2.

008

For-Profit manufacturing firms Performance Measures

Ownership:

Cost

Market value = PV (Earning) + PV (Growth Opportunity)

Management:
Performance Targets

2.008 - Spring 2004

2.008 - Spring 2004

Automotive Market Share in the U.S.

$ billions

GM Financials
Income Statement Revenue Gross Profit Margin Operating Margin Total Net Income Net Profit Margin Balance She e t Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets Other Noncurrent Assets Total Assets Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Noncurrent Liabilities Total Liabilities Preferred Stock Equity Common Stock Equity Total Equity Dec-02 177.3
26.1%
5.7%
0.6
0.3%
De c-02 18.6
141.4
10.0
23.9
193.8
34.9
95.2
324.0
26.2 2.4 35.6 64.2 163.9 75.4 304.3 0.0 19.7 19.7 Dec-00 184.6 28.4% 9.1% 4.5 2.4% Dec-00 10.3 100.2 10.9 24.8 146.3 34.0 122.8 303.1 25.7 2.2 35.2 63.2 142.4 66.5 272.9 0.0 30.2 30.2 Dec-99 167.4 21.0% 5.6% 6.0 3.6% Dec-99 10.4 123.1 10.6 19.8 164.0 32.8 77.9 274.7 21.5 2.0 33.9 57.4 129.7 59.6 254.1 0.0 20.6 20.6 Dec-98 154.0 23.4% 4.2% 3.0 1.9% Dec-98 10.9 76.9 12.2 37.4 137.3 37.2 82.9 257.4 20.0 0.0 0.0 20.0 114.2 97.7 242.4 0.0 15.0 15.0 Dec-97 166.4 21.9% 2.2% 6.7 4.0% Dec-97 11.3 66.4 12.1 11.7 101.4 34.6 92.9 228.9 15.8 0.0 0.0 15.8 93.0 98.7 211.4 0.0 17.5 17.5

35% 30% 25% 20% 15% 10% 5% 0% Oct-99 Jul-00 Apr-01 Dec-01 Oct-02
GM (w/S aab) DaimlerChrysler (w/Mercedes) Honda
2.008 - Spring 2004

Ford (w/Volvo, Jaguar, & Land Rover) Toyota Nissan

3 2.008 - Spring 2004

Toyota Financials
$ billions Income Statement Revenue Gross Profit Margin Operating Margin Total Net Income Net Profit Margin Balance Sheet Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets Other Noncurrent Assets Total Assets Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Noncurrent Liabilities Total Liabilities Preferred Stock Equity Common Stock Equity Total Equity Mar-02 107.4 26.5% 7.6% 4.2 3.9% Mar-02 12.4 29.9 7.2 11.0 60.6 38.3 46.0 144.9 10.7 22.4 17.0 50.1 27.9 6.7 90.4 0.0 54.5 54.5 Mar-02 106.0 24.9% 6.0% 5.4 5.1% Mar-02 12.2 26.3 7.1 9.8 55.4 36.0 46.0 137.4 10.4 17.6 16.8 44.8 24.9 4.6 80.2 0.0 57.1 57.1 Mar-00 119.7 27.4% 5.5% 4.5 3.8% Mar-00 14.4 26.2 7.4 11.2 59.2 43.9 51.7 154.9 12.2 20.5 15.9 48.6 27.5 6.2 89.8 0.0 65.1 65.1 Mar-99 105.8 27.8% 5.9% 3.7 3.5% Mar-99 11.1 21.8 6.3 8.0 47.3 41.2 43.0 131.5 10.3 14.8 17.4 42.5 24.9 5.5 76.2 0.0 55.2 55.2 Mar-98 88.5 27.0% 6.4% 3.4 3.9% Mar-98 9.3 8.9 5.6 24.6 48.3 34.9 21.7 105.0 8.0 11.5 14.6 34.1 21.1 3.5 59.3 0.0 45.6 45.6

Financial Comparison
GM 2001 Current Ratio Days Receivable Asset Turnover Inventory Turnover ROA ROE Gross Margin Operating Margin Profit Margin 3.02 291 0.57 16.90 0.2% 3.0% 26.1% 5.7% 0.3% 2000 2.32 198 0.64 17.11 1.5% 14.8% 28.4% 9.1% 2.4% 1999 2.86 269 0.63 14.65 2.2% 29.1% 21.0% 5.6% 3.6% 2001 1.21 102 0.76 15.04 2.9% 7.7% 26.5% 7.6% 3.9% TOYOTA 2000 1.24 91 0.73 14.61 4.0% 9.5% 24.9% 6.0% 5.1% 1999 1.22 80 0.84 17.35 2.9% 7.0% 27.4% 5.5% 3.8%

2.008 - Spring 2004

2.008 - Spring 2004

Manufacturing Investment Decision

Time Value of Money

$1 today is worth more than $1 tomorrow

NPV Payback Period Average Return on Book Internal Rate of Return Profitability Index

Discount rate: Return foregone by investing in the project rather than in other opportunities

2.008 - Spring 2004

2.008 - Spring 2004

Cash Flow During Product Cycle

Hobbed Gear Material:

Mfg Cost Example

Percent of Total P/M Gear Material: MPIF FC-0208-S (7.0 g/cm3 density) 5% scrap Percent of Hobbed Total SAE 1045, including 2% setup scrap and 46% chips

15.10

9.97

NPV Cash Flow

Operations: Bar chuck, cut off and bore 8.49 3.17 47.50 1.92 Operations: Compact (100-ton press) Sinter Harden Grind ends perpendicular to pitch diameter Deburr Inspect Perishable tools and gages, per piece Total 2.37 2.56 1.92

3 4 5 6 7 8 n

Broach keyway Hob teeth Harden Grind ends perpendicular to pitch diameter Deburr Inspect Perishable tools and gages, per piece Total

5.93 0.53 0.26

5.93 0.53 0.26

17.10 100.00

8.19 31.73
10

2.008 - Spring 2004

2.008 - Spring 2004

Elements of Product Cost

Direct Material Cost Prime Cost Full Production Cost (or Inventory Cost) Full Cost

Full cost (contd)

Plant & machinery, depreciation, energy 12%

=
Direct Labor Cost

Engineering 15%

R&D 5%

=
Overhead Cost

Manufacturing 40%

=
Distribution Cost

Adm in., sales, marketing 25% Profit 15%

Manufacturing 40%

Indirect Labor 26%

Direct Labor 12%

+
General & Administrative Cost

Selling Price

Manufacturing Costs

2.008 - Spring 2004

11

2.008 - Spring 2004

12

Direct/Indirect vs. Fixed/Variable

Relative cost per part ($)

Production Cost Relative to Volume

1000

100

Traceability: Accountant Volume-dependence: Economist

10

1 One of a kind Batch production Mass production

10

102

103

103

104

105

106

Relative Production Rate (parts/time)

2.008 - Spring 2004 13 2.008 - Spring 2004 14

Fixed and Variable Cost

How Man, Machine, and Material Spend Time in the Factory

People
Valu e adde d

Materials
Value adde d

Machines
Value adde d

Cost per unit, $

Total Cost (TC) Variable Cost (VC) Fixed Cost (FC) Waste: waiting for materials, watching machine running, producing defects, looking for tools, fixing machine breakdowns, producing unnecessary items, etc. Waste: transportation, storage, inspection and rework Waste: unnecessary movement of machine, setup time, machine breakdown, unproductive maintenance, producing defective products, producing products when not needed, etc.
16

Waste

Waste

Waste

Volume, n

TC = FC + nVC

2.008 - Spring 2004

15

2.008 - Spring 2004

Product cost by industry

Industry Aerospace Computers Electronics Industrial and farm equipment Metal products Motor vehicles and parts Scientific and photographic equipment Average for seven industries Direct Materials 51.7 69.9 48.6 46.0 52.0 63.8 52.3 54.4 Direct Labor 19.3 7.5 15.1 12.8 15.7 7.8 11.3 12.9 Manufacturing overhead 29.0 22.5 36.3 41.2 32.3 28.4 36.5 32.6

Allocation Bases of Overhead

Labor hours Machine hours Total direct cost Activity based

2.008 - Spring 2004

17

2.008 - Spring 2004

18

ABC: Cost Accuracy Target

Actual Cost Raw material

Allocation Bases of Overhead (contd)

Final product Station 1 Station 2 Station 3

Station 4

Unit Level Activity Value-added Activities:

Cost Driver

Quantity of Driver

Cost per Unit Driver

Total Cost

Extensive ABC System Simple ABC System

- Assembly Non-value Added Activities: - Machine setup - Tool Load/Unload - Part Load/Unload - Inspection Total

1 Person direct labor

8 hours per day

$8.00 / hour

$64.00 per day

1 Person Direct labor Machine time 1 Person Direct labor CMM Time

1 hour per day 2 hours per day 45 hours per day 3 hours per day

$8.00 / hour $60.00 / hour $8.00 / hour $35.00 / hour

$8.00 per day $120.00 per day $6.00 per day $105.00 per day $303.00
20

2.008 - Spring 2004

19

2.008 - Spring 2004

Traditional Costing
Overhead Costs Production Overhead 600 Machine Classes Materials Overhead Support Overhead Materials Overhead Overhead Cost Pools DM Direct Material Allocation Bases

Process Oriented Costing

Production Overhead 600 Machine Classes Support Overhead Order Processing Cost Special Components Cost

DM Direct Material

Cost to date

Per order

# of special components

Cost to date

Products Products

Products

2.008 - Spring 2004

21

2.008 - Spring 2004

22

Traditional and Activity-Based Costing

($ 000s) Material Material re lated overhead Labor Production related overhead Manufacturing cost1 Engineering costs Tooling costs Administrative costs Support related cost Order processing cost Special components cost Total cost $361,500 Traditional $105,000 6,000 36,000 120,000 267,000 (74%) 12,000 22,500 60,000 94,500 (26%) 6,300 0 27,000 33,300 (9%) 13,800 19,500 0 Transferred Process Oriented

Distribution of Orders
3% 630,000

Number of motors

$105,000 6,000 36,000 120,000 267,000 (74%) 5,700 22,500 33,000 61,200 (17%) 13,800 19,500 $361,500

> 99 Motors 9%
44%

352,800

20 99 Motors 14% 157,500 26% 75,600 31,500 48% 1 Motor 2 4 Motors

5% 7% 31%

519 Motors 13%

Percent of Total Cost

Number of orders

65,625

2.008 - Spring 2004

23

2.008 - Spring 2004

24

Cost Estimate: Example

A Pre-Support Related Overhead Cost Base Motor Components Total B C D E 247.0 32.2 279.2 1.35 376.9 1.62 247.0

64.4
311.4 x 1.35 420.4 1.69 247.0 96.6 343.6 x1.35 463.9 1.75 247.0 161.0 408.0 x1.35 550.8 1.83 247.0 322.0 569.0 x1.35 768.2 1.96

Traditional Systems Distort Product and Customer Costs

Low High Overcosted Complexity High

Volume
Total Ratio to Traditional

Traditional Costs

Low
Revised Cost per Unit 1 unit 10 units 20 units 100 units A 613.6 370.6 357.1 346.3 B 713.2 416.2 399.7 386.5 C 812.8 461.8 442.3 426.7 D 1,012.0 553.0 527.5 507.1 E 1,510.0 781.0 740.5 708.1

Undercosted

Product Complexity Small batch sizes Long set-up times Unique components Special inspection and tests Extensive material handling Special vendors
25 2.008 - Spring 2004

Customer Complexity Customized products Short lead times Unpredictable orders Extensive technical support Extensive post-sales support Special test and requirements
26

2.008 - Spring 2004