Management Accounting Assignment
Activity 1: MicroTech Limited Case Study
MicroTech Limited (MT)1 is a leading manufacturer of computers, notebooks and printers. MT's strength lies in research and development, and is constantly coming up with the most innovative products in the industry. To focus on its core competence, MT outsources the following activities to multiple contractors: (i) the manufacture of their older products, (ii) the manufacture of all but key components of new products, and (iii) post-sale repair and maintenance (R&M) of products at customer premises.
Recently, a few irate customers complained about the quality of notebooks produced by one of MT's major manufacturing contractors. The CEO of MT, Jack, had previously failed to discuss how product quality should be ensured when negotiating contracts with contractors. Recognising a potential problem, Jack hired a consultant, Stephen, to assess MT's outsourcing process.
"You should build into agreements the level of quality you expect," Stephen advised. "And you probably want to conduct regular audits of their business to ensure your standards are being adhered to." Jack was dumbfounded, "We have always left our contractors to do their own thing, and we did not receive any complaints previously," he replied. "In fact, our customers surveyed last year indicated that they were especially pleased with the R&M services provided by our suppliers. The customers said they arrived on time and fixed all problems with their computers and printers promptly. This reflects well on us as these suppliers wear our uniform when working on our jobs."
Stephen recommended that MT should consider and identify issues to be covered with various contractors before signing the contracts. For example, the ownership of intellectual property and responsibility for other obligations including product recalls should be discussed with the manufacturing contractors. "You'd be surprised at the number of businesses that enter into arrangements with no contracts or very basic contracts. Of course you'd expect the relationship to go well. But if it doesn't, it saves a lot of anguish and wrangling to have a legal document detailing who is responsible for what."
Jack mentioned that MT manufactured the most critical components of new products in- house, especially those using new technology. "Partly, because I don't think our contractors have the technological expertise to manufacture them. It is a different story when it comes to our R&M suppliers - they are really good at what they, probably the best. Also, they have the numbers. We don't have enough employees to send out and don't have the resources to train new ones to that level."
"How did you select your contractors?" Stephen asked. Jack was unsure but thought selection was based on price. Jack said, "It's a pretty competitive market out there and there are always some rumours about specific contractors. If we don't hear anything negative, we assume they are pretty much the same skills-wise. We have only started to hear a few complaints recently."
"You have been very lucky," Stephen commented. "Selecting a new supplier should get as much attention as employing new staff. Even if the only option is to trawl the Yellow Pages, speak to at least two companies. However, the optimum number of suppliers to evaluate ranges from three to five."
"More importantly, select the supplier that seems to understand your business; and that you feel most comfortable with. This last part is crucial: you should aim to develop a partnership with your suppliers that will benefit your business and theirs. The contractor essentially becomes part of your business. It's not a once-off service like shop outfitting. It's a longer- term relationship, based on undertaking regular activities, and needs careful consideration. This is especially important for suppliers that interact with your customers because we have evidence that customers are placing increasing emphasis on customer service and the entire customer experience. Once the shortlist is drawn up, make the contractors work for your money. If contractors tout themselves as experts, expect the best processes, the latest technology and around-the-clock support."
"It is the norm to formalise your expectations in the form of Service Level Agreements. At the very least, you and your contractor need to come to an agreement about KPIs, which are specific measures tailored to monitor success according to your business, and incorporate these in the contract. In the short-term, put regular reviews in place and ensure clear understanding of each party's responsibilities and critical time frames," Stephen said.
Required: Read the above case and answer the following questions. Draw on case evidence where possible.
1. MT is considering two activities that they should outsource or otherwise, namely, (i) the manufacture of key components of newly developed products, and (ii) post-sale repair and maintenance of products at customer premises.
- Use the outsourcing matrix to classify each activity in one of the four quadrants. Justify your recommendation for each activity especially in relation to the two variables in the outsourcing matrix: (a) the level of competitiveness relative to supplier and (b) the strategic importance of competence. Draw on evidence where available.
2. The outsourcing process is comprised of three phases. Evaluate MT's outsourcing process against the important issues (or critical success factors) in each of the phase, providing specific examples of what was done well and what was not. Where things were not done well, discuss what should have been done. Please identify a total of about four critical success factors across all phrases (i.e., at least one per phase). (Note: In addition to the podcasts and required readings, you may also want to consider Stephen's recommendations).
3. Identify two outsourcing risks faced by MT. Discuss how they can be mitigated by a well- structure outsourcing process.
Activity 2: Total Cost of Ownership
Adapted from Langfield-Smith et al. 2015, Case 15.45 (p. 700-701).
Fast Lane Ltd. manufactures motorbikes and is located in Brisbane. More than 70 per cent of the cost of the company's motorbikes consists of material and components, which are purchased from Australian suppliers. About three years ago, Fast Lane introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guaranteed large orders as long as it performed according to Fast Lane's strict requirements.
Each supplier's performance was measured by considering its adherence to: (1) delivery schedules (Fast Lane adopts a JIT system), (2) accuracy of orders delivered, (3) components rejected on delivery due to poor quality, and (4) its achievement in reducing its production costs (and, therefore, its material and component prices to Fast Lane) over the contract period. Performance in all of these areas will determine whether Fast Lane renews the supplier's contracts or offers the contract to another supplier.
After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of non-financial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplier-related activities and costs have been identified:
|
Activity
|
Total cost
|
Number of activities
|
|
Order components from supplier
|
$1,800,000
|
6,000 orders
|
|
Receive order
|
$9,000,000
|
10,000 deliveries
|
|
Return reject components to supplier
|
$38,500
|
55 returns
|
|
Receive late deliveries
|
$260,000
|
130 late deliveries
|
|
Production downtime due to late delivery
|
$2,400,000
|
800 hours
|
|
Production downtime due to defective material
|
$3,600,000
|
3,000 hours
|
|
Process invoice and pay supplier
|
$1,050,000
|
3,000 invoices
|
|
Dispute invoiced amount
|
$40,000
|
50 disputes
|
|
Quality audit of suppliers
|
$500,000
|
10 audits
|
Fast Lane obtains its exhaust systems from two suppliers: Hot Exhausts and Chrome Manufacturers. Last year, Fast Lane purchased 3,000 units from Hot Exhausts at $100 per unit, and 4,000 units from Chrome Manufacturers at $90 per unit. Both suppliers provide an identical component. The analysis from last year revealed that the following activities are related to the two suppliers:
|
Activity
|
Hot Exhausts
|
Chrome Manufacturers
|
|
Order components from supplier
|
90 orders
|
130 orders
|
|
Receive order
|
90 deliveries
|
150 deliveries
|
|
Return reject components to supplier
|
15 returns
|
16 returns
|
|
Receive late deliveries
|
6 late deliveries
|
28 late deliveries
|
|
Production downtime due to late delivery
|
15 hours
|
59 hours
|
|
Production downtime due to defective material
|
20 hours
|
29 hours
|
|
Process invoice and pay supplier
|
12 invoices
|
130 invoices
|
|
Dispute invoiced amount
|
3 disputes
|
3 disputes
|
|
Quality audit of suppliers
|
1 audit
|
2 audits
|
Required:
1. Calculate the following for each supplier:
a. Total Cost of Ownership (TCO) per unit
b. Supplier Performance Index (SPI)
(Please show your working and round off your answer at every step to 2 decimal places. Please attempt the calculation parts before seminar.)
2. Compare and discuss the performance of the two suppliers.
3. After reviewing a report based on your findings in parts (1) and (2), the CEO of Fast Lane Ltd. is concerned about three activities: "receive late deliveries", "process invoice and pay supplier" and "dispute invoiced amount". You have been asked to identify possible root causes of these activities, and specify whether each root cause is attributable to Fast Lane or its suppliers.
4. Provide recommendations to the CEO on how each supplier should be managed. Use the activity-based costing information and case information where relevant.
5. Fast Lane uses 4 criteria to determine whether to renew a supplier's contract (see case information). For two of the criteria, suggest one performance measure per criterion that Fast Lane might use to evaluate its suppliers' performance.