Value-Chain for Customers and Suppliers

• Costs vary according to the kinds of customers a firm deals with. Customer profitability analysis allows for understanding which costs are related to which customers.
• Customer profitability profiles measure the profitability of a firm’s customer groups to make more informed decisions about sales and customer politics, (e.g. who will receive discounts)
• A customer cost hierarchy classifies customer costs into different analysis levels, similar to ABC:

  • Customer output unit level costs (e.g. product handling cost per unit)
  • Customer batch level costs (e.g. order processing costs, delivery costs)
  • Customer sustaining costs (e.g. customer visit costs)
  • Distribution channel costs (e.g. salary of retail distribution channel)
  • Corporate sustaining costs (e.g. senior management and general admin costs)
• Aspects of CPPs include the firm’s reputation, fixed costs, future customer development, and long-term strategic and political considerations.
• An advantage of CPP is that a higher variety of information enables better management as customer data is combined with existing accounting information.
• CPP is only applicable to organisations that have a limited amount of customers or customer segments.
• Target costing prioritises the selling price over the existing internal cost structure.
• Target Costing Procedure:

  1. Develop a product for potential customers
  2. Choose desirable selling price (target price) and sales volumes with the help of market research
  3. Decide on an amount of profit that is acceptable for the company (e.g. target return on investment) and deduct it from the price
  4. The resulting figure is the target cost. It may be less than the current cost for the same product or service (i.e. a "cost gap")
  5. Innovative efforts then have to be made to bridge this gap, like value engineering
• Value engineering systematically evaluates all aspects of the value-chain business functions, aiming to reduce costs while leaving value untouched.
• Value engineering makes distinctions between value-added costs (costs of assembly, design, machinery) and non-value-added costs (e.g. costs of rework, expediting, special delivery, obsolete stock)
• Value-added costs are costs that customers perceive as adding value or usefulness
• Quality of design - how the product matches the needs of customers
• Conformance quality - performance of a product relative to its specifications
• Quality Cost Analysis:

  1. Cost of Quality Report is received
  2. Techniques to visualise quality problems are created (cause & effect, Pareto or statistical diagrams)
  3. A response is implemented
• Costing measures of quality focus on conformance quality:

  • Prevention costs (incurred in preventing defections production)
  • Appraisal costs (incurred by testing of defections product)
  • Internal failure costs (incurred by failure before shipment)
  • External failure costs (incurred by failure after shipment)
• Inter-firm relationships are relations where the customers are other organisations.
• Inter-Firm Relationships are managed and maintained by open-book accounting, supplier scorecards and industry roadmaps
• Open-book accounting is access to suppliers’ internal management accounting data. Organisations share cost information and use this information as part of their cost management
• Data quality and opportunism may create issues for open-book accounting, the latter related to a lack of trust.
• Supplier scorecards are developed when suppliers’ data isn’t available or reliable. The scorecard monitors performance similar to a BSC.
• Industry roadmaps can be implemented with the collaboration of competitors, customers and public agencies when a whole industry doubts what its future will be made of due to product or production threats.
• Technological and cost advantages are shared through industry roadmaps to foster simultaneous competition and cooperation within the industry and develop it further.
• Just-in-time production is a system where materials arrive exactly when they are needed.
• Just-In-Time has benefits of no sequential tracking of stocks and simple incurrence of the standard cost of each finished product to drive costs down.
• Just-in-time requires a high degree of coordination, in terms of transportation, delivery and other factors and also requires a very tight relationship between the buyer and supplier.