Title: Strategic Management Accounting Essay Example
Title: Strategic Management Accounting
In order to understand the various activities that a company applies to develop a competitive advantage and realize shareholder value, it is important to first separate the system of business into a series of value-generating activities that are known as value chain. Michael Porter pointed out important primary and support activities in a business system (Porter, 1985).
arketing & SalesM
Inbound logistics involves receiving and warehousing of materials, as well as distribution to manufacturing in the right manner. Outbound logistics entails the warehousing as well as distribution of finished goods. Marketing and sales involves the identification the needs of the customer and the generation of sales (Porter, 1985). Service defines the support of customers after the services and products have been sold to them.
The value framework for William Instruments Inc. is as follows:
Production and sales: 400 units per month
When buying the parts;
Manufacturing operations costs $ (600×400) = $ 240,000
Add: Purchased parts from outside suppliers + $800
Total costs when buying the pasts $240,800
Manufacturing the parts:
Manufacturing costs for the parts $ (100×400) = $ 40,000
Parts that cannot be manufactured: $500
Add: investment in labour and equipment: + $175,000
Total costs when manufacturing the parts: $215,500
Cost of contract: — $ (125×400) = $ 50,000
Add: monthly material costs: $(100×400) = 40,000
Add: cost of labour: $ (175,000-75,000) = $100,000
Cost of contracting: $190,000
Williams Instruments Inc. spends $240,800 when purchasing parts from the outside suppliers and spends $215,500 when manufacturing the parts in its plants. When considering whether to manufacture or buy the parts, William Instruments Inc. can consider manufacturing the parts because it is less costly as compared to purchasing the parts from outside suppliers.
Contracting leads to the company saving $75,000 of monthly material and labour costs. The cost of material is $(100×400) = $ 40,000. The cost of labor is $175,000, whereas the cost of contracting is $ (125×400) = $50,000. The total cost of the contract is (40,000+175,000+50,000) = $ 265,000 before deducting the material and labour savings. When the saving is deducted the cost of the contract is $ (265,000-75,000) = $ 190,000. This means that William Instruments Inc. will spend less when it considers outside contracting as opposed to manufacturing of the parts or buying the parts from the suppliers. It is product for the company to have a competitive advantage due to low costs hence it is advisable to use the cheapest means to attain the products. In this case, outside contracting appears to be the cost-effective choice for the company (Maguire, 2005).
There are factors that have to be considered when deciding to manufacture, buy or contract out the marketing, distribution, and servicing of units. Value chain analysis entails external and internal data, applies suitable cost drivers for all main value-creating processes, make use of linkages throughout the value chain, as well as offers continuous monitoring of the strategic competitive advantage of a company. The cost of engineering, distribution, maintenance and service is considered throughout the value chain processes.
Financial (quantitative) factors
The financial factors that William Instruments Inc. has to consider are as follows:
Economies of scale
This refers to the advantage that the firm obtains by producing products on large scale. The company has to consider if it is going to lose its power to meet the demand of its customer either through outsourcing or purchasing the parts from the suppliers. It is important for the company to take advantage of economies of scale.
The management has to consider the infrastructure available at the company. These refer to support systems within the company, as well as the functions that enable it to maintain the daily operations. Administrative, legal, accounting and general management are part of the infrastructure that the business need in the manufacture and selling of its products. The company has to ensure the legal and management structures enhance the efficiency in production of the products (Grant, 2010). Infrastructures that are inefficient lead to wastage of resources.
Linkages among activities
The company has to consider linkages among the activities that lead to the products reaching the intended customer. Linkages among activities will determine the lead time when an order for the products is made and when the products are delivered to the client. This linkage among activities will also determine the cost of warehousing. It is important for the business to reduce the cost of warehousing while ensuring that it does not run out of stock of important parts needed in the manufacturing. The inbound logistics like taxes have to be considered when deciding to manufacture, outsource or purchase the needed parts. Inbound logistics can inflate the cost of procurement.
The geographical location will determine the cost of outbound and inbound logistics. It will affect the cost of ferrying the parts from the suppliers and transporting the finished products to the final consumer. The geographical location of the firm of the supplier or the contracting firm will affect the cost of procurement of the products. Procurement and transportation costs have a bearing on the final cost of the products (Navy & Johnstone, 2015). The company has to strive to reduce the lead time and offer products to customers on time.
The management has to consider the kind of technology that is available and whether it will meet the need at hand. The cost of research and development also affect the cost of the product. Changing technology will affect the production of parts needed for the finished products (Hintze, 2014). The cost of technology will affect the capacity of the company to produce the parts needed. Technological developments affect the manufacturing capacity of the company.
Bargaining power of suppliers
The bargaining power of the supplier is important since it will determine how much it will cost the company to obtain the parts. If the suppliers have more bargaining power they are bound to change the price of parts without consulting the company. The company has to consider purchasing where the bargaining power of the suppliers is low hence they cannot change the prices at will (Schmitz, 2005).
There are important nonfinancial factors that the company has to consider in making the decision of purchasing, manufacturing or outsourcing the parts from another firm. Some of the factors include:
The company should ensure whatever the decision it takes whether to purchase or manufacturer the parts; the quality of products should not be compromised. The customers have to feel that are getting value for their money hence high quality products appeal to customers. Total quality management has to ensure that the products manufacturing or outsourced meet the expectations of the consumers (Kannegiesser, 2008). The management has to ensure that the quality of products is maintained or even enhanced through any choice that is made.
The company has to ensure that it maintains the support service that it provides to the customer. Forfeiting its obligation to the customer in terms of service can affect the sales of the company. Whatever the decision that is made, service to customers has to be maintained or improved. The customers have to get the services or products that they expect from the company.
The management has to consider if the company is going to underutilize its capacity either through outsourcing or purchasing the parts. It is crucial to ensure optimal use of the capacity of the firm in producing products to ensure there is no wastage (Michail, 2013). Low-cost advantage can be obtained if the firm uses its facilities to the maximum in manufacturing of products.
The management has to consider the skills available on the firm in production of the parts. The human resource plays an important part in manufacturing process hence it is crucial to consider the expertise that is available in the company before making a decision of purchasing, outsourcing or manufacturing.
Grant, R.M. 2010, Contemporary Strategy Analysis. 7th ed. John Wiley & Sons, p. 239-241
Hintze S. 2014, Value Chain Marketing: A Marketing Strategy to Overcome Immediate Customer Innovation Resistance, Springer, New Mexico.
Kannegiesser, M. 2008, Value Chain Management in the Chemical Industry: Global Value Chain Planning of Commodities, Springer Science & Business Media, New York.
Navy, H., & Johnstone, R. 2015, Commodity and product identification for value chain analysis, WorldFish, London.
Maguire, M. 2005, BMW Value Chain Analysis, GRIN Verlag, London.
Michail, A. 2013, An Investigation of the Relationship between Value Chain Activities and Generic Strategies in Small and Medium-sized Enterprises in UK Manufacturing, GRIN Verlag, London.
Porter, M. E. 1985, Competitive advantage: creating and sustaining superior performance, The Free Press, New York.
Schmitz, H. 2005, Value Chain Analysis for Policy-makers and Practitioners, International Labour Organization, New York.
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