Management by Objective (MBO)

Introduction:

 Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources.

It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.

Principle:

The principle behind Management by Objectives (MBO) is to make sure that everybody within the organization has a clear understanding of the aims, or objectives, of that organization, as well as awareness of their own roles and responsibilities in achieving those aims. The complete MBO system is to get managers and empowered employees acting to implement and achieve their plans, which automatically achieve those of the organization.

The MBO style is appropriate for knowledge based enterprise when your staff is competent. It is appropriate in situations where you wish to build employees' management and self-leadership skills and tap their entrepreneurial creativity,tacit knowledge and initiative.

Advantages:

•   MBO programs continually emphasize what should be done in an organization to achieve organizational goals.
•   MBO process secures employee commitment to attaining organizational goals.

Disadvantages:

•   The development of objectives can be time consuming, leaving both managers and employees less time in which to do their actual work.
•   The elaborate written goals, careful communication of goals, and detailed performance evaluation required in an MBO program increase the volume of paperwork in an organization.
  
  
  * Some times the goals are unachieveble which leads to failure of MBO
  
  

Just in Time (JIT)

Just-in-time manufacturing is a strategy used in the business manufacturing process to reduce costs by reducing the in-process inventory level. It is driven by a series of signals that tell the production line to make the next piece for the product as and when it is needed. The signals used are usually simple visual signals, such as the absence or presence of a piece needed in the manufacturing process.

Just-in-time manufacturing can lead to huge improvements in quality and efficiency. It can also lead to higher profits and a larger return in investment. A reorder level is set and new stock is ordered when that level is reached. There is no overstocking of parts. This saves on space in the warehouse.

Just-in-time manufacturing was first used by Henry Ford of the Ford Motor Company. Ford only bought materials for his immediate needs in the manufacturing process. He bought only the amount of material needed to fit into his plan of production. He planned transportation of materials so the flow of his product would be smooth. This gave him a rapid turnover and decreased the amount of money tied up in raw materials.

Ford's just-in-time manufacturing process was adopted by many other car manufacturer. Toyota in Japan used the process with very satisfactory results; huge amounts of cash appeared as in-production inventory was built and then sold. The response time on the factory floor fell to about a day. Customer satisfaction was higher, as vehicles could usually be provided within a day or two. Many vehicles were built to order, which reduced the threat that they would be built and not sold, thus eliminating another risk to business.

With just-in-time manufacturing, assemblers no longer have a choice of which parts to use; every part has to fit correctly. This means that multiple suppliers are usually eliminated from the process and quality assurance is higher. The parts used are all of the same quality, which means that line stops for quality checks are almost eradicated, leading to higher productivity rates. The just-in-time manufacturing philosophy has been applied to many industries and businesses with very successful results.

There seems to be only one problem with just-in-time manufacturing, and that is that the whole process lies in historical demand. Manufacturers need to gauge the levels of materials and parts needed from their past or current sales figures. If there is a rise or fall in demand for the product, it could have serious effects on the inventory process. Manufacturers have to make sure they have a sales forecast or reference in place to allow for these fluctuations in sales. If they do not have these figures, it could cause a serious.

                                           

Some Key Elements of JIT:

1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese)

2. Reduce or eliminate setup times: aim for single digit setup times (less than 10 minutes)

3. Reduce lot sizes (manufacturing and purchase)

4. Reduce lead times (production and delivery)

5. Preventive maintenance

6. Flexible work force

7. Require supplier quality assurance and implement a zero defects quality program

8. Small‑lot (single unit) conveyance

Pricing Strategies and methods

Cost Plus Pricing:

Cost-plus pricing is a strategy that is used to determine the retail and/or wholesale price of goods and services offered for consumption. Businesses of all sizes tend to use this simplistic pricing model as a guideline for arriving at sale prices that will allow the company to cover all costs associated with the production and sale of the products, and still make a reasonable profit from the effort. 

     The method determines the price of a product or service that uses direct costs, indirect costs, and fixed costs whether related to the production and sale of the product or service or not. These costs are converted to per unit costs for the product and then a predetermined percentage of these costs is added to provide a profit margin.

Advantages of cost-plus pricing

1.Easy to calculate

2.Minimal information requirements

3.Easy to administer

4.Tends to stabilize markets - insulated from demand variations and competitive factors

5.Insures seller against unpredictable, or unexpected later costs

6.Ethical advantages

7.It is readily available

8.Price increases can be justified in terms of cost increases

Disadvantages 

1. tends to ignore the role of consumers

2. tends to ignore the role of competitors

3. use of historical accounting costs rather than replacement value

4.use of “normal” or “standard” output level to allocate fixed costs

5. inclusion of sunk costs rather than just using incremental costs

6.ignores opportunity costs

Calculations:

There are several ways of determining cost, and the profit can be added as either a percentage markup or an absolute amount. One example is:

P = (AVC + FC%) * (1 + MK%)

where:

§       P = price

§       AVC = average variable cost

§       FC% = percentage allocation of fixed costs

§       MK% = percentage markup

For example: If variable costs are 30 Rs, the allocation to cover fixed costs is 10 Rs, and you feel you need a 50% markup then you would charge a price of 60 Rs:

P = (30 + 10) · (1 + 0.50)

P = 40 · 1.5

P = 60

Marginal Cost Pricing:

The marginal cost of an additional unit of output is the cost of the additional inputs needed produce that output.  More formally, the marginal cost is the derivative of total production costs with respect to the level of output.

Marginal cost and average cost can differ greatly.  For example, suppose it costs Rs.1000 to produce 100 units and Rs.1020 to produce 101 units.  The average cost per unit is Rs.10, but the marginal cost of the 101st unit is Rs.20.

Note that the marginal cost may change with volume, and so at each level of production, the marginal cost is the cost of the next unit produced.

M=dTc/dQ

In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory. In practice, the analysis is segregated into short and long-run cases, and over the longest run, all costs are marginal. At each level of production and time period being considered, marginal costs include all costs which vary with the level of production, and other costs are considered fixed costs.

Price Penetration:

Penetration pricing is a strategy employed by businesses introducing new goods or services into the marketplace. With this policy, the initial price of the good or service is set relatively low in hopes of "penetrating" into the marketplace quickly and securing significant market share. "This pricing approach," wrote Ronald W. Hilton inManagerial Accounting, "often is used for products that are of good quality, but do not stand out as vastly better than competing products."

In most instances, companies will only consider a lower price if revenue is projected to increase, i.e. demand is elastic with respect to price.  But, since the ultimate objective is profitability, a revenue increase is necessary but not sufficient: profits may decrease even if revenues increase since a company typically incurs higher total product cost (fixed plus variable) when volume increases, unless scale economies or experience effects are sufficiently large that variable costs per unit decline.

More specifically, the penetration price is usually set higher than the firm's marginal cost to bolster profitability.  In some special cases, though, the penetration price may actually be lower than marginal cost.  For example, a firm may be willing to incur initial losses  (i.e. price below cost) if substantial future-related profitable sales are expected from complementary sales, upgrades, or price increases.

Price Skimming:

 Skimming Price, a strategy wherein the initial price for the product is set quite high for a relatively short time after introduction. Even though sales will likely be modest with skimming, the profit margin is great. This pricing approach is most often used for high-prestige or otherwise unique products with significant cache. Once the product's appeal broadens, the price is then reduced to appeal to a greater range of consumers. "The decision between skimming and penetration pricing," said Hilton, "depends on the type of product and involves trade-offs of price versus volume. Skimming pricing results in much slower acceptance of a new product, but higher unit profits. Penetration pricing results in greater initial sales volume, but lower unit profits."

Break Even Analysis

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.

To conduct a breakeven analysis, use this formula:
Fixed Costs divided by (Revenue per unit - Variable costs per unit)
Fixed costs are costs that must be paid whether or not any units are produced. These costs are "fixed" over a specified period of time or range of production.

Variable costs are costs that vary directly with the number of products produced. For instance, the cost of the materials needed and the labour used to produce units isn't always the same.
    

    

For example, suppose that your fixed costs for producing 100,000 widgets were Rs.30,000 a year.
Your variable costs are Rs.2.20 materials, Rs.4.00 labour, and Rs.0.80 overhead, for a total of Rs.7.00.
If you choose a selling price of $12.00 for each widget, then:
Rs.30,000 divided by (Rs.12.00 - 7.00) equals 6000 units.
This is the number of widgets that have to be sold at a selling price of Rs.12.00 before your business will start to make a profit.

Limitations

• Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
• It assumes that fixed costs (FC) are constant. Although, this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.
• It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)