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Chapter 6: Problem 11

We have suggested Revenue (total quantity of good product sold per unit time) Operating expenses (operating budget of the plant) Assets (money tied up in plant, including inventories) as plant-level measures. How do these translate to the firm-level measures of total profit and ROI? Are there plant-level activities that are not reflected in the plant-level measures that affect the firm-level objectives? How might these be addressed?

Short Answer

Expert verified
Answer: Some plant-level activities that may not be reflected in plant-level measures but can affect the firm-level objectives include efficiency improvements, quality control, and employee training and development. To address these activities, firms can monitor and measure their impact on plant and firm performance, set targets and align incentives based on these additional metrics, and continuously evaluate the impact of these activities on overall objectives, reassessing targets and performance measures periodically.

Step by step solution

01

Understanding Plant-level Measures

The first step is to understand the three given plant-level measures: 1. Revenue: The total quantity of good product sold per unit time. 2. Operating expenses: The operating budget of the plant. 3. Assets: Money tied up in the plant, including inventories. These are measures that help us examine the performance and efficiency of a plant within a firm.
02

Understanding Firm-level Measures

Next, let's understand the firm-level measures: 1. Total Profit: The difference between the total revenue and the total expenses incurred by the firm. 2. Return on Investment (ROI): A performance measure used to evaluate the efficiency of an investment. It is calculated as: ROI = (Net Profit / Investment) * 100 A firm can have multiple plants, and these measures help us assess the overall performance of the firm.
03

Translating Plant-Level Measures to Firm-Level Measures

To translate plant-level measures to firm-level measures, we can follow these steps: 1. Aggregate plant-level revenues across all plants to obtain the total revenue for the firm. 2. Aggregate the plant-level operating expenses across all plants to obtain the total operating expenses for the firm. 3. Aggregate the plant-level assets across all plants to obtain the total assets for the firm. 4. Calculate the firm's total profit by subtracting the total operating expenses from the total revenue. 5. Calculate the firm's ROI by dividing the total profit by the total assets and multiplying by 100.
04

Identify Activities That Affect Firm-Level Objectives

There may be plant-level activities that are not reflected in the plant-level measures, but that affect the firm-level objectives. These can include: 1. Efficiency improvements: Activities that lead to more efficient operations, such as investing in new equipment or implementing better production processes. 2. Quality control: Ensuring that the products produced meet the desired quality standards, as products with poor quality may have a negative impact on the firm's reputation and sales. 3. Training and development: Investing in the training and development of employees to increase their skills can improve plant-level performance, which in turn, positively impacts firm-level objectives.
05

Addressing Unaccounted Activities

To address plant-level activities that are not reflected in the plant-level measures but affect the firm-level objectives, firms can: 1. Monitor and measure activities that contribute to efficiency, quality control, and employee training to better understand their impact on plant and firm performance. 2. Set targets and align incentives based on these additional metrics to encourage improvements in these areas. 3. Continuously evaluate the impact of such activities on the overall objectives of the firm and reassess targets and performance measures periodically.

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Most popular questions from this chapter

List some dimensions along which manufacturing environments differ. How might these affect the “laws” governing their behavior? Do you think that a single science of manufacturing is possible for every manufacturing environment?

We have suggested net profit and return on investment as firm-level measures. Do these capture the essence of a healthy firm? What characteristics are not adequately reflected in these measures? Can you suggest alternatives?

Why might the objective to maximize profits be difficult to use at the plant level? What advantages, or disadvantages, are there to using “minimize unit cost” instead?

Give a specific example where “gaming behavior” (i.e., considering the other guy) is important in a manufacturing environment.

Why do you think that many writers in the lean and Six Sigma literature are loath to acknowledge the existence of trade-offs? Do you think this has had positive, negative, or both effects?
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