production operations and management

7/30/2019 Production operations and management

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11 - 12003 Prentice Hall Business Publishing, Cost Accounting11/e, Horngren/Datar/Foster


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Learning Objective

Use the five-step decision

process to make decisions.


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Information and the

Decision Process

A decision model is a formal method

for making a choice, often involvingquantitative and qualitative analysis.


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Five-Step Decision ProcessGather Information

Make Predictions

Choose an Alternative

Implement the Decision

Evaluate Performance

Step 1.

Step 2.

Step 3.

Step 4.

Step 5.

Historical Costs

Other Information

Specific Predictions

Feedback


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Learning Objective

Distinguish between quantitative

and qualitative factors in decisions.


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Quantitative and Qualitative

Relevant Information

Quantitative factors

Financial Nonfinancial

Qualitative factors


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Outsourcing versus Insourcing

Outsourcing is

purchasing goodsand services from

outside vendors.

Insourcing is

producing goodsor providing services

within the organization.


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Make or buy decisions It is the act of making a strategic choice between producing an item

internally or buying it externally.

A firmsMake-or-Buychoices should be based onthe followingconsiderations:

Strategic impact

Available capacity

Expertise

Quality considerations

Speed

Cost (fixed cost + variable cost)make = (fixed cost + Variable cost)

buy


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Factors Impact on current vendor relation

Nature of demand

Availability and lead time for acquiring the

technical expertise for producing the item.

Current capacity utilization.

Develop new strategic process capabilities

Break even analysis


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Make or Buy considerations

Cost considerations(less expensive to make the part)

Desire to integrate plant operations.

Productive use of excess plant capacity to help absorbfixed overhead(using existing idle capacity).

Better quality control.

Unreliable suppliers.

Need to exert direct control over production and quality. Design secrecy is required to protect proprietary

technology.

No competent suppliers.


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Factors that may influence to buy

Cost and availability of production capacity

Lack of expertise

Suppliers research and specialized know-how exceeds thatof the buyer

Cost considerations and

Brand preference

Small volume requirements Procurement and inventory considerations

Item not essential to firms strategy

Indirect managerial control considerations


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Factors influence to make

Finished product can be made cheaper

Strict quality control

Capacity to manufacture the product inside

the firm

The lack of suppliers


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Element of make analysis include

Incremental inventory carrying cost

Direct labor costs

Factory overheads

Delivered purchased material costs

Incremental managerial costs Incremental capital costs

Incremental purchasing costs


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Cost consideration for the buy

analysis include

Purchase price of the part

Transportation cost

Receiving and inspection costs

Incremental purchasing costs

Any follow on costs related to quality orservce


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Make-or-Buy Decisions-apple

Apple Co. also manufactures Mac book accessories.

Management is considering producing a part itneeds ($39) or buying a part produced

by outside for $42.


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Make-or-Buy Decisions

Apple Co. has the following costs

for 150,000 units of making:

Direct materials $ 15,00,000

Direct labor 12,00,000

Variable overhead 13,50,000

Fixed overhead 18,00,000Total $58,50,000

Apple Co. manufactures Mac book accessories.


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Make-or-Buy Decision

What is the cost to buy 150,000 macbooks

Purchase cost,$42* 150,000 units=63,00,000

Should Apple Co. manufacture the part

or buy it from Outside?


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Make-or-Buy Decisions Example

Relevant cost to make:$58,50,000

Cost to buy :$63,00,000Apple would save $4,50,000 by making the part.


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conclusion

Buy making the macbook inside the firm

,apple would save $45,00,000

The quality and brand loyalty can bepreserved buy making the parts

The purchase cost and overheads can be

minimize.


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production operations and management

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