Industrial business management and engineering economics

Karthikeyan M R

Industrial Business Management and Engineering Economics

M.R. Karthikeyan , BE,M.Tech, DTT,MISTEExpatriate Lecturer, Textile Engineering,Wollo University, Ethiopia

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Management ConceptsManagement is a universal phenomenon.

It is a very popular and widely used term. All organizations - business, political, cultural or social are involved in management because it is the management which helps and directs the various efforts towards a definite purpose.

“Management is an art of getting things done through and with the people in formally organized groups. It is an art of creating an environment in which people can perform and individuals and can co-operate towards attainment of group goals”.

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Management can be defined in detail in following categories

Management as a Process Management as an Activity Management as a Discipline Management as a Group Management as a Science Management as an Art Management as a Profession

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Determining planning premises

Establish objectives

Develop Strategies

Establish policies

Develop program for accomplishments

Establish schedules and budgets

Establish procedures

Identify potential problems

Develop preventive &/or contingent action

Coordinate throughout the planning

How does a management Plan?

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Features of Management

1. Management is Goal-Oriented: The success of any management activity is accessed by its achievement of the predetermined goals or objective. Management is a purposeful activity. It is a tool which helps use of human & physical resources to fulfill the pre-determined goals. For example, the goal of an enterprise is maximum consumer satisfaction by producing quality goods and at reasonable prices. This can be achieved by employing efficient persons and making better use of scarce resources.

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Features of Management2. Management integrates Human, Physical and Financial Resources: In an organization, human beings work with non-human resources like machines. Materials, financial assets, buildings etc. Management integrates human efforts to those resources. It brings harmony among the human, physical and financial resources.

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Features of Management 3. Management is Continuous:

Management is an ongoing process. It involves continuous handling of problems and issues. It is concerned with identifying the problem and taking appropriate steps to solve it. E.g. the target of a company is maximum production. For achieving this target various policies have to be framed but this is not the end. Marketing and Advertising is also to be done. For this policies have to be again framed. Hence this is an ongoing process.7

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Features of Management4. Management is all Enveloping: Management is

required in all types of organizations whether it is political, social, cultural or business because it helps and directs various efforts towards a definite purpose. Thus clubs, hospitals, political parties, colleges, hospitals, business firms all require management. Whenever more than one person is engaged in working for a common goal, management is necessary. Whether it is a small business firm which may be engaged in trading or a large firm like Tata Iron & Steel, management is required everywhere irrespective of size or type of activity.

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Features of Management 5. Management is a Group Activity: Management is very much less concerned with individual’s efforts. It is more concerned with groups. It involves the use of group effort to achieve predetermined goal of management of ABC & Co. is good refers to a group of persons managing the enterprise.

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Levels of Management

Top level / Administrative level Middle level / Executory LevelLow level / Supervisory / Operative /

First-line managers

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Functions of Management

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PlanningPlanning is deciding in advance -

what to do, when to do & how to do.Planning is determination of courses

of action to achieve desired goals. Thus, planning is a systematic

thinking about ways & means for accomplishment of pre-determined goals.

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Organizing

Identification of activities. Classification of grouping of activities.

Assignment of duties. Delegation of authority and creation of responsibility.

Coordinating authority and responsibility relationships.

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Staffing “Managerial function of staffing involves

manning the organization structure through proper and effective selection, appraisal & development of personnel to fill the roles designed un the structure”.

Staffing involves:Manpower Planning (estimating man power in

terms of searching, choose the person and giving the right place).

Recruitment, selection & placement. Training & development. Remuneration. Performance appraisal. Promotions & transfer. 14

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DirectingIt is that part of managerial

function which actuates the organizational methods to work efficiently for achievement of organizational purposes

Direction has following elements:Supervision Motivation Leadership Communication

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Controlling

“Controlling is the process of checking whether or not proper progress is being made towards the objectives and goals and acting if necessary, to correct any deviation”.

The purpose of controlling is to ensure that everything occurs in conformities with the standards. An efficient system of control helps to predict deviations before they actually occur.

Therefore controlling has following steps:Establishment of standard performance. Measurement of actual performance. Comparison of actual performance with the standards

and finding out deviation if any. Corrective action.

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ProductivityProductivity is a measure of the efficiency of production.

Productivity is a ratio of production output to what is required to produce it (inputs). The measure of productivity is defined as a total output per one unit of a total input.

At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs.

Productivity growth is important to the firm because it means that the firm can meet its obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the market place

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Economic well-being is created in a production process. Production means, in a broad sense, all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. This kind of economic well-being cannot be measured with production data.

Characteristics of production

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Characteristics of productionEconomic well-being also increases due to

the growth of incomes that are gained from the more efficient production. The most important forms of production are market production, public production and production in households. In order to understand the origin of the economic well-being we must understand these three processes. All of them have production functions of their own which interact with each other. Market production is the prime source of economic well-being and therefore the “primus motor” of the economy. Productivity is in this economic system the most important feature and an essential source of incomes

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What is OHSAS 18001?

OHSAS 18000 is an international occupational health and safety management system specification

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http://www.ohsas-18001-occupational-health-and-safety.com/what.htm

MATERIALS MANAGEMENT

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MATERIALS MANAGEMENT

Materials management is simply the process by which an organization is supplied with the Goods and services that it needs to achieve its objectives of buying, storage and movement of materials.

Materials management is related to planning, procuring, storing and providing the appropriate material of right quality, right quantity at right place in right time so as to co-ordinate and schedule the production activity in an integrative way for an industrial Undertaking.

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MATERIALS MANAGEMENT Most industries buy materials, transport them in

to the plant, change the materials in to parts, assemble parts in to finished products, sell and transport the product to the customer.

All these activities of purchase of materials, flow of materials, manufacture them in to the product, supply and sell the product at the market requires various types of materials to manage and control their storage, flow and supply at various places. It is only possible by efficient materials management

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FUNCTIONS OF MATERIALS MAGEMENT

PlanningDetermination of materials requirements.Production scheduling according to the

requirement, keeping in view the various constraints.

Planning of inventories – determination of stock levels, recorder timings and quantities etc.

Co-coordinating various activities of material management to improve efficiency (reduce paper work, eliminate duplication etc).

Liaison with other functions of management.Classification and codification materials

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Procurements:Market research for materials – development of

most suitable source, purchasing research.Value Analysis – substitute development.Negotiations, pricing and placing of orders.Expediting and follow up of purchase ordersContracting of labour, transport and other

services (for handling of materials)Insurance of materials.Disposal of surplus, obsolete and scrap

materials.

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Receiving & Storage:Receipt of materials, unpacking, entering into books

etc.Inspection of materials, approval (or rejection)

storage of approved materials (or return or rejected materials).

Handling and maintaining physical inventories periodic stock verification (reconciliation with book balances).

Maintaining stock records and Bin cards (or kaidex) etc.

Indenting of stock items.Physical inventory Control.Packing of final product.Issue of materials.

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Movement & Transportation:Transportation of materials, minimizing

transportation costs.Clearing of various shipments, incoming as

well as outgoing at various points (Excise, customs etc.)

Claims for losses and damages.Dispatching of finished goods.

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Purchasing Systems

Forward Buying:Forward buying is nothing but committing an

organization into the future. The buyer commits to buy at a future date a contacted quantity at a concentrated price, whatever may be the ruling market price then. The trader makes such moves with a speculative interest with an idea that the actual prices will rise in the future and hence he will be able to make profits. The reasons for the industrial buyer are different. He seeks to protect his organization from any future shortages or undue increases in price. He is interested in having an uninterrupted supply of materials.

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Hedging(Any technique designed to reduce or eliminate financial risk; for example, taking two positions that will offset each other if prices change)

Hedging is slightly different from more forward buying. In this case the buyer tries to protect himself in the future by entering into two transactions- a purchase and a sale in two markets whose prices move up and down together. Thus the profit or loss sustained in the buying transaction is compensated by the loss or profit in the selling transaction. This implies that the two markets behave similarly and one can reach the ideal solution of sero loss by a perfect hedge. Thus hedging is basically a tool for protecting oneself against future losses due to vagaries of prices in the commodities market. To operate successfully in a future market, a strong forecasting base in required.

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Stockless Purchasing:Here the items, that are required in large

quantities and for which the seller has other markets as well can consider them for stockless buying. The seller holds the stocks in a convenient location so that the buyer can draw from it according to his needs.

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STEPS FOR EFFECTIVE PURCHASING

The following steps are taken for carrying out effective purchasing:

Pre-purchase System.Ordering System.Post purchase System.

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Principles of Purchasing

Right Price. Right price need not be the lowest price as usually understood. The tender system of buying is normally used in public sector organizations. The objective should be to identify the lowest responsible bidder and no the lowest bidder. The price can be kept low by proper planning and not by rush buying. Price negotiation also helps to determine the right prices.

Right Quality. In order to determine the quality of a

product sampling schemes are quite useful. The quality particulars are obtained from the indents and experience indicates that the substantial portion of the indents prepared by the user departments are invariably incomplete. The objective of purchasing is to ensure continuity of supply the time at which the material is provided to the user department assumes great importance.

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Right Time. The purchase manager should have lead time information for all products. Lead time is eth total time elapsed between the recognition of the need of an item till the item actually arrives and is provided for use. While determining the purchases, the buyer has to consider emergency situations like floods, strikes, etc. However rush purchase should be resorted to only in exceptional circumstances

Right Sources. The source of the material should be dependable and capable of supplying items of uniform quality. Techniques such as value analysis will enable the buyer to locate the right material. Specifying the right place of delivery, say, head office or works would often minimize the handling and transportation costs. Packaging forms an important aspect in the cost of an item.

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Right Quantity. The right quantity is an important parameter in buying. Economic Order Quantity (E.Q.Q), Economic Purchase Quantity (E.P.Q.), Fixed quantity systems will serve as broad guidelines. The buyer has to adopt separate policies and procedures for capital and consumer items.

Negotiation. Negotiation for prices has been accepted

as a policy by some material managers. It is an art of embodying sophisticated tactics. A successful negotiator has to possess the qualities of patience, persuasiveness, clear thinking, logical analysis, optimism knock of getting along with people, ability to plan and be “thick skinned”.

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Store Keeping

It is servicing facility, inside an organization, responsible for proper storage of the material and then issuing it to respective departments on proper requisition.

The custodian of stores is generally known as store-keeper or Store-controller. Those items which are not in use for some specific duration e.g. spare parts and the raw-materials are called as stores and the building or space where these are kept is known as store room Alford and Beauty say that, “storekeeping is that aspect of material control which is concerned with the physical storage of goods.

The duties of storekeeping are to receive materials to protect them while in storage from damage and unauthorized removal, to issue the materials in the light quantities, at the right time, to the right place and to provide these services promptly and at least cost.”

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Functions of Store

To receive, check and a range all incoming materials and supplies. To keep inventories as low as possible consistent with the market conditions To meet the demands of consuming departments by proper issues against

authorized requisitions, and account for the consumption. To forecast market conditions of the supply an availability of various items. To minimize obsolescence, surplus and scrap through proper codification,

preservation and handling. To highlight stock accumulation, discrepancies and abnormal consumption

and effect control measures. To maintain accurate records. To ensure good store-keeping so that inventory handling, materials

preservation, stocking, receipt and issue can be done adequately. To assist in verification and provide supporting information for effective

purchase action. To ensure that various documents and reports relating to storage functions

are sent to required departments without delay.

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Project Management

Project Management is the art of managing all the aspects of a project from inception to closure using a scientific and structured methodology. The term project may be used to define any endeavor that is temporary in nature and with a beginning or an end. The project must create something unique whether it is a product, service or result and must be progressively elaborated. As the definition implies, not every task can be considered a project. It would be worthwhile to keep this definition in mind when categorizing projects and studying their role in the success of the organization. With the above definition of the project, one gets a clear idea on what a project is.

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Program ManagementProgram Management is defined as a

department that centralizes the management of projects. What this means is that the PMO or the Project Management Office is a repository of all the projects that are being executed in an organization. Program Management serves the CIO (Chief Information Officer) by providing him or her with regular status updates regarding the progress of all the projects in the company.38

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The PMO’s role is to ensure that the projects are financially viable and to raise an alert whenever there is a possibility or occurrence of a cost over run. The PMO also keeps tab on the billing and other details that are concerned with the project. Thus, the PMO’s function is to oversee the projects coming under its domain and act as a kind of monitoring agency for them. In the current scenario, there is a need for visionary leadership by the CIO’s in addition to the technical leadership.

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The role of a project manager is similar to that of a conductor in a symphony. Individually each of the artists knows what has to be done for his or her role. But, there needs to be a person who has the overall “big picture” or the collective vision to make the performance a success. Similarly, the project manager drives the entire project team in pursuit of common goals.

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The Project Manager’s role is to ensure that the overall objectives of the project are achieved with the participation of each individual member. The project manager deals how well he or she can leverage the strengths of the individual members while minimizing the impact of their weaknesses. Program managers take the same view but at a much higher level. Their job is on the overall bottom line for the division or the company and they drive the individual project managers.

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Importance of Project Management

Project management is the art of managing the project and its deliverables with a view to produce finished products or service. There are many ways in which a project can be carried out and the way in which it is executed is project management.

Project management includes: identifying requirements, establishing clear and achievable objectives, balancing the competing demands from the different stakeholders and ensuring that a commonality of purpose is achieved.

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Marketing Management for Textile & Leather

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What is Marketing…??Selling?

Advertising?

Promotions?

Making products available in stores?

Maintaining inventories?

All of the above, plus much more!

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Marketing = ?

Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, services to create exchanges that satisfy individual and organizational goals

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Marketing = ?Marketing management is the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.

Marketing management is the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.

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Simple Marketing System

Industry(a collection

of sellers)

Market(a collection

of Buyers)

Goods/services

Money

Communication

Information

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Marketing = ? Marketing is the sum of all activities that take you to a

sales outlet. After that sales takes over. Marketing is all about creating a pull, sales is all

about push. Marketing is all about managing the four P’s –

productprice placepromotion

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The 4 Ps & 4Cs

MarketingMix

Product

Price Promotion

Place

CustomerSolution

CustomerCost

Communication

Convenience

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Difference Between - Sales & Marketing ?

Difference Between - Sales & Marketing ?

Salestrying to get the customer to want what the company produces

Marketing trying to get the company produce what the customer wants

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Scope – What do we market

Goods Services Events Experiences Personalities Place Organizations Properties Information Ideas and concepts

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Core Concepts of Marketing

Based on : Needs, Wants, Desires / demand Products, Utility, Value & Satisfaction Exchange, Transactions & Relationships Markets, Marketing & Marketers.

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Needs, wantsdemands

Markets Marketing &Marketers

Utility, Value &Satisfaction

Xchange, TransactionRelationships

Products


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Need – food ( is a must )

Want – Pizza, Burger, French fry's ( translation of a need as per our experience )

Demand – Burger ( translation of a want as per our willingness and ability to buy )

Desire – Have a Burger in a five star hotel

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In order to understand Marketing let us begin with the Marketing Triangle

Customers

CompetitionCompany

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Who is a Customer ??

Anyone who is in the market looking at a product / service for

attention, acquisition, use or consumption that satisfies a want or a

need

CUSTOMER IS . . . . .

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Customer –CUSTOMER has needs, wants, demands and

desiresUnderstanding these needs is starting point of

the entire marketing These needs, wants …… arise within a

framework or an ecosystemUnderstanding both the needs and the

ecosystem is the starting point of a long term relationship

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How Do Consumers Choose Among Products & Services?

Value - the value or benefits the customers gain from using the product versus the cost of obtaining the product.

Satisfaction - Based on a comparison of performance and expectations.

Performance > Expectations => Satisfaction

Performance < Expectations => Dissatisfaction

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Customers - Problem Solution

As a priority , we must bring to our customers “WHAT THEY NEED”

We must be in a position to UNDERSTAND their problems

Or in a new situation to give them a chance to AVOID the problems

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Customer looks for ValueCustomer looks for ValueValue = Benefit / Cost

Benefit = Functional Benefit + Emotional Benefit

Cost = Monetary Cost + Time Cost + Energy Cost + Psychic Cost

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Strategic MarketingStrategic Marketing

Strategic marketing management is concerned with how we will create value for the customer

Asks two main questions

What is the organization’s main activity at a particular time? – Customer Value

What are its primary goals and how will these be achieved? – how will this value be delivered

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Strategic PlanningStrategic Planning

Strategic Planning is the managerial process of creating and maintaining a fit between the organization’s objectives and resources and the evolving market opportunities.

Also called Strategic Management Process All organizations have this Can be Formal or Informal

Strategic Planning is the managerial process of creating and maintaining a fit between the organization’s objectives and resources and the evolving market opportunities.

Also called Strategic Management Process All organizations have this Can be Formal or Informal

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The Strategic-Planning, Implementation, and Control ProcessThe Strategic-Planning, Implementation, and Control Process

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Business Strategic-Planning Process

External environment

(Opportunity &

Threat analysis)

Internal Environment

(Strength/ Weakness analysis)

Goal FormulationBusiness Mission

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Strategy FormulationEnvironmental Analysis

Internal AnalysisCompetitorCustomerSupplier

RegulatorySocial/ Political

Technology Know-HowManufacturing Know-How

Marketing Know-HowDistribution Know-How

Logistics

Strength & Weaknesses

Identity Core Competencies

Opportunities & Threats

Identify opportunity

Fit internal Competencies with external opportunities

Firm Strategies

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The Marketing Plan

A written document that acts as a guidebook of marketing activities for the marketing manager

A written document that acts as a guidebook of marketing activities for the marketing manager

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CONTENTS of MARKETING PLAN CONTENTS of MARKETING PLAN Business Mission Statement

Objectives

Situation Analysis (SWOT)

Marketing Strategy Target Market Strategy Marketing Mix

Positioning Product Promotion Price Place – Distribution People Process

Implementation, Evaluation and Control

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The Marketing ProcessThe Marketing Process

Business Mission Stateme

nt

Objectives

Situation or SWOT Analysis

Implementation Evaluation,

Control

Target Market Strategy

Marketing Strategy

Product

Promotion

Place/Distribution

Price

Marketing Mix

Marketing Environment

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Why a product like radio declined and now once again emerging as an entertainment medium ?

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What Were the Drivers of This Change ?

Technology ?

Government policy ?

Other media substitutes ?

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Why Market Leaders Suffered ?

HMT vs. Titan

HLL vs. Nirma

Bajaj vs. Honda

Dot.com boom, then bust and now resurgence

Market leadership today cannot be taken for granted.New and more efficient companies are able to upstage leaders in a much shorter period.

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Factors Influencing Company’s Marketing Strategy

Factors Influencing Company’s Marketing Strategy

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DemographicsDemographics

SocialChangeSocial

Change

EconomicConditionsEconomicConditions

Political & Legal FactorsPolitical &

Legal Factors

TechnologyTechnology

CompetitionCompetition

EnvironmentalScanning

EnvironmentalScanning

Target Market

ProductDistributionPromotion

Price

ProductDistributionPromotion

Price

External Environment is not controllable

External Environment is not controllable Ever-Changing

MarketplaceEver-Changing

Marketplace

External Marketing EnvironmentExternal Marketing Environment

Physical / Natural

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The macro-environmentThe macro-environment

is the assessment of the external forces that act upon the firm and its customers, that create threats & opportunities

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P r o d u c tP r o d u c t

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Anything that is offered to the market for

attention, acquisition, use or consumption that

satisfies a want or a need

Product is . . . . . Product is . . . . .

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Types of Products

ConsumerProducts

IndustrialProducts

PRODUCTS

Services

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Product Items, Lines, and Mixes

Product ItemProduct Item

Product LineProduct Line

Product MixProduct Mix

A specific version of a product that can be designated as a

distinct offering among an organization’s products.

A specific version of a product that can be designated as a

distinct offering among an organization’s products.

A group of closely-related product items.

A group of closely-related product items.

All products that an organization sells.

All products that an organization sells.

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Product MixWidth – how many product lines a company has

Length – how many products are there in a product line

Depth – how many variants of each product exist within a product line

Consistency – how closely related the product lines are in end use

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Gillette’s Product Lines & Mix

Blades and Writingrazors Toiletries instruments Lighters

Fusion – 5 bladeMach 3 TurboMach 3 Series Paper Mate CricketSensor Adorn Flair S.T. Dupont Trac II Toni S.T. DupontAtra Right GuardSwivel Silkience Double-Edge Soft and Dri Lady Gillette Foamy Super Speed Dry LookTwin Injector Dry Idea Techmatic Brush Plus

Width of the product mix

De

pth

of

the

pro

du

ct

line

s

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What is a Service? Defining the Essence

An act or performance offered by one party to another (performances are intangible, but may involve use of physical products)

An economic activity that does not result in ownership

A process that creates benefits by facilitating a desired change in customers themselves, or their physical possessions, or intangible assets

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Some Industries - Service Sector

Banking, stock broking

Lodging

Restaurants, bars, catering

Insurance

News and entertainment

Transportation (freight and passenger)

Health care

Education

Wholesaling and retailing

Laundries, dry-cleaning

Repair and maintenanceProfessional (e.g., law,

architecture, consulting)

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Classification of Services

Pure Tangible Product

Materials / Components

Computers

Major Product withMinor Services

Product = Service

Major Service withMinor Product

Business Hotels

Good Transportation

Banking Pure Intangible Service

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Intangibility – Services are intangibility cannot be seen, tasted, felt, heard or smelled before purchase.

Inseparability - Services are produced and consumed simultaneously.

Variability or Heterogeneity – Services are highly variable

Perishability – Services cannot be stored.

Non Ownership - Services are rendered but there is no transfer of title

Major Characteristic of Services Major Characteristic of Services

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The Marketing Mix

The conventional view of the marketing mix consisted of four components (4 Ps): Product, Price, Place/ distribution and Promotion.

Generally acknowledged that this is too narrow today; now includes , Processes, Productivity [technology ]People [employees], Physical evidence

Marketers today are focused on virtually all aspects of the firm’s operations that have the potential to affect the relationship with customers.

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The “8Ps” of Integrated Service Management vs. the Traditional “4Ps”

► Product elements

► Place, cyberspace, and time

► Process

► Productivity and quality

► People

► Promotion and education

► Physical evidence

► Price and other user outlays

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The Give and Get of Marketing

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Great Words on Marketing

1. “The purpose of a company is ‘to create a customer…The only profit center is the customer.’”

2. “A business has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results: all the rest are costs.”

3. “The aim of marketing is to make selling unnecessary.”

4. “While great devices are invented in the Laboratory, great products are invented in the Marketing department.”

5. “Marketing is too important to be left to the marketing department.”

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Drivers of Customer Satisfaction

Many aspects of the firm’s value proposition contribute to customer satisfaction: The core product or service offered Support services and systems The technical performance of the firm Interaction with the firm and it employees The emotional connection with customers

Ability to add value and to differentiate as a firm focuses more on the top levels

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Marketers and MarketsMarketers are focused on stimulating

exchanges with customers who make up markets – B2C or B2B.

The market is comprised of people who play a series of roles: decision makers, consumers, purchasers, and influencers.

It is absolutely essential that marketers have a detailed understanding of consumers, their needs and wants.

Much happens before and after the sale to affect customer satisfaction

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Stages of Customer Interaction

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What Changed in Marketing…

Organize by product unitsFocus on profitable transactionsLook primarily at financial

scorecardFocus on shareholdersMarketing does the marketingBuild brands through advertisingFocus on customer acquisitionNo customer satisfaction

measurementOver-promise, under-deliver

Organize by product unitsFocus on profitable transactionsLook primarily at financial

scorecardFocus on shareholdersMarketing does the marketingBuild brands through advertisingFocus on customer acquisitionNo customer satisfaction

measurementOver-promise, under-deliver

• Organize by customer segments• Focus on customer lifetime value• Look also at marketing scorecard

• Focus on stakeholders• Everyone does the marketing• Build brands through performance• Focus on customer retention• Measure customer satisfaction and

retention rate• Under-promise, over-deliver

Old Economy New Economy

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Are Banks truly marketing-savvy and customer - centric?

Are Banks truly marketing-savvy and customer - centric?

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Myth 1 – The larger the range of products, the more customer-centric I am.

Mythbuster – The range of products has

emerged from being

competition-centric.

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Myth 2 – Better technology (read CRM) leads tobetter customer service.

Mythbuster – Technology

alone does not deliver,

helps people do.

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Myth 3 – Launch a product and the customer will start

using instantly.- Give a customer a card and he will learn how to play

with it immediately

Mythbuster – Customers need

To be educated too…

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Mythbuster – Customers are not only present where competition is.

Myth 4 – The only way to get a customer is from

competition.

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Myth 5 – Just advertise and - You will sell.

Mythbuster – Advertising will only sell,

Not retain customers.

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Myth 6 – No difference between marketing & selling

Mythbuster – “Selling focuses on the needs of the seller; marketing on the needs of the buyer.

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Myth 7 – In the absence of relationships ‘trust’ builds financial brands

Mythbuster – Trust is not a differentiator at all…it is the very minimum that the customer expects!!

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So what will the differentiators be :So what will the differentiators be :

• Technology ?

• Brand ?

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The real differentiator of

customer – centricity in a

commoditised world of

financial products -

Customer Service !

Costing & Depreiciation

Unit CostThe unit cost of a product is the cost per standard unit

supplied, which may be a single sample or a container of a given number.

When purchasing more than a single unit, the total cost will increase with the number of units, but it is common for the unit cost to decrease as quantity is increased (bulk purchasing), as there are discounts etc.

This reduction in long run unit costs which arise from an increase in production/purchasing is due to the fixed costs being spread out over more products and is called economies of scale.

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Opportunity costOpportunity cost is the cost of any activity

measured in terms of the value of the next best alternative forgone (that is not chosen).

It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.

The opportunity cost is also the cost of the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice"

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Cash flowCash flow is the movement of money into

or out of a business, project, or financial product. It is usually measured during a specified, finite period of time.

Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation

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Sunk CostIn economics and business decision-

making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken

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InflationInflation is a rise in the general level of prices of

goods and services in an economy over a period of time.

When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time

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DepreciationDepreciation refers to two very different

but related concepts:the decrease in value of assets (fair value

depreciation), andthe allocation of the cost of assets to

periods in which the property are used (depreciation with the matching principle).

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Depreciation involves

Generally this involves four criteria:Cost of the asset,Expected salvage value, also known as

residual value of the asset,Estimated useful life of the asset, and a

method of apportioning the cost over such life.

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Methods of depreciationStraight-line depreciationDeclining-balance method (or Reducing

balance method)Activity depreciationSum-of-years' digits method Units-of-production depreciation methodUnits of time depreciationGroup depreciation methodComposite depreciation method & Tax depreciation

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Straight-line depreciation

Straight-line depreciation is the simplest and most-often-used

technique, in which the company estimates the salvage value

of the asset at the end of the period during which it will be

used to generate revenues (useful life) and will expense a

portion of original cost in equal increments over that period.

The salvage value is an estimate of the value of the asset at

the time it will be sold or disposed of; it may be zero or even

negative. Salvage value is also known as scrap value or

residual value.

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Depreciation formula for Straight-line depreciation

Cost of Fixed Asset – Residual Value

Depreciation = -------------------------------------------------

Usual Life of Asset(In Years)

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Book value atbeginning of year

Depreciationexpense

Accumulateddepreciation

Book value atend of year

$17,000 (original cost)

$3,000 $3,000 $14,000

$14,000 $3,000 $6,000 $11,000

$11,000 $3,000 $9,000 $8,000

$8,000 $3,000 $12,000 $5,000

$5,000 $3,000 $15,000$2,000 (scrap value)

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Declining-balance method (or) Reducing balance method

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new. One popular accelerated method is the declining-balance method. Under this method the book value is multiplied by a fixed rate.

Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year11

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Depreciationrate

Depreciationexpense




40% $400 $400 $600

$600 40% $240 $640 $360

$360 40% $144 $784 $216

$216 40% $86.40 $870.40 $129.60

$129.60 $129.60 - $100 $29.60 $900

$100 (scrap value)

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Depreciation Rate

119

N

dAssetCostofFixe

esidualValuonRateDepreciati

Re1

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Activity depreciation

Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine.

When the asset is acquired, its life is estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime.

The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile.

Each year, the depreciation expense is then calculated by multiplying the rate by the actual activity level.

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Sum-of-years' digits method

Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method.

Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions.

Depreciable cost = original cost − salvage value

book value = original cost − accumulated depreciation

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ExampleExample: If an asset has original cost of

$1000, a useful life of 5 years and a salvage value of $100, compute its depreciation schedule.

First, determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1.

Next, calculate the sum of the digits. 5+4+3+2+1=15

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Sum-of-years' digits method


Totaldepreciablecost

Depreciationrate

Depreciationexpense




$900 5/15$300 ($900 * 5/15)

$300 $700

$700 $900 4/15$240 ($900 * 4/15)

$540 $460

$460 $900 3/15$180 ($900 * 3/15)

$720 $280

$280 $900 2/15$120 ($900 * 2/15)

$840 $160

$160 $900 1/15 $60 ($900 * 1/15) $900

$100 (scrap value)

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Units-of-production depreciation method

Under the units-of-production method, useful life of the asset is expressed in terms of the total number of units expected to be produced

Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.

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Cost of Fixed asset – Residual Value

Depreciation = ----------------------------------------------- X Actual Production

Estimated Total Production

Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.

Depreciation per unit = ($70,000−10,000) / 6,000 = $10

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Example


Units ofproduction

Depreciationcost per unit

Depreciationexpense




1,000 $10 $10,000 $10,000 $60,000

$60,000 1,100 $10 $11,000 $21,000 $49,000

$49,000 1,200 $10 $12,000 $33,000 $37,000

$37,000 1,300 $10 $13,000 $46,000 $24,000

$24,000 1,400 $10 $14,000 $60,000$10,000 (scrap value)

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Units of time depreciation

Units of time depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.

A simple example can be given for construction companies, where some equipment is used only for some specific purpose. Depending on the number of projects, the equipment will be used and depreciation charged accordingly.

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Group depreciation method

Group depreciation method is used for depreciating multiple-asset accounts using straight-line-depreciation method. Assets must be similar in nature and have approximately the same useful lives.

AssetHistoricalcost

Salvagevalue

Depreciablecost

LifeDepreciationper year

Computers $5,500 $500 $5,000 5 $1,000

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Composite depreciation methodThe composite method is applied to a collection of assets

that are not similar, and have different service lives. For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-line-depreciation method.

Composite life equals the total depreciable cost divided by the total depreciation per year. $5,900 / $1,300 = 4.5 years.

Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500 = 0.20 = 20%

Depreciation expense equals the composite depreciation rate times the balance in the asset account (historical cost). (0.20 * $6,500) $1,300. Debit depreciation expense and credit accumulated depreciation.

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Tax depreciation Most income tax systems allow a tax deduction for recovery of

the cost of assets used in a business or for the production of income. Such deductions are allowed for individuals and companies.

Where the assets are consumed currently, the cost may be deducted currently as an expense or treated as part of cost of goods sold. The cost of assets not currently consumed generally must be deferred and recovered over time, such as through depreciation.

Some systems permit full deduction of the cost, at least in part, in the year the assets are acquired. Other systems allow depreciation expense over some life using some depreciation method or percentage.

Rules vary highly by country, and may vary within a country based on type of asset or type of taxpayer. Many systems that specify depreciation lives and methods for financial reporting require the same lives and methods be used for tax purposes. Most tax systems provide different rules for real property (buildings, etc.) and personal property (equipment, etc.).

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Thank You

Industrial business management and engineering economics

Business

Transcript of Industrial business management and engineering economics