Production Management I - wzl.rwth-aachen.de · Production management is an essential element for every producing business enterprise. The “St. Galler Management Konzept” represents

Production Management I (Prof. Schuh)

Introduction in Production Management

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Production Management I- Lecture 1 -

Introduction to the Fundamentals of Production Management

Assistant Lecturer:Dipl.-Ing. Christoph [email protected] 53b R. 518Tel.: 80-27379

Lecture targets:

• Gain an overview over the contents of the lecture “Production Management“

• Get to know the basic terms and definitions of production management

• Get to know the most important key figures and their use

L1 page I

Lecture 1



Table of contents of lecture 1:

1. Short summary of added value in production L1 page 2

2.1 Added value in a business enterprise L1 page 2

2.2 The value chain – an added value analysis deviceL1 page 4

2.3 Production within the value chain L1 page 6

2. Management of adding value

- “Production Management“ L1 page 7

2.1 Production management in the “St. GallerManagement Concept” L1 page 7

2.2 Strategic Management L1 page 8

2.3 Up-to-date concepts of management L1 page 10

3. Key figures – tools for the production management L1 page 11

3.1 The term key figures and its classification L1 page 11

3.2 Key figures in practical use L1 page 13

3.2.1 Key figures referring to results L1 page 14

3.2.2 Key figures for the management of production L1 page 16

3.3 Key figures systems L1 page 17

4. Exercise E1 page 1

4.1 Definition of basic key figures E1 page 2

4.2 Determination of ROI and ROCE E1 page 3

4.2 Cash-flow calculation E1 page 5

4.3 Calculation of key figures concerning production E1 page 6

Lecture 1

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References lecture 1:Brown, M. G. Kennzahlen - Harte und weiche Faktoren erkennen, messen

und bewertenCarl Hanser Verlag München, Wien 1997

Dobler, T. Kennzahlen für die erfolgreiche UnternehmenssteuerungSchäffer-Poeschel Verlag, Stuttgart 1998

Dyckhoff, H. Grundzüge der Produktionswirtschaft3. AuflageSpringer-Verlag, Berlin 2000

Küting, K. Handbuch der Konzernrechnungslegung2., grundlegend überarbeitete AuflageSchäffer-Poeschel Verlag, Stuttgart 1998

Müller-Stewens, G. Strategisches Management - Wie stragegische Initiativen zumLechner, C. Wandel führen

2., überarbeitete und aktualisierte AuflageSchäffer-Poeschel Verlag, Stuttgart 2003

Porter, M. E. Competitive Strategy - Techniques for Analyzing Industries and CompetitorsFree Press, 1998

Porter, M. E. Competitive Advantage - Creating and Sustaining Superior Performance Free Press, 1998

Schuh, G. Betriebshütte - Produktion und ManagementEversheim, W. 7., völlig neu bearbeitete Auflage

Springer-Verlag, Berlin 1999

Siegwart, H. Kennzahlen für die Unternehmensführung5., aktualisierte und erweiterte AuflageVerlag Paul Haupt, 1998

Lecture 1

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Short summary of lecture 1

A producing business enterprise has to be managed according to its specific needs. But that is not enough: in an increasingly difficult competitive environment a strong market position has to be achieved using smart production management.

The business enterprise as an element of its surroundings interacts in a complex environment with many other units on various fields such as politics, law or even culture. In this complex environment the task of the production business enterprise, namely the value adding transformation from input to output, has to be managed.

Added value is defined as the difference between the value of output and the value of input. For analysing the added value Porter’s value chain proves itself to be apt, as it covers all the activities of a business enterprise. In doing so the activities of a business enterprise are divided into primary and supporting activities, which then are divided again into direct and indirect activities and quality assurance. It turns out to be quite difficult to clearly specify the term of “production”.

Production management is an essential element for every producing business enterprise. The “St. Galler Management Konzept” represents an integrated management concept. It differentiates between the normative, the strategic and the operational management level. Each of these levels is again divided into three different management aspects: activities, structures and behaviour.

For the process of strategic management the strategic initiative is of vital importance. Its progress is determined by the phases of initiation, positioning, value adding, change and performance measurement. Their order is variable, depending on occasion and intention.

The use of key figures is one of the most common among the modern management methods. Küting defines key figures as “highly compressed measurands, showing numerically ascertainable facts in a concentrated way as related or absolute figures”. Generally, the related figures are the more significant key figures. Two important ones are the ROI (“Return On Investment“) and, a more modern variant of it, the ROCE.

Key figures are often used in so-called key figure systems, showing their correlations. These key figure systems are a useful management aid. A very common system is the DuPont-System. A new, comprehensive system is the so called “balanced scorecard“ for strategy oriented controlling of a business enterprise. Vision and strategy of a business enterprise are transformed into targets, key figures, specifications and measures and then divided into four different perspectives. By simplifying complex contents to an understandable level the appropriate measures can be derived systematically.

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Introduction - The Business Enterprise as a Part of the Environment

Natural environment

Availability of resourcesProbability of natural disasters.....

Economical environment

Economic growthInflationInterest ratesGlobalisation...

Sociological and cultural

environment

Level of educationWorking hoursChange in valuesAge pattern...

Political environment

Fiscal policyMonetary and credit policyImport and export control...

Legal environment

Employees‘ rightsCustomers‘ rights...

Technical environment

New materialsNew technologiesNew products...

Added valueBusiness enterprise

Output

Business enterprises have to hold their ground in an increasingly complex environment

Input Output

Introduction - The Business Enterprise as a Part of the Environment

From a macro-economic point of view companies and (private) households are considered to be the smallest elements (“economic units”) of the economic system. These units interact with each other and exchange objects of material and immaterial kind. Such objects are, for example, products, services, rights, information and money. The interactions are caused resp. influenced on one hand by the individual needs (demand) and abilities (supply) of the economic units, on the other hand by multi-dimensional influences from the environment. Within the economical environment the consumer and investment behaviour of the economic units is influenced by the current interest rates as well as the rate of inflation. If for example the inflation rate is high and the interest rate is low at the same time, consumption intentions will gain advantage over saving intentions.

Within the technical environment, advantages over competitors can be gained by inventions resp. innovations, for example by the development of a new technology. In addition, offering new products might release yet hidden or even new needs of the economic units, thus creating an increase in the interaction volume, which means economic growth. Business enterprises today have to act according to a rising number of national and international laws. The relatively new regulations concerning the product liability law and the warranty law can be taken as examples. Here, considering the same transaction, the customer de facto has more rights without being forced to provide a widened return service (payment).

As there are many influences from other environments and levels too, we have to keep in mind that business enterprises have to hold their ground in an increasingly complex environment.

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Terms: Added Value in a Business Enterprise

Economical unit

performing value-creating transformation from input to output

to either supply goods or to dispose evils,

thereby serving society.

Enterprise

Business enterprise (Company)

Enterprisewithin a market economycarrying out business for the purpose of profitfree to act autonomously referring to Gutenberg

Added valueContribution ofthe company

Value: Price which the customers are willing to pay for what an enterprise supplies (monetary consideration)

Value added by the company

Intermediateinput

Question: How do enterprises add value?

Terms: Added Value in a Business Enterprise

In order to be able to organise resp. control a business enterprise in a way that it can successfully cope with its complex environment, it is necessary to understand how success develops in a business enterprise. Therefore we first need some knowledge about the basic terms.

A business enterprise is a special kind of enterprise. According to this definition a business enterprise has to maintain itself within a market economy by making profit through value adding transformation from input to output, thus refinancing itself.

Added value is the difference between the value of the output and the value of the input. The price that a consumer is willing to pay for the company’s output is called ‘value’.

If one wants to determine or even influence the success of a business enterprise, one question has to be answered: How do business enterprises add value? This will be exemplarily demonstrated below with special attention on the characteristics of producing companies.

A producing company is the most complex type of an enterprise. Other types of enterprises such as service suppliers, banks or trading companies can be considered as simplified producing business enterprises, because the process of business in these enterprises like e.g. purchasing, logistics, finance or service are also part of producing business enterprises. The following explanations can easily be transferred to examine other kinds of enterprises.

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The Value Chain - Added Value Analysis Device

valid for all types of companiespotential for adding value given at every part of the chainValue activity: physically und technologically distinguishable activity performed by a companyProfit margin: total value - sum of costs

Value chain model

supportingactivities

primary activities

Inboundlogistics

Opera-tions

Marketing& sales

Outboundlogistics Service

Infrastructure Profit margin

Profit margin

Technology development

Procurement

Source: Porter

Human resource management

The Value Chain - Added Value Analysis Device

In order to investigate the question of how business enterprises add value, Michael Porter, professor at the Harvard School of Business, has developed the device “value chain”. The value chain structures a business enterprise into strategically relevant activities in order to understand cost behaviour as well as existing and potential differentiation sources which are causes for competition advantages.

Porter states that the value chain of every business enterprise consists of nine basic types of activities that are connected characteristically. He divides these basic activity types into “primary activities“ and “supporting activities“. The primary activities immediately concern themselves with the physical product resp. its components. Supporting activities sustain the primary activities and themselves by taking care of the purchase of inputs, technology, human resources and the infrastructure of the business enterprise. On one hand procurement, technology development and human resources management are linked to certain direct activities (e.g. process development: technology development for operations), on the other hand they can support the whole chain. In contrast the company infrastructure is not related to any certain primary activity and “only” offers general support for the whole chain.

The success of a business enterprise can be influenced positively as well as negatively by all activities. Every activity causes costs, but can also be be the cause for a special customer benefit. A course of action with the aim of minimising the supporting “not directly value adding“ activities would be fundamentally wrong, because divison of labour and specialisation realised through the help of supporting activities represent the main characteristics of a modern and efficient industrial company.

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Value Activities in Detail

Inboundlogistics

Opera-tions

Marketing& sales

Outboundlogistics

Kunden-dienst

Infrastructure

Human resource management

Technologydevelopment

Procurement

Profit margin

Profit margin

Activities involving:

receiptstoragedistribution

of resources for the product

transformation of the material inputs into their final product shape

activities in order to make customers buy the product

receiptstoragedistribution

of the product

activities concerning maintenance or conservation of value of the product

Acquisition of inputs or resources.For both primary and support activities

Efforts to improve products and processes concerning both primary andsupport activities. Technology is represented by know-how, processes,procedural equipment, product attributes

Management of human resources by recruiting, hiring, education and training, discharging etc.

General management, planning, finances, government relations etc. Supports the whole value chain

Service

Value Activities in Detail

Primary activities:

According to Porter there are five categories of primary activities for every industry. Each of these categories can be divided into a range of different activities depending on the company’s industry and strategy (see picture). Each category can be of vital importance for the realisation of a competitive advantage and therefore for the success of the whole company. For a producer of photocopying-machines for example service might provide the crucial cause for advantages in competition. For the automotive industry on the other hand procurement and marketing are of vital importance, especially against the background of decreasing depth of adding value.

Supporting activities:

Based on Porter the supporting activities, which can be found in every industry, can be divided into four categories. Technology development means for example component layout, the layout of the means resp. sites of production as well as the layout of the production process, but also the development of marketing methods or IT-systems for inbound and outbound logistics. Other categories can be divided similarly (s.a.).

The category infrastructure represents a special case. It can be divided into “corporate functions“ and “corporate services“. Corporate functions deal with the company management, which among others consists of the board of management as well as the supporting staff. The corporate services are service functions that support all parts of the company, e.g. the personnel department or the in-house consulting.

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“Production” within the Value Chain

Meaning of the term „production“

in the narrowest sense(i.n.s.)

commondefinition

in the broadest sense(i.b.s.)

Production = manufacturing,in the value chain:all direct activities in the category ‘operations‘

All activities enabling the enterprises‘ output are part of the production,in the value chain:all direct activities

any combination of production factors,in the value chain:all operational activities

Legend: direct activitiesindirect aktivitiesquality assurance Source: Betriebshütte

“Production“ within the value chain

The legend:

Activities that are part of the accumulation of value for the buyer such as assembly, marketing, product design etc. are called direct activities. Indirect activities should make the direct activities possible. These are activities like maintenance, time scheduling, operating the machines, etc.. The quality assurance guarantees the quality of the other activities. These are for example monitoring, quality inspection, adjusting and reengineering. As a matter of principle direct and indirect activities as well as quality assurance are part of each of the primary and supporting activity categories.

The figure:

There are several possible meanings of the term “production“ which literature is disagreeing about. On one hand production can be seen as pure manufacturing which would be represented in the value chain by the direct activities of the field operations. It is called “production in the narrowest sense“.

Yet most common is another meaning of the term which is much wider kept. According to this meaning production includes all direct activities in the value chain, that means all activities directly taking part in the accumulation of value for the buyer.

The designation of all operational functions as production tasks as a third meaning of the term, namely the “production in the broadest sense“. This would imply that everything a producing business enterprise does is part of the production.

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Production Management in the “St. Galler Management-Konzept“

Development of the company

Corporate culture

Awareness of time, costs and quality, promotion of learning

processes

Behaviour in terms of performance and cooperation

Company constitution

Structural and procedural organisation, production management systems

Production and logistics processes and systems

Normative Production ManagementCorporate policy(Corporate goals,

principles and rules)

Programs for the design of performance systems

and business processes

Development and production orders

BehaviourStructuresActivities

BehaviourStructures Activities

Normative

Strategic

Operational

Focus of the lecture: strategic and operational management

Management aspects

Man

agem

ent l

evel

s

Strategic Production Management

Operational Production Management

Production Management in the "St. Galler Management-Konzept“

As has been shown over the course of this lecture, it is not quite trivial to comprehend “production“ or the term itself systematically. The same problem occurs when dealing with the term “production management“.

The “St. Galler Management-Konzept” represents an integrated management concept and can be applied to production companies (as shown above).

It also differentiates between three levels of management: the normative, the strategic and the operational level. Each of these levels is again divided into three different management aspects: activities, structures and behaviour, which in the end results into nine fields of view. However, this lecture concentrates on the strategic and operational levels.

On the normative management level the corporate goals, principles, rules and culture of the company are determined. They typically aim at keeping the company vital and capable to develop.

On the strategic management level these goals and principles are supported by suitable organisation structures, realized through programs for the design of performance systems and business processes. The aim is the build-up, use and care for so-called success potentials, which are the requirements for success in competition.

The operational management finally implements the guidelines of the strategic management by e.g. planning and controlling of the development and production orders.

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The Process of Strategic Management

PM: How do companies watchand evaluate their strategic

initiatives?

How do companiesorganise their

process of adding value?(inner relationship)

How do strategic initiatives within the company become effective and how do they

change the company?

How do companies position themselves towards their

stakeholders?(outer relationship)

How are strategic initiatives generated within the company?

Reflection

performancemeasurement

value addingchange

positioninginitiation

effectiveness

GenesisP

roce

ss (H

ow?)

Content (W

hat?)

The Process of Strategic Management

The strategic initiative – its course is shown in the picture above – is vitally important for the process of strategic management.

Initiation is defined as the development of strategic initiatives within the company. Every impulse that has the potential to essentially influence the company’s development can be seen as a strategic initiative. These are decisions like entering new fields of business or the forming of corporations.

Positioning means the determination of the relationship between the company and the stakeholders of its environment, called the outer relationship. Stakeholders are all groups that influence the company or are influenced by it. So it is not only about the exchange of money and goods, but also about political and cultural influences.

The value adding refers to the inner life, which means the skills and value-adding processes of a company, because they directly affect the course of action towards the environment. Strategic initiatives dealing with value adding mostly aim at developing and/or improving the organisational skills, e.g. the model of adding value or the organisation structure.

A change occurs when a strategic initiative has taken effect and the company starts to alter. This also affects the basic organisational process, i.e. the development of strategic initiatives. So the circle comes to a close towards initiation.

Finally, the course of the strategic initiative has to be measured and observed by performance measurement.

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Alternative Paths of Strategic Management

MobilisationInventionof the business

Strategicorientation

Alternative Paths of Strategic Management

Of course the paths of strategic management do not always have to progress the same way. The sequence of the fields initiation-positioning-value adding-change represents an idealised process. It is variable, depending on occasion and intention of the initiative.

Also, fields that have already been worked on can be passed through again, or different fields can be worked on interconnected and at the same time. Yet every path begins with the initiation phase.

In the picture shown above some alternative paths of strategic initiatives are given ordered by their intention:

In the case of strategic orientation, the desired position is developed first to then either work onthe inner relationship or to go for a change in the company.

In the case of invention of the business, a new model of added value is developed first to attack a competitor by e.g. achieving a lead in costs before concentrating on other fields of work.

For mobilisation the first step would be to strive for a change in the company in order to break old structures and then to search for new strategic programs.

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Actual Management Concepts

Percent Who Used The Tool

Ave

rage

Ove

rall

Satis

fact

ion

0% 25% 50% 75% 100%3,0

3,5

4,0

4,5

Strategicplanning

Mission andvisionstatements

Benchmarking

Pay-for-Performance

Growth strategies

Outsourcing

Strategic alliances

Core competencies

Knowledgemanagement

Shareholder valueanalysis

Scenario planning

Reengineering

Activity-based management

Supply chainmanagement

TQMBalancedscorecard

Source: Müller-Stewens/ LechnerTQM – Total Quality Management

Up-to-date Concepts of Management

Regarding the use of modern management concepts in the economy it appears that many of the latest methods are rarely used. A reason could be that these concepts are not well known. But there are also company specific differences: some do not want to use these management concepts at all, others are making comprehensive use of it. One has to take into account that oftentimes “new“ concepts are put together from already known elements. The “new“ thing about these concepts is the novel combination of elements in order to deal with a new problem. So the use of modern management concepts is not a suitable key figures for benchmarking the quality of a company’s management.

The diagram shown above illustrates a survey for the spread of and the contentedness with management concepts by the consulting company Bain & Company in 1999. The survey took place in north America with 214 companies involved.

Using management concepts one always has to be careful, because their use is not in every case well defined. Also, the results are not always clearly interpretable. So it is important to not only know their functionality and how to use them but also the limits of their possibilities. Only then these concepts can be a useful instrument.

In practical use the quality of a concept mainly depends on how good it is worked with and how it is managed within the company. Compared to that the applicability of the method for the given problem is less important.

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Key figures – Aid for the Management

Key figures are operationally relevant, numeric information. (Source: Bürkeler)

Key figures are highly-compressed measurands, showing numerically ascertainable facts in a concentrated way as related or absolute figures. (Source: Küting)

The term “Key figure“

The purpose of key figures

Determination of efficiency Targets Controlling devices

Informationsupply Planning Organisation

Personnel management Control

Management tasks

Key figures are an important aid to fulfil management tasks.

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Key figures – Aid for the management

As a helpful management device so-called key figures are widely and intensively used throughout all kinds of companies of various industries.

The definitions given above have proven to characterise these key figures. Yet, a better understanding for what a key figure is good for results from the connections and examples given on the following pages. Simplified, there are three main purposes of key figures: To determine efficiency, to specify targets and to serve as controlling means.

Compared with the main management tasks which are information supply, planning, organisation, personnel management and control it can be seen that these tasks overlap with the purposes of key figures.

For example, consideration of the management task personnel management shows that in this case key figures are helpful to specify targets and as controlling means. Thanks to them one can not only control how (well) the staff currently works, but can also specify targets, possibly even in comparison to other companies.

Therefore key figures are an important aid to fulfil the management tasks.



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Types of Key figures

Key figures

Absolute figures Related figures

Single figures Sums Differences Average values

e.g.: turnover,cash-flow

e.g.: total assets

e.g.: workingcapital*

*working capital = circulating capital – short-term liabilities

e.g.: average stock

Ordering figures

subsettotal amount

e.g.:

turnover product xtotal turnover

=

Linked key figures

“watched figure““related figure“

e.g.:

sales areanumber of products

=

Measured figures

a) simple measured figures

e.g. development of turnover

b) index figures

price, quantity,value index

Source: Siegwart

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Types of Key figures

At first key figures are divided into absolute figures which are determined independently from other figures, and related figures containing two items correlated to each other. Although widely used in practice the value of absolute figures as key figures is very limited. Their use only makes sense in a time line in order to show a development (e.g. the development of the turnover), in a comparison of debits and actuals, or put in a relationship to other senseful items, e.g. in order to compare to competing companies. Generally, related figures are much more useful.

The first division of the related figures are the ordering figures where subsets are correlated to the corresponding total amount. Secondly there are the linked key figures, which are the most important. To calculate them, data of two different kinds is put into proportion. For the value of this proportion it is very important that the two types of data are factually coherent which also depends on the industry. For example, while for a department store the relation between turnover per sqmof sales area is important, the relation between turnover and sqm of production area has no use for a machine producing company. As a third division there are the measured figures. They are subdivided into simple ones, for which a base value of 100 is defined as being the benchmark for the other figures, and index figures, showing the run of several factually related data series.

The actual value of key figures is created by the comparison to other key figures. Key figures can be compared within the company and/or with other companies. Examples for an intra-company comparison are the comparison of time for which actuals of different data are compared, the comparison of debits and actuals, showing the difference between the debits and the actually reached figures, or the comparison of norm and debit, for which the norms from different management levels are compared.



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Key figures in Real Life - Overview

Key figures

For the managementof the company

For the managementof single company processes

Referring to finances Referring to results

Structure ofcapital and assetse.g. debt-equity ratio

Liquidity

e.g. cash liquidity

Cover relation

e.g.fixed assets coverage

Stocks

e.g. range of coverage

Referring to earnings

e.g. ROI, ROE, ROS,

ROCE, RONA, ROIC

ROX – Return on X, I – Investment, E – Equity, S – Sales, CE – Capital Employed, NA – Net Asset, IC – Invested Capital

Referring to cash-flow

e.g. payout force,

self-financing force,

free cash-flow

Marketing/ Salese.g. market share, success rate for offers, readiness to deliver

Production (i.n.s)e.g. productivity, efficiency,capacity utilization

Human resource managemente.g. personnel turnover, absenteeism, age pattern, average wages

Technology developmente.g. time to market, age pattern ofturnover, innovation force

Source: Siegwart

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Key figures in Real Life - Overview

Until today a much too complex variety of key figures for almost all kinds of companies and company processes has been created. For the use of key figures it is not only important to regard industry-specific differences but also the needs of every management level. Oftentimes, for the top management a few global key figures with strategic significance such as profit, market share and productivity are sufficient. For the lower management levels more detailed and department specific key figures are more important.

Some terms mentioned in the diagram above:

The debt-equity-ratio shows the ratio of loan capital and capital in percent. A debt-equity-ratio too high can influence the independence of a company in a negative way, but it also shows the management‘s readiness to take risks.

The ratio between the average stocks of bought resp. self-manufactured supplies and the consumption of materials of the sold services is called range of coverage. From this ratio can be seen how long production can last without buying materials resp. how long goods can be sold without production.

The fixed assets coverage shows the ratio between equity capital and fixed assets and therefore the long-term coverage of the fixed assets.

For the use of key figures in practice there are some important preconditions such as the existence of a sophisticated accountancy, the right choice, up-to-dateness or – very important – the correct determination of data. The best key figures will be of no use if the preconditions are not sufficiently fulfilled!



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EBIT

capital employed

variant of return on total investment

Key figures referring to Results 1/2 - Profit

Profit as an absolute key figure is not meaningful enoughdefinition of linked key figures necessary, linking profit to related figures

common related figures: a) capital invested (ROI, ROCE, ROIC, RONA)b) turnover (ROS)c) equity capital (ROE)

EBIT

capital

“return on total investment“

ROI – traditional key figure ROCE – modern key figure

Expenditures RevenueProfit and loss statement

profit

taxesinterestsEBIT

EBIT – Earnings before Interest and Taxes

Assets LiabilitiesBalance sheet

fixedassets

circulationassets

equity capital

loan capitalworkingcapital

capitalemployed

= =

capital

long-termcapital

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Key figures referring to results - profit

As mentioned above the use of the key figure “profit” is limited, because it is an absolute figure. So the definition of linked key figures, that link profit to related figures, makes much more sense. Here, the difference between the key figures ROI and ROCE, both referring to the capital invested, is to be examined. The main difference between them is the definition of what can exactly be called invested capital. A little trip to the world of balance sheets should be helpful for a better understanding:

During the profit and loss statement, expenditures and revenue are regarded comparatively. If the revenue is higher than the expenditures the surplus is called profit. As taxes and interests change permanently and can not be influenced, for purpose of calculating ROI and ROCE, they are substacted from the the expenditures and added to the profit. The created surplus is called EBIT, short for earnings before interests and taxes. In order to calculate key figures the EBIT is related to the capital invested.

On a balance sheet of a company different amounts of capital can be found. The term capital itself stands for the whole capital tied-up in a company. It is tied-up to the assets (fixed assets + circulation assets). It is provided by both equity capital investors such as shareholders and owners or by debt capital investors who give credits. Another kind of capital amount is the capital employed. It only stands for the long-term capital, containing the fixed assets (machines, buildings, etc.) on the one hand, long-term tied-up circulation assets, the so-called working capital, on the other, e.g. long-term material stocks.

To calculate the ROI the capital itself is used while for the calculation of the ROCE the capital employed is the important figure.



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Key figures referring to Results 2/2 – Cash-flow

Payment Out payment

Cash-flow

-

shows the part of the profit for the year that has become effective in terms of liquidity

direct calculation: revenues effective in terms of liquidity – expenditures effective in terms of liquidity

indirect calculation: taken from profit and loss statement: profit + depreciation (simplified)

Capital actually available to the company (after allowance for taxes and interests)for:

reinvestment in the company

honouring debts

payment of loan capital interests

dividend payout (“equity capital interests“)

Free Cash-flow (Example for a specific, corrected cash-flow calculation)

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Key figures referring to Results – Cash-flow

The cash-flow is a key figure of outstanding importance: it is the “actual key figure for the evaluation of a company‘s financial strength and earning power“, states Siegwart. From the company’s political point of view the cash-flow is to be preferred over many other key figures. Due to its functional connection with liquidity, profit and self-financing it shows whether the intended investment can be funded by equity capital. The cash-flow is calculated from the profit and loss statement in two different ways: directly or indirectly.

For the direct calculation of the cash-flow, transactions effective in terms of liquidity are regarded.Contrary to the indirectly calculated cash-flow the directly calculated one complies with its actually earned size. Therefore the direct calculation can be used for cash-flow planning.

The indirect calculation is used if the cash-flow has already been gained. If a profit and loss statement is available the indirect method is oftentimes easier to perform. Yet, as for instance the build-up or liquidation of long-term reserves are not regarded, the indirectly calculated cash-flow does not comply with its actually earned size.



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Revenue (€)

Expenditures (€)

Efficiency

=

Key figures for the Management of the ProductionE

cono

mic

and

val

ue

base

d vi

ew

Revenue: “value of the output“

= sales revenue +/- change of inventory

Expenditures: costs of inputTotal costs: costs for material

+ manufacturing wages+ overheads

“true“ productivity: pure consideration of quantities

also: financial evaluation of quantities (especially output); e.g. productivity of employeesTech

nica

l and

qua

ntity

ba

sed

view

Output: production output

output quantity (e.g. pieces, kg, ...)

Input: input for production

material input orfactor input (e.g. employees, equipment, time)

Output

Input

Productivity

=

Lecture 1

L1 page 16

Key figures for the Management of the Production

In today‘s competitive environment it is vital for every company to keep production as effective as possible, which means to permanently supervise efficiency and productivity and to improve them if possible. In order to achieve this, key figures for the management of the production are an important aid.

The productivity is a key figure for how effectively the given production factors are used. As the calculation based on quantities is difficult in reality and therefore the calculation of the “true“ productivity, the quantities are often evaluated financially. Oftentimes instead of the overall productivity, partial productivities are calculated, for example the labour cost productivity.

The efficiency shows the correlation between revenue and expenditures and is influenced by many factors such as the utilisation of the production equipment, the production processes and the quality demands.



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Key figure systems – Linking key figures sytematically

Stocks

Debts receivable

Liquid assets

Production costs

Storage costs

Distribution andadministrative costs

Fixed assets

Circulation assets

Turnover

Total assets

Success

Turnover

Asset turnover

Return on sale(ROS)

x

:

:

+

+

+

+

+

Return on totalinvestment (ROI)

Presumption: change in inventory, taxes, interests = 0

Turnover

Cost

-

DuPont-System

Key figure systems - Linking key figures systematically

Siegwart states: “Key figure systems can be defined as a logical and/or calculative linking of several key figures that are related to each other.“ Key figures can be linked systematically so that they represent the business enterprise in a purpose-oriented way.

The DuPont-system is one of the most common key figure system and was developed by an american chemical engineering company in 1919. The starting point and the main target of a company is the return on investment (ROI), i.e. the return on invested assets.

The excellence of the DuPont-system results from dividing the ROI into the asset turnover andthe return on sale: it shows the possibilities to increase the ROI. Another strength is that through its structure this key figure system shows coherences within a company.

Lecture 1

L1 page 17



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Balanced Scorecard – Holistic key figure system

Visionand

Strategy

What positionshould wetake facing our investors?

Financial

Targ

ets

Key

figur

esSp

ecifi

catio

nsM

easu

res

Whatprocessesdo we haveto performoutstandingly?

Internal business processes

Targ

ets

Key

figur

esSp

ecifi

catio

nsM

easu

resWhich services

should wesupplyto ourcustomers?

Customer

Targ

ets

Key

figur

esSp

ecifi

catio

nsM

easu

res

How can we maintainour abilityto change andimprove?

Learning and growth

Targ

ets

Key

figur

esSp

ecifi

catio

nsM

easu

res

Source: Kaplan/ Norton

Balanced Scorecard - Holistic key figure system

The Balanced Scorecard as a holistic key figure system is a device for the strategy based management of a business enterprise.

Vision and strategy of a business enterprise are transformed into targets, key figures, specifications and measures and then divided into four different perspectives as shown in the picture above. By simplifying complex contents to an understandable level the appropriate measures can be derived systematically.

The financial perspective is about considering the long-term financial aims and then connecting them with the necessary financial processes, with the customers, the internal processes and finally with the implementing personnel and systems.

The customer perspective deals with the determination of the customer and market segments in which the company wants to be competitive and the planning of the offered services in these segments.

The whole value adding-chain of the company is looked at from the internal business processes-perspective.

By taking a look at the perspective of learning and growth a learning and viable organisation shall be encouraged by increasing the potentials of employees, systems and organisation processes.

It is important to know that the use of the balanced scorecard does not only measure the advances but also initiates them.

Lecture 1

L1 page 18

Documents

Production Management I - wzl.rwth-aachen.de · Production management is an essential element for every producing business enterprise. The “St. Galler Management Konzept” represents