Planning Cycle

The base for the entire planning is the strategic business plan. Strategic business plan incorporates all the plan of marketing, finance and production. These are high level plans based on overall organizational perspective and devised by top management. they span across 2 to 10 years and talk about the strategic direction of the company.

Business Planning is based on the strategic plan and define the objective of various functions at an aggregate level. These are more financial oriented and address the sales, manufacturing, finance and other activities to achieve the strategic objectives. The horizon extend from 12 to 18 months.

Sales and Operations Planning include the planning of the manufacturing facilities required to support the business plan. It determines the overall level of manufacturing output broken down by quarterly / monthly time periods and ensures the integration between the production function and business plan. S&OP is responsible to determine the production rates, desired inventory levels and resource requirements for the end items / product families. Rough Cut capacity planning at this level helps in identifying and evaluating the bottleneck resources involved in the achieving production schedule.

Material requirement planning drills down further the requirement of the number of manufactured and purchased components. it is a plan for determining the production and purchase of the various components of the end items to support S&OP. Capacity requirement planning determines the detailed requirement of the labor and equipment resources needed to achieve the production of components as per MRP.

Financial Fundamentals for SCM

SCM Practitioners need to understand the cost structure of every organization in supply chain. Following diagram shows the impact of cost structure of one entity on the other entity.

An important activity in managing the SCM is to reduce costs in the entire supply chain network. In order to achieve this, first we need to understand the inventory valuation or costing methods that help to arrive at product cost. Following are some standard costing methods used across world:

• Standard Costing method: In this method, the standard cost of the items is defined by cost accountant and it is updated periodically to reflect the changes in the actual prices.

• First in First Out (FIFO): The cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.

• Last in First Out: The cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income.

• Weighted Average: Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO.

Following are the major steps in the accounting cycle that will help to understand the fundamental aspects of accounting:

• Analyze Business Transactions
• Record entries in Journal
• Post entries to Ledger
• Prepare a Trial Balance
• Prepare Adjusting entries and Post to the Ledger Accounts
• Prepare Adjusted Trial Balance
• Prepare Financial Statements
• Profit and Loss Statement
• Balance Sheet Statement
• Closing entries are made

Balance Sheet:

It is a financial statement that summarizes organization’s financial position at a specific point of time. It’s a numeric illustration of the balance between a firm’s assets on one hand and its liabilities and owner’s equity on the other hand in a given point of time.

To Analyze the cost structure of the Supply Chain Network, following financial ratios are widely used:

Liquidity Ratios: Liquidity Ratios are used to examine the firm’s ability to meet short-term cash outflow

needs.

Profitability Ratios: Profitability Ratios are ratios used to measure the profitability of the firm.

Activity Ratios: Activity Ratios are ratios used to measure the efficiency with which the firm conducts its

business.

• Inventory Turnover: measures number of times that average inventory turned overduring a period of time. Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory (inventory of finished goods)
• Accounts Receivable Turnover: the average length of time it takes to collect the sales made on credit. Accounts Receivable Turnover =Sales/Average Accounts Receivable (Sales/Accounts receivable)
• Days (Inventory/Receivable) Outstanding: measures number of days each is outstanding. Days (Inventory/Receivable) Outstanding =365/Inventory Turnover; 365/Accounts Receivable Turnover
• Total Asset Turnover: a measure of the utilization of all the firm’s assets. Total Asset Turnover = Sales/total assets during period

Leverage Ratios: Leverage Ratios are ratios used to measure firm’s ability to meet its long-run debt service obligation.

Supply Chain Management Basics

Supply Chain: The supply chain encompasses all activities associated with the flow and transformation of goods / services from the raw materials stage (extraction), through to end users, as well as the associated information flows.

SCM is the integration of all the activities in the supply chain to achieve a sustainable competitive advantage. Supply Chain can be broadly classified of comprising of three networks – Supplier, Firm and Distribution.

Logistics: Logistics, also called as Physical distribution, focuses on the physical movement and storage of goods and materials. Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption.

Elements of Supply Chain : Customers, Producers, Suppliers

Suppliers > Produers > Customers / Suppliers > Manufacturing Facility > Customer

Three distinct phases of evolution of SCM:

Pre-1970 era:

• Supply Chain was not considered as a competitive unit. Companies seek more profit by maneuvering their suppliers and customers.
• Scientific methods like EOQ and SPC were applied.
• Companies attempted at Vertical integration – themselves

1970 – 1980 era :

•   Holding inventory becomes key due to Oil shock
•  TQM and JIT practice becomes popular in Japan
•  Distribution is not yet the focus area
•  MRP systems gain popularity in US and Europe

Post 1980 era :

•  Inventory profits dry up as inflation reigns in US manufacturers embrace JIT philosophy. JIT pushes inventory upstream.
•  Lower setup times, lower batch quantities result in reduction in lead times and drastic improvement in customer responsiveness.
• Suppliers and customers considered as part of the organization network. We against them philosophy fades away.
• MRP systems give way to MRP II systems, ERP and then to advanced supply chain systems involving optimization.

21st Century era :

•  Advanced Supply Chain Planning methods due to globalization
• Combination of Advanced MRP for finished goods and critical assemblies and JIT for raw material / common assemblies inventory
•  Evolution of new philosophies like TOC (Theory of constraints), Constraint based planning, Global Supply chains, Global Procurement, Hub and Spoke distributions etc.

 Business Processes that connect various elements in the SCM:

• Design to Release: Product development and Engineering
• Supply Chain Planning: Purchase planning & Production Planning
• Procure to Pay: Sourcing and Purchasing of the components
• Production Plan to Schedule: Detail scheduling of the resources and jobs / batch
• Schedule to Build: Production / Manufacturing of the Product
• Order to Cash: Order orchestration and Order fulfillment
• Demand Management: Forecasting and Demand planning
• Customer Relationship Management: Maintaining and increasing the customers

Production Environments:

• Design / Engineer to order: ETO environment caters to specific customers’ requirements. The process starts with the preparation of unique / highly customized engineering designs of the product, with the close involvement of the customer. Delivery lead is maximum in this environment. Typical product topology is project based.
• Make to Order: In this environment, the final product is made after the receipt of the customer order. Standard components are purchased / manufactured and are usually stocked as raw material inventory. On receipt of customer orders, the product is made from these standard components and the process may include minor customizations of the design. Lead time is less than Engineer to order due to lack of significant change in the design. Production is project based or in small batches.
• Assemble to Order: In this environment, the standard components and sub-assemblies are manufactured and stocked in the form of component / sub-assembly inventories. Delivery lead time is the time required to assemble and ship the product. Production is in batches like that of Automobile industry.
• Make to Stock: In this environment, the products are completely manufactured and the finished goods are stocked as end item / finished goods inventory. On the receipt of customer orders, the goods are packed and shipped to the customers and hence the delivery lead time in this environment comprises of only the shipping time.

Supply Chain Domain Certifications

Following are major domain SCM Certifications:

APICS Certificates: The Association for operations management:

1) CPIM - Certified in Production & Inventory Mangement

The APICS Certified in Production and Inventory Management (CPIM) program is recognized worldwide as the standard of professional competence in production and inventory control and supply chain management. Obtaining APICS certification shows a commitment to the profession that leads to a sense of accomplishment, demonstrates value to the employer, enhances earning potential, and provides a path to career advancement. The APICS CPIM program is divided into five process-oriented topic areas to provide participants with the best possible educational assessment and knowledge base.

 Entry Module 

•      Basics of Supply chain Management

  Core Competency Modules

•       Master Planning of Resources
•       Detailed Scheduling and Planning
•       Execution and Control of Operations

  Capstone Modules 

•       Strategic Management of Resources

2) CSCP: Certified Supply Chain Professional

The APICS Certified Supply Chain Professional (CSCP) program is recognized worldwide as the premier supply chain management education and certification program.

The APICS CSCP program takes a broad view of operations, extending beyond internal operations to encompass the entire supply chain—from supplier, through the company, to the end consumer. The program provides professionals with the knowledge necessary to understand and manage the integration and coordination of end-to-end supply chain activities. The APICS CSCP program is divided into four modules to provide participants with the best possible educational assessment and knowledge base.

A CPIM / CSCP Education can help you to:

•   Increase your functional knowledge of production and inventory management.
•   Improve efficiency across the processes of your organization's supply chain.
•   Streamline operations through accurate forecasting.
•   Predict outcomes more accurately.
•   Maximize customer satisfaction by delivering products and services Just-in-Time.
•   Increase profitability by optimizing your organization's inventory investment.
•   Enhance your credibility among employers, and customers

3) CTL: Certified in transportation & Logistics 

The CTL designation may be used just as similar recognitions are employed in accounting, insurance, medicine, law, and other professions. Either the full expression or the initials may be used after the individual’s name on business cards, stationery, etc. The CTL credential remains valid with active membership in AST&L

4) PLS: Professional designation in logistics & Supply chain management

professionals seeking an understanding of the key strategies for improving customer service and increasing the efficiency of their logistics and supply chain operations. The purpose of the PLS is to recognize individuals that have completed a course of study examining the strategies for improving logistics and supply chain operations and are seeking to apply this knowledge within their profession.

References:

www.apics.org

www.astl.org

www.knowerx.com (India Partner)

Cross functional career options in SCM (Supply Chain Management)

This blog is for the people who want to know the various options available in the vast field of supply chain management. Supply chain or more recently called Value chain is the management of the flow of goods or services right from the raw material vendors to the end customers. It includes various interconnected networks, channels, nodes involved in the provision of delivering products and services.

SCM draws heavily from the Operations, Procurement, Logistics, Manufacturing Planning & Information Technology (mostly ERP). SCM has evolved with the various management techniques like JIT (Just in Time), Kanban, Lean Manufacturing, Network Optimization, Sales & Operation Planning, Green Supply Chain management, TOC (Theory of Constraints) etc.

Major career options available in the Domain SCM Area are:

• Procurement / Sourcing
• Supply Chain Planning
• Production / Operations Planning
• Logistics
• Demand Planning
• Sales & Operations Planning
• Vendor Management etc.

Whereas the other career options related to the SCM are:

• ERP Functional Consulting (SAP, Oracle etc.) 
• ERP Technical consulting (ABAP, PL/SQL in ERP Products)
• ERP Presales
• Business Consulting
• Business Analysts
• SCM Analytics
• Master Data Management

Usually there are cross functional requirements in various jobs in the market. Mostly in ERP consulting it is always preferred if the candidate has the domain knowledge / Experience. Also the people in the domain industries are required to have worked on major ERP / IT applications related to their domain. E.g. A Demand planner should be conversant in estimating the demand using highly complex applications like Oracle Demantra / SAP ATO.

In order to enhance the knowledge of the related areas following are some useful courses:

1) Experts who work in ERP / IT applications but lacks in domain experience can look into the following courses that can help to ameliorate their domain knowledge:

• CPIM (Certification in Production & Inventory Management from APICS)
• CSCP (Certification in Supply Chain management from APICS)
• CTL (Certification in Transportation & Logistics from ASTL)
• SCM Online courses from IIMs / top institutes

2) Similarly people with domain knowledge can enhance their ERP / IT skills with the help of following courses:

SAP Certification from partners like Genovate or Simens

Oracle Certification from Oracle University (In Bangalore / Hyderabad in India)

Online courses on ERP from reputed institutes

This cross functional learning will also help to switch the career in case the opportunity knocks the door :)

Evaluation of effectiveness of Activity Based Costing (ABC) for ERP Projects

Abstract - The widespread environmental change has forced many organizations to change and rethink their business and competitive strategies, particularly cost management system, in order to achieve the competitive edge in the marketplace. Activity-based costing (ABC) (Cooper 1987a, 1987b, 1988), which uses various activities to trace overhead directly to cost objects, such as products, processes, services, etc., avoids the distortions of traditional costing systems. ABC provides accurate cost predictions and effective strategic decision making (Johnson and Kaplan, 1987; Johnson, 1987).

Activity-Based Costing (ABC) is primary used to enhance productivity and efficiency in the business process; to help create budgets and set prices; to identify customer costs and improve customer relations; to make decisions on strategic issues; and to address external negotiation issues. ABC has been often used together with other management tools and methods depending on the overall objectives of specific initiatives.

This paper presents a framework and evaluation of activity-based costing in ERP projects / programs in IT industries. This paper analyzes ABC project implementations in various industries, identifies issues related to such implementations and offers a framework for maximum benefits. The survey investigated the reasons for adopting activity based costing, the perceived and achieved benefits of activity based costing and the reasons for nonadoption. The reasons for adoption were more accurate costing and better use of resources. Thus this case study analyses how an ABC costing system improves operations and helps to meet the needs of IT projects / programs in effective manner.

Introduction

The nature of software development is undergoing a dramatic change, one that strikes at the core of how the industry will build software systems in the coming decade. Various companies are trying different approaches like Agile, Reusability, Modular development and cost reduction. Organizations are faced with many challenges during this time of economic recession. The most common organizational reactions are to button down the hatches, secure the turf, and start chopping staff positions. Forward looking organizations that seek out opportunities during a time of economic recession tend to focus on process improvement initiatives such as, business-process analysis; Activity Based Costing (ABC), life cycle compression metrics, among other things.

A couple of differences between ABC and traditional cost systems are ABC traces costs according to activities rather than by functions or departments.

Organizations are moving from managing vertically to manage horizontally.  It is a move from a function orientation to a process orientation. Total quality management (TQM), just-in-time (JIT), benchmarking and business process reengineering (BPR) are all examples of horizontal management improvement initiatives. These initiatives are designed to improve an organization’s work processes and activities to effectively and efficiently meet or exceed changing customer requirements.  

Activity-based costing/activity-based management fills this information need by providing cost and operating information that mirrors the horizontal view. The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts, and projects. Activity-based management makes this cost and operating information useful by providing value analysis, cost drivers, and performance measures to initiate, drive or support improvement efforts and to improve decision-making. ABC has been often used together with other management tools and methods depending on the overall objectives of specific initiatives. 

2. Framework of research

Following research questions were analysed to evaluate the effect of Activity Based Costing on various ERP projects. The responses were collected from Project Managers and Accountants of IT Industries from India.

2.1 The Research questions:

a) Check the feasibility of ABC principles to Internal ERP projects / programs in India

b) What is the extent of ABC/M’s adoption in Indian IT Projects?

c) What  are  the  reasons  for  the  introduction  of  activity  based  costing  in  IT Industry in India   

d)   How companies identify the cost drivers and the performance measures

e) Compare ROI and payback period of ERP projects / programs against traditional costing method and ABC.

f)   What are the benefits achieved by those who have adopted ABC/M?

g)   What are the rates of non-adoption and why?

2.2 Target Population:

Ø Project / Program managers from major IT industries

Ø  >Delivery Heads / Account Managers responsible for cost analysis of the projects

ØBusiness Analysts from Finance department of IT industry who are responsible for allocating overheads for the projects

3. Case Study:

Indirect Cost of the company is allocated to all BUs proportionately. Cost of the cost projects (non revenue project)  is allocated to other projects in the same BU.

Gross Contribution is the expected profit earned in a project after deducting the expenses / direct costs from the revenue. Net contribution is the expected profit earned after decuting the indirect costs. Net contribution of about 60% was normally the cut-off for selecting any ERP project.

Net contribution is inaccurate in traditional costing which might lead to faulty selection or rejection of the project. This is overcome by the Activity based costing where exact cost is known for key activities.

Thus determining the true cost plays an important role in strategic decision-making. The ABC system provides more accurate cost management and enables the company Managers to calculate the ‘true’ cost of a project.

4. Discussion

4.1 Case Study:

In a nutshell, the ABC system clearly indicates that it can help the company to understand where the costs are, what drive them to occur, and which costs may be low value-added to the cost object. The system enables the project managers to analyze and see things through the lens of costs and work activities. This definitely will replace their decision-making behavior through intuition and assertions to fact-based.

4.2 Extent of ABC / M adaption:

An analysis of the responses of the survey indicates that 55.76% of the respondents had implemented or had considered implementing an activity based costing system. And 44.34% had not adopted this system in their organization. Further 34.61% have already adapted the ABC and others have considered / initiated adapting the ABC.

4.3 Assessment of accuracy of the costing System:

It was found that traditional costing is the most widely used costing allocation method with 42.30% of the companies employing it in their organization. 59.1% of those find this system an ‘accurate’ way of allocating their overheads. While ABC is the most accurate costing method.

4.4 Reasons for Adoption of ABC /M:          

The results are outlined show that the more accurate cost information and better use of resources are the major reasons of adoption of ABC.

4.5 Benefits received after ABC/M implementation:

Respondents, on average, agree that the use of an ABC system enables more accurate costing and improved insight into cost causation.

4.6 Measures taken for successful implementation:

Below table examines the measures deployed by organizations in an attempt to ensure the successful implementation of the ABC system. Many of them used the combination of these measures.

Ø  Extensive research into the similar implementations

Ø  Involvement of outside consultants

Ø  Staff training and education

Ø  Benchmarking against the other IT industries who have implemented ABC

4.7 Reasons for no adoption of ABC:

From the responses received, the responses of the companies which have not implemented ABC were analyzed to find the major causes of no adoption of ABC.

The 45% of respondents who have not adopted activity based costing cited the cost and complexity involved with implementation as the main factors in non-adoption. Senior management commitment to such an implementation was also seen as a prohibiting factor.

                                                                                                                         

5. Recommendations and Conclusion:

The ABC system provides more accurate cost management and enables the managers to calculate the ‘true’ cost of a product / service.

New version of ABC, time driven ABC, is to eliminate the problems involved in large scale ABC implementations because of a changed way of obtaining data on time required to perform the activities and a modification of activity cost calculation. Time driven ABC uses time as primary cost driver to allocate resource cost directly to objects e.g. transactions, orders, finished products, services and customers.

In a nutshell, the ABC system clearly indicates that it can help the project managers to understand where the costs are, what drives them to occur, and which costs may be low value-added to the cost object. This definitely will replace their decision-making behavior through intuition and assertions to fact-based. Therefore, the big opportunities of ABC system predicting planning cost estimation and elimination of non-added value activities, which are useful for operational strategic decision. In emerging economies, this change to a company’s cost structure could be especially significant, as many of these economies are notoriously known for high capital costs.

*This blog is based on my MBA dissertation report

Technology: Path to Paperless Business

Today the business has shadowed the geographical boundaries of world. Now it is the age of globalised business. In the present era of communication revolution, information can be sent from one end of globe to another end within seconds. Gone are the days of using diaries and posting letters.

It is possible to perform different business transactions without being presenting physically the parties involved. Now with a single mouse click, you can buy the best roses of the seasons from a distant shop or book a hotel room from the home computer or you can pay your telephone bill from your bank account without even going to the bank branch. All this is performed through Internet and termed as e-business just like e-mail. The websites involved are called business portals and are responsible for marketing, executing and safeguarding different business transactions through their sites. Electronic commerce can be between two businesses transmitting funds, goods, services and/or data or between a business and a customer and even between two customers.

"Electronic Record" means date, record or date generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro film. . Information captured through electronic means, and which may or may not have a paper record to back it up. It is also called machine readable record.

A digital signature is an electronic signature that can be used to authenticate the identity of the sender of a message or the signer of a document, and possibly to ensure that the original content of the message or document that has been sent is unchanged.

Paper signatures v/s Digital Signatures

Parameter	Paper	Electronic
Authenticity	May be forged	Cannot be copied
Integrity	Signature independent of the document	Signature depends on the contents of the document
Non-repudiation	Handwriting expert needed Error prone	Any computer user Error free

M-Commerce is the buying and selling of goods and services through wireless handheld devices such as mobile telephone and personal digital assistants (PDAs). M-Commerce is a platform where a mobile customer can avail various banking and other related commercial facilities through his mobile phone. The main areas of m-Commerce use are in text messaging or SMS, mobile payment, financial & banking services, logistics, goods/services buy/sell information services and wireless customer relationship management etc.

 The advent of personal computers brought the storage, retrieval and processing capacities of computers to Government offices. By the late 1980s, a large number of government officers had computers but they were mostly used for ‘word processing’. Gradually, with the introduction of better softwares, computers were put to other uses like managing databases and processing information. Advances in communications technology further improved the versatility and reach of computers, and many Government departments started using ICT for a number of applications like tracking movement of papers and files, monitoring of development programs, processing of employees’ pay rolls, generation of reports etc. Recent technological developments has enabled the entire business functions to go online using technologies and tools like Cloud computing, ERP, CRM, Business Intelligence, RFID, Bar coding etc.

With the affluent power of technology, comes the misuse of technology. Hence the law relating to ‘information technology’ cam into existence as the Information Technology (IT) Act, 2000 which came into force on 17th October, 2000. It is the first Cyber Law in India. It is mainly based on the UNCITRAL Model Law.  The United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Commerce in 1996. This Model Law provides for equal legal treatment of users of electronic communication and paper based communication.

Following course of action is required to prevent the misuse of technology:

•      Need international co-operation

•      Mutual co-operation between countries

•      Transfer of technology between countries

•      Deportation of criminals

•      Educate the masses

•      Spreading awareness about crimes (related to Ecommerce, digital signature,M-cmmerce and electronic Record )

•      Training and educating policemen

•      More and more stringent norms