenario 2 in the Scenario Title text box. 4. Ensure the Annual check box is selected in the Periods text box. 5. Click Create. Scenario 2 is created and loaded.Hyperion Business Modeling Solutions Guide s 65
  • 66. Product Profitability Case Study Marketing Many of OK Plastics’s problems could be traced to marketing. So, the team took the following direction from the Marketing Department to revive the three product lines: q Product Line A: Sales volumes could double with a lower price of $2.25. To support the lower price, marketing increased the number of advertisements. q Product Line B: Sales volumes could increase from 500,000 to 575,000 pieces with a ten cent per piece price decrease to $3.45. Marketing decided to support the price decrease with more advertising. q Product Line C: The money-losing price of $5.90 per piece could rise to $6.50 to cause a relatively small drop in sales volumes to 125,000. Marketing then could shift advertising priorities to Product Lines A and B. ➤ To implement volume and price changes to the product lines: 1. In the Project window of the Model workspace, click the Building Blocks tab and click demand box, DEMA. 2. In the Edit window, click in the Volume text box and type 2000. 3. In the Financial pane, click the expand pane button to see the financial categories associated with the box. 4. Click in the Value field and type 2.25 for Category 10. 5. Click Update. 6. Repeat Steps 1 to 5, making the following changes to Product Lines B (DEMB) and C (DEMC): q Product Line B: Volume: 575; Financial Data: 3.45 for Category 20 q Product Line C: Volume 125; Financial Data: 6.50 for Category 3066 s Hyperion Business Modeling Solutions Guide
  • 67. Product Profitability Case Study ➤ To implement the new advertising strategy: 1. In the Project window of the Model workspace, select the Building Blocks tab and click Summary Box, SASA Sales & Administration Summary A. 2. In the Input Links pane, click the expand pane button to see the input links for SASA. The input links and their data are displayed. 4 3. Select the table row for the ADVT link, then click the Factor text box. 4. Replace the current factor value of 1.0 with 5. 5. Click Update. 6. Repeat Steps 1 to 5 to change the Advertising Input Link factor for each of the following Summary Boxes: q In SASB, change ADVT Input Link to 3. q In SASC, change ADVT Input Link to 2. 7. Verify the scenario. 8. To calculate the model, click the Calculate button . Note the following broken constraints:Hyperion Business Modeling Solutions Guide s 67
  • 68. Product Profitability Case Study They tell you that the higher production volumes of the three product lines cause parts of the operation to exceed their capacities. 9. Go to the next section to make the necessary operations changes for the new volumes of Product Lines A, B, and C. Operations Rethinking the processes by which OK Plastics creates its products resulted in the following operational improvements: q Run another shift on Molding Machines. q Add another shift of operators: 10 operators required. q Add supervision for the increased operator requirement. q Halve machine setups for Product A from 0.025 to 0.0125. q Improve setup processes so that: – Molding Machines hours are reduced from 5 to 4 per setup. – Maintenance Mechanics spend 8 hours rather than 10 per setup.68 s Hyperion Business Modeling Solutions Guide
  • 69. Product Profitability Case Study ➤ To run another shift using one of the three Molding Machines: 1. In the Project window of the Model workspace, select the Global Data tab. 2. Click to expand the Global Data items. 4 3. Expand the Variables list and click #sft Number of shifts. 4. In the Edit window, replace 1 with 1.33 in the Values sub-pane to show that one of the three machines will run an extra shift. 5. Click Update. ➤ To add another operator shift: 1. While you are still in the Variables list of the Global Data tab, click #opr Number of operators. 2. In the Values sub-pane of the Edit window, change the 30 to 40 to represent an additional shift. 3. Click Update. ➤ To add supervision for increased operator requirement: 1. Click the EP View button to display the EP View of the scenario. Note: This step is required for this example only because the formulas contain EP components that cannot be modified in Regular View. For additional information on Economic Profit, see Chapter 6 in this guide. If you are creating your own model in regular view, you can skip this step and continue with step 5.Hyperion Business Modeling Solutions Guide s 69
  • 70. Product Profitability Case Study 2. In the Building Blocks tab of the Project window, click resource box, SPVN Supervision. 3. Click the expand pane button in the Financial pane of the Edit window. The Financial categories list is displayed. 4. In the Building Blocks tab of the Project window, click resource box, SPVN Supervision. 5. In the Financial pane, click the Formula button for category 520, then select Edit. The Edit Formula dialog is displayed. 6. In the Formula text box, change 45.0 to 60.0. 7. Click Update to close the Edit Formula dialog. 8. Click Update in the Edit pane. 9. Click the Regular View button on the toolbar to return to the Regular View of the scenario. Supervisors manage 20 employees each. However, the 40 operators and the 2 maintenance mechanics mean that supervisors will need to supervise another employee. ➤ To increase supervision capacity: 1. While you are still in SPVN Supervision, click the Formula button in the Capacity pane of the Edit window. 2. Click Edit. The Edit Formula dialog displays. 3. In the Edit Formula dialog, change the 20.0 to 21.0. 4. Click Update to update the formula. 5. Click Update to accept all the changes for SPVN Supervision. Next, you will make setup improvements.70 s Hyperion Business Modeling Solutions Guide
  • 71. Product Profitability Case Study ➤ To reduce setups on Production Summary A: 1. In the Building Blocks tab in the Project window, click Summary Box PRSA Production Summary A. 2. In the Input Links pane, click the expand pane button to see the input links for PRSA. 4 3. Click Factor for the SETUP Setting Up link from 0.025 to .0125. 4. Click Update. ➤ To improve setup processes for Maintenance Mechanics and Molding Machines: 1. In the Building Blocks tab of the Project window, click the Activity Box SETUP Setting up. 2. In the Input Links pane, click the expand pane button to see the input links. 3. Click the Factor text box in the table row for the MAINMCH link. 4. Replace the current factor value of 10.0 with 8.0. 5. Click Update.Hyperion Business Modeling Solutions Guide s 71
  • 72. Product Profitability Case Study 6. In the Input Links pane, replace the current MLDMC factor value of 5.0 with 4.0. 7. Click Update. Purchasing The Purchasing Department negotiated a volume discount for raw materials for Product Line A based on the higher volume. The new price reduces Material A to $1.00. ➤ To change the per unit price of Material A: 1. In the Building Blocks tab in the Project window, click Supply Box MTLA Material A. 2. In the Edit window, click the expand pane button of the Financial pane to see the financial categories associated with MTLA. 3. In the Value text box of the 101 Raw Material sub-pane, change the value to 1.00. 4. Click Update.72 s Hyperion Business Modeling Solutions Guide
  • 73. Product Profitability Case Study Calculating the Scenario After the team introduces changes to the model data to reflect operational, marketing, and purchasing initiatives, they can see the effects on the model and, by extension, their own division. ➤ To calculate the scenario, click the Calculate button to see the results of the changes. Note the following new figures: 4 The new net profit of $1,391,740 is significantly higher than the activity-based costing result of the current operations. Even if the organization did not adopt all the changes recommended by the activity-based management team, it does point OK Plastics in a more profitable direction. Note: This scenario has already been built and saved under the name Marketing Projections. To double-check your results, open and compare Marketing Projections to Scenario 2. Next Steps Try your own activity-based management scenarios. What improvements could you make to the OK Plastics model to make the division a more efficient and profitable organization?Hyperion Business Modeling Solutions Guide s 73
  • 74. Product Profitability Case Study74 s Hyperion Business Modeling Solutions Guide
  • 75. Chapter Customer Profitability Case 5 Study As a result of rising internal costs and increased competition, OK Service Bureau reevaluated costing methods and pricing for billing services. A key priority was to respond to the competition’s uniform pricing strategy. The resulting activity-based management study showed that a profitable account type was—according to activity-based costing—serviced at a loss while another generated a higher profit than had been thought. This led to other discoveries about the future of OK Service Bureau in a more competitive market and found areas for cost efficiencies and, finally, higher profits. The case study is broken down into the following sections: q “Business Issue” on page 76 q “ABM Solution Result” on page 78 q “How the Solution was Developed” on page 80 – “Step 1: Defining the Project Scope” on page 81 – “Step 2: Identifying Activities, Resources, and Measures” on page 81 – “Step 3: Developing the Schematic” on page 82 – “Step 4: Collecting Data and Rules” on page 87 – “Step 5: Building the Model” on page 95 – “Step 6: Validating the Results” on page 101 q “Activity-Based Cost Analysis” on page 105 – “Step 7: Interpreting New Information” on page 105 q “Activity-Based Management” on page 111 – “Step 8: Performing Activity-Based Management” on page 111Hyperion Business Modeling Solutions Guide s 75
  • 76. Customer Profitability Case StudyBusiness Issue OK Service Bureau provides clients with customer account inquiry services and bill printing from a central facility. Accounts are classified according to the following customer types: q Residential: a high volume of accounts currently at 120,000; residential accounts require simple bills with one pricing plan. q Commercial: a low volume of accounts currently at 20,000; commercial accounts require complex bills with multiple pricing plans. Within each customer type, only minor differences are found among the administrative procedures that serve clients. The company invoices all accounts monthly, distributing the invoicing cycle evenly throughout the month. Larger competitors set their sights on OK Service Bureau’s core business: providing billing services to local companies. The competition’s main strategy is to use aggressive pricing to gain entry into the existing market and to capitalize on future opportunities. In response to the competitive challenge, management launched three analyses: q Market Conditions q Current Costs q Profit/Loss Projection The Profit/Loss Projection is based on the data provided by the Marketing Department and Current Cost analysis.76 s Hyperion Business Modeling Solutions Guide
  • 77. Customer Profitability Case Study Market Conditions After a careful study, Marketing reported OK Service Bureau’s prospects for new business and warned of potential market threats. In summary, the report stated the following: q Through an acquisition, a current customer has acquired an additional 53,000 residential customers and 2,000 commercial accounts. By next month, OK Service Bureau will be billing the following numbers overall: – Residential Accounts: 173,000 – Commercial Accounts: 22,000 q The increased business will be accompanied by the following competitive environment: Rivals are offering similar services for $4.20 regardless of the type of account. This pricing strategy aims to draw away existing customers and attract new commercial accounts when they appear. Currently, OK Service Bureau sets its billing rates by account type: 5 – Residential: $3.98 per account – Commercial: $6.75 per account Current Costs OK Service Bureau needs to calculate its current cost per account to anticipate the impact of the new business and more competitive environment. The current accounting system allocates costs for the residential and commercial accounts based on the number of account inquiries. Because 78.26% of inquiries were from residential customers, they received that proportion of the costs. The equation below shows how the cost of each residential account is calculated by standard costing:Total Cost 583,730 X Account Inquiry Percentage 0.7826 = 456827 = $3.807 per 120000#ofaccts residential acct Commercial accounts are calculated in the same manner:Total Cost 583,730 X Account Inquiry Percentage 0.2174 = 126902 = $6.345 per 20000#ofaccts commercial acctHyperion Business Modeling Solutions Guide s 77
  • 78. Customer Profitability Case Study Last month, OK Service Bureau earned a profit of $28,870: Residential Commercial Accounts Accounts Total #Accounts 120,000 20,000 140,000 Revenue/Account $3.980 $6.750 Standard Cost/Account $3.807 $6.345 Profit/Account $0.173 $0.415 Total Profit $20,768 $8,102 $28,870 Profit/Loss Projection Marketing then projected the next month’s profit and loss based on the competition’s rates and the new accounts. The projection showed a profit that would decrease by $8,071.00 if the company adopted the competitor’s one price approach. Residential Commercial Accounts Accounts Totals #Accounts 173,000 22,000 195,000 Proposed Revenue/Account $4.20 $4.20 Total Proposed Revenue $726,000 $92,400 $819,000 Standard Cost/Account $3.807 $6.345 Total Standard Cost $658,611 $139,590 $798,201 Profit (Loss) $67,989 $(47,190) $20,799ABM Solution Result The activity-based management solution begins with determining the activity-based costs of the company and continues with a what-if scenario played in the OK Service Bureau model. These scenarios point the division in a more profitable direction.78 s Hyperion Business Modeling Solutions Guide
  • 79. Customer Profitability Case Study Activity-based Costing (ABC) Results Two discoveries upset previously held beliefs: q a residential account costs less to service. q a commercial account costs much more to service. The differences become clear in the following table: Current Month Residential Account Commercial Account Standard ABC Standard ABC Account Volume 120,000 120,000 20,000 20,000 Revenue per $3.980 $3.980 $6.750 $6.750 account $477,600 $477,600 $135,000 $135,000 Total Revenue Cost per account $3.807 $2.380 $6.345 $14.9051 Total Cost $456,832 $285,600 $126,900 $298,100 5 Total Profit $20,768 $192,000 $8,102 ($163,100) The company believes that the activity-based costs reflected the real costs of running their business better than the standard costs did. The company cited the following reasons: q As noted under Current Costs, the current accounting system distributes costs on a rough basis: by percentage of inquiries. q Activity-based costing allocates costs more precisely: by the activities required to serve the two account types and the quantity of supplies and resources those activities consume. This will have implications for the marketing conditions faced by OK Service Bureau.Hyperion Business Modeling Solutions Guide s 79
  • 80. Customer Profitability Case Study Activity-based Management Strategy Through activity-based management, OK Service Bureau gained at least two new insights: q The new market environment creates a profitable opportunity: the per account increase to $4.20 and the large increase in the number of accounts bolster the company’s profitability even as commercial accounts continue to lose money. q Management needs to introduce process improvements to commercial account processes: bill inquiries and verification. By playing what-if scenarios, management can introduce measures to make the company more profitable.How the Solution was Developed OK Service Bureau management gave full support to a multi-disciplinary team assigned to develop an activity-based management model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology. Supporting The Model Approach Before starting the project, the team secured management’s commitment to provide project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully.80 s Hyperion Business Modeling Solutions Guide
  • 81. Customer Profitability Case Study Step 1: Defining the Project Scope The OK Service Bureau’s activity-based management team performed the following tasks for Step 1 of The Model Approach: 1. Identify the areas of study. 2. Select the model time period. 3. Determine the project demands. 4. Identify the activities required to complete the project. 5. Identify available resources to assist in the project. 6. Establish the time frame to complete the project. 7. Find a reliable reporting mechanism for distributing and analyzing the results. For this activity-based costing study, the project team decided to focus on the cost and profitability of the types of accounts the company services for its clients. Therefore, Residential and Commercial accounts became the model’s demands. The project team decided that the model should take a macro view of the 5 organization and include all the operations and resources of the company. The multi-functional team believes it can obtain meaningful results in six weeks. Step 2: Identifying Activities, Resources, and Measures The team identified the resources, associated activities, and units of measure required to deliver the services or products identified by the project scope. After interviewing the appropriate representatives of OK Service Bureau’s operations, the multi-functional team created the following table.Hyperion Business Modeling Solutions Guide s 81
  • 82. Customer Profitability Case Study Units of Measure and Associated Resources and Activities Activities/ Resources Unit of Measure Building (Occupancy Costs) Square Feet (SqFt) Managing Hours Account Inquiry Team Hours Billing Team Hours Correspondence Letters (#Letters) Bill Printing Pages (#Pages) Bill Verification Bills (Commercial) (#Bills) Account Inquiries Inquiries (#Inquiries) Paper Cases (#Cases) Variable Telecom Minutes (#Minutes) Computer Charges Transactions (#Transactions) Maintenance/Cleaning Square Feet (SqFt) Printers Pages (#Pages) Bill Printing Pages (#Pages) Bill Reprinting Reprints (#Reprints) Step 3: Developing the Schematic At this stage, the team prepared an operational schematic, a diagram which represents the interrelationships among an organization’s resources, activities, and demands. The following pages show the boxes for the operational schematic developed for OK Service Bureau from the findings of Step 2. (For the schematic containing all the model data, see the OK Service Bureau Schematic 2.)82 s Hyperion Business Modeling Solutions Guide
  • 83. Customer Profitability Case Study OK Service Bureau Schematic Box Definitions Each box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Service Bureau schematic to represent the demands, activities, supplies, resources and routes identified in Step 2: Demand Boxes Box ID Box Name Description RESDEM Residential Demand Residential account billings COMDEM Commercial Demand Commercial account billings Activity Boxes Box ID Box Name Description CORRES Correspondence Prepare written responses to inquiries 5 BILPRT Bill Printing Prepare hardcopy bill statements BILRPT Billing Reprinting Reprint bills with corrections after verification BILVER Bill Verification Verify accuracy of commercial bills RESINQ Residential Inquiries Answer questions about residential accounts COMINQ Commercial Inquiries Answer questions about commercial accounts Resource Boxes (Fixed) Box ID Box Name Description OCCY Occupancy OK Service Bureau’s building facility ACTINT Account Inquiry Team People who respond to customer inquiries MANAGE Managers People who supervise the staffHyperion Business Modeling Solutions Guide s 83
  • 84. Customer Profitability Case Study Resource Boxes (Fixed) (cont’) Box ID Box Name Description BILLTM Billing Team People who prepare the bills PRNTRS Printers Equipment to prepare statements Supply Boxes (Variable) Box ID Box Name Description MNTCLN Maintenance Build cleaning VARTEL Variable Telecom Telecommunications COMCHG Computer Charges Computer resources PAPER Paper Paper used in billing ACIOT Account Inquiry Overtime hours used to respond to Overtime inquiries Route Box Box ID Box Name Description AITR Account Inquiry Team Proportion of regular and overtime Routing hours for Account Inquiry Team84 s Hyperion Business Modeling Solutions Guide
  • 85. Customer Profitability Case Study OK Service Bureau Schematic 1 $ MNTCLN Maintenance$ VARTEL $ Variable COMCHG $ PAPER SqFt Telecom Computer Paper Charges $ c= #Minutes Supplies #Transactions OCCY #Cases VARTEL Occupancy OCCY COMCHG PAPER VARTEL OCCY SqFt $ $ ACIOT OCCY ACTINT c= Account Inquiry $ $ Account MANAGE Overtime c= Inquiry Team Managers Hours Hours Hours OCCY MANAGE AITR Account Inquiry $ PRINTERS OCCY Hours Team Routing $ Printers MANAGE VARTEL MANAGE VARTEL c= #Pages $ BILLTIM $ Billing Team ACTINS Account Inquiry Summary Hours 5 Hours PAPER COMCHG MANAGE PAPER COMCHG COMCHG BILPRT BILVER CORRES Bill Printing Bill Verification Correspondence #Pages #Bills #Letter BILPRT BILVER CORRES ACTINS CORRES BILPRT BILVER BILPRT BILVER ACTINS CORRES BILPRT CPRTSM COMINQ Commercial BILRPT Commercial Print Billing Reprints RESING RPRTSM Summary Residential Residential #Inquiries #Bills #Reprints Print Summary #Inquiries #Bills RESDEM COMDEMSM Residential Commercial Summary Summary #Accounts #Accounts RESDEM COMDEM $ V= $ V= Residential Commercial Demand DemandHyperion Business Modeling Solutions Guide s 85
  • 86. Customer Profitability Case Study Interpreting the OK Service Bureau Schematic Because the requirements for activities are demand driven, the operational results of the OK Service Bureau model are calculated using a bottom-up approach. A review of the relationships among the resources and activities required to support Residential Demand illustrates how activity-based costing works. At the bottom of the schematic, you will find the symbol for Residential Demand (RESDEM). The Residential Summary (RESDEMSM) box represents a summary of all activities and resources required for billing residential utility customers. Follow the flow upwards, as detailed on the following table. The logic of the model reflects the logic of OK Service Bureau’s operations. As you move up through the schematic, you see how its activities and resources draw from others in the organization. Requirement This Activity or Resource Requires Boxes Residential Summary (RESDEMSM) Residential Inquiries RESINQ Residential Print Summary RPRTSM Residential Inquiries Account Inquiry Summary ACTINS (RESINQ) Correspondence CORRES Residential Print Summary (RPRTSM) Bill Printing BILPRT Written responses (CORRES) Management MANAGE Paper Supplies PAPER Account Inquiry Summary ACTINS Computer Charges COMCHG Account Inquiry Summary (ACTINS) Management MANAGE Computer Charges COMCHG Account Inquiry Team ACTINT Account Inquiry Team Overtime ACIOT Variable Telcom VARTEL Account Inquiry Team (ACTINT) Occupancy OCCY Bill Printing (BILPRT) Paper Supplies PAPER Printers PRNTRS Computer Charges COMCHG Billing Team BILLTM Printers (PRNTRS) Occupancy OCCY86 s Hyperion Business Modeling Solutions Guide
  • 87. Customer Profitability Case Study Step 4: Collecting Data and Rules The team gathered the relevant operational and financial data needed to complete the model. Through a process of interviews with OK Service Bureau staff, the team collected data on the company processes and activities. It is summarized in the following statements. Report Content Income Statement: An income statement for the current month Current Month ($000) Customer Cost Analysis Detailed information about current costs by customer type Costs of Services and Costs of internal and external variable supplies Consumables Resource Availability Capacities of resources and percentages of capacities and Utilization used for the current month 5 Variable Data A description of the variables used in the model Financial Accounts A list of all revenue and cost categories used in the model Fixed Resource Costs Financial categories associated with resources, variables used to calculate costs, and units in category Activity, Resource, and A list of all activities, fixed resources, and various Supply Analysis supplies by account type Management Time The number of management hours for billing team, Expenditures account inquiry team, and correspondence Occupancy Data Square footage usage by management and staffing resources Note: Not all data items in the model are contained in the above tables.Hyperion Business Modeling Solutions Guide s 87
  • 88. Customer Profitability Case Study Income Statement: Current Month ($000) Revenue Residential Acct Revenue $477,600 Commercial Acct Revenue 135,000 Total Revenue $612,600 Cost of Service Management Wages Salaries $28,000 & Benefits Benefits 5,600 $33,600 Non-management Account Inquiry Team 93,610 Wages & Benefits Account Inquiry Overtime 2,590 Billing Team 55,000 Benefits 34,700 $185,900 Computer & Variable Telecom Charges 59,899 Communication Charges Data Processing Charges 179,800 $239,699 Equipment, Material & Printer & Data Processing 50,000 Supplies Printer Maintenance 5,000 Paper 7,531 $62,531 Occupancy Rent & Real Estate 40,000 Advertising 22,000 $62,000 Total Cost $583,730 Net Income $28,870 Customer Cost Analysis88 s Hyperion Business Modeling Solutions Guide
  • 89. Customer Profitability Case Study The project team was given the latest cost analysis. This analysis was used later to compare activity-based costs and standard costs. OK Service Bureau Report: Cost Analysis (using current standard costs) Month: Last Month Residential Commercial Total Volume (# of customers) 120,000 20,000 140,000 # Account Inquiries 18,000 5,000 23,000 % Account Inquiries 78.26% 21.74% Total Standard Cost $456,832 $126,898 $583,730 Cost/Customer Type $3.807 $6.345 The team also collected the following data on internal and external costs. 5 Costs of Services and Consumables Service Cost Telecommunications $0.30 per minute Computers $0.03 per transaction Paper $92 per case (2500 sheets per case) Cleaning $7,000 per monthHyperion Business Modeling Solutions Guide s 89
  • 90. Customer Profitability Case Study Resource Availability and Utilization Resource Max. Availability/Month Used Last Year Utilization% Account Inquiry 4070 hours 3,704 91 Team Printers 336,000 hours 204,960 61 Billing Team 2,750 hours 2,244 81.6 Supervisors 770 hours 741 96.24 Variable Data To make the model more flexible, some of the data collected is defined in the model as variables. For example, if you added another person to the billing team, you only need to change the variable: Variable Represents Value #blt Billing Team 25 #int Account Inquiry Team 37 #mgr Managers 7 mins Minutes to hour conversion 0.016666790 s Hyperion Business Modeling Solutions Guide
  • 91. Customer Profitability Case Study Financial Accounts The following cost and revenue categories are used in the model. # Name # Name 10 Residential Account Revenues 500 Equipment, Material, & Supplies 20 Commercial Account 510 Printer Depreciation Revenues 200 Total Labor Costs 520 Printer Maintenance 210 Account Inquiry Labor 530 Paper 215 Account Inquiry Overtime 600 Occupancy 220 Billing Wages 610 Rent & Real Estate 230 Manager Salaries 620 Building Maintenance 5 250 Benefits 300 Mgmt Services Charges 310 Variable Telecom Costs 320 Computer ChargesHyperion Business Modeling Solutions Guide s 91
  • 92. Customer Profitability Case Study Fixed Resource Costs Financial Resource Financial Category Value Variable Occupancy Rent and Insurance $40000 Building Maintenance $7000 Account Inquiry Team Account Inquiry Wages $2530 #int Account Inquiry Overtime $600 #int Managers Manager Salaries $4000 #mgr Manager Benefits $800 #mgr Printers Printer Depreciation $50000 Printer Maintenance $5000 Billing Team Billing Wages $2200 #blt Benefits $500 #blt Activity, Resource, and Supply Analysis Account Type Activities Fixed Resources Variable Supplies Commercial Commercial Billing Team Paper Supplies Inquiries 1 Printers Variable Telecom Bill Printing Managers Computer Charges Billing Reprints Occupancy Maintenance Bill Verification Account Inquiry Team Account Inquiry Correspondence Overtime Residential Residential Inquiries Billing Team Paper Supplies Bill Printing Printers Variable Telecom Correspondence Managers Computer Charges Occupancy Maintenance Account Inquiry Team Account Inquiry Overtime1 Bolded items are unique to account type.92 s Hyperion Business Modeling Solutions Guide
  • 93. Customer Profitability Case Study Management Time Expenditures Team Hours Activity Billing Team 228 Supervising billing staff Correspondence 140 Signing letters Account Inquiry Team 377 Supervising account inquiry staff Occupancy Data Occupancy Square Feet Managers 1,000 Account Inquiry Team 8,000 Billing Team 4,000 Printers 7,000 5 Total 20,000Hyperion Business Modeling Solutions Guide s 93
  • 94. Customer Profitability Case Study OK Service Bureau Schematic 2 310 $0.3 VARTEL 320 $0.03 COMCHG 530 $92 620 $0.75 MNTCLN PAPER Variable Computer Paper Maintenance Telecom Charges Supplies #Minute #Transactions #Case SqF VARTEL COMCHG PAPER 610 $40,000 OCCY 620 $7,000 Occupancy OCCY VARTEL OCCY c= 20000 SqF cf=8,000 530 $34.38 ACIOT c=f(11*int) tf=4470 cf-1000 OCCY 210 f(2530*int) 250 f(600*int) ACTINT c= f(100*int) Account Inquiry Overtime 230 $f(4000*#mgr) Account 250 $f(500*#blt) MANAGE c=f(110*#mgr) Inquiry Team Hours Managers Hours 0.98 Hours 0.02 OCC MANAGE Policy=Ratio AITR Account Inquiry cf=7000 Team Routing 510 $50,000 PRINTERS c=336,000 OCCY 520 $5,000 Printers MANAGE VARTEL MANAGE Hours VARTEL tf=228 tf=6847 #Pages cf=4000 tf=377 f=200 tf=188,371 c=f(100*#blt) 220 $f(2200*#blt) ACTINS 250$f(500*#blt) BILLTIM Account Inquiry Billing Team Summary Hours MANAGE PAPER COMCHG COMCGH PAPER COMCHG tf=140 f=0.0004 tf=f(10*mins) f=6 tf=242 f=9 f=0.0004 f=25 tf=2040 CORRES BILPRT BILVER Correspondence Bill Printing Bill Verification #Letters #Pages #Bills CORRES BILVER BILPRT ACTINS CORRES BILPRT BILVER BILPRT BILVER f=f(18*mins) f=0.2 f=4 f=4 ACTINS CORRES BILPRT CPRTSM Commercial BILRPT COMINQ f=f(6*mins) f=0.1 Commercial Print Billing Reprints RESINQ RPRTSM Summary Residential Residential #Inquiries #Bills #Reprints Print Summary #Inquiries #Bills f=0.15 f=0.25 f=0.02 RESDEM COMDEMSM Residential Commercial Summary Summary #Accounts #Accounts RESDEM COMDEM 10 $3.98 Residential 20 $6.75 Commercial V=120,000 V=20,000 Demand Demand # Accounts # Accounts94 s Hyperion Business Modeling Solutions Guide
  • 95. Customer Profitability Case Study Step 5: Building the Model The team created a computer-based model using the schematic from Step 3 and the data collected in Step 4. In this section, we will review some of the components in the pre-calculated OK Service Bureau model as built by the activity-based management team. The next three TMA steps will discuss the model results. OK Service Bureau Customer Profitability Model If you have not done so, install and start the Hyperion Business Modeling software. ➤ To open the OK Service Bureau Customer Profitability Model: 1. From the Model workspace, select Project > Open. The Open Project dialog appears. 2. Ensure the Local Storage Area folder is selected in the Containers pane and 5 double-click okservicebureau.md. The OK Service Bureau Customer Profitability model opens. Workspa ToolbarProject Window Display WindowEdit WindowHyperion Business Modeling Solutions Guide s 95
  • 96. Customer Profitability Case Study q The Projects & Time tab contains the model name, time period, and any saved scenarios. q The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, the following details for the selected box are displayed: q Box ID q Box Type and Name q Unit of Measure. q Depending on the type of box you select, the following panes might also be available: q Capacity q Financial category data q Input and output links q Volume q Route policy q Notes q Tags Note: You might need to scroll to view all elements. q The Global Data tab in the Project window shows all the Units of Measure, Financial Categories, and Variables used in the model. q The Display window contains a high-level, or Schematic, view of the model and a box level, Detail view. A third tab offers the Flow View for a selected box. q In the Schematic view, you create the model by adding boxes and building links between them. q The Toolbar contains buttons to calculate the model, save changes, open existing models, and create new ones.96 s Hyperion Business Modeling Solutions Guide
  • 97. Customer Profitability Case Study q On the right side of the Toolbar, you can navigate to report, results, and print workspaces: q Select the Reports tab to open a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model. q Select the Results tab to open a workspace where you can create model results tables. You can display cost, net profit, and utilization results by box type and specific boxes. q Select the Print tab to open a workspace where you can print single and multiple copies of your model data and results. Reviewing a Resource Box The resource box below shows how the collected data is used to build a model. ➤ To review a resource box: 1. From the Model workspace, select the Detail tab in the Schematic window to 5 view individual boxes and the data associated with them.Hyperion Business Modeling Solutions Guide s 97
  • 98. Customer Profitability Case Study 2. Select the Account Inquiry Team (ACTINT) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to the account inquiry team. The following is a list of the characteristics of the Account Inquiry Team resource box: q This resource has one input link (OCCY) that shows it uses another resource: Occupancy. According to the constant factor on the resource box OCCY, the Account Inquiry Team occupies 8000 square feet of floor space. q The unit of measure of this box (Hours) is displayed at the bottom of the box. q The Capacity label on the right side of the box shows a total Account Inquiry Team capacity of 4070 hours. When the model is calculated, the value for A= represents the actual number of hours that will be used; the value for U= represents the utilization percentage of the total capacity (Actual/Total Capacity).98 s Hyperion Business Modeling Solutions Guide
  • 99. Customer Profitability Case Study q The monthly capacity of the account inquiry team is 4070 hours. To view the capacity formula, click the Formula button in the Capacity pane, and select Edit. The Formula dialog shows that the total capacity has been calculated by multiplying the number of account inquiry team members (37) by the number of hours worked by each team member (110). q The costs of the Account Inquiry Team are derived from employees’ wages and benefits. Click the Financial Totals button to display the financial categories 250 Benefits and 210 Acct Inquiry Wages (displayed on the left side of the box), the average benefit or wage per employee is multiplied by the number of account inquiry staff members (37). For example, click in the Financial pane to view the financial categories. View the formula for financial category 210 Account Inquiry Wages: each employee earns $2,530 monthly, so the total salaries of the Account Inquiry Team is $93,610 per month. q ACTINT is one of the links into the route box AITR, Account Inquiry Team Routing. A route box must have at least two links: the other link to AITR is Account Inquiry Overtime. 5Hyperion Business Modeling Solutions Guide s 99
  • 100. Customer Profitability Case Study Reviewing a Demand Box ➤ To review a demand box in the model: 1. In the Project window of the Model workspace, click RESDEM in the Building Blocks tab under demand box types. 2. Ensure that the Detail tab is selected. The Detail view for the RESDEM box is displayed. Note the characteristics of this demand box: q It has an input link (RESDEM) and no output links. (Demand boxes can have more than one input link.) q The volume of demand (120,000) is displayed within the graphic symbol. q The unit of measure used for this box (#Accounts) is displayed beside the volume value. q The revenue per account ($3.98) and Financial Category (10 Residential Account Revenue) are displayed on the right side of the symbol.100 s Hyperion Business Modeling Solutions Guide
  • 101. Customer Profitability Case Study Step 6: Validating the Results The activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modelled. The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4. Operational Validation Before validating the figures, the team verified and calculated the model. To follow the steps taken by the team, make sure that okservicebureau.md is open. ➤ To validate operational data in the OK Service Bureau model: 1. On the Model workspace toolbar, click the Verify button , if the model is 5 unverified. A dialog tells you that you have successfully verified the model. 2. On the Model workspace toolbar, click the Calculate button . The Calculation indicator appears. When it disappears, the model has been successfully calculated.Hyperion Business Modeling Solutions Guide s 101
  • 102. Customer Profitability Case Study 3. Select the Detail tab for RESDEM to see the results available in the Detail view. Note the following operational results available: – Flow from summary box RESDEMSM is 120,000 accounts. 4. Select the Results workspace tab. 5. From the Results drop-down list, select % Utilization. All the utilization levels for model’s resources with a defined capacity are displayed. 6. Compare the utilization level for Printers calculated by the OK Service Bureau model and the level from “Resource Availability and Utilization” on page 90.Both are about 60%. Other operational comparisons: – The occupancy is fully utilized.102 s Hyperion Business Modeling Solutions Guide
  • 103. Customer Profitability Case Study – The manager utilization is almost exact. – The Billing Team utilizations are very close: 81.6% and 83%. – The Account Inquiry Team utilizations are the same. Using other reports and results workspace data, the project team compared other operational results generated by the model to the company’s historic results. It found that the model’s results accurately reflected company experience. Financial Validation With full confidence in the operational data generated by the Hyperion Business Modeling model, the project team compared standard financial data with the data generated by the model. The team looked at the model’s financial reports and compared their results with the standard costing figures. ➤ To generate a profit and loss financial report: 5 1. From the Model workspace, select the Reports workspace tab. The Reports workspace opens. 2. From the first drop-down list, choose Calculated Results. 3. From the Type drop-down list, choose Model Report. 4. From the Report drop-down list, choose Flows and Financials - by category.Hyperion Business Modeling Solutions Guide s 103
  • 104. Customer Profitability Case Study 5. Click the Generate Report toolbar button . In the Display window, the report shows costs and revenues by financial category and overall net income. 6. Compare the financial results from the model to the data collected in Step 4. For more information, see “Income Statement: Current Month ($000)” on page 88. – The total revenue is $612,600 in both the Hyperion Business Modeling report and the standard income statement. – The total cost is $583,745: a close match. – The cost of management and staff is $219,500 in both statements.104 s Hyperion Business Modeling Solutions Guide
  • 105. Customer Profitability Case Study – The total net profit in the current month is $28,855 in Hyperion Business Modeling and $28,870 on the income statement. The model’s results closely follow the financial experience as shown in the income statement. To return to the Model workspace, select the Model workspace tab.Activity-Based Cost Analysis When the project team validated the operational and financial results of the OK Service Bureau model with the standard costing results, they could confidentially interpret the new information. Step 7: Interpreting New Information In this step, the team used Hyperion Business Modeling to obtain a better understanding of the organization’s operational and financial performance. The project management team decided to compare the profitabilities of the two 5 account types first. Before you follow the team’s procedures, make sure that you have the OK Service Bureau model open and calculated. See “To open the OK Service Bureau Customer Profitability Model:” on page 95. ➤ To examine cost and operational requirements for Residential Demand: 1. In the Project window of the Model workspace, select the Building Blocks tab. 2. Scroll to the demand boxes and click RESDEM.Hyperion Business Modeling Solutions Guide s 105
  • 106. Customer Profitability Case Study 3. In the Display window, select the Detail tab. The Detail view presents new information summarizing cost and operational requirements for the support of Residential Demand. From this screen, the activity-based management team discovered that: – The total cost to service Residential Accounts last month was $285,643. – Each Residential Account costs $2.38 to service. The team was surprised by the average cost of Residential Accounts. The standard costing per unit cost was much higher at $3.807. For more information, see “Current Costs” on page 77. The $1.42 difference per account signalled to the team that with operational and financial results properly validated between the standard costing and activity-based costing model, there must be other significant differences in costs and net profit in the Commercial Account customer type.106 s Hyperion Business Modeling Solutions Guide
  • 107. Customer Profitability Case Study ➤ To examine cost and operational requirements for Commercial Demand: 1. In the Project window of the Model workspace, select the Building Blocks tab. 2. Scroll down the Project window and select COMDEM Commercial Demand. The Commercial Demand box appears in the Display window. Note the following: – The total cost to service Commercial Accounts last month was $298,101.94. – Each Commercial Account costs $14.91 to service. 5 Standard costing calculated that each Commercial Account costs $6.75 to service, a much lower rate.Hyperion Business Modeling Solutions Guide s 107
  • 108. Customer Profitability Case Study ➤ To examine costs, revenues, and net profits of all account types: 1. From the Project window in the Model workspace, select any Demand box. 2. Select the Results workspace tab. The Results workspace opens. The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Net Profit for each Demand type. Again, the net profit of each of the account types is noticeably different from the company’s standard calculations. (For more information, see “Customer Cost Analysis” on page 88.) The project team observed the following: q Using standard costing, commercial accounts earned a profit of $8,102. In fact, on a per account basis, commercial accounts were the most profitable at $0.415. However, the activity-based costing model has revealed a loss of $163,101.90! The detail view of COMDEM shows a per account loss of $8.15. q Standard costing shows residential accounts per unit earnings at $0.173. The model now shows residential account net profit of $191,956.62. The detail view of RESDEM shows a per unit earning of $1.59—far higher than calculated by standard costing. The project team analyzed the model’s results for causes of the commercial account losses.108 s Hyperion Business Modeling Solutions Guide
  • 109. Customer Profitability Case Study Other Situations to Analyze Try analyzing the model yourself. As you go, you delve more deeply into the OK Service Bureau model. Answers to the questions below provided the foundation for the project team’s activity-based management decisions. q In the Results workspace, view the following results: – Results: Flow - Costs – Type: Resource – Box: All What do you notice about unit total costs for the two types of account inquiries represented by RESINQ and COMINQ? Note: Commercial accounts are far more expensive than residential ones in fielding inquiries. The standard income statement only counts staffing costs. It does not distinguish between the two types of inquiries, nor does it include all the costs for inquiries such as correspondence, management, and paper. For more information, see “Income Statement: Current Month ($000)” on page 88. 5 q Using the same Results, note the per unit cost for BILVER, Bill Verification. OK Service Bureau spends $4.3715 for verification of each commercial account bill. Residential bills are not verified. Under standard costing, however, residential accounts also carry the burden of bill verification even though they did not require this activity. q To look at the implications of the Commercial and Residential inquiry activities, generate the following report of Calculated Results: – Type: Box Report – Report: Activities – Boxes: Type: Activity – Box: RESINQ and COMINQHyperion Business Modeling Solutions Guide s 109
  • 110. Customer Profitability Case Study The following report is displayed. Ten percent of residential inquiries require a written response, but 20% of commercial inquiries require a written response. So, Commercial account inquiries run up the highest costs.110 s Hyperion Business Modeling Solutions Guide
  • 111. Customer Profitability Case StudyActivity-Based Management The final step in The Model Approach is where you begin to manage the success of your organization by testing business strategies. Step 8: Performing Activity-Based Management The project team used the Hyperion Business Modeling to evaluate the financial and operational impact that a proposed change has on the organization. Finding a Solution to Customer Profitability The project team faces three issues: q The pricing consequences of new competition q The prospect of increased account volumes q Unexpected residential and commercial account profitabilities The team explored the issues by running a scenario based on competitive pricing 5 and account volumes first. After gauging the impact of these changes, the team aimed to improve customer profitabilities with process improvements. The OK Service Bureau scenario addressed two areas of the business: q Marketing q Operations The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with okservicebureau.md model open. You must first create a new scenario.Hyperion Business Modeling Solutions Guide s 111
  • 112. Customer Profitability Case Study ➤ To create a new scenario: 1. In the Projects & Time tab in the Model workspace, click Scenarios. 2. In the Edit window, click New. The New Scenario dialog opens. 3. Type Scenario 1 in the Scenario Title text box. 4. Ensure the Monthly check box is selected in the Periods text box. 5. Click Create. The new scenario is created.112 s Hyperion Business Modeling Solutions Guide
  • 113. Customer Profitability Case Study Marketing The first scenario showed the implications of more business and common pricing based on the competition’s strategy: q Residential Accounts: Volume 173,000 accounts; Price $4.20 per account q Commercial Accounts: Volume 22,000 accounts; Price $4.20 per account ➤ To implement volume and price changes to the customer account types: 1. In the Project window of the Model workspace, select the Building Blocks tab and click demand box, RESDEM. 2. In the Edit window, click in the Volume text box, and type 173,000. 3. Click Update. 4. In the Financial pane, click the expand pane button to see the financial categories associated with the box. 5. Click in the Value text box, and type 4.20 for Category 10. 6. Click Update. 5 7. Using Steps 1 to 6, make the following changes to COMDEM: q Volume: 22,000 q Financial Data: 4.20 8. Click the Calculate button and the Per Unit Values button. Note the following broken constraints: The higher account volumes require more management and account inquiry staff. 9. Go to the next section to make the necessary operations changes for the new volumes of Residential and Commercial accounts.Hyperion Business Modeling Solutions Guide s 113
  • 114. Customer Profitability Case Study Operations Rethinking the processes by which OK Service Bureau serves its accounts resulted in the following resource changes: q Add another manager. q Add inquiry team staff. q Add ten hours of overtime to managers’ monthly schedule. q Add overtime hours to managers’ salaries. ➤ To add another manager: 1. In the Project window in the Model workspace, select the Global Data tab. 2. Select the Global Data Variables. 3. Click to expand the Variables list and select #mgr Manager Headcount. 4. In the Edit window, replace 7.0 with 8.0 in the Values text box. 5. Click Update.114 s Hyperion Business Modeling Solutions Guide
  • 115. Customer Profitability Case Study ➤ To add inquiry staff: 1. In the Project window in the Model workspace, select the Global Data tab. 2. Select the Global Data Variables. 1. Click #INT Inquiry Team Headcount. 2. In the Values text box of the Edit window, change the 37 to 45 to represent the addition of Inquiry Team employees. 3. Click Update. ➤ To add overtime to managers’ schedules: 1. In the Project window of the Model workspace, select the Building Blocks tab. 2. Click the resource box, MANAGE Managers. 3. Click the Formula button in the Capacity pane of the Edit window. 4. Click Edit. 5 The Formula dialog displays. 5. In the Formula text box, change the 110 to 120. 6. Click Update. Next, you add the ten overtime hours per month to the managers’ salaries.Hyperion Business Modeling Solutions Guide s 115
  • 116. Customer Profitability Case Study ➤ To increase the salaries expense: 1. While you are still in MANAGE Managers, click the expand pane button in the Financial Pane of the Edit window. The Financial categories are displayed. 2. In the sub-pane, 230 Manager Salaries, click Formula > Edit. The Edit Formula dialog is displayed. 3. In the Formula text box, change 4000 to 4400. 4. Click Update. 5. Select Project > Save to save the changes.116 s Hyperion Business Modeling Solutions Guide
  • 117. Customer Profitability Case Study Calculating the Scenario The team calculated the OK Service Bureau scenario to show the effects of the new marketing conditions. The results of the scenario and the actions proposed to reduce the commercial account costs are examined in the following sections: q “Interpreting the Marketing Challenge” on page 117 q “Examining Costs” on page 118 q “Reducing Costs/Increasing Profits” on page 118 Interpreting the Marketing Challenge Now that the project team has introduced changes to the model data to reflect upcoming marketing challenges, they can see the effects on the model and, by extension, on their own company. ➤ To see the results of the changes, click the Calculate button and the Per Unit Values button to see the results of the changes. 5 Note the following new figures: The new net profit of $129,037 is significantly higher than the activity-based costing result of the current operations. OK Service Bureau has much to be optimistic about: the largest number of accounts will gross more dollars per account with the lowest costs. CAUTION: We strongly encourage you to change all totals to per unit values, and save your results.Hyperion Business Modeling Solutions Guide s 117
  • 118. Customer Profitability Case StudyExamining Costs The cost of servicing commercial accounts is still too high. Revenue per unit has dropped from $6.35 per account to $4.20. Although costs per unit fell to $13.84 from $14.90, the drop could not offset the drop in revenue. As the Commercial Demand detail view of net income shows, the loss of $8.15 per commercial account has now jumped to $9.64. The project team will propose commercial account savings in a second scenario. Reducing Costs/Increasing Profits To reduce commercial costs, the project team targeted account inquiry costs. By adding another page of billing information, the team estimates that inquiries will drop by 40%. First create Scenario 2. For this example, name the new scenario, Scenario 2, ensuring that the time period check box is selected for Monthly and the starting conditions are based on Scenario 1. ➤ To increase the number of pages per bill: 1. In the Project window of the Model workspace, select the Building Blocks tab and click summary box, COMDEMSM Commercial Summary. 2. In the Input Links pane, click the expand pane button to see the three input links for COMDEMSM. 3. Click the Factor text box in the COMINQ Commercial Inquiries sub-pane. 4. Replace the current factor of .25 with .15. 5. Click the Factor text box in the CPRTSM Commercial Print Summary sub-pane. 6. Replace the current factor of 1.0 with 5.0. 7. Click the Factor text box in the BILRPT Billing Reprints sub-pane.118 s Hyperion Business Modeling Solutions Guide
  • 119. Customer Profitability Case Study 8. Replace the current factor of 0.02 with 5.0. 9. Click Update. 10. To calculate the model, click the Calculate button and the Per Unit Values button. You have a new net profit of $127,873. The reduction of commercial inquiries did not compensate for the increased printing costs. Look at the utilizations for ACTINT Account Inquiry Team and MANAGE Managers. The process change reduced the utilizations for both. ➤ To reduce utilization and check the results: 1. Eliminate managers’ overtime by resetting the MANAGE Managers capacity to 110.0*#MGR. 2. Eliminate the managers’ overtime expense: that is, reset 230 Manager Salaries to 4000*#MGR. 5 3. Return the number of billing team staff (#BLT) to 37. 4. Recalculate the model using per unit values. The model calculates with no broken constraints and almost full capacity. Note the following: – Total costs have fallen to $663,233 as the result of the process improvements. – Commercial Demand is still losing $8.58 per account, but that is closer to the original model’s calculation. – The proposed increase in billing team staff is now unnecessary. – Another manager is still necessary, but the need for managers overtime is now eliminated.Hyperion Business Modeling Solutions Guide s 119
  • 120. Customer Profitability Case Study Next Steps Much more work needs to be done to deal with the commercial account losses. Try the scenarios below. First create Scenario 2. For this example, name the new scenario, Scenario 2, ensuring that the time period check box is selected for Monthly and the starting conditions are based on Scenario 1. q To meet management requirements, eliminate the need for 1 manager and reinstate the 10 hours per month of overtime to the 7 original managers. q How do the costs, revenues, and net profit compare to the last scenario?120 s Hyperion Business Modeling Solutions Guide
  • 121. Chapter Improving Economic Profit 6 Case Study OK Plastics is developing its strategic plan and needs to evaluate several key initiatives. The decision to implement any strategic initiative is to be made based primarily on its impact on the economic profit of the division. Economic Profit Concepts Economic Profit, which is also known as Economic Value Added (EVA), is defined as net operating profit after taxes, less a charge for the capital used. Economic profit, or EP, tracks both earnings and the capital aspects of a business. Mathematically, EP is defined by the following equation: Figure 1: Formula for Calculating Economic Profit Economic = Net Operating Profit - (Weighted Average of the Cost of Profit After Tax Capital Percentage X Capital) (NOPAT) The cost of capital percentage is a weighted average of both interest-bearing debt and equity. To maximize Economic Profitability, a company must aim to improve net operating profit after tax by reducing production costs and raising capital efficiency. In addition, the capital structure needs to be optimized. The company should aim to grow profitability as long as returns are adequate, and manage the company’s assets, including the release of capital when there are inadequate returns.Hyperion Business Modeling Solutions Guide s 121
  • 122. Improving Economic Profit Case Study The following case study shows you how to apply economic profit variables to formulas in your existing model to evaluate the impact of strategic initiatives on the profitability of the company. The case study is broken down into the following sections: q “Business Issue” on page 123 q “EP Solution Results” on page 126 q “How the Solution was Developed” on page 128 – “Step 1: Defining the Project Scope” on page 128 – “Step 2: Identifying Activities, Resources, and Measures” on page 129 – “Step 3: Developing the Schematic” on page 130 – “Step 4: Collecting Data and Rules” on page 136 – “Step 5: Build the Model” on page 146 – “Step 6: Validating the Results” on page 163 q “Activity-Based Cost Analysis” on page 167 – “Step 7: Interpreting New Information” on page 167 q “Activity-Based Management” on page 172 – “Step 8: Performing Activity-Based Management” on page 172122 s Hyperion Business Modeling Solutions Guide
  • 123. Improving Economic Profit Case StudyBusiness Issue OK Company recently adopted a value-based management system using economic profit (EP) as its key financial performance measure and criteria for decision making. Further, corporate-level resource allocation decisions will be guided in large measure by the economic profit of the divisions. Divisions with a history of negative economic profit will be subject to closure or substantial reductions in investment. As a result, the company has charged each of its four divisions to use EP as a strategic planning tool. The OK Plastics division is developing its strategic plan and needs to evaluate several key initiatives. The decision to implement any strategic initiative is to be made based primarily on its impact on the division’s profitability. The division has already implemented activity-based costing, and has a process model of operations. What is needed is a methodology that will enable management to fully integrate economic profit into the planning process. Specifically, the method should enable division management to determine overall division economic profitability, and to allocate the capital charges down to individual product lines and activities. By unbundling the capital charges, the division will be able to easily isolate and evaluate profitable or unprofitable products and activities. After this is done, the impact of initiatives on division and product-line EP can be determined. 6Hyperion Business Modeling Solutions Guide s 123
  • 124. Improving Economic Profit Case StudyCompany Profile OK Company has four divisions. OK Plastics Division was the only one that failed to generate positive EP during the last reporting period. The OK Plastics Division’s profitability has been declining steadily for three years due to intense competitive pressures. Product Lines OK Plastic’s overall strategy has been cost leadership. In the past, strategic initiatives have focused on cost control and asset management. OK Plastics Division produces three major lines of plastic products within its single plan. Product Line A Product Line A consists of high-volume, simple products, such as cellphone casings, that are produced in large batches. A cost leadership strategy has traditionally been employed for Product Line A. Recently, stiff competition from a major competitor (who has used a focus strategy based on cost and quality for cellular phones) has seriously eroded OK Plastic’s market share and profitability. Product Line B Product Line B consists of medium-volume, more complex products, such as regular phone casings. A cost leadership strategy has been used for the B-line. The market for regular phone casings is stable and management believes that its pricing is competitive, and that its market share should not change. Product Line C Product Line C consists of low-volume, small-order, highly complex products, such as business phone casings. A differentiation strategy has been employed for C-line products based on service and price. Its pricing has been consistently below that of all competitors, resulting in growing market share.124 s Hyperion Business Modeling Solutions Guide
  • 125. Improving Economic Profit Case Study Strategy Different strategic initiatives to increase economic profitability are: q Growing operating profits without tying up more capital q Investing in new projects that earn more than the full cost of capital q Divesting from activities that do not cover the cost of capital For example, one initiative sponsored by production involves an investment in new process technology, coupled with price decreases in Product Line A and price increases in Product Line C. The improved technology will reduce processing times and improve product quality. Reduced processing time frees up capacity that can be used to produce more of Product Line A. In addition, the need for labor to operate machines will decline, resulting in more cost savings. Demand for Product Line A should increase due to both lower prices and higher quality. By increasing prices for Product Line C, demand will decline and so will related required resources. The divesting strategy will be automatically implemented. To evaluate this strategic initiative in terms of its probable impact on the division and Product Line A, the OK Plastics model can be modified to incorporate the economic profit in its formulas. 6Hyperion Business Modeling Solutions Guide s 125
  • 126. Improving Economic Profit Case StudyEP Solution Results One of the key advantages of Hyperion Business Modeling is its capability to unbundle financial information down to the product level. This enables the strategic planning team to identify products that are generating positive EP, as well as products that are destroying value for the owners. Using a process model that was modified to yield EP results, division management was able to calculate that the division EP of -$171,550 was negative during the current year. In the following example, there is a large positive EP of $381,160 for Product Line A, but Product Line C has a large negative EP of $735,320. EP Unbundled (000’s) Division Product Line A Product Line B Product Line C Net Operating $583.06 $559.48 $348.13 ($324.54) Profit Before Taxes EP ($171.55) $381.16 $182.61 ($735.32) Business Modeling Strategy The EP process model results led to the strategic division to invest more capital in Product Line A and to divest capital in Product Line C. A strategic initiative to invest in new process technology to support growth for Product Line A was evaluated. Based on the EP View scenario results shown below, the division’s overall economic profitability would increase dramatically to $525,140. This strategic initiative will be approved as part of the division’s overall strategic plan.126 s Hyperion Business Modeling Solutions Guide
  • 127. Improving Economic Profit Case Study EP View Scenario Strategy Results EP Unbundled ($000) Division Product Line A Product Line B Product Line C Net Operating Profit $1,393.16 $893.54 $602.49 ($102.87) Before Taxes EP View $525.14 $543.36 $388.58 ($406.79) Utilization Analysis: Operator Labor 69% Machine Utilization 68% How did the division chart a more profitable course using economic profitability as a value-based management framework? Read on to see how OK Plastics Division used The Model Approach and Hyperion Business Modeling to implement EP. 6Hyperion Business Modeling Solutions Guide s 127
  • 128. Improving Economic Profit Case StudyHow the Solution was Developed OK Plastics’ Division management gave full support to a multi-disciplinary team assigned to develop an economic profit model using The Model Approach. See Chapter 3, “The Model Approach,” for a description of the eight-step methodology. Supporting The Model Approach Before starting, the team secured management’s commitment to provide project resources, including staff time, to the project. Team members also attended The Model Approach workshop to understand the essential concepts of process modeling and acquire practical software training for carrying out the project successfully. Step 1: Defining the Project Scope The OK Plastics’ business modeling management team performed the following tasks for Step 1 of The Model Approach: 1. Identify the areas of study. 2. Select the model time period. 3. Determine the project demands. 4. Identify the activities required to complete the project. 5. Identify available resources to assist in the project. 6. Establish the time frame to complete the project. 7. Find a reliable reporting mechanism for distributing and analyzing the results. For this economic profit study, the project team decided to focus on the cost and profitability of the products produced by OK Plastics. Therefore, the three product lines became the model’s demands. The project team decided that the model should take a macro view of the organization and include all the operations and resources of the company. The multi-functional team believes it can obtain meaningful results in six weeks.128 s Hyperion Business Modeling Solutions Guide
  • 129. Improving Economic Profit Case Study Step 2: Identifying Activities, Resources, and Measures The team identified the resources, associated activities, and units of measure required to deliver the services or products identified by the project scope. After interviewing the appropriate representatives from operations, the team identified the following activities, resources, and units of measure: Activities/Resources Unit of Measure Operators Operator Hours (OperHrs) Maintenance Mechanics Mechanic Hours (MechHrs) Supervision People (#People) Building (Occupancy Costs) Square Feet (SqFt) Molding Machines Machine Hours (MchHrs) Raw Materials (Resin & Additives) Thousand Pieces (Pcs [000]) Energy Megawatt Hours (Mwh) Machine Supplies Machine Hours (MchHrs) Molding Process Machine Hours (MchHrs) Set Ups Setups (#Setups) 6 Sales and Marketing Calls (#Calls) Order Processing Orders (#Orders) Computer Services Orders (#Orders) Advertising Ads (#Ads)Hyperion Business Modeling Solutions Guide s 129
  • 130. Improving Economic Profit Case Study Step 3: Developing the Schematic At this stage, the team prepared an operational schematic, a diagram which represents the interrelationships among an organization’s resources, activities, and demands. To model EP, four types of changes are required to convert an HBM model from an accrual-based view to an EP-based view, as follows: q Apply the tax rate to all revenues and expenses using new tr variable, as outlined in “Adding the Tax Rate” on page 149. q Allocate capital charges to all resources that are associated with working capital and fixed assets using the new variable for Capital Charges (cc), as outlined in “Allocating Capital Charges” on page 153. q Add a new box, MCAP, to incorporate the capital charge into the model as outlined in “To create the new MCAP Machinery Capital Charge resource box:” on page 156. q Make adjustments, known as equity equivalents or EEs, to convert some accrual accounting amounts to an EP basis, as outlined in the following section. Creating Equity Equivalents (EEs) Equity equivalents, or EEs, are adjustments that are made to convert some accrual accounting amounts to an economic profitability basis. These adjustments to GAAP working capital and non-current assets are intended to provide a truer measure of cash. Although as many as 164 EEs can be created, most companies use only 5 to 20. EEs can impact both operating profit and capital. For example, research and development costs are typically expensed as incurred for financial reporting purposes. The Economic Profit model assumes that most research and development costs have future benefit, and should be considered part of capital. As a result, accumulated Research and Development expense is added back to capital, and the annual expense is added back to operating income. For the purpose of this case study, assume that all required EEs for the division have been incorporated into the operating data provided.130 s Hyperion Business Modeling Solutions Guide
  • 131. Improving Economic Profit Case Study OK Plastics Schematic Box Definitions Each box in the schematic is assigned a unique box identifier and name. The following boxes are used in the OK Plastics schematic to represent the demands, activities, and resources identified in Step 2: Table 5: Demand Boxes Box ID Box Name Description DEMA Demand A Demand for product line A DEMB Demand B Demand for product line B DEMC Demand C Demand for product line C Table 6: Activity Boxes Box ID Box Name Description MLDPRO Molding Process Process of manufacturing pieces SETUP Setting up Activities to set up machines Table 7: Resource Boxes (Fixed) 6 Box ID Box Name Description OCCY Occupancy OK Plastics’ building facility MLDMC Molding Machines Machines for product manufacturing ORDPRO Order Processing Resources and activities for processing orders SPVN Supervision All supervisors OPRL Operators People handling the machines MAINMCH Maintenance People keeping machines in good Mechanics repair MCAP Machinery Capital Capital charges for machinery ChargeHyperion Business Modeling Solutions Guide s 131
  • 132. Improving Economic Profit Case Study Table 8: Supply Boxes (Variable) Box ID Box Name Description MTLA Material A Raw materials required for product lines A, B, and C MTLB Material B MTLC Material C ENERGY Energy Energy to run the machines ADVT Advertising Advertising for product lines A, B, and C COMP Computer Computers used by order processing SUPL Machine Supplies Consumable supplies for the molding process The following pages show the operational schematic developed for OK Plastics from the findings of Step 2. (For the schematic containing all the model data up through Step 3, see “OK Plastics Schematic 1” on page 133.) A description of how to interpret the model follows the schematic.132 s Hyperion Business Modeling Solutions Guide
  • 133. Improving Economic Profit Case Study $ c= $ OK Plastics OCCY Occupancy COMP Computer Schematic 1 SqFt #Orders $ c= $ c= $ c= $ c= MLDMC MCAP SALDEPT ORDDEPT Molding Machinery Sales & Order Machines Capital Marketing Processing MchHrs MchHrs #Calls #Orders MLDMC MCAP $ c= $ SLMKT c= Sales & $ ORDPRO Marketing $ Order Processing $ #Calls c= #Orders SPVN SLMKT Supervision ORDPRO $ OPEROT c= Operator #People Overtime OperHrs c= $ MAINMCH c= $ ENERGY $ Maintenance Energy OPRL Mechanics Operators MWh MechHrs ENERGY OperHrs $ SUPL c= OPERCH $ ADVT Machine Operator Choice Advertising Supplies OperHr MchHr MLDMC ENERGY #Ads MLDMC ENERGY ADVT 6 MLDPRO SETUP Molding Process Setting up MchHr #Setup MLDPRO SETUP $ $ $ MTLA MTLB MTLC Material A Material B Material C Pcs(000) Pcs(000) Pcs(000) SLMKT ORDPRO ORDPRO MLDPRO MCAP SETUP ORDPRO ADVT MLDPRO MCAP SETUP SLMKT ADVT MLDPRO MCAP SETUP SLMKT ADVT PRSA SASA PRSB PRSC SASC Production Sales & Admin SASB Production Sales & Admin Production Sales & Admin Summary A Summary A Summary B Summary C Summary C Summary B $ v= v= $ DEMA $ DEMC v= Demand A DEMB Demand B Demand CHyperion Business Modeling Solutions Guide s 133
  • 134. Improving Economic Profit Case Study Interpreting the OK Plastics’ Schematic Since the requirements for activities are demand driven, the operational results of the OK Plastics’ model will be calculated using a bottom-up approach. The schematic illustrates the relationships among the resources and activities required to support the production of, for example, Product Line A. At the bottom of the schematic, you will find the symbol for Demand A (DEMA). The Total Summary A (SUMA) box represents a summary of all activities and resources required for the production of Product Line A. The following table continues this upward direction. The logic of the model reflects the logic of OK Plastics’ operations. Activities and resources are involved in the creation of products. As you move up through the schematic, you will see how the activities and resources draw from others in the organization. Requirement Boxes Requires Boxes Demand A (DEMA) Machinery Capital Charges MCAP Production Support PRSA Sales & Administration SASA Production Summary A Molding Processing MLDPRO (PRSA) Raw Material: Product Line A MTLA Setting up activities SETUP Machinery Capital Charges MCAP Sales & Administration Sales & Marketing SALMKT (SASA) Order Processing ORDPRO Advertising ADVT Molding Process (MLDPRO) Machine Supplies SUPL Molding Machine MLDMC Energy ENERGY Operator Choice OPERCH Maintenance Mechanic MAINMCH Setting up (SETUP) Maintenance Mechanics MAINMCH Energy ENERGY Molding Machine MLDMC134 s Hyperion Business Modeling Solutions Guide
  • 135. Improving Economic Profit Case Study Requirement Boxes Requires Boxes Operators (OPRL) Supervision SPVN Mechanics (MAINMCH) Supervision SPVN Order Processing (ORDPRO) Order Processing Department ORDDEPT Molding Machines Building space OCCY (MLDMC) Sales & Marketing Sales & Marketing Department SALDEPT (SALMKT) The schematic can be used similarly to describe the activities and resources required to support product lines B and C. 6Hyperion Business Modeling Solutions Guide s 135
  • 136. Improving Economic Profit Case Study Step 4: Collecting Data and Rules The team gathered the relevant operational and financial data needed to complete the model. Through a process of interviews with OK Plastics’ staff, the team collected data on the company processes and activities. It is summarized in the following statements: Report Content OK Plastics Income An income statement for the current year Statement Operational and Detailed information about each product line Financial Data Costs of Services and Costs of internal and external variable supplies Consumables Resource Availability Resource availability and utilization for the current year and Utilization Variable Data A description of the variables used in the model Financial Accounts A list of all revenue and cost categories used in the model Fixed Resource Costs Resource financial, volume, and unit data Occupancy Data Square footage use of building by resource Note: Not all data items in the model are contained in the above tables.136 s Hyperion Business Modeling Solutions Guide
  • 137. Improving Economic Profit Case Study OK Plastics Income Statement REVENUE Sales of Product Line A $2,450 Sales of Product Line B 1,775 Sales of Product Line C 885 Total Revenue $5110 COSTS Sales Raw Materials $1,865 Operators 690 Shared Production Maintenance Mechanics $60 Supervision 90 Machine Depreciation 390 Production Overhead 669 $3764 6 Gross Margin $1,346 Selling & Admin. Expenses Sales & Marketing $190 Order Processing Salaries 120 Rent & Insurance 270 Advertising 85 Computer Costs 73 Other Expenses 25 Total SG & A $763 TOTAL INCOME $583 BEFORE TAXESHyperion Business Modeling Solutions Guide s 137
  • 138. Improving Economic Profit Case Study Operational and Financial Data These spreadsheets contain detailed operational and financial data gathered by the company for each member of the three product lines. Note that each product line consists of several different products of varying units and resource requirements. A summary of the data to be used for each of the product lines in the activity-based costing model is displayed below: Table 9: Product Analysis Detail for Product A Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders A110 500 1181 499 8970 950 5 15 A120 200 498 210 3635 394 4 8 A130 120 304 131 2189 252 3 7 A140 80 204 92 1476 172 4 8 A150 50 129 59 950 115 5 6 A160 50 134 59 881 117 4 6 Total A 1000 2450 1050 18200 2000 25 50 Unit A 2.45 1.05 18.20 2.00 .025 .050 Table 10: Product Analysis Detail for Product B Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders B201 100 331 112 3033 330 5 16 B202 70 242 79 2174 238 4 12 B203 50 174 57 1560 173 3 10 B204 50 175 58 1565 175 6 8 B205 40 142 46 1256 140 6 6 B206 40 144 46 1264 140 6 7 B207 30 110 35 948 108 7 8138 s Hyperion Business Modeling Solutions Guide
  • 139. Improving Economic Profit Case Study Table 10: Product Analysis Detail for Product B (Continued) Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders B208 30 113 35 959 110 6 6 B209 25 94 30 806 93 6 6 B210 25 96 30 817 93 7 7 B211 20 77 24 699 76 7 7 B212 20 78 24 720 76 7 7 Total B 500 1775 575 15800 1750 70 100 Unit B 3.55 1.15 31.6 3.50 .140 .20 Table 11: Product Analysis Detail for Product C Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders C301 23 122 35 938 104 5 18 C302 16 86 25 660 74 4 12 6 C303 12 68 19 501 56 3 15 C304 10 57 16 423 47 4 14 C305 8 47 13 342 38 6 13 C306 7 42 11 302 34 6 15 C307 7 42 11 302 34 5 16 C308 7 43 11 303 34 6 13 C309 6 36 10 259 29 6 14 C310 6 38 10 259 29 5 17 C311 6 38 10 259 29 5 15 C312 5 31 8 219 25 5 11 C313 5 32 8 221 25 4 12 C314 5 32 8 226 25 3 14Hyperion Business Modeling Solutions Guide s 139
  • 140. Improving Economic Profit Case Study Table 11: Product Analysis Detail for Product C (Continued) Sales Sales Material Product Units Revenue Cost Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders C315 5 32 8 229 25 4 12 C316 4 26 7 183 20 3 11 C317 4 26 7 183 20 6 8 C318 4 26 7 184 21 4 12 C319 3 19 5 138 16 6 10 C320 2 13 4 91 11 7 8 C321 1 6 2 47 5 6 6 C322 1 6 2 47 5 6 10 C323 1 6 2 48 6 7 7 C324 1 6 2 49 6 7 8 C325 1 5 2 49 6 7 9 Total C 150 885 240 6460 720 130 300 Unit C 5.90 1.60 43.07 4.80 0.867 2.0 Table 12: Product Analysis Detail for All Products Sales Sales Material Product Units Revenue Costs Operator Machine Code (000) $(000) $(000) Hours Hours Set Ups Orders Total 1650 5110 1865 40460 4470 225 450140 s Hyperion Business Modeling Solutions Guide
  • 141. Improving Economic Profit Case Study Costs of Services and Consumables The team also collected the following on internal and external costs: Service Cost Advertising $8.5 per advertisement Computers $0.05 per order Energy $0.0048 per megawatt hour (MWh) Machine Supplies $0.03 per machine hour Material A $1.05 per Product Line A piece Material B $1.15 per Product Line B piece Material C $1.60 per Product Line C piece Resource Availability and Utilization Max. Used Last Resource Availability/Year Year Utilization% Maintenance Mechanics 3200 hours 2876.3 90 6 Molding Machines 5928 hours 5595.25 94 Occupancy 100,000 sq. ft. 100,000 100 Operators 45,000 hours 39,023 87 Occupancy Data Occupancy Square Feet Molding Machines 60,000 Sales and Marketing 15,000 Order Processing 25,000 Total 100,000Hyperion Business Modeling Solutions Guide s 141
  • 142. Improving Economic Profit Case Study Financial Accounts The following table shows the financial accounts. Entries in bold represent cost totalers. Number Name Number Name 10 Revenue from Product A 700 Selling/Administration Expense 20 Revenue from Product B 710 Order Processing Salaries 30 Revenue from Product C 720 Sales/Marketing Salaries 725 Office Supplies Costs 100 Cost of Sales 750 Computer Costs 101 Raw Materials 760 Advertising 102 Operators 790 Other Expenses 500 Shared Production Costs 900 Capital Charges 510 Maintenance Mechanics 901 Cash and other Fixed Assets 520 Supervision 911 Accounts Receivable 550 Machine Depreciation 921 Trade Payables - Material A 560 Machine Supplies 922 Trade Payables - Material B 570 Energy 923 Trade Payables - Material C 600 Occupancy Costs 930 Property and Plant 610 Rent and Insurance 940 Machinery142 s Hyperion Business Modeling Solutions Guide
  • 143. Improving Economic Profit Case Study Fixed Resource Costs Financial Resource Financial Category Value Variable Maintenance Maintenance Mechanics $30.00 #mnt Mechanics Salaries Molding Machines Machine Depreciation $130.00 #mch Occupancy Rent and Insurance $675.00 Operators Operator Salaries $22.30 #opr Order Processing Computer Costs $50.50 Office Supplies $24.00 #ord Other Expenses $5.00 #ord Sales & Marketing Sales & Marketing $23.75 #sal Salaries Supervision Supervisor Salaries $45.00 #spv Variable Data To make the model more flexible, some of the data collected is defined in the 6 model as variables. Variable Description Value cc Cost of Capital .10 efmc Machine efficiency rate 0.95 #mch # of machines 3 #mnt # of maintenance staff 2 #opr # of operators 30 #ord # of order processors 5 #sal # of sales people 8 #sft # of shifts 1 #spv # of supervisors 2 tr Tax Rate .15Hyperion Business Modeling Solutions Guide s 143
  • 144. Improving Economic Profit Case Study Assigning Capital Charges Capital charges must be assigned to the appropriate boxes. To do this, the accrual-based balance sheet must be analyzed. Associate each working capital component and each long-term asset with the related resource in the existing model, as outlined in the following analysis: Table 13: EP Analysis of Working Capital and Fixed Asset Accounts Year-End Balance ($000’s) Related HBM Resource Working Capital Accounts Cash $20 Sales and Marketing Department Accounts Receivable $300 Order Processing Accounts Payable ($120) Purchased Materials Fixed Asset Accounts Property and Plant $2,200 Occupancy Equipment $1,800 Machinery Capital Charge Other $940 Sales and Marketing Note: Not all data items in the model are contained in the above table.144 s Hyperion Business Modeling Solutions Guide
  • 145. Improving Economic Profit Case Study 610 $f675*(1-tr) c=100,000 750 $.05*(1-tr) OK Plastics 930 f 2200*cc OCCY Occupancy COMP Computer Schematic 2 SqFt #Order cf=25,000 550 cf=60,000 c=250*#sal 750 $50.5*(1-tr) 940 $f(3300*cc)$f(130*#mch)*(1-tr) 702 23.75*#sal*(1-tr) 710 $ƒ(24*#ord) SALDEPT MLDMC c=f 2080*#mch MCAP 901 f (960*cc) Sales & 790 $ƒ(5*#ord) ORDDEPT Molding *#sft*efmc Machinery Marketing 911 $ƒ(300*cc) Order Machines Capital #Calls Processing MchHrs MchHrs cf=15,000 #Orders MCAP MLDM c=ƒ(250*#sal) c=ƒ(110*#ord) 720 $ƒ(23.75*#sal) SLMKT Sales & Marketing ORDPRO 520 $ƒ(45*#spv) Order Processing SPVN c=ƒ(20*#spv) #Calls Supervision SLMKT #Order $ c=9.00 ORDPRO OPEROT #People Operator OperHrs cf=ƒ(1*#opr) 510 $ƒ(30*#mnt) c=ƒ(1600*#mnt) 102 MAINMCH $ƒ(22.3*#opr)*(1-tr) OPRL Maintenance c=ƒ(1500*#opr) Mechanics Operators MechHrs ENERGY 570 $.0048*(1-tr) Energy 560 f=9 OperHrs $.025*(1-tr) MWh OPERCH SUPL Operator Choice ENERGY Machine OperHr MchHrs MLDMC ENERGY ENERGY 760 $8.5*(1-tr) ADVT MLDMC f=10 f=5 f=15.75 Advertising f=6.3 f=.14 #Ads 6 MLDPRO SETUP ADVT Molding Process Setting up MchHr #Setups MLDPRO SETUP921 ƒ(-0.06756*cc) 101 $1.15 101 $1.6 101 $1.05 MTLA MTLB MTLC Material A 922 ƒ(-0.074*cc) Material B 923 ƒ(-0.10295*cc) Material C Pcs(000) Pcs(000) Pcs(000) ORDPRO ORDPROMLDPRO MCAP SETUP SLMKTORDPRO ADVT MLDPRO MCAP SETUP SLMKT ADVT MLDPRO MCAP SETUP SLMKT ADVT f=4.8 f=.1 f=.867 f=10 f=2 cf=8 PRSA SASA PRSB PRSC SASC Production Sales & Admin SASB Production Sales & Admin Production Sales & Admin Summary A Summary A Summary B Summary C Summary C Summary B 10 ƒ $2.45*(1-tr) 20 ƒ $3.55*(1-tr) 30 ƒ $5.9*(1-tr) DEMA DEMC Demand A DEMB v=1000 pcs Demand B v=500 pcs Demand C v=150 pcs (000) Hyperion Business Modeling Solutions Guide s 145
  • 146. Improving Economic Profit Case Study Step 5: Build the Model The team created a computer-based model using the schematic from Step 3 and the data collected in Step 4. The next step is to build the activity-based model for the division. After this model has been created, the EP variables have to be added to convert the existing activity-based model from an accrual-based view to an EP-based view. OK Plastics Activity-Based Model If you have not done so, install and start the Hyperion Business Modeling software. ➤ To open the OK Plastics Economic Profitability Model: 1. From the Model Workspace, select Project > Open. The Open Project dialog is displayed.146 s Hyperion Business Modeling Solutions Guide
  • 147. Improving Economic Profit Case Study 2. Ensure the Local Storage Area folder is selected in the Containers frame, and double-click okplastics. The OK Plastics Product Profitability model opens. Workspaces Workspaces tabs ToolbarProject Window Display Window: Schematic and Detail viewsEdit Window The following is a list of the model details in the workspace areas: 6 q The Projects & Time tab contains the model name, time period, and any saved scenarios. q The Building Blocks tab in the Project window lists the model’s boxes by type. In the Edit window, the following details for a selected box are displayed: q Box ID q Box Type and Name q Unit of Measure. Depending on the type of box you have selected, the following panes might also be available: q Capacity q Financial category data q Input and output linksHyperion Business Modeling Solutions Guide s 147
  • 148. Improving Economic Profit Case Study q Volume q Route policy q Notes q Tags Note: You might need to scroll to view all elements. q The Global Data tab in the Project window shows all the Units of Measure, Financial Categories, and Variables used in the model. q The Display window contains a high-level, or Schematic, view of the model and a box level, Detail, view. A third tab offers the Flow View for a selected box. q In the Schematic view, you create the model by adding boxes and building links between them. q The Toolbar contains buttons to calculate the model, save changes, open existing models, and create new ones. q From the Toolbar, you can select the EP View button or the Regular View button to toggle between the two views. q On the right side of the Toolbar, you can navigate to report, results and print workspaces: q Select the Reports tab to open a workspace of preformatted model and results reports that provide project information and data from selected boxes as well as the entire model. q Select the Results tab to open a workspace where you can create model results tables. You can display cost, net cost, net profit, and utilization results by box type and specific boxes. Please note, the Results button is activated only after you have calculated the model. q Select the Print tab to open a workspace where you can print single and multiple copies of your model data and results. For additional information about any of the model details listed above, refer to the Hyperion Business Modeling User’s Guide.148 s Hyperion Business Modeling Solutions Guide
  • 149. Improving Economic Profit Case Study Adding Changes to Model EP Using the activity-based model you created, you must apply the changes to calculate economic profit. To model EP, the following elements must be added to convert the activity-based model from an accrual-based view to an EP-based view: q Apply the tax rate to all revenues and expenses using new tr variable, as outlined in “To apply the tax rate to the existing model:” on page 151. q Allocate capital charges to all resources that are associated with working capital and fixed assets using the new variable for Capital Charges (cc), as outlined in “Allocating Capital Charges” on page 153. q Add a new box, MCAP, to incorporate the capital charge into the model as outlined in “To create the new MCAP Machinery Capital Charge resource box:” on page 156. Note: Equity equivalent adjustments (or EE’s) to convert some accrual accounting amounts to an EP basis are also required, but for the purposes of this case study, you can assume that this has already been done. For more information, refer to “Creating Equity Equivalents (EEs)” on page 130. Adding the Tax Rate The appropriate tax rate must be applied to all revenues and expenses. A new variable called Tax Rate (tr) is defined to represent the effective tax rate. This 6 variable is added to the formula for each revenue or expense that is taxable or tax deductible to allocate the correct portion of the overall tax to the particular activity. The tax rate is usually added to existing formulas using the following format: Before Tax Expense*(1 - tr) When constructing the formula is it crucial to add the EP factors to the equation in such a way that, when calculating the same formula in Regular View, the EP portion is zeroed out. In the following example, the formula works in Regular View because the EP variables equal zero, but in EP View, the actual values are applied and the calculation will be correct. a*(1-tr)Hyperion Business Modeling Solutions Guide s 149
  • 150. Improving Economic Profit Case Study ➤ To add the tax rate variable to Global Data: 1. In the Project window in the Model workspace, select Global Data. 2. From the Model workspace toolbar, click the EP View button to change to EP View. 3. Select Variables. The Variable pane is displayed in the Edit window. 4. Enter tr in the ID text box. 5. Enter Tax Rate in the Name text box. 6. Set the value of the variable for the current period in the Values text box to .15. 7. Click Add. The new EP variable is added to the Variables list.150 s Hyperion Business Modeling Solutions Guide
  • 151. Improving Economic Profit Case Study ➤ To apply the tax rate to the existing model: 1. In the Project window in the Model workspace, select the Building Blocks tab. 2. Select MCDMC Molding Machines from the list of Resource boxes or on the schematic. 3. In the Financial pane of the Edit window, select Category 550 Machine Depreciation. 4. Click the Formula button , then select Edit to edit the existing formula The Edit Formula dialog displays. 6 5. Append the tax rate portion of the formula to the existing formula, then select Update in the Edit Formula dialog. 6. In the Edit window, select Update.Hyperion Business Modeling Solutions Guide s 151
  • 152. Improving Economic Profit Case Study 7. Repeat Steps 2 to 6 to update the appropriate formula for each revenue and expense listed in the following table: Box ID Category Formula Expenses ADVT 760 8.5*(1-tr) COMP 750 0.05*(1-tr) ENERGY 570 0.0048*(1-tr) MAINMCH 510 30*#mnt*(1-tr) MLDMC 550 (130*#mch*(1-tr)) MTLA 101 1.05*(1-tr) MTLB 101 1.15*(1-tr) MTLC 101 1.06*(1-tr) OCCY 610 (675*(1-tr)) OPEROT 012 0.0174 OPRL 102 22.3*#opr*(1-tr) ORDDEPT 710 24.0*#ord*(1-tr) 750 (50.5*(1-tr)) 790 5*#ord*(1-tr) SALDEPT 720 (23.75*#sal*(1-tr)) SPVN 520 45.0*#spv*(1-tr) SUPL 560 0.025*(1-tr) Revenue DEMA 10 2.45*(1-tr) DEMB 20 3.55*(1-tr) DEMC 30 5.9*(1-tr) 8. Save the model when all formulas are updated.152 s Hyperion Business Modeling Solutions Guide
  • 153. Improving Economic Profit Case Study Allocating Capital Charges An additional cost called a capital charge must be added to model resources that are associated with working capital and fixed assets.Capital in this instance equals working capital (meaning current assets less current liabilities), plus long-term assets. The cost of capital percentage is a weighted average of both interest-bearing debt and equity. These charges represent the cost of the related capital used in the business. The charge represents interest on debt and a return to shareholders. A capital credit results from savings due to current liabilities, including assets, such as material inventory, that are funded by suppliers without interest. A Cost Category of 900 is reserved in the EP Preferences dialog for the Capital Charges totaler. A Cost of Capital category is created for each working capital item and fixed asset item on the balance sheet, and assigned a category between 901 and 999. Multiply this balance sheet item amount times the variable cc to calculate the capital charge for this resource. Complete the following steps to allocate capital charges to the existing model: q Define a new variable called Cost of Capital (cc) that represents the dollar total for the cost of all capital. q Create a Cost Category for each working capital item and fixed asset on the balance sheet. 6 q Create a new resource box called MCAP Machinery Capital Charges to proportionately allocate the cost of the new equipment to the three product lines. q Apply the cost of capital to each working capital or fixed asset item on the balance sheet.Hyperion Business Modeling Solutions Guide s 153
  • 154. Improving Economic Profit Case Study ➤ To add the Cost of Capital variable to Global Data: 1. In the Project window in the Model workspace, select Global Data. 2. Select Variables. The Variable pane is displayed in the Edit window. 3. Enter cc in the ID text box. 4. Enter Cost of Capital in the Name text box. 5. Set the value of the variable for the current period in the Values text box to .10. 6. Click Add. The Cost of Capital variable is added to the Variables list.154 s Hyperion Business Modeling Solutions Guide
  • 155. Improving Economic Profit Case Study ➤ To create the new Cost Categories: 1. In the Project window in the Model workspace, select the Global Data tab. 2. Select Categories. The category pane is displayed in the Edit window. 3. Enter 901 in the ID text box. 4. Enter Cash and other Fixed Assets in the Name text box. 5. Click Add. 6. Repeat steps 2 to 5 to add the remaining EP categories to the model: 6 EP Cost Category Box ID 900 Capital Charges Totaler 901 Cash and Other Fixed Assets 911 Accounts Receivable 921 Trade Payables - Material A 922 Trade Payables - Material B 923 Trade Payables - Material C 930 Property and Plant 940 MachineryHyperion Business Modeling Solutions Guide s 155
  • 156. Improving Economic Profit Case Study ➤ To create the new MCAP Machinery Capital Charge resource box: 1. In the Project window in the Model workspace, select the Building Blocks tab. 2. Select Resource. The resource box data panes are displayed in the Edit window. 3. In the Edit window, enter the following information: – in the ID text box, enter MCAP – in the Name text box, enter Machinery Capital Charge – in the Unit text box, enter MchHrs 4. Click Add. The box is displayed in the upper left corner of the Display window. 5. Drag the box to a logical position on the schematic. Note: This box has no input links, and has output links to PRSA, PRSB, and PRSC. ➤ To apply the cost of capital to the existing model: 1. In the Project window in the Model workspace, select the Building Blocks tab. 2. Select MCAP Machinery Capital Charges from the list of Resource boxes or on the schematic. 3. In the Financial pane of the Edit window, select 940 Machinery from the drop-down list.156 s Hyperion Business Modeling Solutions Guide
  • 157. Improving Economic Profit Case Study 4. Click the Formula button , then select Edit to edit the existing formula The Edit Formula dialog displays. 5. Enter the formula where the proportionate cost of the machinery is multiplied by the cost of capital for the purchase (3300*cc). 6. In the Edit Formula dialog, click Update. 7. In the Edit window, click Update. 6Hyperion Business Modeling Solutions Guide s 157
  • 158. Improving Economic Profit Case Study 8. Repeat Steps 2 to 7 to add the appropriate formula to each item of working capital and fixed assets, as shown below: EP Cost Category Box ID Formula 901 SALDEPT $960*cc 911 ORDDEPT $300*cc 921 MTLA $-0.06786*cc 922 MTLB $-0.074*cc 923 MTLC $-0.10295*cc 930 OCCY $2200*cc 940 MCAP $3300*cc Reviewing a Resource Box A resource box shows the kinds of data used to create a Hyperion Business Modeling model. ➤ To review a resource box with Tax Rate applied: 1. From the Display window in the Model workspace, select the Detail tab to view individual boxes and the data associated with them.158 s Hyperion Business Modeling Solutions Guide
  • 159. Improving Economic Profit Case Study 2. Click the MLDMC (Molding Machines) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines. 6 Note the following characteristics of the Molding Machines resource box: – The constant factor is set at 60,000.00 square feet. – 1,125 hours are passed to SETUP. – 4,470 hours are passed to MLDPRO.Hyperion Business Modeling Solutions Guide s 159
  • 160. Improving Economic Profit Case Study – The total depreciation allocated to Cost Category 550 is $390.00 in Regular View. If the tax rate of .15 is applied, the depreciation is actually $331.50. – The Capacity is 5,928 machine hours, based on the formula 2080*#mch*#sft*efmc, where: q #mch is the number of machines q #sft is the number of shifts q efmc is the machine efficiency rate ➤ To review a resource box with Cost of Capital applied: 1. From the Display window in the Model workspace, select the Detail tab to view individual boxes and the data associated with them.160 s Hyperion Business Modeling Solutions Guide
  • 161. Improving Economic Profit Case Study 2. Click the OCCY (Occupancy) resource box from the Building Blocks tab to view the units, capacities, and financial data attached to operators performing the molding processes for all three product lines. Note the following characteristics of the Occupancy resource box: – The capacity is set to 100,000.00 square feet. 6 – 25,000 square feet are allocated to ORDDEPT. – 60,000 square feet are allocated to MLDMC. – The allocation of the cost of capital for OCCY is $220,000, based on the formula for EP Category 930 Property and Plant.Hyperion Business Modeling Solutions Guide s 161
  • 162. Improving Economic Profit Case Study Reviewing a Demand Box ➤ To review a demand box: 1. From the Display window in the Model workspace, select the Detail tab to view individual boxes and the data associated with them. 2. Click DEMA in the Building Blocks tab under demand box types. Note the characteristics of this demand box: – It has two input links (SASA and PRSA) and no output links. (Demand boxes can have more than one input link but never an output link.) – The volume of demand (1000) is displayed within the graphic symbol. – The unit of measure used for this box (Pcs[000]) is displayed beside the volume value. – The revenue per piece ($2.08) and Financial Category (10 Revenue from Product A) are displayed on the right side of the symbol.162 s Hyperion Business Modeling Solutions Guide
  • 163. Improving Economic Profit Case Study Step 6: Validating the Results The activity-based management team took this step to confirm that the operational and financial results produced by the model reflect the actual experience of the business for the period being modeled. The team knew that operational validation is done first because the financial calculation is derived from the operational flow. They compared the results calculated by the model with the data gathered in Step 4. Refer to the Balance Sheets, Income Statement, Operational Resource Availability and Utilization reports to compare the results. Operational Validation Before validating the figures, the team verified and calculated the model. Ensure okplastics.md is open. ➤ To validate operational data in the OK Plastics model: 1. On the toolbar, click the Verify button , if your model is unverified. A dialog tells you that you have successfully verified the model. 2. On the toolbar, click the Calculate button . 6 The Calculation indicator is displayed. When it is displayed, the model has been successfully calculated. 3. Select the Detail tab for DEMA to see the results available in the Detail view. Note the following operational result: – The flow from the Summary Boxes SASA and PRSA is 1,000,000 pieces (displayed as 1,000 Pcs(000)). 4. From the Model workspace toolbar, select the Results workspace.Hyperion Business Modeling Solutions Guide s 163
  • 164. Improving Economic Profit Case Study 5. From the Results drop-down list, select % Utilization. All the utilization levels for the model’s resources with a defined capacity are displayed. 6. Compare the utilization level for OCCY calculated by the OK Plastics model and the level from “Resource Availability and Utilization” on page 141. Both are 100%. Other operational comparisons: – Maintenance mechanics are 89.88% utilized. – Sales and Marketing is 90% utilized. Using other reports and results workspace data, the project team compared other operational results generated by the model to the company’s historic results. It found that the model’s results accurately reflected company experience. Financial Validation With full confidence in the operational data generated by the Hyperion Business Modeling model, the project team compared standard financial data with the data generated by the model. The team looked at the model’s financial reports and compared their results to the standard costing figures.164 s Hyperion Business Modeling Solutions Guide
  • 165. Improving Economic Profit Case Study ➤ To generate a profit and loss financial report: 1. Select the Reports workspace in either the Results or Model workspace. The Reports workspace opens. 2. From the first drop-down list, choose Calculated Results. 3. From the Type drop-down list, choose Model Report. 4. From the Report drop-down list, choose Flows and Financials - by category. 5. Click the Generate Report toolbar button . In the Display window, the report shows costs and revenues by financial category and overall net income. 6Hyperion Business Modeling Solutions Guide s 165
  • 166. Improving Economic Profit Case Study166 s Hyperion Business Modeling Solutions Guide
  • 167. Improving Economic Profit Case Study Compare the financial results from the model to the data collected in Step 4. For further information, see “OK Plastics Income Statement” on page 137. – The total revenue of the three product lines after tax is $4,515,050. – The capital charges are $664,000. – The EP categories 921, 922 and 923 all represent negative values. – The total economic profit for OK Plastics is negative $171,550. The model’s results match the financial experience as shown in the income statement. ➤ To return to the Model workspace, select the Model workspace tab.Activity-Based Cost Analysis When the project team validated the operational and financial results of the OK Plastics model with the standard costing results, they could confidently interpret the new information. Step 7: Interpreting New Information In this step, the team used Hyperion Business Modeling to obtain a better understanding of the organization’s operational and financial performance. 6 The project team decided to look at the company’s least profitable product line first. Before you follow the team’s procedures, make sure that you have the OK Plastics model open and calculated. For more information, see “OK Plastics Activity-Based Model” on page 146. ➤ To examine cost and operational requirements for Product Line A: 1. From the Project window in the Model workspace, select the Building Blocks tab. 2. Scroll to the Demand boxes and click DEMA Demand A.Hyperion Business Modeling Solutions Guide s 167
  • 168. Improving Economic Profit Case Study 3. In the Display window, select the Detail tab. The Detail view presents new information summarizing cost and operational requirements for the support of Product A. From this screen, the OK Plastics team discovered that: – The total cost to produce 1000 (000) pieces of Product A this year was $1,701,340. – Machine and material costs accounted for $1,627,220 of the total. – Sales and administration costs accounted for negative $74,120 of the total. – The average cost to produce one Product Line A piece was $1.70. The team was surprised by the average cost of Product Line A. The standard per unit cost was only $1.89. The difference per piece signalled to the team that with operational and financial results properly validated between the standard costing reports and activity-based costing model, there must be other significant differences in costs, revenues, and economic profit among all three product lines.168 s Hyperion Business Modeling Solutions Guide
  • 169. Improving Economic Profit Case Study ➤ To examine the costs, revenues, and economic profit for all product lines: 1. In the Display window of the Model workspace, select any Demand box. 2. From the Model workspace, select the Results workspace tab. The Results workspace opens. The Flow - Net Profit result is pre-selected, and a chart displays, showing the ID, Name, Flow, Units and Economic Profit for each Demand type. Again, the net profit of each of the product lines is noticeably different from the company’s standard calculations. 6Hyperion Business Modeling Solutions Guide s 169
  • 170. Improving Economic Profit Case Study Based on calculations provided in this chapter, the following table shows the profit for each product line, based on the type of costing applied to the project: Table 14: Profit for each Product Line with Original Model Model/ Costing Product Product Product Economic Scenario Type Line A Line B Line C Net Profit Profit Traditional Traditional ($181,000) $193,000 $88,500 ---- ---- Model Original NP Activity-Based $559,480 $348,130 ($324,540) $583,060 ---- Model EP $381,160 $182,610 ($735,320) ---- ($171,550) The project team observed the following: q Using traditional methods, Product Line A was perceived as the least profitable line at negative $181,000, but Hyperion Business Modeling revealed it is a profit leader at $559,480. q Product Line B was always considered profitable at $193,000, but it contributes $348,130 to OK Plastics’s bottom line—much more than previously thought. q Using traditional methods, Product Line C appeared to generate a profit of $88,500. With activity-based costing, it becomes evident that Product Line C actually produced a loss of $324,540. When using EP to calculate the cost of capital and taxes into the equation, it demonstrates that this loss is actually $735,320, more than double the amount anticipated.170 s Hyperion Business Modeling Solutions Guide
  • 171. Improving Economic Profit Case Study Other Situations to Analyze Try analyzing the model yourself. As you go, you will be digging more deeply into the OK Plastics model. q Determine the accrual-based operating income before tax by setting the variables tr and cc to zero. The operating income before tax should be $583,000. This points out the value of variables in Hyperion Business Modeling. This model can be easily changed to reflect accrual income before tax, accrual income after tax and economic profitability. q Change the cost of capital to 25%, then change the marginal tax rate to 35%. Note that economic profitability is much more sensitive to changes in the assumed cost of capital than to changes in the assumed marginal tax rates. Over the relevant range of cost of capital, economic profitability for the model can vary by as much as $1,000,000. The economic profitability only varies by about $240,000 over the same range of tax rates. The implication for management is to carefully estimate the cost of capital for the division. For a cost of capital greater than approximately 15%, the new process technology’s impact on division economic profitability will be negative, suggesting that it be rejected as a viable strategic initiative. 6Hyperion Business Modeling Solutions Guide s 171
  • 172. Improving Economic Profit Case StudyActivity-Based Management The final step in The Model Approach is where you begin to manage the success of your organization by testing business strategies. Step 8: Performing Activity-Based Management The project team used Hyperion Business Modeling to evaluate the financial and operational impact that the proposed strategic objective has on the organization. Management needs to know the impact of purchasing new process technology. In the past, the division production operation has been very labor intensive with 30 machine operators. The new technology involves upgrading the three molding machines. The expected results are faster processing speeds, coupled with higher quality. Faster processing should reduce the consumption of operator labor as the division changes its production system to be more capital intensive. Higher quality will have a beneficial impact on demand for all three product lines. If this new technology is not adopted, it is believed that competitors will do so, resulting in a further erosion of market share for Product Line A. The proposed new process technology strategic initiative is part of a comprehensive, three year strategic plan. This initiative will be implemented during the first year of the three year planning period. Other components of the strategic plan will be implemented during years two and three. Scenario Assumptions q The cost of machine upgrade is $500,000 per machine q The depreciation of upgrade additions is $50,000 per year, per machine q The expected life of machines (with or without the upgrade) is 10 years q The processing times for all products are expected to be reduced to 50% of previous levels q The capital charge allocations will be changed to a ratio of 4:1:5 for Product Lines A, B and C respectively, to reflect the fact that the new process technology investment is being made primarily to support Product Line A. Whether or not the new technology is implemented, the price of Product Line A will be reduced.172 s Hyperion Business Modeling Solutions Guide
  • 173. Improving Economic Profit Case Study Proposed Initiatives The initiatives described in the following table are proposed to evaluate the impact of purchasing the new equipment on the profitability of the company. The changes are added to the Hyperion Business Modeling model and saved as Scenario 1. For complete instructions, refer to “To evaluate the purchase of new processing equipment:” on page 174. Proposed Initiative Expected Result HBM Model Change Purchase new processing Improved processing Add depreciation to machinery resource equipment times and quality Increased demand for Add purchase price of new processing Product Line A equipment to Machinery Capital Charges box (MCAP) Increased demand for Reduce factors on production summary Product Lines B and boxes C, but magnitude of Modify complexity output measure on increase is not as Machinery Capital Charge box to reflect great as for Line A higher allocation to Product Line A Increase demand for Line B to 600,000 Decrease pricing for Increase demand for Demand for Line A is 1,700,000 (reflecting 6 Product Line A Line A both the improved quality and decreased price) Price for Line A is reduced to $2.20 per unit Divest in Product Line C Decreased demand Increase price of Line C to $7.75 per unit by significant increases for Line C Decrease demand for Line C to 100,000. in price The reduction in demand is mitigated by improved quality. After the scenario is modeled, and the results are calculated, evaluate the operational results, and check the utilization levels for resources.Hyperion Business Modeling Solutions Guide s 173
  • 174. Improving Economic Profit Case Study Evaluating the Impact of New Process Technology on Economic Profit To evaluate the potential of these initiatives, you must first create a new scenario. The scenario-playing exercise below assumes that you are running Hyperion Business Modeling with okplastics.md model open. Economic Profit - Scenario 1 ➤ To evaluate the purchase of new processing equipment: 1. Open the model in the Model workspace. 2. On the Model workspace toolbar, click the EP View button to change to the correct view. 3. In the Projects & Time tab, click Scenarios 4. In the Edit window, click New. The New Scenario dialog opens. 5. Type Economic Profit in the Scenario Title text box. 6. Ensure the Annual check box is selected in the Periods text box, then click Create. 7. In the Project window, select the Building Blocks tab.174 s Hyperion Business Modeling Solutions Guide
  • 175. Improving Economic Profit Case Study 8. Modify the formula for the MLDMC Resource box as follows: a. Click the MLDMC Molding Machine in the Resource box list. b. In the Edit window, select Financial, then select Category 550, Machine Depreciation from the drop-down list. c. Click the formula button, then select New. The Formula dialog is displayed. d. Enter the following formula to calculate the expected depreciation on the new equipment using the appropriate tax rate, as shown below: 180.0*#mch*(1 - tr) 6 e. Click Add. f. In the Edit window, click Update to save the new formula. 9. Repeat the procedure in Step 7 to modify each of the following formulas for the specified Building Blocks: Financial Building Block Category Modified Formula DEMA Category 10 2.20*(1-tr) DEMC Category 30 7.7500*(1-tr) 10. From the Building Blocks tab in the Project window, select the Summary Box PRSA.Hyperion Business Modeling Solutions Guide s 175
  • 176. Improving Economic Profit Case Study 11. From the Input Links pane in the Edit window, select MLDPRO and change the factor to 1. 12. From the Input Links pane in the Edit window, select MCAP and change the factor to 4.0, then select Constant as the factor type. 13. Repeat the procedure in Steps 9 to 11 to modify the factors for each of the following input links: Building Block Input Link Modified Factor PRSB MLDPRO 1.750 PRSC MLDPRO 2.400 MCAP 5.00, Constant 14. From the Volume pane in the Edit window, modify the volumes for each demand as specified in the following table: Building Block Modified Volume DEMA 1700.00 DEMB 600.00 DEMC 100.00 15. In the Project window, select OPERCH Operator Choice Route Box. 16. In the Policy pane in the Edit window, enter the following values: Building Block Modified Policy Value OPEROT 0.00 OPRL 1.00 17. From the Global Data tab in the Project window, select Variables. 18. Select #opr and change the value in the Edit window to 26.0 for the Number of Operators. The changes for the new scenario are now complete.176 s Hyperion Business Modeling Solutions Guide
  • 177. Improving Economic Profit Case Study Calculating the Scenario After the team introduced changes to the model data to reflect operational, marketing, and purchasing initiatives, they can see the effects on the model and, by extension, their own division. ➤ To see the results of the changes, click the Calculate button . Note the following new figures: The new economic profit of $525,140 is significantly higher than the economic profit costing result of the current operations. Even if the organization did not adopt all the changes recommended by the activity-based management team, it does point OK Plastics in a more profitable direction. Table 15: Profit for each Product Line with Scenario Changes 6 Model/ Costing Product Product Product Economic Scenario Type Line A Line B Line C Net Profit Profit Traditional Traditional ($181,000) $193,000 $88,500 ---- ---- Original NP Activity- $559,480 $348,130 ($324,540) $583,060 ---- Based EP $381,160 $182,610 ($735,320) ---- ($171,550) Scenario NP Activity- $893,540 $602,490 ($102,870) $1,393,160 ---- Based Scenario EP EP $543,360 $388,580 ($406,790) ---- $525,140 Note: This scenario has already been built and saved under the name Economic Profit Increase. To double-check your results, open and compare Economic Profit to your scenario.Hyperion Business Modeling Solutions Guide s 177
  • 178. Improving Economic Profit Case Study Next Steps Determine the accrual-based operating income before tax by setting the variables tr and cc to zero, or by switching to Regular View and recalculating, if necessary. Operating income before tax should be $583,000. This points out the value of variables in Hyperion Business Modeling. This model can easily be changed to reflect accrual income before tax, accrual income after tax and economic profit. Sensitivity Analysis Management is concerned about the accuracy level of the cost of capital percentage used and the marginal tax rate. The cost of capital may be substantially higher than the 10% used. Also, the marginal tax rate may be higher than 15%. To assess the sensitivity of EP results to these parameters, change the cost of capital percentage to 25%. Change the marginal tax rate to 35%. Note that EP is much more sensitive to changes in the assumed cost of capital than changes in the assumed marginal tax rates. Over the relevant range of cost of capital, EP can vary by as much as $1,000,000, whereas EP only varies by about $240,000 over the relevant range of tax rates. The implication for management is to carefully estimate the cost of capital for the division. For a cost of capital greater than approximately 15%, the impact of the new process technology on division economic profit will be negative, suggesting that it be rejected as a viable strategic initiative.178 s Hyperion Business Modeling Solutions Guide
  • 179. Chapter Next Steps 7 If you are interested in learning more about Hyperion Business Modeling and The Model Approach, Hyperion Solutions and its partners offer courses in the eight-step methodology. The Model Approach is internationally recognized as the most effective implementation strategy for activity-based costing and management. This two-day workshop is designed especially for busy professionals, drawing from years of implementation experience and using the case study approach. During the workshop, you will receive hands-on experience as well as a solid conceptual foundation for building your process models, generating results, and using those results in activity-based management scenarios. Our instructors are seasoned professionals who have years of field experience with activity-based management projects.Hyperion Business Modeling Solutions Guide s 179
  • 180. Next Steps180 s Hyperion Business Modeling Solutions Guide
  • 181. Appendix Concepts A Hyperion Business Modeling incorporates the concepts of activity-based management, activity-based costing, and process modeling. By understanding these concepts, you will gain a better understanding of how The Model Approach and the software help you solve the issues facing your business. This appendix is divided into the following sections: q “Activity-Based Costing and Management” on page 181 q “Solution” on page 184Activity-Based Costing and Management The two essential concepts behind Hyperion Business Modeling are Activity-Based Costing and Activity-Based Management. The advantages to activity-based costing will become more apparent if you understand the limitations of traditional costing first. The Problem of Indirect Costs Organizations have struggled to understand costs that do not directly contribute to the production of goods or provision of services. The traditional method involves determining a basis for allocation and distributing the indirect costs on that basis. For example, labor hours have been a common basis for allocating costs. Indirect (or overhead) costs are pooled and allocated based on the number of hours used to generate a product or service.Hyperion Business Modeling Solutions Guide s 181
  • 182. Concepts Activity-Based Costing The following definition of activity-based costing was developed by the Consortium for Advanced Manufacturing International (CAM-I), a group of organizations engaged in joint research into new management techniques. Activity-based costing is a cost management system that: q Measures the cost and performance of activities, resources, and cost objects q Assigns appropriate resources to activities and activities to cost objects q Recognizes the causal relationships of cost drivers to activities A cost object is any customer, product, service, contract, project, or other work unit for which a separate measurement of cost is desired. In activity-based costing, activities and resources are traced to cost objects through cost drivers—the units by which activities are measured. When an activity’s cost driver—such as machine hours, number of orders, billing hours, number of pounds produced, and so on— changes, the costs of resources and supplies feeding that activity also change. Those costs are reflected in the cost of supporting the creation of a volume of products, provision of a service, or serving a customer. Process Modeling Process models begin with creating a schematic of an organization. In a general sense, a schematic is a visual representation of two aspects the organization: q a comprehensive understanding of all the processes and activities of the business and q how they relate to one another. Process modeling traces costs from resources to activities, to other activities, and finally to the products or services or other cost objects based on how they are consumed. These resources are then costed, showing the financial results of the model’s activities. Because this approach can show more than two levels of drivers, process models can accurately reflect complex processes.182 s Hyperion Business Modeling Solutions Guide
  • 183. Concepts Activity-Based Management Activity-based management (ABM) tests the impact of operational and financial changes on an organization through the use of “what-if” scenarios in process models. These models help decision makers identify and manage the activities that drive costs. Managers can examine areas of the business that contribute to the production of products, the servicing of clients, or the distribution of products through channels. ABM gives managers a better understanding of the processes that bring goods and services to market. Activities generate costs, so managers can target activities for improvements, efficiencies, and cost reductions. Experience shows that companies have used ABM for much more than activity cost analysis and process improvements. Companies have used activity-based management for: q Profitability – product – service – channel – market segment q Pricing q Process Improvement (including Economic Profit, also called Economic Value Add or EVA) q Cost Analysis – target costing – evaluation of outsourcing – cost driver analysis – inventory evaluation A q Budgeting q Operational Analysis – what-if analysis – capacity management – constraint analysisHyperion Business Modeling Solutions Guide s 183
  • 184. Concepts The real power of Hyperion Business Modeling emerges when managers can test strategies in their business models to introduce marketing, financial, and operational innovations in “what-if” scenarios.Solution Hyperion Business Modeling uses process modeling with activity-based costing to calculate revenues, profits, and costs, play business scenarios, and produce operational information. Using the process modeling features of Hyperion Business Modeling, you can perform the following kinds of analysis: q costing for activities, processes, products, services, and customers q utilization level and constraint analysis of equipment and other resources q projection of future demands on resource needs and costs q evaluation of process improvement opportunities q preparation of budgets q profitability and margins q cost information for various stages of an operation With its scenario-playing powers, you can make changes to the financial and operational data of a business model to explore the impact of changes on your business. Because Hyperion Business Modeling can model constraints, you can check whether any of the constraints will be broken in a specific scenario.184 s Hyperion Business Modeling Solutions Guide
  • 185. IndexA overview, 19 product profitability, 31Activity Based Costing, defined, 182 using, 18, 19Activity Based Management, defined, 183 Collect data and rulesActivity box, 27, 28 Economic Profit, 136Adobe Acrobat Reader, xiii Connector schematic symbol, 28B Constraints, managing, 21 Consulting services, xvBoxes Costs, controlling, 22 schematic symbols, 27, 28 Customer profitability IndexBuilding the model case study, 75 economic profit, 146 measuring, 22Business issue, case study Economic Profit, 123 OK Plastics, 32 D OK Service Bureau, 76 Demand boxBusiness issues schematic symbol, 28 case studies, 24 Documentation costs, controlling, 22 printing online guide, xiii customer profitability, 22, 76 Hyperion Business Modeling, x economic profit, 123 investment and reengineering, 23 managing capacities and constraints, 21 E new product, introducing, 24 Economic Profit process improvements, 23 case study, 121 product profitability, 32 justifying investment, 23 reengineering, 23C Economic Profit case study, 121 activity based management, 172Capacities and constraints, managing, 21 build the model, 146Case studies business issue, 123 manufacturing, 31 collect data and rules, 136 OK Plastics, 31 define the project scope, 128 organization, 18 develop the schematic, 130Hyperion Business Modeling Solutions Guide s 185
  • 186. Index identify activities, resources and measures, 129 identify activities, resources and units of interpret new information, 167 measure, 35 schematic box definitions, 131 interpret new information, 60 solution result, 126 marketing analysis, 32 solution results, 126 solution result, 33 The Model Approach steps, 128 to ??, 128 to 178 The Model Approach steps, 34 to 73 validate the results, 163 validate the results, 55Economic Value Add (EVA) Model Approach SeeEconomic Profit, 23 SeeThe Model ApproachH OHelp OK Plastics PDF, printing, xiii case study. See Case Study for Economic Profit,Hyperion Business Modeling 121 consulting services, xv case study. See Manufacturing case study, 31 documentation, x schematic box definitions, 37 technical support, xv economic profit case study, 131 training, xiv OK Service Bureau case study. See Service case study, 75 schematic box definitions, 83IImproving capacity, 21 P process, 23 Preface, viiInventory box Printing schematic symbol, 28 online guides, xiiiInvestment user guide, xiii economic profit, 23 Process improvements, planning, 23Investment, justifying, 23 Process modeling, 182 Product introducing new, 24L profitabilityLinks case study, 31 schematic symbol, 28 measuring, 22 Profitability customerM case study, 75, 121Managing capacities and constraints, 21 measuring, 22Manufacturing case study, 31 product activity based management, 64 case study, 31 build the model, 51 measuring, 22 business issue, 32 Project scope collect data and rules, 42 economic profit, 128 cost analysis, 33 define the project scope, 35 develop the schematic, 36186 s Hyperion Business Modeling Solutions Guide
  • 187. IndexR Solution results economic profit, 126Reengineering Summary box economic profit, 23 schematic symbol, 28 justifying, 23 Supply boxResource box schematic symbol, 27, 28 schematic symbol, 27, 28Results economic profit case study, 163 TRoute box Technical support, xv schematic symbol, 27, 28 The Model Approach build the model, 29S collect data and rules, 28 define the project scope, 26schematic symbol, 27, 28 identify activities, resources, and measures, 26 activity box, 27 interpret the new activity-based information, 30 connectors, 28 overview, 25 demand box, 28 perform activity-based management, 30 illustrated, 27, 28 validate the results, 29 inventory box, 28 Training, xiv resource box, 27 route box, 27 summary box, 28 V supply box, 27 Validating resultsscope economic profit, 163 economic profit case study, 128sensitivity analysis, 178Service case study, 75 build the model, 95 business issue, 76 collect data and rules, 87 cost analysis, 77 define the project scope, 81 develop the schematic, 82 identify activities, resources and measures, 81 interpret new information, 105 marketing analysis, 77 perform activity-based management, 111 solution result, 78 The Model Approach steps, 80 to 119, ?? to 177 validate the results, 101Services consulting, xv service packages, xv technical support, xv training, xivHyperion Business Modeling Solutions Guide s 187
  • 188. Index188 s Hyperion Business Modeling Solutions Guide