Management Control Systems (2nd Edition)

Management Control of Production and Operations - II : Overview

Target costing concentrates on managing costs during the planning and design stage of a product. It is basically a customer-focused method. Activity-based costing is a method of allocating costs to each and every activity of the organization and determining the cost driver for every major activity. It aims to fulfill the needs of customers by consuming fewer organizational resources. Value chain analysis involves evaluating the various activities in the value chain, improving their efficiency, and identifying the scope for cost reduction. The higher the efficiency of the value chain, the greater the competitive advantage an organization can achieve in the market.

Environmental cost management is also becoming important as several governments across the world have imposed more stringent regulations that organizations have to comply with in order to protect the environment. An environmental cost report that states the costs incurred by the organization with regard to its environmental development and sustainability initiatives should be prepared. In this report, four cost categories - environmental prevention costs, environmental appraisal costs, environmental internal failure costs, and environmental external failure costs - are reported.

Modern day organizations have to face lot of challenges due to growing competition, increased consumer awareness media boom, etc. In order to survive and grow in such a highly complex and globalized environment, they need distinct techniques which guide and control organizational performance. Value Engineering, Business Process Reengineering, Kaizen, Total Quality Management, Benchmarking, Benchtrending, Just-in-Time, Lean Manufacturing, and Six Sigma are some of the techniques that can be used to enhance organizational performance.

Value engineering is the process of analyzing the factors that influence the cost of the product so that the necessary quality standards and functionalities can be obtained in order to arrive at the target cost. It is done to obtain the preset target cost by examining improved product designs that can reduce the costs without compromising on the functionality of the output, and to remove all those functions from the product design that increase the cost of manufacturing and are also not valued by customers.

Business process reengineering (BPR) is a management technique through which an organization can improve its operational effectiveness, efficiency, and profitability through a fundamental and radical redesign of business processes. It involves modifying the existing systems and simplifying the processes in an organization in order to improve productivity, reduce costs, and adopt better business practices.

Kaizen is an approach to productivity improvement that is applied during the production stage. It aims at cost reduction by keeping its focus on improving the manufacturing process. It focuses on giving significant power to employees to improve the manufacturing process as they are the people who are closest to the production process and to the customers.

Total quality management is a useful technique that helps to improve the effectiveness and flexibility of a business as a whole by organizing and involving every department, every activity, and each and every person across all hierarchical levels. It is an integrated effort to gain a competitive advantage by continuously improving every aspect of the organization.

Benchmarking involves comparing the practices of the organization with best management practices from across the globe. It helps an organization to learn the potential and limitations of its own operations as well as those of the industry leaders, thereby controlling the limitations and eliminating the weaknesses in its operations. Benchmarking can be broadly classified into two types - competitive and generic. Competitive benchmarking focuses on the products and manufacturing processes of the organization's competitors, while generic benchmarking evaluates the processes of the organization against those of organizations (irrespective of the nature of the industry) considered the best in those processes.

Benchtrending helps in controlling and directing the organization's response to the volatility of the market forces and the dynamics of the industry in which it operates. It involves assessing the existing situation and anticipating changes in the critical market conditions and consumer preference variables and evaluating their impact. Benchtrending can be broadly classified into strategic and process benchtrending. Strategic benchtrending controls the growth direction of the business unit and sets long-term goals and objectives, while process benchtrending is used to control the performance of a specific function or process of the organization. Just-in-Time or JIT is a technique which helps in controlling the inventory costs on both the fronts of procurement costs as well as holding costs. To reduce procurement costs, JIT makes use of stable relationships and electronic links between the organization and its vendor(s). Whenever the material approaches the reorder levels, the vendor automatically ships the material so that it reaches the organization exactly when it is required. Thus, the average inventory level is maintained at very low levels; this reduces the inventory holding costs.

Lean manufacturing is a business strategy focused on the elimination of process waste. It aims at controlling wasteful processes by eliminating them or by improving them. Lean manufacturing is a philosophy designed to bring about overall process improvement. According to the lean philosophy, elimination of wastes will lead to an improvement in productivity and quality, thereby leading to a reduction in cost.

Six Sigma is a rigorous technique used to manage process variations that cause defects and to work systematically to manage those variations in order to eliminate the defects. It is a powerful technique specifically designed to resolve complex quality problems. By controlling defect occurrence, this technique aims to achieve world-class performance, reliability, and value for customers. For Six Sigma implementation, DMAIC (an acronym for define, measure, analyze, improve, and control) is an important methodology, especially for enhancing the quality of the existing processes of an organization.

Operational audits are very important tools for management control. Operational auditing is a technique for appraising the effectiveness of a unit or function on a regular and systematic basis against corporate and industry standards. The various steps involved in operational audit are purpose definition, knowledge gathering, preliminary survey, development of program, fieldwork, reporting, and follow-up.

Operational audits can be broadly classified into three categories: functional audits, organizational audits, and special assignment audits. A functional audit focuses on a particular activity in one location or throughout the organization and may include a study of relationships among units. Organizational audit deals with organizational units like departments or manufacturing plants, and not with individual activities or processes. A special assignment operational audit deals with process, quality, safety, risk, environment control techniques, etc., and is generally initiated at the request of the management for varied purposes.

In order to manage risks effectively, safety should be given the same emphasis as any other business area. Therefore, organizations have to conduct safety audits. A safety audit is the study of an organization's operations and assets. It aims at identifying existing and potential hazards, and the actions needed to render these hazards harmless. It is important for organizations to periodically assess the soundness of their safety systems.

Chapter 12 : Overview