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Transcript of Operations and Managerial Accounting Madhav Rajan Stanford Graduate School of Business MAS 2006...
Operations and Managerial Operations and Managerial Accounting Accounting
Madhav RajanMadhav RajanStanford Graduate School of BusinessStanford Graduate School of Business
MAS 2006 MeetingMAS 2006 Meeting
OutlineOutline
Operations and Managerial Accounting Operations and Managerial Accounting Why are inter-firm relations importantWhy are inter-firm relations important Why are we in a unique position to Why are we in a unique position to
examine these issuesexamine these issues
Classic Hold-upClassic Hold-up Accounting in OperationsAccounting in Operations Operations in AccountingOperations in Accounting
Importance of SuppliersImportance of Suppliers
Outsourcing has increasedOutsourcing has increased From 1973 to 1993, the median Fortune From 1973 to 1993, the median Fortune
500 industrial company has shrunk 37%500 industrial company has shrunk 37% Over the past 50 years the value of
purchased materials and services has grown from 20% to 56% of the selling price of finished goods
As tasks become outsourced, intra-As tasks become outsourced, intra-firm relationships are replaced with firm relationships are replaced with inter-firminter-firm relationships relationships
Why Managerial Accountants Why Managerial Accountants are a Perfect Fitare a Perfect Fit
Managerial Accounting has covered Managerial Accounting has covered many intra-firm issuesmany intra-firm issues
Inter-firm issues are very similar, Inter-firm issues are very similar, only no “Selected Intervention”only no “Selected Intervention”
DivisionA
DivisionB
HQ.Firm A
DivisionA
DivisionB
Firm A
Firm B Selected
Intervention
Contracts
Hold-UpHold-Up
Classic Hold-up problem (Inter-firm) Classic Hold-up problem (Inter-firm) Edlin and Reichelstein 1996Edlin and Reichelstein 1996 Che and Hausch 1999Che and Hausch 1999
Intra-firm asymmetric informationIntra-firm asymmetric information Baldenius 2000 Baldenius 2000 Vaysman 1998Vaysman 1998
Inter-firm asymmetric informationInter-firm asymmetric information Your name hereYour name here
Testing incoming products (single Testing incoming products (single supplier)supplier) Baiman et al. 2001a: TestingBaiman et al. 2001a: Testing Baiman et al. 2001b: DesignBaiman et al. 2001b: Design
Buyer-Supplier contracting with Buyer-Supplier contracting with multiple suppliersmultiple suppliers Baiman et al. 2003Baiman et al. 2003
Accounting and ProcurementAccounting and Procurement
Opportunism across the Opportunism across the Supply-ChainSupply-Chain
Buyer-Supplier Moral Hazard (Dual):Buyer-Supplier Moral Hazard (Dual): Role of WarrantiesRole of Warranties Balachandran and Radhakrishnan 2005Balachandran and Radhakrishnan 2005 Saouma 2005Saouma 2005
Sharing Private Innovations:Sharing Private Innovations: Asymmetric informationAsymmetric information Baiman and Rajan 2002Baiman and Rajan 2002
Capacity and Cost AllocationCapacity and Cost Allocation
Full CostingFull Costing Never optimal for price settingNever optimal for price setting
Why use it?Why use it? Is it useful for making capacity decisions?Is it useful for making capacity decisions? If so, then price and cost decisions should If so, then price and cost decisions should
be made simultaneously…be made simultaneously…
Very computationally intensive
Full Costing ResearchFull Costing Research Find scenarios where it is optimalFind scenarios where it is optimal
Banker and Hughes 1994Banker and Hughes 1994 Gox 2002Gox 2002
Examine Full Costing as a pricing and Examine Full Costing as a pricing and capacity heuristiccapacity heuristic Balakrishnan and Sivaramkrishnan 2001Balakrishnan and Sivaramkrishnan 2001 Balakrishnan et al. 1997Balakrishnan et al. 1997
Questions from Operations:Questions from Operations:Accounting AnswersAccounting Answers
Why do we observe revenue sharing Why do we observe revenue sharing contracts?contracts? Cachon and Lareviere 2005Cachon and Lareviere 2005
How share private information across How share private information across the supply chain?the supply chain? Cachon and Lareviere 2001Cachon and Lareviere 2001
Who should carry inventory risk?Who should carry inventory risk? Cachon 2004Cachon 2004
A Sampling of A Sampling of Operations Management Operations Management
ResearchResearch
Erica PlambeckErica PlambeckStanford Graduate School of Stanford Graduate School of
BusinessBusiness
Gentlemen, we’re sitting on a hell of a lot of inventory
Roots of O.M. ResearchRoots of O.M. Research
Recent O. M. ResearchRecent O. M. Research Empirical ResearchEmpirical Research
forthcoming focus issue in forthcoming focus issue in Manufacturing & Manufacturing & Service Operations Management Service Operations Management
Revenue ManagementRevenue Management
Service OperationsService Operations call center focus issue forthcoming in call center focus issue forthcoming in
Management ScienceManagement Science Dynamic Supply Chain ManagementDynamic Supply Chain Management
Recent O. M. ResearchRecent O. M. Research Empirical ResearchEmpirical Research
forthcoming focus issue in forthcoming focus issue in Manufacturing & Manufacturing & Service Operations Management Service Operations Management
Revenue ManagementRevenue Management
Service OperationsService Operations call center focus issue forthcoming in call center focus issue forthcoming in
Management ScienceManagement Science Dynamic Supply Chain ManagementDynamic Supply Chain Management
relational contractsrelational contracts product returnsproduct returns
During development process, product design changes substantially. Delaying capacity investment ‘til product is well-defined would cause unacceptable delays:
“If we waited until we were sure of every final detail, and drew it [a contract] up beautifully so anyone could read it, we would be 6 months to 12 months later in the marketplace” –Toshiba purchasing manager
Toshiba and supplier instead adopt relational relational contractcontract: informal agreement about terms of : informal agreement about terms of trade, enforced by the future value of a trade, enforced by the future value of a cooperative relationship.cooperative relationship.
Relational Contracts Relational Contracts (Toshiba)(Toshiba)
Research QuestionsResearch Questions
How does repeated interaction affect capacity investment and profitability?
How should a buyer make promises to purchase? If promised terms are highly
generous, supplier may not find promise credible
If stingy, supplier may invest little
Model: Model: Repeated New Product Repeated New Product Intro. Intro. and Capacity and Capacity Investment Investment
supplier builds K units of capacity at cost cK
buyer realizes demand
formal contract: -price-quantity
production & retail sale at price r
discount factor
buyer pays T,supplier builds K units of capacity at cost cK
buyer realizes demand &orders q()
formal contract: if both firms cooperate, codify q, d(q)
otherwise, Nash bargaining
production,retail sale at price r
Relational ContractRelational Contract specifies: specifies: terms: terms: T, dT, d((qq)) buyer strategy: buyer strategy: qq(()), , cooperate until supplier cooperate until supplier renegesreneges supplier strategy: supplier strategy: KK,, cooperate until buyer cooperate until buyer renegesreneges
strategies must bestrategies must be perfect public perfect public equilibriumequilibrium
Relational Contract Design Relational Contract Design = Fixed Point Problem= Fixed Point Problem
buyer pays
supplier builds capacity
buyer orders specified quantity
))1(),min()( }ˆ)({1
)) ()1()())((}(ˆ)({1 maxarg
),min())(1( ))( ()),(min(
)}(),min(max{arg)(
:subject to
)}(),(,{
)]()),(min([max
]
}{
1
1
0ˆ K
Kq
ˆ Kc
KprKq
pqqdKqEK
Kprqdqr
qdqrq
qqdK
cKpqqrE
S
B
max expected profit
discount factor
0.25 0.50 0.75 1.0
95-100%65-95%
5-35%35-65%
0-5%
first best achieved
10.0 7.5 5.0 2.5
r = 10p = 0= 0.5uniform(0,1)
cap
aci
ty c
ost
c
discount factor
Increase in Expected Profit Increase in Expected Profit (Relational Contract – Nash bargaining)/(First Best)(Relational Contract – Nash bargaining)/(First Best)
Research QuestionsResearch Questions How do informational links influence How do informational links influence
structure and performance of optimal structure and performance of optimal relational contract? relational contract?
Who is responsible for relationship? Who is responsible for relationship?
Product Returns - Product Returns - CommercialCommercial
Internet purchase “Not what I expected”Internet purchase “Not what I expected” Zappos.com lets you return unworn shoes for Zappos.com lets you return unworn shoes for
60 days for any reason60 days for any reason Banana Republic.com offers free returns to Banana Republic.com offers free returns to
customers that spend $800+/yr customers that spend $800+/yr Obsolescence (electronics)Obsolescence (electronics) can’t resell can’t resell
QuestionsQuestions What is cost and frequency of returns: by What is cost and frequency of returns: by
product type, customer type, returns policy? product type, customer type, returns policy? Resell (speed, price, channel) or recycle or…? Resell (speed, price, channel) or recycle or…?
Generous returns policy? Customer-specific? Generous returns policy? Customer-specific?
Product Returns - Product Returns - CommercialCommercial
Home DepotHome Depot 10% of sales returned ~ $11 B/year10% of sales returned ~ $11 B/year Labor cost ~ $85 M/year Labor cost ~ $85 M/year >10% of returns are destroyed >10% of returns are destroyed
$22 M/year to landfill$22 M/year to landfill
QuestionsQuestions What is value of information about usage? What is value of information about usage? Should return logistics be centralized? Should return logistics be centralized?
Outsourced?Outsourced? How to forecast? Adapt procurement and How to forecast? Adapt procurement and
pricing?pricing?
Product Returns – End of Product Returns – End of LifeLife
EU makes manufacturer responsible for EU makes manufacturer responsible for products at end of lifeproducts at end of life Cars, electronics, white goods Cars, electronics, white goods
Restrictions on Hazardous Substances Restrictions on Hazardous Substances Questions Questions
Sort?Sort? What is value of information: What is value of information: manufacturer, product, condition, time and manufacturer, product, condition, time and location of return? location of return?
How to estimate and internalize EOL cost in How to estimate and internalize EOL cost in design, timing, and price of new products? design, timing, and price of new products?
How does RoHS influence optimal number How does RoHS influence optimal number and size of suppliers? Relational contracting? and size of suppliers? Relational contracting?
SummarySummary “Hot” OM research areas
Empirical research Revenue management Service operations Dynamic supply chain management
Multi-disciplinary research opportunities Relational contracts Product returns
EmpiricalEmpirical Research in Research in Operations Management Operations Management
and Management and Management AccountingAccounting
Shannon AndersonShannon AndersonRice University & University of MelbourneRice University & University of Melbourne
““Managing Costs and Cost Structure throughout the Value Managing Costs and Cost Structure throughout the Value Chain: Research on Strategic Cost Management.” In Chapman, Chain: Research on Strategic Cost Management.” In Chapman,
Hopwood, & Shields (Eds.). Hopwood, & Shields (Eds.). Handbook of Management Handbook of Management Accounting ResearchAccounting Research. .
Also: http://ssrn.com/abstract=869070Also: http://ssrn.com/abstract=869070
Integration isn’t new…Integration isn’t new…In the 1980’s and early ‘90s, the primary domain of In the 1980’s and early ‘90s, the primary domain of
integrative research was integrative research was performance performance measurementmeasurement Relating lean operations strategies to performance and cost
structure Product design and development strategies Inventory management strategies Process quality strategies Technology investment strategies Workforce management strategies
Designing information systems to reveal hidden costs of… quality, time, customers, suppliers (ownership)
Summary: Summary: Management accounting and operations Management accounting and operations management research are linked because better management research are linked because better operating strategies are apparent when operating strategies are apparent when performance is properly measuredperformance is properly measured
The domain for integration has The domain for integration has expanded…expanded…
Within the firmWithin the firm Performance managementPerformance management developing developing
comprehensive, causal models that relate comprehensive, causal models that relate operational performance to financial performanceoperational performance to financial performance
Lean operations span firm boundariesLean operations span firm boundariesManagement ControlManagement Control promoting cooperation and promoting cooperation and coordination between self-interested firms in coordination between self-interested firms in settings with information asymmetry, uncertainty, settings with information asymmetry, uncertainty, asset specificity, etc.asset specificity, etc.Performance measurementPerformance measurement measuring measuring performance of all participants in the value chainperformance of all participants in the value chain
Integrated Research in Performance Integrated Research in Performance ManagementManagement
Similar FrameworksSimilar Frameworks
Management Accounting:Management Accounting:The Balanced Scorecard & Strategy Maps – Kaplan
and Norton (1996, 2000, 2004)
Operations:Operations:The Service Profit Chain – Heskett et al. (1997,
2002)
Marketing:Marketing:Customer Equity Framework – Rust et al. (2000)
Causal Relations among Performance Causal Relations among Performance IndicatorsIndicators
Financial
Customers
Internal BusinessProcesses
Customer Satisfaction
Process QualityShorter Cycle Time
Lower Rework
EmployeeSuggestions
EmployeeSkills
Employee Morale
On-time delivery
Return on Capital Employed(ROCE)
SalesOperating Expenses
Integrated Empirical Research in Integrated Empirical Research in Performance ManagementPerformance Management
Descriptive validity of causal modelsDescriptive validity of causal models Workforce management Ittner & MacDuffie (1995),
Schneider et al. (2003) Quality & Cycle Time Maher & Marais (1998), Nagar &
Rajan (2001), Hendricks & Singhal (2001) Kaynak (2003), Sedatole (2003)
Inventory Mgmt & Supply Chain Balakrishnan & Linsmeier (1996), Randall & Ulrich (2001), Hendricks & Singhal (2005)
Customer satisfaction Rust & Zahorik (1993), Itter & Larcker (1998), Foster & Gupta (1999), Anderson et al. (1994), Yeung & Ennew (2000), Banker et al. (2000), Heim et al. (2001)
Multiple causal links Soteriou & Chase (1998), Behn & Riley (1999), Rust et al. (2000), Verma et al. (1999, 2001, 2005), Kamakura et al. (2002) Goldstein (2003), Roth & Menor (2003), Hitt & Frei (2002)
Integrated Empirical Research in Integrated Empirical Research in Performance ManagementPerformance Management
Behavioral response to multiple Behavioral response to multiple performance measuresperformance measures
Reallocation of work effort Ulrich & Tuttle (2004)
Cognitive processing of complex performance information Lipe & Salterio (2000), Dearman & Shields (2001), Ittner & Meyer (2003), Banker et al. (2004), Libby et al. (2004), Roberts et al. (2004)
Integrated Empirical Research in Integrated Empirical Research in Management ControlManagement Control
Cost-minimizing organizational formsCost-minimizing organizational forms Product design & development: Ulrich & Eppinger
(1995), Wasti & Liker (1997), Seal et al. (1999), Novak & Eppinger (2001), Randall & Ulrich (2001), Cooper & Slagmulder (2003, 2004)
Process development: Walker (1994), Anderson, Glenn & Sedatole (2000)
Linked supply & distribution logistics: Dyer (1996), Netessine et al. (2005)
Integrated Empirical Research in Integrated Empirical Research in Management ControlManagement Control
Inter-organizational Management Inter-organizational Management ControlsControls
Formal Contracting: Gietzmann (1996), Gulati & Singh (1998), Mayer et al. (2004), Anderson & Dekker (2005)
Decision-making processes: Clark & Fujimoto (1991), Ring & Van de Ven (1992, 1994), Nixon (1998), Ulrich and Eppinger (1995), Anderson, Glenn & Sedatole (2000), Thomke & Fujimoto (2000), Davila & Wouters (2004, 2006), Van der Meer-Koistra & Vosselman (2000), Dekker (2004)
Knowledge sharing with suppliers & partners: Tani (1995), Krishnan et al. (1995), Robertson & Ulrich (1998), Seal et al. (1999), Thomke & Fujimoto (2000), Kajuter & Kulmala (2005), Terwiesch et al. (2005)
Knowledge sharing with distributors & customers: Srinivasan et al. (1997), Anderson & Lanen (2002), Kulp et al. (2004)
Supplier selection and performance measurement: Carr & Ittner (1992), Carr & Ng (1995), Meyer et al. (1997), Dekker (2003, 2005), Wouters et al. (2005)
Opportunities for Integrative Opportunities for Integrative ResearchResearch
Extended Horizon: Lifecycle Costs & Sustainable ProfitsExtended Horizon: Lifecycle Costs & Sustainable Profits Internalizing and creating visibility for externality
costs and costs of compliance – Lanen (1999), Joshi et al. (2001), Corson (2002), Epstein & Widener (2005)
New cost and control settings: Product recovery & disposal, Reverse supply chain, Markets for pollution credits
Extended Value Chain: Customers as value chain Extended Value Chain: Customers as value chain partnerspartners
Customer switching costs – Keaveney (1995), Chen & Hitt (2002), Womack & Jones (2005)
Customer/ Channel choice – Hitt & Frei (2002), Campbell (2003)
Opportunities for Integrative Opportunities for Integrative ResearchResearch
Dynamics: Applied Risk ManagementDynamics: Applied Risk Management Operational decisions as real options
Product design – Baldwin & Clark (2000), Krishnan & Gupta (2001) Desai et al. (2001), Lee & Billington (1995), Lee & Tang (1997)
Process technology & capacity – Moel & Tufano (2002), Weiss & Maher (2005), Kallapur & Eldenburg (2005)
Measuring and managing performance volatility Incentives and controls to induce optimal risk-taking
Theory Base: Testing cognitive and behavioral theories Theory Base: Testing cognitive and behavioral theories in the (service) operations management settingin the (service) operations management setting
Unique features of the Employee-Customer interface Judgment and decision making processes Incentive issues