Modern business Techniques in Strategic Cost Management

Modern Business Environment Page 1
Modern Business Environment
Topic 1: Introduction 2
Topic 2: Cost of Quality (COQ) 3
Topic 3: Total Quality Management (TQM) 10
Topic 4: Supply Chain Management (SCM) 15
Topic 5: Gain Sharing Arrangements 25
Topic 6: Outsourcing (Contracting Out) 26
Topic 7: Theory of Constraints 27
Topic 8: Throughout Accounting 31
Topic 9: Business Excellence Model 32

Topic 1: Introduction
Question: Modern Business Environment has transit from a seller’s market to buyer’s market. Explain?
Answer
 The business environment is ever changing and dynamic in nature.
 The modern business environment has changed drastically and in a different manner.
 The main revolution has been the transition from a seller’s market to a buyer’s market.
 Earlier the supplier or service provider dictated the dimensions of a transaction i.e.
o Price - usually determined by a “cost plus” approach
o Response time - determined by the supplier
o Quality - determined by the service/ product provider
o Performance - dictated to the customer
 However, this trend has completely changed. This trend is result of
o Globalization of the world economy.
o High competition among organizations across the globe.
o Global excess capacities in production, services, and in some areas of development.
o Using new managerial methods.
o Availability and accessibility of data and knowledge.
o Timely availability of materials and services.
o Ease of global travel and transportation
 Therefore, challenge for businesses today is to satisfy their customers through the exceptional
performance of their processes
Hindi Mein Jane
Phle business mein jo seller hota tha – woh king hota tha – jo price woh decide kre, jo quality de ya jitney time
mein de – sab ussi ke hisab sa hota tha – upar se maal bus sell krne tak – ki responsibility supplier par hoti thi –
baad mein kuch ho jaye product mein toh woh customer kkhud jhelta tha – reason yahi tha inn sab ka ki
competition kam tha – business house utne expand ni the.
Par jaise jaise Globalization hua – competition increase hua – business house ki capabilities badi – nayi
technologies introduce hui – toh inn sab ne kya kia – ki seller jo sab decide krta tha – uske hath se power buyer
ke hath m shift kr di – Abb koi seller after sale service ni de and dusra de raha hai toh buyer first wala supplier
select krega – Iss taahar se ek tranisition tha – seller ke king na rehne se le kar – customer ke bhagwan ban ne
tak.

Topic 2: Cost of Quality (COQ)
Quality is concerned with
 conformance to specification
 ability to satisfy customer expectations and
 value for money
8 Dimensions of Quality [PFC-RSD-AP]
1) Performance i.e. Primary Function or Primary Operating Characteristics
2) Features i.e. Additional Functions or Characteristics that enhance the appeal of product or service
to the user
3) Conformance i.e. meeting the specification or specified standards
4) Reliability i.e. trust that product will not fail instantly or within a specific time period
5) Serviceability i.e. components detachable or replaceable or speed with which the product can be
put into service when break down and include competence and the behaviour of the service
person
6) Durability i.e. Life of product or length of a product life
7) Aesthetics i.e. appearance or design of product. Also represent customer preference or response
has to a product.
8) Perceived Quality i.e. meeting the needs as per customer’s perception on several attributes or
quality attributed to a good or service based on indirect measures
Smjo zarra: Phone liya – basic feature hone chahiye – additional features kya hai – china phone toh ni ki chle hi
na – wahi sab dia h jo apne btaya tha – agar khrb ho gaya toh service centre hai – life 2 saal toh hogi phone ki –
appearance mein acha lagata hai – and customer ka jo jo btaya hai phone ke bare mein and customer ne jo
perceive kia hai woh wahi hai na jo aap btana chahte the customer ko.
Example:
Quality of Products Dimensions of Quality
Consistency of performance over time Reliability
Primary Product characteristics Performance
Exterior finish of a product Aesthetics
Useful life of a product Durability
Cost of Quality is the sum of the costs related to prevention and detection of defects and the costs
incurred due to occurrences of defects.
Concept jaan lo ek bar
 Phle company input leta tha – process krta tha – supply kr deta tha goods
 Fir kisi ko laga after sale service deni chahiye toh woh kya kia ki ek rework centre naam se khul liya jaha jo
defect aata tha sahi krte the
 Par hua yeh ki woh koi dedicated department ni tha – normal process se jab time lgta toh – toh rework krte
the – iss se customer response time bahut jyda ho gaya – toh fir ek idea nikla ki
 Hum khud inspect kr ke hi deliver kregy – iss process mein yeh hua ki item rework department par jyda jane
lage – and – volume kam ho gaya company ka – though quality increase ho gayi – par demand meet ni kra
paa rahe the

 Sabse phla company jo issme fassa woh tha Motorola. Motorola ne bahut socha and smj aaya usse ki
problem humri process mein hai – toh usne puri process badal di and iss badalne ka naam padha – Business
Process Enginerring – iss se massive cost cut hua Internal failure cost mein (say phle 100cr to abb bus 10cr
lagte)
 Par Motorola socha ki 10 Cr bhi kyu lag rahe hai – usne fir socha and dekha ki problem input mein hai
humare – ussne uss par bhi check laga diye jo hue appraisal and prevention process cost
 Isske baad Motorola ne kaam kia – ki itne sab ke baad bhi koi failure reh jata hai – toh hum usse bhi solve
kregy – cost incur kregy and uss cost ko external failure cost
 Iss pure 4 chizo se i.e. internal cost, BPR, appraisal and prevention cost and External cost ko jab implement
kia – toh concept aaya six sigma – matlab error zero ho bilkul.
 Abb yeh sab chiz achieve krne ke liye chahiye focus and focus kisi ek bande ka ni puri management ka i.e.
Quality ke liye management chahiye hoga and saare level of management chahiye isliye isse hum bolte hai
TQM. TQM focus krta hai – process improvement ke liye – jiske liye six sigma, BPR jaisi techniques use hoti
hai.
3 Views regarding Cost of Quality
1St
View: Higher quality means higher cost
It is considered that enhanced quality features cost more in terms of labour, material, design, and
other costly resources. However, the additional benefits which are gained from improved quality do
not compensate for the additional expenses.
Hindi meaning: Quality increase krne se jitna paisa extra milta hai, use jyda to kharch hi ho jta h!!
2nd
View: The resultant savings are greater than the cost of improving quality
It is considered that the savings result from less rework, scrap, and other direct expenses related to
defects are higher than the cost incurred.
Hindi meaning: Quality increase krne se jo extra aata hai, woh kafi jyda hota h jo cost lagi use and long term
benefit deta h!!
3rd
View: Quality costs are those costs that is incurred in excess of cost that would have been incurred
if product was built or service performed exactly right the first time
Hindi meaning: Jab product phli bar hi perfect banate toh jo extra cost aati woh Quality cost hoti!!
4 Components of COQ
 Price of Non conformance
 Cost of failure of control
 Price of conformance
 Cost of control
Inverse Relation

Question: What is Quality Management Programme?
Answer: Define all 4 costs and optimal COQ.
Prevention Costs
 The costs incurred for preventing the poor quality of products and services may be termed as
Prevention Cost.
 These costs are incurred to avoid quality problems and prevent errors from being made or occur
or reoccur.
 They are planned and incurred before actual operation.
 They try to keep failure and appraisal cost to a minimum.
 These are associated with the design, implementation, and maintenance of the quality
management system.
 Examples of this cost includes
o Quality planning (creation of plans for quality, reliability, operations, production, and inspection)
o Quality assurance (creation and maintenance of the quality system)
o Supplier evaluation
o New product review
o Error proofing
o Process Capability evaluations
o Quality improvement team meetings
o Quality improvement projects
o Quality education and training (development, preparation, and maintenance of programs – include
both internal and external training provided)
o Cost incurred due to product specification arising may be from incoming materials or
intermediate processes
o Routine preventive repairs and maintenance to equipment
Appraisal Costs
 The need of control in product and services to ensure high quality level in all stages, conformance
to quality standards and performance requirements is Appraisal Costs.
 It is a bad cost which verifies whether an activity was done properly or not.
 These are costs associated with measuring and monitoring activities related to quality.
 It is incurred to determine the degree of conformance to quality requirements (measuring, evaluating
or auditing).
 These are connected with measuring conformity with requirements and include
o Cost of incoming inspections
o Cost of set up inspections
o Cost of acquiring and operating the process control and measuring equipment
 They are associated with the supplier’s and customer’s evaluation of
o purchased materials,
o processes,
o products and
o services
to ensure that they are as per the specifications

 Examples include the costs are
o Verification (checking of incoming material, process setup, and products against agreed specifications)
o Quality audits (confirmation that the quality system is functioning correctly)
o Supplier rating (assessment and approval of suppliers of products and services)
o Checking and testing purchased goods and services
o In-process and final inspection/test
o Field testing
o Product, process, or service audits
o Calibration of measuring and test equipment
Internal Failure Costs
 Internal Failure Cost associated with defects found before the customer receives the product or
service.
 These costs occur when the product is not as per design quality standards
 Deficiencies are caused both by errors in products and inefficiencies in processes
 Examples for these costs are:
o Waste- waste occurs when unnecessary work is done or holding of stock as a result of
errors, poor organization, or communication
o Scrap—defective product or material that cannot be repaired, used, sold
o Rework or rectification—when the work needs to be rectified for defective material or
errors
o Failure analysis—activity required to establish the causes of internal product or service
failure
o Delays
o Re-designing
o Shortages
o Failure analysis
o Re-testing
o Downgrading
o Downtime
o Lack of flexibility and adaptability
External Failure Costs
 External failure costs are incurred to medicate defects discovered by customers.
 These costs occur when the product is not as per design quality standards
 This leads to customer dissatisfaction
 Examples include the costs for
o Repairs and servicing (of both products that have been returned by the customer and which are serviced
at the customer’s place)
o Warranty claims (failed products that are replaced or services that are re-performed under a guarantee)
o Complaints (all work and costs associated with handling and servicing customer’s complaints)
o Returns (handling and investigation of rejected or recalled products, including transport costs)
o Losses due to sales reductions
o Environmental costs

Therefore, total quality costs are then the sum of all these costs i.e.
COQ will be calculated
 in terms of effort (hours/day)
 in terms of money (i.e. converting the effort into money and adding
any other tangible costs like test environment setup)
 in terms of percentage of total cost
COQ must be determined by the external person rather than a core
member of the project or product team.
Optimal COQ
An increased expenditure in prevention and appraisal is likely to result in a substantial reduction in
failure costs. Due to competition, there may be an optimum operating level in which the combined
costs are at a minimum.
While making decision w.r.t quality control, both financial and non financial perspective needs to be
considered.
Even if from the financial perspective point of view the new proposal for quality control cannot be
accepted as it will lead to an additional cost, non-financial perspective point of view should be taken
into account as it lead to customer satisfaction and ultimately leads to capture market share and
create a brand image.
5 Steps for Application of PAF Model
The prevention, appraisal, and failure (PAF) model is the most widely accepted method for measuring
and classifying quality costs. Those steps are:
 Gather basic information about the number of failures in the system i.e. abhi kitna failure hai
woh dekho phle
 Quantify the data using assumptions i.e. kuch assumptions ke basis par unn failure ka loss
calculate karo
 Chart the data based on the 4 elements of cost and study it i.e. fir unko wahi 4 heads mein
break kar do
Iss point par cost
minimum hogi i.e.
optimum COQ

 Allocate resources to combat the weak-spots i.e. apne weak points ko identify kar unko
sudharo
 Continue study on a regular basis and evaluate your performance i.e. fir isko regularly and
continuously krte rahe
Zero Defects through a Continuous Quality Improvement Programme
It is possible to increase quality while at the same time reducing both conformance and non-
conformance costs, if a programme of aiming for 0% defect and/or continuous improvement are
followed.
Zero defect advocates continuous improvement. To implement this elimination of all forms of waste,
including reworks, yield losses, unproductive time, over-design, inventory, idle facilities, safety
accidents, etc. is necessary.
Suitable Quality Control level at a Minimum Cost
To achieve 0% defects, costs of conformance must be high. Cost of non-conformance should be nil but
these will increase as the accepted level of defects rises. There should therefore be an acceptable level
of defects at which the total costs of quality are at a minimum.
Iceberg Model to under Cost of Quality
Many of the costs of quality are hidden and thus making it difficult to identify by formal measurement
systems. These costs can be illustrated by iceberg model.
Only a minority of the costs of poor and good quality is obvious – appear above the surface of the
water. The reduction of cost under water has a huge scope. If we identify and improve these costs, the
costs of doing business will significantly reduce.

Example for practice
Quality Cost Category
Rework Internal Failure Cost
Disposal of scrap Internal Failure Cost
Warranty Repairs External Failure Cost
Revenue Loss External Failure Cost
Repairs to manufacturing equipment
Prevention Cost (if routine repairs). If
not routine, then Internal Failure Cost
Discount on defective sale
External Failure Cost (if defect
identified after sales)
Raw Material Inspection Appraisal Cost
Finished Product Inspection Appraisal Cost
Establishment of quality circles Prevention Cost
Packaging inspection Appraisal Cost
Quality Consultant cost Appraisal Cost
Re-purchase of components to create replacement External Failure Cost
Customer survey for feedback on quality
Appraisal Cost
If customer survey is for knowing taste
etc. of customer it will be prevention
cost.
Employee time spend on reviewing and assessing the quality
of output
Appraisal Cost
Testing of material of special nature from outside
laboratory
Appraisal Cost
Vendor Survey or Supplier review Prevention Cost
Summarization [Reading Only]
Prevention costs mein hota h 5 types ke cost
 Quality Planning Cost i.e. cost associated with time spent in planning quality
 Process Control Costs i.e. cost related to analysis of production process and capabilities and
implementation of controls
 Information systems costs i.e. cost to develop data requirements and quality measurements
 Training Costs i.e. cost associated with developing an operating formal training programs and
attending seminars on quality assurance
 General Management Costs i.e. cost for clerical staff , supplies and communication related to
quality of efforts
Appraisal costs mein hota h 3 types ke cost
 Test and Inspection Cost of raw material, WIP, finished goods and include salary for inspectors,
supervisors and other personnel
 Cost of Maintaining Instruments includes testing and repairing of equipment
 Process Control Costs i.e. cost of time spent by operators in gathering and analyzing quality
measurement

Internal Failure costs mein hota h 2 types ke cost
 Scrap and Rework Cost
 Downgrading Cost i.e. loss of revenue as a result of selling a product at a lower price as it does
not meet specification but still usable
External Failure costs mein hota h 4 types ke cost
 Cost of customer complaints and Returns i.e. cost of investigation complaints and take
corrective actions
 Production Recall Costs i.e. administrative and production cost of making adjustments
 Warranty Claims Costs i.e. cost of repair and replacement
 Product Liability Costs i.e. legal actions and settlements cost
4 P’s of Quality Control [Reading Only]
a) People: Where individuals lacking enthusiasm are charged with the responsibility for driving group
success then progress will be slow or negligible.
b) Process: It is essential to approach problem-solving practically and to regard the formal process as
a system designed to prevent participants from jumping to conclusions.
c) Problem: Problems need to be approached in bite-sized chunks, with teams tackling solvable
problems with a direct economic impact, allowing for immediate feedback together with
recognition of the contribution made by individual participants.
d) Preparation: Courses on creative thinking and statistical processes are needed in order to give
participants a greater appreciation of the diversity of the process. This training must quickly be
extended beyond the immediate accounting circle to include employees at supervisory levels and
below who are involved at the data input stage.

Topic 3: Total Quality Management (TQM)
TQM is a management strategy aimed at embedding awareness of quality in all organizational
processes. TQM based on saab ka saath, sabka vikaas.
TQM requires that the company maintain this quality standard in all aspects of its business. This
requires ensuring that things are done right the first time and that defects and waste are eliminated
from operations.
4 Objectives of TQM
 TQM is a management philosophy that seeks to integrate all organizational functions (marketing,
finance, design, engineering, and production, customer service, etc.) to focus on meeting customer
needs and organizational objectives.
It is a joint effort of management, staff members, workforce, and suppliers to meet and exceed
customer satisfaction level.
 TQM aims at improving the quality of organizations outputs, including goods and services, through
continual improvement of internal practices.
 As part of the TQM approach, standards can be set based on both
o Internal priorities or
o any industry standards1
currently in place.
 TQM's objectives are to eradicate waste and increase efficiency. This is done by ensuring that the
production of the organization's product (or service) is apt the first time.
Therefore, TQM is a comprehensive management system which
 Focuses on meeting owner’s/ customer’s needs, by providing quality services at a reasonable cost
 Focuses on continuous improvement.
 Recognizes role of everyone in the organization.
 Views organization as an internal system with a common aim.
 Focuses on the way tasks are accomplished.
 Emphasizes teamwork
1
Industry standards can be defined at multiple levels, and may include production of items to an understood norm or adherence to various laws and regulations
governing the operation of the particular business.
Total Quality Management
is
Integrated and comprehensive system
of
planning and controlling
all business functions
so that products or services
produced
can meet or exceed customer expectations

6 C’s for implementation of TQM process
Commitment
 For developing TQM culture, a clear commitment from the top management is required such
that quality improvement becomes a normal part of everyone’s job.
 It is not sufficient to delegate ‘quality’ issues to a single person since this will not provide an
environment for changing attitudes and breaking down the barriers to quality improvement.
 Such expectations must be made clear, together with the support and training necessary to
their achievement.
Culture
 For purpose of implementing TQM a change in culture and attitude is required. Such change
can be bring in an organization through training of management.
 Culture must be changed to encourage individual contributions and to make ‘quality’ a normal
part of everyone’s job.
Continuous Improvement
 TQM is a ‘process’ not a ‘programme’ that requires long term commitment for searching the
room of improvement and on continuous basis.
Co-operation
 The on-the-job experience of all employees along with their involvement and co-operation
must be fully utilised and sought in the development and implementation of TQM i.e.
application of Total Employee Involvement (TEI) principles.
Customer Focus
 TQM Implementation shall focus on providing perfect service with zero defectives with
satisfaction to both external customer (in receipt of the final product or service) as well as internal
customer’s (colleagues who receive and supply goods, services or information).
Control
 Documentation, procedures and awareness of current best practice are essential if TQM
implementation is to function appropriately.

 The control mechanisms need to be frequently overlooked for better customer service and
employee empowerment.
 Unless procedures are in place improvements cannot be monitored and measured nor
deficiencies corrected.
Deming’s 14 points Methodology on Quality (TQM)
These points are principles that guide companies in achieving quality improvement. The principles are
founded on the idea that upper management must develop a commitment to quality and provide a
system to support this commitment.
1) Create constancy of purpose towards improvement. Replace short term reaction into long term.
(short term mein aap soch rahe ho sirf profit ki – vision long term karo aur brand banao apna)
2) Adopt the new philosophy (by top management and workforce) (aisa ni ki bus aap lower level of management
se umid kar rahe ki woh quality par dhyn de – top management ko sbse phle dena chahiye dhyn)
3) Cease dependence on inspection to achieve quality (aise supplier se maal lena hi kyu – jis par quality ka
doubt hai and internally quality check krni pade – aise se lo jiski quality achi hi achi ho)
4) Move towards a single supplier for any one item. Multiple suppliers mean variation between
feedstock
5) Improve constantly and forever. Constantly strive to reduce variation
6) Institute training on the job (in order to reduce variation)
7) Adopt and institute leadership (not supervision as leadership is target based)
8) Drive out fear (allow workers from acting in organization best interest) (generally top management ko kya lagta
hai – ki workers ko jyda mat sikhao – kam sikh kr khud ka khul lia toh – yeh mat karo – unko freedom do taking unke
best ideas apko mil pae)
9) Break down barriers between departments (TQM is the concept of the internal customer i.e. each
department should not only serve the management but also the other departments that use its output)
10) Eliminate slogans, exhortations and targets for the workforce (matlab agar prb tumhari process m hai to
usko sahi karo – workers ko harass mat karo bina baat ke)
11) Eliminate management by objectives (i.e. deming ke according agar aap production target ko achieve krne m lag
jate ho toh quality se comprise krte ho – target jldi achieve krne ke chakar m)
12) Remove barriers to pride of workmanship and eliminate the annual rating or merit system (as it
help in reducing worker dissatisfaction)
13) Institute education and self-improvement
14) The transformation is everyone’s job (put everybody in the company to work accomplishing the
transformation)
Deming Wheel or Shewhart Cycle or Plan Do Study Act Cycle
PDCA Cycle describes the activities a company needs to perform in order to incorporate continuous
improvement in its operation. Continuous improvement is a never-ending process. Steps involved in
this cycle are:

Plan: The first step in the PDCA cycle is to plan. Managers must evaluate the current process and make
plans based on any problems they find. They need to document all current procedures, collect data,
and identify problems.
This information should then be studied and used to develop a plan for improvement as well as
specific measures to evaluate performance.
Do: The next step in the cycle is implementing the plan (do). During the implementation process
managers should document all changes made and collect data for evaluation.
Study / Check: The third step is to study the data collected in the previous phase. The data are
evaluated to see whether the plan is achieving the goals established in the plan phase.
Act: The last phase of the cycle is to act on the basis of the results of the first three phases. The best
way to accomplish this is to communicate the results to other members in the company and then
implement the new procedure if it has been successful.
Since, this is a cycle; the next step is to plan again. After we have acted, we need to continue
evaluating the process, planning, and repeating the cycle again.
4 Criticisms of TQM
 Focus on documentation of process and ill measurable outcomes
 Emphasis on quality assurance rather than improvement
 Focus more on internal customers rather than being customer oriented
 TQM may not be appropriate for service based industry2
4 Features of Total Employee Involvement (TEI) – yeh TQM ki jagah suggest kia gaya
 Empowers loyalty to the vision of the company through the pursuit of tough, visible goals;
 Provide recognition of satisfied customers and motivated employees as the true assets of a
company;
 Allow delegation of decision-making to the point of responsibility by eliminating hierarchical
tiers of authority to allow direct and speedy response to customer needs; and
 Lead to decentralisation of management to make best use of the creative energy of the
workforce
2
Total Quality Services (TQS) is suggested which is more customer oriented and creates an environment to
promote enthusiasm and commitment.

Topic 4: Supply Chain Management (SCM)
SCM can be defined as
All activities associated with the flow and transformation of goods from raw material to end user- is
called supply chain. It is the entire network of organisations working together to design, produce,
deliver and service products.
8 SCM Processes in Global Supply Chain Forum (GSCF) Framework [Link with Key Business Processes]
1. Customer Relationship Management i.e. Understanding customer needs and providing them with
the best possible solution to assist in customer retention and driving sales growth.
2. Supplier Relationship Management provides the structure for how relationships with suppliers are
developed and maintained.
When selecting the key suppliers, weight age should be given to supplier capabilities of
innovation, quality, reliability and costs/price reductions and agility to reduce risk factors.
3. Customer Service Management as better customer service gives higher customer retention.
Customer Service is the source of customer information.
4. Demand Management provides the structure for optimising the customer's requirements with
supply chain capabilities.
Flexibility in manufacturing process to react to changing market is a must. Orders processed under
JIT with minimum lot sizes have shorter cycle time and thus increases efficiency in meeting
customer demands.
5. Order Fulfilment includes all activities necessary to define customer requirements, design the
logistics network, and fill customer orders.
6. Manufacturing Flow Management includes all activities necessary to move products through the
plants and to obtain, implement and manage manufacturing flexibility in the supply chain.
This process manages activities related to planning, scheduling, and supporting manufacturing
operations, such as work-in-process storage, handling, transportation, and time phasing of
components, inventory at manufacturing sites, etc.
Key business processes  from end user  through or original suppliers  that provides
– products
– services and that add value for customers and stakeholders
– information
Transformation of product from node to node
includes activities:
 Production Planning
 Purchasing
 Material Management
 Distribution
 Customer Service
 Forecasting
Accordingly, SCM comprises of
 vendors that supply raw material,
 producers who convert the material into
products,
 warehouses that store,
 distribution centres that deliver to the
retailers and
 retailers who sell the product to the
ultimate user

7. Product Development and Commercialization provides the structure for developing and bringing
to market new products jointly with customers and suppliers.
Customers and suppliers must be integrated into the product development process in order to
reduce the time to market. For the firms to have a competitive edge, as product life cycles get
shorter, the appropriate products and services should be developed and successfully launched at
even shorter time schedules.
8. Returns Management includes all activities related to returns, reverse logistics, gate keeping, and
avoidance.
Returns management is necessary in case of both upstream and downstream supply chain flow for
optimum utilisation of resources and reduction in cost of repairs and renewal.
2 Types of Supply Chain
1. Push Model
Under Push model stocks are produced on the basis of anticipated demand. Demand forecasting can
be done via a variety of sophisticated techniques may be from operations research area or data
mining.
Hindi meaning: Yaha hum apne according sab bana lete h (based on demand) and customer ko offer krte hai.
Customer last banda hai iss model mein. Like Cocacola Model
2. Pull Model
Under Pull model stocks are produced in response to the actual demand. This new business model is
less products centric and more directly focused on the individual consumer – a more marketing -
oriented approach.
Hindi meaning: Yaha hum apna set up bana lete hai saara – fir customer ke order ka wait krte hai – and jo woh
order deta hai use supply kr dete ha i.e. Customer first banda hai iss model mein. Like Amazon Model.
Flow Jaane ki kosis
Sabse phle aap ek industry ko smjte ho – jnate ho ki uss industry meiin manufacturing flow kya hai – fir app
dekhte jo kon kon customer hai hamara and unki requirement kya/ hai unki need kya hai – fir aap dekhte
ho ki kon kon supplier available hai – accordingly hum ek product banane ka faisla lete hai – ek baat jo
business ko ache se chlane mein help krti hai who ek ki aap demand meet kar lo – jo order aaya uske
specification meet kar sako – after fulfilling the order – and deliver krne ke baad – apko do chize dekhni
hogi – after sale services to customer and return policy.

Electronic connections are used in the pull model to bring out the needs of customers.
 Electronic supply chain connectivity gives end customers the opportunity to give direction to
suppliers. For example about the precise specifications of the products they want.
 Customers have a direct voice in the functioning of the supply chain.
Supply chain created through E-Commerce brings benefit to both customer and manufacturer. Thus,
facilitating the companies to fulfil the
 customer needs,
 carry fewer inventories, and
 send products to market more quickly.
2 Flows of Supply Chain
A supply chain begins right from the supplier and finally ends on end customer or consumer. In the
total chain there are flows of material, information and capital or finance.
When the flow relates to supplier it is termed as upstream flow. If the flow is with consumers or
customers it is named as downstream flow.
Upstream Flow Downstream Flow
Material Return, repairs, after sale services Products, part
Information Orders, Point of sale data Capacity, delivery Schedules
Capital or Finance Payments Invoicing, Pricing, Credit terms
1. Upstream Supply Chain Management
a. Relationship with suppliers- This relates to supplier relationship management. It focuses on selection
of such suppliers that has capability of innovation, quality, reliability and costs/price reductions and
ability to reduce risk factors and ultimately help to bring greater value for the business.
b. Supplier Strategy- i.e. organization has to build up a set of strategies which in turn results in control
over suppliers. Matters to be considered while making strategies are:
Upstream SCM
Relationship with
suppliers
Supplier Strategy
Sources
Number of
Suppliers
Cost, Quality,
and Speed of
Delivery
Make or Buy and
OutsourcingUse of
Information
Technology
[E-procurement]
E-Sourcing
E-Purchasing
E-Payment
Management of transactions with suppliers are termed as upstream
supply chain management. It can be summarized as

 Sources i.e. Location and availability of source and bargaining power of buyer and seller based on
size of operation.
 No. Of Suppliers i.e. organization may prefer several or multiple suppliers to avoid the risk of failed
deliveries in case of single supplier who might provide huge discount due to bulk quantity
 Cost, Quality, and Speed of Delivery i.e. strategy form shall have interrelation of these factors in
order to achieve the right balance.
 Make or Buy and Outsourcing i.e. depending upon the application of various strategic cost
management techniques, decision on to produce or to outsource has to be taken.
c. E- Procurement Process
E-Procurement is the electronic methods beginning from identification of the organization’s
requirements and end on payment. E-Procurement includes E-Sourcing, E-Purchasing and E-Payment.
7 Advantages of E-Procurement: It results in
 lower cost,
 lesser time,
 quick ordering,
 selection of best supplier,
 control over inventory,
 better purchase and sales,
 greater financial transparency
3 Points related to E-Sourcing (E-sourcing means locating the supplier):
 It is the best possible way to find out the best supplier among others.
 Under this organization provide electronic invitation to tenders and request them to submit their
quotations.
 This process reduces the cost, time and effort associated with the selection of supplier.
3 points related to E-Purchasing (E-purchasing means placing the order):
 It is a process of placing an order with the suppliers electronically.
 It resulted in lesser time, lower cost & better result in product selection and ordering.
 4 Features of this process is
o Electronic catalogues for core/standard items
o Recurring requisitions/shopping lists for regularly purchased items
o Electronic purchase orders dispatched automatically through an extranet to suppliers
o Detailed management information reporting capabilities.
Case Study: Wal-Mart and P&G [Refer Page no. 2.43]
P&G ka head and shoulder shampoo hai – uske liye walmart ne ek contract sign kia P&G wale ke sath ki aap
humre store mein ek puri reck le lo and apna product becho. Product walmart ke store mein becha jayega – abb
prb yeh aai ki stock reck mein khtm hone par walmart P&G ko late btata tha – toh usse P&G ki short sale hoti thi
– iss problem ka solution yeh nikla ki – uss reck mein ek sensor (RFID) laga dia – jab bhi stock kam hota toh P&G
ko turant pta chl jata and woh stock timely bhej deta tha. Iss case mein humme dekhne ko mila – P&G ke sath
walmart ka relationship and kaise uss relationship bond ko strong kia technology use kr ke

2 Points related to E Payment:
 After purchasing from the best possible supplier payment also takes place through electronic
mode i.e. invoicing and fund transfer.
 E-Payment results in faster payment with zero error which is expected in manual form.
a. Relationship Marketing (yeh bolta hai- rishte banao-uske liyee 6 market model diye haii)
The Relationship marketing helps the organization to keep existing customer and to attract new
customers through helpful staff, quality service / product, appropriate prices and proper customer
care etc. It is a form of marketing that emphasizes on customer retention and satisfaction rather than
sales transactions.
6 Advantages of Relationship Marketing
or
6 Dimensions that illustrate how relationship marketing differs from the historical definition
or
Relationship marketing suggests a shift in the nature of marketplace transactions from discrete to
relational exchanges i.e. history and plans for future interaction. Explain
Downstream SCM
Relationship
Marketing
Six Markets Model
Internal Markets
Referral Markets
Influence Markets
Recruitment’s
Markets
Supplier’s Markets
Customer’s
Markets
Customers
Relationship
Management
Analysis of
Customers and
their Behaviour
Customers
Account
Profitability (CAP)
Customers
Lifetime Value
(CLV)
Customer’s
Selection,
Acquisition,
Retention and
Extension
use of Information
Technology
Brand Strategy
2. Downstream Supply Chain Management
Management of transactions with consumers or customers are termed
as downstream supply chain management.

 Relationship marketing seeks to create new value for customers and then share it with these
customers
 Relationship marketing recognises the key role that customers have both as purchasers and in
defining the value they wish to receive
 Relationship marketing businesses are visualised to design and align process
 Relationship marketing represents continuous cooperative effort between buyers and sellers
 Relationship marketing recognises the value of customer’s purchasing lifetimes (i.e. Customer
Lifetime Value)
 Relationship marketing searches for the chain of relations that can be drawn within the organisation.
Customer’s wants and values are created between the organisation and its main stakeholders.
6 Market Models i.e. key market domain where organizations may consider directing their marketing
activities
Internal Markets
Internal markets include internal departments and staff. Staffs have the ability to determine customer
oriented corporate culture.
Referral Markets
Referral Markets include two main categories:
 existing customers who recommend their suppliers to others
and
 referral sources such as a consultancy firm that may refer work to a law firm.
Influence Markets
Influence Markets represent entities and individuals, which have the ability to influence the marketing
environment of a firm like
 financial analysts,
 shareholders,
 the business press,
 the government, and
 consumer groups
A good relationship needs to be developed by the firms with critical sources of influencers relevant to
their markets.
Recruitment’s Markets
Firms have to manage its relationships with recruitment markets such as
 commercial recruitment agencies,
 universities and
 institutes
in order to have access to potential employees who possess the required skills for the job position.
Supplier’s Markets
Supplier Markets refer to traditional suppliers as well as organizations with which the firm has some
form of strategic alliance to gain benefits such as
 better quality,
 faster reach-to-market,
 original & creative products, and
 lower levels of inventory.

Customer’s Markets
Customer Markets represent all existing and prospective customers as well as intermediaries. They can
be either consumers or intermediaries. In today’s environment, the way firms provide services affects
the market and helps in gaining customers.
b. Customer Relationship Management (CRM)
CRM is an approach to managing a company’s interaction with current and potential customers. It
uses data analysis about customers
 personal information,
 purchase history,
 buying preferences and
 concerns
It involves knowing the needs of the customers and providing them with best possible solution.
Customers under different channels are compiled through CRM to ensure that they are satisfied with
organization products and services.
3 Types of CRM or 3 fundamental aspects of CRM to facilitate building relationship with profitable
customers
Operative CRM
It takes care of individual transactions and is used by operational team. Interactions by customers are
kept in the data base and used later by sales, marketing and service team for operational decisions.
It is made up of 3 components i.e.
 Sales Force Automation which focus on converting a potential client into an actual client. It
implements sales promotion analysis, automates the tracking of a client account history for
future sales, marketing etc.
 Marketing Automation which focuses on easing overall marketing process to make it more
effective and efficient
 Service Automation which focuses on direct customer service technology. These are
supported by technology such as emails, knowledge portal etc.
Analytical CRM
It is to analyze customer data collected through multiple sources and present it so that business
managers can make more informed decisions related to evaluation and prediction of customer
behaviour. It uses techniques such as data mining, correlation and pattern recognition to analyze the
customer data.
Collaborative CRM
It is to incorporate external stakeholders such as suppliers, vendors and distributors and share
customer information across groups/departments and organizations. It comprises interactive
technology like email, digital media to simplify the communications between customers and staff
which would help in building relationships.
with a main motive of
 improving business relations with customers,
 assisting in customer retention and
 driving sales growth.

CRM can be achieved by following tools and strategies
i. Analysis of Customers and their Behaviour:
Analysis of customers can be done based on geographical location or purchasing characteristics.
Factors to be considered while analysis is:
 Quality,
 discount,
 serviceability,
 size
 physiological need,
 safety need,
 social need,
 status/ ego need and
 self-fulfilment
ii. Customers Account Profitability (CAP)
Undertaking a customer account profitability improvement initiative is a 5-step process:
Customer Profitability Analysis is best conducted with a technique known as Activity Based Costing or
ABC analysis or using Pareto Analysis. [Refer Page no. 2.36]
iii. Customers Lifetime Value (CLV)
CLV value is the present value of net profit that we derive from a customer over the entire lifetime of
relationship with that particular customer.
It is an essential tool used in marketing to focus on more profitable customers and stop servicing non-
profitable customers.
It is the net present value of the projected future cash flows from a lifetime of customer relationship.
3 Steps for Implementation
 Ascertain the profits generated from each customer by using ABC Model
 Take judgements w.r.t the duration of relationships by using details such as
o strength of relationships,
o the likelihood,
o frequency and
o amount
o competitive products,
o customer loyalty
of repeated or additional purchases
need of existing and future customers

 Discount the profit margins at the firm’s cost of capital or any other rate that may be determined
by the organisation to arrive at the CLV
iv. Customer’s Selection, Acquisition, Retention and Extension
c. 3 points related to use of IT
 organizations should link their sales system to the purchasing system of its customer through
Electronic Data Change.
 Further, Intelligence gathering is used to monitor the online customer transactions
 Use of IT results in quick action, reduction in associated cost and saving in time
d. Brand Strategy: Branding of product makes a huge difference in its appeal to customers. Branding can
be usage of logo or specific colour or any other means which makes the product or service distinctively
visible among others.
10 Benefits of Supply Chain
Tangible benefits such as
 inventory reduction,
 personnel reduction,
 productivity improvement
 order management improvement
 financial cycle improvement etc
Customer
Selection
•Type of customer
•Who are we targeting?
•What is their value?
•Where do we
Customer
Acquisition
•A relationship needs
•Methods of acquiring
techniques
Customer
Retention
•Keeping existing
•Emphasis on understanding
•Ensure ongoing
assurance and
•E-techniques
extranets, opt-
Customer
Extension
•The products bought
•"Re-sell" similar
•"Cross-sell" closely
•"Up-sell" more
profit margins at the firm’s cost of capital or any other rate that may be determined
rive at the CLV.
Customer’s Selection, Acquisition, Retention and Extension
link their sales system to the purchasing system of its customer through
ing is used to monitor the online customer transactions
Use of IT results in quick action, reduction in associated cost and saving in time
randing of product makes a huge difference in its appeal to customers. Branding can
ogo or specific colour or any other means which makes the product or service distinctively
productivity improvement
improvement
financial cycle improvement etc
customer which the company needs to target has to be selected
targeting?
value?
reach them?
needs to be developed with in new customers.
acquiring customers include traditional off-line techniques
existing customers.
understanding customer needs to ensure better customer
ongoing service quality by focussing on tangibles, reliability,
and empathy.
for retaining customers are personalisation,
-in e-mail and online communities.
bought by the customers need to be increased.
similar products to previous sales
closely related products
more expensive products
Results in
 information visibility,
 new/ improved processes,
 customer responsiveness,
 standardization- flexibility &
 globalization of business performance
Page 23
profit margins at the firm’s cost of capital or any other rate that may be determined
link their sales system to the purchasing system of its customer through
ing is used to monitor the online customer transactions.
Use of IT results in quick action, reduction in associated cost and saving in time.
randing of product makes a huge difference in its appeal to customers. Branding can
ogo or specific colour or any other means which makes the product or service distinctively
selected.
techniques and online
customer satisfaction.
reliability, responsiveness,
mass customisation,
information visibility,
new/ improved processes,
customer responsiveness,
flexibility &
globalization of business performance

4 Key Business Processes in Supply Chain [kuch kuch Value Chain jaisa hai yeh]
1. Procurement Process
This process includes obtain products and materials from outside suppliers and various activities
involving
 resource planning,
 supply sourcing,
 negotiation,
 order placement,
 inbound transportation,
 storage,
 handling,
 quality assurance, etc.
This process can be done by using E-Procurement Process i.e. E- sourcing, E-Purchasing and E-
Invoicing.
2. Manufacturing Flow Management Process
This process manages activities related to
 planning,
 scheduling, and
 supporting
manufacturing operations, such as work-in-process storage, handling, transportation, and time
phasing of components, inventory at manufacturing sites etc.
Based on the past tends the manufacturing process produces and supplies products to the distribution
channels. Orders can be processed operating on a just-in-time (JIT) basis. Flexibility in manufacturing
process requires in order to respond to market changes.
3. Product Development and Commercialization
Here, customers and suppliers must be integrated into the product development process in order to
reduce the time to market. Managers of the product development and commercialization process
must:
 Closely coordinate with customer relationship management so that they are able to identify
customer-articulated needs;
 Select materials and suppliers in aggregate with procurement; and
 Enhance production technology in the manufacturing flow to manufacture and integrate into
the best supply chain flow for the given combination of product and markets.
4. Physical Distribution
This concerns the movement of a finished product or service to customers. In physical distribution, the
customer is the final destination of a marketing channel, and the availability of the product or service
is a vital part of each channel participant's marketing effort.
It is also through the physical distribution process that the time and space of customer service become
an integral part of marketing.
Thus, it links a marketing channel with its customers (i.e., it links manufacturers, wholesalers, and
retailers).
It also includes the
 responsibility to coordinate with suppliers on
matters of scheduling,
 supply continuity (inventory),
 hedging, and
 research into new sources or programs.

Topic 5: Gain Sharing Arrangements
It is a fundamental form of gain sharing  where a supplier agrees to perform its side of the contract
 with no guarantee of receiving a payment.
Under this arrangement  a supplier agrees to perform  its side of the contract  against the
benefits that emerge to the customer  as a result of the successful completion of the supplier’s side
of the bargain. Therefore, this kind of arrangements is risky for the supplier.
The gain, benefit or advantage to be shared under this arrangement is usually financial in nature. But,
these arrangements can also provide non financial benefits to both parties.
To assess any financial benefit, both parties have to provide each other with  access to relevant cost
numbers  to determine the
 basis for the assessment of the benefit
 calculation and sharing of the benefit.
In this situation, the supplier could almost be described as taking an equity stake in the customer
rather than entering into a contract with it.
3 Reason for failure of Gain Sharing Arrangements
 Unstructured or Poorly Structured terms of arrangement
 Error in implementation
 Relationship between outsource supplier and entity
Therefore,
If the benefits to the customer are substantial, the supplier could find itself rewarded with a large
return. Thus, there must be no rewards for the suppliers to achieve a higher return through
adversarial behaviour or by hiding behind the contract.
4 Precaution for executing Gain Share Arrangement
 Be specific in outsourcing agreement
 Predefined formula for sharing of benefits and period
 Required effort from entity
 Constitute innovation team to create an innovation structure, generate the idea and execution
of same.
Gain sharing arrangement (Cost saving sharing arrangement)
is an approach to
the review and adjustment
of an
existing contract or series of contracts,
where the adjustment provides benefits to both parties
i.e. a win-win situation for suppliers and their customers

Hindi mein jaan le: Yaha supplier supply ke against paise ni leta – baki ek contract sign kr leta hai – ki agar profit
hua toh share uska hoga – in case loss ho jata buyer ko toh supplier ko kuch ni milta. Arrangement usually aisa
hota hai ki dono ka win win situation aae. Thailand ka airport example h iss chiz ka.
Refer Q1 and Q6 of RTP 2020.
Topic 6: Outsourcing (Contracting Out)
Outsourcing is a business practice used by companies to reduce costs or improve efficiency by shifting
tasks, operations, jobs or processes to another party for a span of time.
It is a cost saving measure which can be followed in both manufacturing based sector as well as service
based sector.
3 Advantages of Outsourcing
 Outsourcing helps in cost savings. The lower cost of operation and labour, and Reduction in
overhead costs makes it attractive to outsource.
 It frees an organization from investments in technology, infrastructure and people that make up
the bulk of a back-end process capital expenditure.
 It gives businesses flexibility in staffing, manpower management, and helps in cost savings.
3 Disadvantages of Outsourcing
 Risk of losing sensitive data and the loss of confidentiality.
 Control of operations and deliverables of activities outsourced.
 Inexperienced worker or improper process can lead to quality problems
3 Issues in Outsourcing
 Underutilization of production capacity.
 Reaction of workforce as few workers need to be retrenched and might lead to strike by remaining
workforce due to insecurity in job.
 Cost associated redundancies needs to be considered
3 Precaution to be taken in Outsourcing
 the entity needs to ensure
o Timely delivery in right quantity
o Quality of supplies
o Penalties or compensation in case of default or loss in business3
 The entity must have to identify alternate vendors which can provide same level of goods or
services in case of non availability of current vendor. Thus list of alternate vendors is necessary
backup.
 In-house departments can be made after considering control over factors such as input material,
performance of service, training to staff, equipment used etc.
3
SLA is a formal or informal agreement b/w the customer & service provider. It includes various components
from a definition of services to the termination of agreement. To ensure that SLAs are consistently met,
agreements are often designed with specific lines of differentiation and the parties involved are required to
meet regularly. Thus, providers’ rewards and penalties are specified. Further, there is always a place left for
revisiting in most SLA.
For this purpose, detailed
Service Level Agreements
(SLA) needs to be drawn

Topic 7: Theory of Constraints
Every organization thrives to achieve their future goals. Goals can be expressed in monetary or non
monetary terms. There is always at least one constraint that limits the organization to achieve their
goals. The theory of constraints focuses on revenue and cost management when faced with
bottlenecks.
TOC is Procedure based on
 identifying bottlenecks (constraints),
 maximising their use,
 subordinating other facilities to the demands of the bottleneck facilities,
 alleviating bottlenecks and re-evaluating the whole system.
Constraint means such factors that limits the flow or output or achieving the goal of an organization. It
is also known as bottleneck. A bottleneck is an activity within the organisation where the demand for
that resource is more than its capacity to supply.
3 Examples of Internal Constraint
 Equipment i.e. assets deployed by organization
 People i.e. human resources employed by the organization
 Policies
Goldratt’s 5 steps method for improving performance [TOC Steps or Process]
The theory of constraints describes the process of identifying and taking steps to remove the
bottlenecks that restrict output. The theory of constraints considers short-run time horizons and
assumes other current operating costing to be fixed costs. The key steps in managing bottleneck
resources are as follows:
1. Identifying the System Bottlenecks i.e. identify constraints which restrict output from being
expanded.
2. Describe How to Exploit the Bottlenecks i.e. taking decision regarding the optimum mix of
products to be produced by ensuring that bottleneck activity is fully utilized.
Type of Constraint
External constraint
This arises
when an
organization
is able to
supply more
than the
demand.
Therefore,
company
needs to
generate
demand to
overcome
this type of
constraint
Internal constraint
This arises
when an
organization
is not able to
supply as per
the demand.
The
constraint in
this case is
the system.
Therefore, to
overcome
this
constraint
apply TOC
Steps.

3. Subordinate and Synchronise to the Constraint i.e. use optimum production of bottleneck activity
to determine the production schedule of the non-bottleneck activities. Preferred course of action
is that bottleneck machine should setup pace for non-bottleneck machine.
4. Elevate the System Bottlenecks or Increase Bottleneck Efficiency and Capacity i.e. take necessary
actions to remove or elevate the constraint. This can be done by
 replacing machine,
 providing training to workers,
 changing of design of product,
 reducing processing time etc.
5. Repeat the Process as a New Constraint Emerges i.e. if the bottleneck activity has been elevated
and replaced by a new bottleneck activity it is necessary to return to step 1 and repeat the
process.
Elevating the constraints (Drum-Buffer-Rope)
7 Points related to Drum-Buffer-Rope
 When there is an internal constraint, there are few resources dictating the output of the system.
The most limited resource is referred as drum.
 Drum determines the pace of the entire system, therefore, it should be utilized on maximum
capacity. To ensure this, drum schedule can be created which derives from the shipping schedule
of the organization.
 Subordinate everything else to the above decisions, there are number of actions that have to met
by the non constraints in the system in order to meet drum schedule and ultimately the shipping
schedule.
Process A 1000 units Process B 200
units
Non Bottleneck Step 1: Identified Bottleneck
Input Output
Step 2: To elevate this bottleneck –
we need to fully utilize the capacity
and that to on continuously basis
Step 3:
1. hum A ko bolegy ki aap continuous kam
karo and Thoda extra bana ke rakho i.e.
Buffer
2. Aap apni capacity ke hisab se kam ni
kregy – Process B ke hisab se karegy
3. Jaise hi buffer kam hoga –prcess A wapis
kam shuru kr dega. Iss release of capacity
ko Rope Bolte
Bottleneck is also known as
Drum
This implies that bottleneck
mein humesha kaam hota
rehna chahiye
Abb A ko kaise pt chlega ki wapis
production shuru kre – toh ek traffic
signal system laaye
R
Y
G Okay h – no buffer
needed
Caution - buffer kam
hone wala h
Buffer empty ho gaya
Isstarahsehum
subordinatekiye
Step 4:
Hum Process B ko badha kar degy – uski
capacity badha degy –to elevate
constraint
Printer ko dekho waha same
concept use hota h.
Aquaguard another example

 Since, the capacity of non constraints is more than the constraint segment, a buffer has to be
created in order to ensure that maximum capacity of constraint does not affected due to non
availability of inventory (WIP).
 However, to ensure that too much inventory is not introduced in system, new order should be
started only as the constraint finish. To ensure this, rope is tied in first operation of the system.
 Rope is calculated as difference between date the order appears on drum schedule and constraint
buffer time.
 However, this choking needs to be handled properly while implementation otherwise this may
impact non constraint and ultimately causes an impact on throughput.
To Summarize
This approach advocates that bottleneck resources/activities should be fully utilised while non-
bottleneck resources/activities should not be utilized to 100% of their capacity since it would result in
increase in inventory.
The main concept is to maximise the rate of manufacturing output i.e. production or throughput of
the firm by removing the constraints through synchronous manufacturing or harmonization of
production process.
8 Rules/Principles of Production Scheduling (Synchronous Manufacturing – jo Step 3 mein dekhe the hum)
It is an all encompassing manufacturing management philosophy which includes a set of principles,
procedures, and techniques where every action is evaluated in terms of common goals of the
organization.
1) Focus on synchronizing the production flow than on idle capacities
2) The level of utilization of a non bottleneck resource is determined not by its own potential but by
some other constraint in the system
3) Value of time at a bottleneck resource is equal to the throughput rate of products processed by
the bottle neck.
4) Utilization and activation of the resource are not same i.e. jitna capacity hai utna use hoga koi guarantee ni
5) Value of time at a non bottleneck resource is negligible.
6) The transfer batch may not and many times should not be equal to the process batch
7) A process batch should be variable both along its route and time (design such production flow jo flexible
ho ki koi aur kam krna padhe toh kar le i.e. bottleneck ka kam non bottleneck mein de paye)
8) Priorities for production mix can be set only by examining the system constraints

3 Operational Measures of Theory of Constraints
Hindi mein jaan lo:
Investment karte hai –also known as inventory which include all asset (fixed, working , current etc.) – abb iss
inventory ki wajah se operating expenses hote hai – so that inventory saleable position mein aa jaye - yaha ek
assumption hai – ki raw material chord sab expenses fixed hai – fir hmesha kosis kregy ki yeh finished good jaldi
se jaldi sale ho jaye i.e. throughput – a rate at which sales are made from inventory i.e. how inventory convert ho
rahi sale mein to maintain continuity.
Based on these three measures, the objectives of management can be expressed as increasing
throughput, minimizing investment and decreasing operating expenses.
Example:
Expenses Classification Expenses Classification
R&D Cost Investment Labour Cost Operating Expense
Rent/utilities Operating Expense Stock of Raw Material Investment
Raw Material consumed Throughput Sales Throughput
Depreciation Operating Expense Cost of equipment/ building Investment
Inventory

Topic 8: Throughout Accounting
Assumption: treated only direct material as variable and all labour and overhead costs as fixed.
Here, Throughput means difference between Sales Value and Direct Material.
Analysis: If the TA ratio is greater than 1, the product in question is profitable. If there was a
bottleneck, products could be ranked by a variant of the TA ratio.

Topic 9: Business Excellence Model
3 Advantages or importance or essence of Business Excellence
 To develop quality management principles that
 increase the overall efficiency of the operation,
 minimize waste in the production of goods and services, and
 help to increase employee loyalty
 Maintaining high standards throughout the business by achieving excellence in everything that an
organization does (including leadership, strategy, customer focus, information management, people, and
processes).
 Considers various management thoughts as core concepts and structures quality management in
a manner that can be adapted by any enterprise.
5 Models or Tools of Business Excellence
 European Foundation for Quality Management (EFQM) Excellence Model
 Baldrige Criteria for Performance Excellence (USA)
 Singapore BE Framework
 Japan Quality Award Model
 Australian Business Excellence Framework
EFQM Excellence Model
 EFQM Excellence Model meets the Fundamental Concepts of excellence.
 It provides an all-round view of the organisation.
 It can be used with other tools of improvement to attain sustainable excellence.
 It is a practical, non -prescriptive tool that enables organizations to understand the cause and
effect relationships between what their organisation does and the results it achieves.
3 Integrated Components of EFQM
 The Fundamental concepts of excellence
 The Criteria conceptual framework
 The RADAR logic assessment framework
Business Excellence (BE)
is a
philosophy
for
developing and strengthening
the
management systems and processes
of an organization
to
improve performance and create value for stakeholders.

8 Fundamental Concepts of Excellence
These are the basic principles that describe the essential foundation for any organization to achieve
sustainable excellence. These 8 principles are:
 Developing organization capability i.e. company needs to manage change within the organization
and beyond. Company should identify ‘what it is capable of being great at?’ (mtlb apni core
competency banani chahiye)
 Leading with vision, inspiration and integrity i.e. top management of the company should have a
clear vision of what company wants to achieve, develop strategy to achieve it and work with
integrity and ethics (top management ko pata hona chahiye ki company ko kya achieve karna h – ussi directon m
unko kam krna chahiye – and vision achieve krne mein ethical rahe)
 Harnessing creativity and innovation i.e. company should promote the environment that enables
and appreciate creativity and innovation (apne employee ko freedom do taki ache ideas bahar aaye and koi
acha idea dia h toh usse reward bhi do)
 Succeeding through the talent of people i.e. there must be an atmosphere of teamwork that
enables achievement of organizational and personal goals of employees as well.
Performance evaluation, rewards and recognition, training etc. are ways to cultivate talent within
the organization.
 Adding Value for Customers i.e. company need to understand their customers, their needs,
anticipate their needs and make use of opportunities to fulfil their expectations.
 Creating a sustainable future i.e. a company should have as much positive impact on its
surroundings (society and environment).
Company should assess the environmental impact of its operations, business impact on the
society etc. to minimize the negative impact, if any by taking corrective actions. (Company ke
stakeholder mein society bhi aati hai – company ko aise kaam krne chahiye jo society ke heet mein ho jaise ki
environment ka dhyn rakhna – isse company ko long run mein ek sustainable future milega)
 Sustaining Outstanding Results i.e. Constant and periodic evaluation is required to keep up and
sustain excellence as EFQM model is not a onetime exercise.
 Managing with agility i.e. capability of the organization to identify and effectively respond to
opportunities and threats (agility means change in business environment)
8 Principles ki baate
Apni capabilities jaano – uss hisab se vision banao, strategy banana – iske liye thoda creative ho
– employees ke idea ko aane do – unke personal goals ka bhi dhyn rakho – unko motivate krne
ke vaste reward do – aise hi apne customer ko jano unki need ko smjo – par yeh ni sirf customer
ki hi socho – puri society ki socho – environment ka dhyn rakho – inn sab se apka future secure
hoga – par aisa ni ki ek baar yeh saari chie kr li, future secure ho gaya toh sab bhul gaye – isko
continuous follow karo – taki position retain kr pao – and apne ko iss layak banao – ki jab
environment change ho – toh usko jldi se jldi adapt kr lo and apni position ko secure rakh pao.

EFQM Excellence Model Criteria
(Application of Model and relationship between various criteria)
This helps organizations to realize in practice the fundamental concepts and to understand the cause-
and-effect relationships between what the organization does and the results it achieves. It is based on
9 criteria i.e. 5 Enablers and 4 Results.
5 Enablers (enabler means yeh krna hai – toh yeh result milega)
a) Leadership:
A leader defines the organization’s culture. They enable the organization to achieve its goals by
taking the correct decisions at the correct time. To do this they should have
 sufficient skill and inspires trust,
 work as per the company’s code of conduct and
 should be ethical in their dealings.
b) Strategy:
Strategy (plan) enables the company to achieve these goals. Strategy of the organization must be
in align with company’s vision and mission statement.
c) People:
People must be motivated, recognized, and managed to enable them to work towards the
company’s vision and mission.
There must be an atmosphere of teamwork that enables achievement of organizational and
personal goals of employees as well.
Performance evaluation, rewards and recognition, training etc. are ways to cultivate talent within
the organization.
d) Partnerships and resources:
Effective management of partnerships that the company has with other organizations is critical to
success. Partners could be external vendors, suppliers, and service providers.
The services of partners enable business to operate smoothly. Further, Proper management of
resources enables optimal results.
e) Processes, Products, and Services:
A company exists because of its processes, products, and services. They should be managed and
continuously improved to create value to the stakeholders.
Financial Prospects
Non Financial
Prospects

Gyaan ki baat:
Phle ek leader laao, jo trust build kare paye – woh leader fir ek strategy banaega jo company ke vision and
mission se match krta ho. Uss strategy ko successful krne ke liye – apko 2 chize lagegi – People jinse kaam
karwaegy – and – fir aise logo se partnership krege, jinse resource procure kar paye – fir people resources ko
process kregy internally – and – goods and services provide kregy.
Abb jab aap yeh 5 chize organization mein laaogy – tab apke yaha 4 result aayegy – phle result apki society ke
liye – dusra apke customer ke liye – tesra unn people (employees) ke liye – and at last apke shareholders
(business) ke liye.
Like society ko apka brand dikhega and unse communication transparent hoga – employees ko dikhega ki usko
opportunity mil rahi hai apke sath kaam kar ke - customer product ki quality dekhega – shareholder ROI dekhgy.
Abb inn sabko lane ke liye apko – learning creativity and innovation karna hai – that too continuously basis par
tab apke 5 enablers successfully yeh 4 result laa payegy.
4 Results
a) Customer results:
 Are the customers of the company satisfied with the products and service?
 How does the company fare in terms of brand loyalty?
 Is the customer base growing to indicate increasing market share?
Result can be seen in terms of value adding products and excellent quality of services provided by
the organization.
b) People results:
 Does the company have skilled and motivated employees?
 What is the employee turnover with reasons for the same?
 Does the company have proper access to hire required talent?
 Are the employees motivated, trained, recognized, and rewarded for their performance?
 What is performance measurement system is it robust and accurate to measure
performance?
Result can be seen in terms of opportunity to develop and grow with the organization, work life
balance and Pride in organization.
c) Society results:
 Is the company a good corporate citizen?
 Are the objectives of corporate social responsibility being met?
 If the organization is a not for profit organization, is it meeting its objectives and goals?
Results can be seen in form of Brand Reputation, Ethical Behaviour and Transparent
communication.
d) Business results:
 Is a profit organization achieving the required return on investment, profitability that the
shareholders and other investor demand?
 Has the company been able to manage financial and other risks properly?
Results can be seen in form of Return on Investment, sustainable financial growth and ability of
optimizing profitability.

Link between enablers and results
 Enabler criteria cover what an organisation does. Results criteria cover what an organisation
achieves.
 'Results' are caused by 'Enablers’. EFQM model documents this flow and symbiosis in a structured
way. It highlights the strength and weakness of the enablers. With this information, the company
can alter its operations and strategy to achieve desired results.
 On assessment, there is a flow from results to enablers. If the results have been achieved, enablers
continue to operate status quo. If the results fall short of targets, changes have to be made to
enablers to improve performance.
RADAR Logic Assessment Framework
Above 9 criteria can be further evaluated using the RADAR logic assessment framework. RADAR logic is
a management and evaluation tool used for analysing the performance of an organization.
It is used as an underlying basis of the scoring system of the EFQM Excellence Award and can help to
lead changes and manage improvement projects.
RADAR Stands for
R: Result Required
A: Approaches Plan and Developed (to achieve result)
D: Deploy Approaches (to execute approach)
AR: Assess and Refine approached and deployment (to monitor)
Jab apko enablers pta chl gaya –
toh inn enablers ko align kaise krna
hai – ki result aa jaye – toh RADAR
use krte hai i.e. how to do things.

Baldrige Criteria for Performance Excellence
This model provides the foundation for most of the business excellence models adopted around the
world. The framework is build round the 7 categories i.e.
 Leadership,
 Strategic planning,
 Customer and market focus,
 Measurement analysis and knowledge management,
 Workforce,
 Process management and
 Business results
Business Excellence Model and Organizational Culture
Business Excellence approach focuses on
 strengthening the internal function and communication,
 looks towards the cultivation of strong ties with consumers and
 can be incorporated into the culture.
How to achieve Business Excellence [isme aap 8 principles likh skte]
(a) Focus on Employees
Excellence can be attained where employees focus on pursuing the organization goal rather than
meeting their own objectives. This can be achieved when organization considered employees as
important elements, motivate them to learn new skills.
Some of the strategies to make the employees feel connected to the management philosophy of the
organization are
 A strong and empathetic leader,
 effective communication system,
 employee empowerment,
 employee motivation,
 innovative and creative culture
(b) Leadership
For achieving business excellence, effective leadership is equally important to manage all the
resources efficiently. A feeling of association is to be developed among stakeholders including
employees.
Conclusion
A robust culture arises as a result of implementation of business excellence model which can make the
organization a world class performer.
Thus,
The EFQM Excellence Model provides an all-round view of the organisation and it can be used to
determine how these different methods fit together and complement each other.
Based on the needs of the organisation, this model can be used with other tools of improvement to
attain sustainable excellence.

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