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Specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives |
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An organization’s ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors |
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An organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control |
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The fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance, such as cost, quality, service, speed, and customer satisfaction |
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Translates an organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy |
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A diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the financial, customer, internal business process, and learning and growth perspectives |
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The amount of productive capacity available over and above the productive capacity employed to meet consumer demand in the current period |
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Result from a cause-and-effect relationship between the cost driver— output—and the (direct or indirect) resources used to produce that output. Engineered costs have a detailed, physically observable, and repetitive relationship with output |
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Have two important features: (1) They arise from periodic (usually annual) decisions regarding the maximum amount to be incurred, and (2) they have no measurable cause-and-effect relationship between output and resources used |
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An integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future |
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The total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use |
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Refers to how closely the characteristics of a product or service meet the needs and wants of customers |
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The performance of a product or service relative to its design and product specifications |
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The costs incurred to prevent, or the costs arising as a result of, the production of a low- quality product |
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Costs incurred to preclude the production of products that do not conform to specifications |
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Costs incurred to detect which of the individual units of products do not conform to specifications |
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Costs incurred on defective products before they are shipped to customers |
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Costs incurred on defective products after they have been shipped to customers |
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An important tool in SQC, is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time |
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A chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent |
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Identifies potential causes of defects using a diagram that resembles the bone structure of a fish (hence, cause-and-effect diagrams are also called fishbone diagrams) |
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How long it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer |
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How long it takes the marketing department to specify to the manufacturing department the exact requirements in the customer’s order |
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Manufacturing Cycle (Lead) Time |
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How long it takes from the time an order is received by manufacturing to the time a finished good is produced |
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How long it takes to deliver a completed order to a customer. |
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Delivery of a product or service by the time it is scheduled to be delivered |
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Any factor that causes a change in the speed of an activity when the factor changes |
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Occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it |
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The average amount of time that an order waits in line before the machine is set up and the order is processed |
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Describes methods to maximize operating income when faced with some bottleneck and some non-bottleneck operations |
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Revenues minus the direct material costs of the goods sold |
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Management Control System |
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A means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees |
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Formal Management Control System |
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Includes explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees |
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Informal Management Control System |
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Includes shared values, loyalties, and mutual commitments among members of the organization, company culture, and the unwritten norms about acceptable behavior for managers and other employees |
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The desire to attain a selected goal (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect) |
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Exists when individuals and groups work toward achieving the organization’s goals |
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The extent to which managers strive or endeavor in order to achieve a goal |
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The freedom for managers at lower levels of the organization to
make decisions |
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The degree of freedom to make decisions. |
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Suboptimal Decision Making |
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Occurs when a decision’s benefit to one subunit is more than offset by the costs to the organization as a whole |
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The manager is accountable for costs only |
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The manager is accountable for revenues only |
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The manager is accountable for revenues and costs |
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The manager is accountable for investments, revenues, and costs |
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The price one subunit charges for a product or service supplied to another subunit of the same organization |
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The product or service that is transferred between subunits of an organization |
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Market-Based Transfer Price |
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Top management may choose to use the price of a similar product or service publicly listed |
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Cost-Based Transfer Price |
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Top management may choose a transfer price based on the cost of producing the product in question |
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Hybrid transfer prices take into account both cost and market information |
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Refers to the resources or assets used to generate income |
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An accounting measure of income divided by an accounting measure of investment = Income / Investment |
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An accounting measure of income minus a dollar amount for required return on an accounting measure of investment = Income - (Required rate of return * Investment) |
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A cost recognized in particular situations but not recorded in financial accounting systems because it is an opportunity cost |
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Equals after-tax operating income minus the (aftertax) weighted-average cost of capital multiplied by total assets minus current liabilities = After Tax Op. Inc. - [WACC x (Total Assets - Current Liabilities)] |
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The income-to-revenues ratio (or sales ratio) = Income / Revenue |
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The cost of purchasing an asset today identical to the one currently held, or the cost of purchasing an asset that provides services like the one currently held if an identical asset cannot be purchased |
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Describes a situation in which an employee prefers to exert less effort (or to report distorted information) compared with the effort (or accurate information) desired by the owner, because the employee’s effort (or validity of the reported information) cannot be accurately monitored and enforced |
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Diagnostic Control Systems |
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Measures help diagnose whether a company is performing to expectations |
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Describe standards of behavior and codes of conduct expected of all employees, especially actions that are off-limits |
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Articulates the mission, purpose, and core values of a company. They describe the accepted norms and patterns of behavior expected of all managers and other employees with respect to one another, shareholders, customers, and communities |
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Interactive Control System |
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Formal information systems that managers use to focus the company’s attention and learning on key strategic issues |
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Four perspectives of balanced scorecard |
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Financial perspective - This perspective evaluates the profitability of the strategy and the creation of shareholder value Customer perspective - This perspective identifies targeted customer and market segments and measures the company’s success in these segments Internal-business-process perspective - This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance Learning-and-growth perspective - This perspective identifies the capabilities the organization must excel at to achieve superior internal processes that in turn create value for customers and shareholders |
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Financial Perspective Examples |
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Operating income from productivity gain Operating income from growth Revenue Growth Gross margin percentage Cost reductions in key areas EVA ROI |
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Customer Perspective Examples |
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Market share in particular segment Number of new customers Customer-satisfaction ratings Customer-retention percentage Time taken to fill customers' requests Number of customer complaints |
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Internal Business Process Perspective Examples |
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Service response time Yield Order delivery time On-time delivery Number of major improvements in mfg and business processes Percentage of processes with advanced controls New product development times Number of new products Time taken to replace or repair defective parts Hours of customer training for using the product |
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Learning-and-Growth Perspective Examples |
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Employee satisfaction ratings Percentage of line workers empowered to manage processes Percentage of employees trained in process and quality management Percentage of manufacturing processes with real-time feedback Employee education and skill level Employee turnover rates Percentage of compensation based on team and individual incentives Information system availability |
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Four categories of the cost of quality |
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Prevention Costs - Incurred to preclude the production of defective products that do not conform to specifications Appraisal Costs - Costs incurred to detect which of the individual units of products do not conform to specifications Internal Failure Costs - Costs incurred on defective products before they are shipped to customers External Failure Costs - Costs incurred on defective products after they are shipped to customers |
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A chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent |
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Identifies potential causes of defects using a diagram that resembles the bone structure of a fish (hence, cause-and-effect diagrams are also called fishbone diagrams) |
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Stages of Customer Response Time |
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Receipt Time - Customer places orders and it is taken to manufacturing Waiting Time - Time between manufacturing's reception of the order and machine set up for order Manufacturing Time - From the machine set up until the product becomes a finished good Delivery Time - Finished good is produced and the order is delivered to the customer |
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1. Uncertainty about when customers will order products or services 2. Bottlenecks due to limited capacity |
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4 Steps to dealing with Theory of Constraints |
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1. Recognize that the bottleneck operation determines throughput margin of the entire system 2. Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on 3. Keep the bottleneck operation busy and subordinate all nonbottleneck operations to the bottleneck operation 4. Take actions to increase the efficiency and capacity of the bottleneck operation as long as throughput margin exceeds the incremental costs of increasing efficiency and capacity |
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Time-related Financial measures |
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- Revenue losses or price discounts attributable to delays - Carrying cost of inventories - Throughput margin minus operating costs |
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Time-related Customer measures |
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- Customer-response time (the time it takes to fulfill a customer order) - On-time performance (delivering a product or service by the scheduled time) |
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Time-related Internal Business Process measures |
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- Average manufacturing time for key products - Manufacturing cycle efficiency for key processes - Idle time at bottleneck operations - Defective units produced at bottleneck operations - Average reduction in setup time and processing time at bottleneck operations |
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Time-related Learning-and-Growth measures |
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- Employee satisfaction - Number of employees trained in managing bottleneck operations |
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Income/Investment = Income/Revenues x Revenues/Investment = Return on Sales x Investment Turnover |
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Income - (Required Rate of Return x Investment) |
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Economic Value Added formula |
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After-tax Operating Profit - [WACC x (Total Assets - Current Liabilities)] |
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Includes all assets, regardless of their intended purpose |
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Total assets available minus the sum of idle assets and assets purchased for future expansion |
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Financial perspective measure |
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Operating Income Revenue Growth Gross Margin % Revenues from new products ROI EVA |
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Customer perspective examples |
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Market share Customer-satisfaction ratings Customer-retention ratio Number of customer complaints |
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Internal Business Process measures (innovation) |
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Innovation - Number of new products - Number of new patents - New product development time |
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Internal Business Process measures (operations) |
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- Yield - Defect rate - Setup time |
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Internal Business Process measures (post-sale service) |
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Time to repair or replace defective products Hours of customer training |
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Learning and growth perspective |
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Employee education and skill level Employee satisfaction ratings Employee turnover rates Info system availability |
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Prevention costs examples |
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Design engineering Process engineering Supplier evaluations Quality training Test of new materials |
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Inspection Online product manufacturing and process inspection Product testing |
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Internal failure costs examples |
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Spoilage Rework Scrap Machine repairs |
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External failure costs examples |
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Customer support Warranty repair costs Liability claims |
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