RUNNING HEAD: Value Decision for JMI
Value Decision for JMI
By Stephanie J. McGowan
February 26, 2006
JetSet Machinations (JMI) upper level managers are interested in reducing cost and increasing profit, and managerial accounting is willing to present and apply value chain management to accomplish this task. The value chain is a set of activities and resources necessary for the creation and delivery of a product to its customers. (Williams, J) There are six value chain functions in which management can find accounting information and which decisions can be made to assist in the value chain effort. Value chain includes the following: research and development, design and engineering, production and distribution, and customer service. (Zimmerman, R. 2006). “Value added activities “add to the product’s or service’s desirability in the eyes of the consumer, Non-value added activities do not add to the product’s desirability.” (Williams, J) The goal is to drive out cost and satisfy the needs of the customer. (Williams). When accounting information is collected throughout the value chain questions can be answered to assist management in understanding and resolving solutions for JMI’s accounting methods.
Value Chain Analysis has three essential steps which includes the following: the breaking down of a market or organization into its key activities; the identifying of current activities where a business has a competitive advantage; and the utilization of activities for the business which will help improve or sustain a competitive advantage. (tutor2u) What is JMI’s competitive advantage? Since, JMI produces shoes for travel, and they are certainly comfortable, the company may want to fund better production methods or design special styling of shoes, perhaps the shoes have an orthopedic advantage over other shoes purchased from JMI’s competitors. Accounting may ask research and development in conducting a survey to find out if customers really appreciate comfort of shoe style instead of design. What will it cost to provide this comfort?
Managers are often called to make decisions in resource and development. Target costing begins at the onset of a new product and service and includes planning and market analysis. The engineering of the product is important and the question of how to improve on the product remains a constant goal. How can JetSet Machinations improve on its travel products? Value chain engineering speeds up the development and the perfection of a product because every department works together simultaneously becomes multi-functional. (Williams) The fact that a product can be improved upon is also included and what funds can be expended to make this improvement.
Each part of the value chain incurs its own unique demand and cost. Accountants for JetSet Machinations, Incorporated will want to assess its current cost and predict what its future cost will be. This organization wants to know what should be considered in determining the cost to make the product and also to bring the product to the consumer. What is fair and profitable for the consumer and all the stakeholders? This knowledge will help determine the price for the product. It is also understood that when changes in the marketing mix occurs, the changes will influence the cost of JMI’s products. This influences the concept of cost and demand. The question of having just one cost system to provide the cost information in a competitive market needs to be answered. Inventory control and production and cost metrics for the product must be considered. All the expenses belonging to each group of the value chain must be studied. (Stephens, J. 1992).
Questions can also be address in the value chain for customer service. Some questions address how does the value chain add value to the customer, or basically what does the customer get when he/she buys the product? Profit is important to an organization and the most important goal is to help create value for the customer. According to Ronald J. Baker, an organization must price for the customer and understand the five Cs of value:
1) Comprehend value to customers
2) Create value for customers
3) Communicate the value you create
4) Convince customers they must pay for value
5) Capture value with strategic pricing based on value, not costs and efforts
These five components assist in determining how an organization can become more profitable. (Baker, R. 2005)
This is why the whole value chain is studied and the cost structure is looked upon as a whole. Sometimes it is necessary to shift to another point in the value chain perhaps maybe product design instead of customer service. (Stephen, J.). An example would be if managerial accounting uses marketing or product design to attract the right customers because they may be able find a solution to the product quicker than distribution could. (Stephen, J.) One of the questions that can be answered by product design is about product safety, such as the soles of the shoes to prevent any slippage. What will it cost to provide this safety? Research and development will probably look at various materials suitable for JMI to use in its productions of travel shoes. Accounting can also ask this question to determine if JetSet should seek out other locations for their warehouses to cut down on transportation expense and storage space.
JMI must create a business development plan which covers the cost for tools, equipment, labor, and future improvements. JMI will look to its suppliers and try to negotiate the best possible cost. In distribution of the product, JMI must ask how much they are willing to spend in shipping their products. A strategy devised by Mike Scimeca of Florida CirTech in Sarasota, who provided chemicals and metals for the circuit board industry was to ask his supplies for advice. He asked them how they saved money in transporting via trucking and found out he could save cost if his freight traveled at a cheaper weight classification. He reduced freight cost by 15%. (Mochari, I. 2000).
Engineering is also important in the value chain because it helps develop and construct new products that should be innovative. This is aided by information that is collected. How will JMI gather this information? The most likely answer will be a good informational system that tracks maintenance, locates materials necessary to build a better product. Inventory can also be check to make sure everything is in stock in order to meet production scheduling and customer demand. Scheduling must conform to customer needs and demands. What if a specification should suddenly change, the method of the value system which cohesively blends each part of the value chain will be ready? Multi-dimensional inventory management is one way to do this and a company believes in each part of the value chain communicating with the other. Some of these features include the following as taken directly from the Information Solutions website:
• Comprehensive real-time communications across your value chain, including customers, suppliers, subcontractors, logistics providers, plants and other facilities–with EDI, XML and traditional communications such as FAX
• Robust capacity planning, scheduling, management and resource management tools for multiple methods of managing customers, labor, tooling, supply sources, shipping and plant equipment
• Multiple advanced statistical forecasting tools to measure demand and supply chain performance without relying on after-the-fact reports
• Comprehensive order-to-cash processes for accurate, real-time drill-down into information from Payables and Receivables across other business operations
• Multifunction analytical tools to enhance user productivity and provide exception based
insight into operations and simplified reporting for departmental and managerial needs
One of the questions that may be asked by accounting is if JMI should deal with the same suppliers or seek out other suppliers to save money and be exposed to new product and materials?
In conclusion, there are many questions that can be answered by accounting because of the methodologies of the value chain system. It is this synchronization that works together to help in customer resource management, value, profit and cost savings for JMI and its stakeholders.
(NOTE): The companies listed are fictitious and part of a class study.
Baker, R. (2005), Who’s in Charge of Value in Your Firm?, Retrieved on 26 February 2007 from the World Wide Web: http://accounting.smartpros.com/x49410.xml.
Infor, discrete manufacturing, Solutions for the Metal Fabrication Industry, Retrieved on 26 February 2007 from the Find White Papers website: http://www.findwhitepapers.com/index.php?option=com_categoryreport&task.
Mochari, I., (2000), A Can’t-Miss Plan for Cutting Cost, Inc.com, Retrieved on 26 February 2007 from the World Wide Web: http://www.inc.com/articles/2000/05/18907.html.
Stephens, J., et.al. (2002) Cross-functional Interface of Marketing and Accounting: Value Chain Analysis, Retrieved on 25 February 2007 from the World Wide Web:
Tutor2u, strategy, value chain analysis, Retrieved on 25 February 2007 from the World Wide Web:
Williams, J., et. al., (2002), Costing and the Value Chain, Chapter 18, Online Learning Center, Retrieved on 25 February 2007 from the World Wide Web: http://highered.mcgraw- hill.com/sites/0072396881/student_view0/chapter18/chapter_summary.html.