Figure 1.6 list four activities of a manufacturing process to
create a finished part. Activity #1
consumes the resources of a stock piece of metal and a cutting machine to
produce a piece of metal cut to the specification for the part. Each downstream activity in the process flow
that occurs after activity #1 adds incremental value to the value created by
the upstream activities.
Figure 1.6: The Cost/Benefit of a Finished Part
The activities
of a process each add an incremental value to the finished product or service
at an incremental cost. Totaling each
establishes the cost/benefit of the process.
The
incremental value of each manufacturing activity is determined by comparing the
consumed resources with the created value for that activity. Activity #2 consumes the part shape produced
by Activity #1 and creates a part shape with a hole. The incremental value produced by Activity #2
is the difference between what is consumed and created; In this case the hole. Therefore the incremental value created by
Activity #2 is the hole in the part.
The cost to
produce the incremental value is the cost to execute that manufacturing activity
for one unit of value. In activity #2,
the cost to create the hole in one part shape is $2. The cost is established by allocating the fixed
and variable costs of the materials, labor, facilities, etc., used to create
the hole in one part shape.
The total
value produced by a process and the total cost of producing that value can be
determined by adding the value and cost of each of its separate activities. In Figure 1.6 the process produced a finished part at a total cost of
$9. With this knowledge, it can be
determined if the benefit of producing a finished part is worth its cost. And where opportunities may exist to either
to increase the value of the part or reduce the resource cost of the process.
The approach
used to evaluate the cost/benefit of a manufacturing process also applies to an
information process. Although it is
easier to see the incremental value produced by a manufacturing activity than
an information activity, the principle is the same. The incremental value and its associated cost
can be determined for each activity of a process.
Figure 1.7 lists four activities for preparing a customer order for
production. The paper order is first
prepped by adding internal part codes to the customer’s order information. Next the order is entered into the
system. A quality check is then made to
validate that the order was entered correctly.
in the final activity of this process, the order is released to
production.
Figure 1.7:
The Cost/Benefit of a Production Order
Each activity
of an information process can be analyzed for its incremental value and cost. What could you do with that information?
The
incremental value of each information activity is determined by comparing the consumed
resources with the create value of that activity. Activity #2 consumes both the customer
supplied information as well as the part codes copied on the order in Activity
#1. Activity #2 creates electronic data
from the data stored on the paper order.
The incremental value created by Activity #2 is an electronic version of
the order captured in the system.
The cost to
produce the incremental value is the cost to execute that activity for one unit
of value. In activity #2, the cost to data
enter one order is $4. Note that the
cost of activity #3 to validate the correct data entry of the order is $6. This example is based on a case study of a midsized
manufacturing company. The cost of
checking data entry quality was greater than the original data entry. This discovery led to the company to modify
the validation activity to increase its cost/benefit.
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