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Cost Management-final                                                                                                       6

Processes are structured and measured sets of activities designed to produce a specified output for a particular customer or market. Emphasizing process means focusing not on what work is done but on how work is done within the organisation. While an organization’s hierarchical structure typically lays out responsibilities and reporting relationships, its process structure shows how the organization delivers customer value. While it is not possible to measure or improve hierarchical structure in any absolute sense, processes lend themselves to such measures as cost, time, output quality and customer satisfaction.

Because processes normally cut across functional areas, defining process boundaries is not always a straightforward task. People associated with a particular business process may view it in different ways. For example, the new product development process could start with marketing surveys or with delivery of product requirements from marketing to development engineering. The process could end with the release of product specifications or with shipment of the first order. Process boundaries should be defined independently of the way in which activities are organized.

Selecting the appropriate activity category may be anything but straightforward. The key is to classify value activities according to their true contribution to the firm's competitive advantage. For example, if order processing is important to a firm's customer interactions, then this activity should be classified under marketing.

Management at American Airlines, for example, handed its marketing unit the task of developing and implementing the carrier's SABRE computerized reservation system. The result; a significant competitive advantage that left the other airlines scrambling to cop; the system. Even mighty United Airlines has failed to match American's installed base o: terminals in travel agencies.

2. Determine the portion of the total cost of the product or service attributable to each value creating process : The next step of internal cost analysis is to trace or assign cost* and assets to each value-creating process identified. Although firms maintain internal re­ports and cost accounting information, this information may not align with their processes Companies might have to reclassify their data or conduct cost studies to assign costs and assets to each process. Rather than conduct a detailed cost study, an organisation might use rough estimates to assign costs to their value-creating processes.

A full-cost approach provides the best estimate of life-cycle costs for evaluating the strategic cost advantage of a firm's value-creating process. Without adopting this approach, a firm

Risks sacrificing product development costs to short-term profits or for example, the savings in factory labour that an organisation gains through using flexible manufacturing systems, robotics aid computer-integrated manufacturing might be offset by the high cost or computer software programmers. The information systems support costs should be allocated to the value-creating processes that benefit from the new systems as part of the full cost.

For estimating the full cost of each value-creating activity, the full utilization of the capacity of the activity or its practical capacity, is normally used. Facility managers and equipment vendors are useful sources of capacity estimates. If estimates of full capacity vary widely, a firm could perform the analysis with the resulting costs to assess the sensitivity of the analysis to the different capacity measures. When costs vary dramatically, companies should seek more information for a more realistic long-term estimate of capacity.

Although many of the processes identified may be instrumental for achieving competitive advantage, various value-creating processes may have differing effects on a firm's costs or products. Companies selling pencils, pens or paperclips, for example, are unlikely to concern themselves with after-sales service. But customer support is a vital part of the competitive strategy for makers of computers or high-speed copiers.

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