2.008 For-Profit manufacturing firms Performance Measures Ownership: Market value = PV (Earning) PV (Growth Opportunity) Management: Performance Targets 2 Automotive Market Share in the U.S. 3 30% 2 20% % 0% Oct-99 Jul-00 Apr-0 Dec-0 Oct-02 GM Financials $ billions Income Statement Dec-02 Dec-00 Dec-99 Dec-98 Dec-97 Revenue 77.3 84.6 67.4 54.0 66.4 Gross Profit Margin 26.% 28.4% 2.0% 23.4% 2.9% Operating Margin 5.7% 9.% 5.6% 4.2% 2.2% Net Income 0.6 4.5 6.0 3.0 6.7 Net Profit Margin 0.3% 2.4% 3.6%.9% 4.0% Balance She e t De c-02 Dec-00 Dec-99 Dec-98 Dec-97 Cash 8.6.3.4.9.3 Net Receivables 4.4 0.2 23. 76.9 66.4 Inventories.9.6 2.2 2. Other Current Assets 23.9 24.8 9.8 37.4.7 Current Assets 93.8 46.3 64.0 37.3.4 Net Fixed Assets 34.9 34.0 32.8 37.2 34.6 Other Noncurrent Assets 95.2 22.8 77.9 82.9 92.9 Assets 324.0 303. 274.7 257.4 228.9 Accounts Payable 26.2 25.7 2.5 2 5.8 Short-Term Debt 2.4 2.2 2.0 Other Current Liabilities 35.6 35.2 33.9 Current Liabilities 64.2 63.2 57.4 2 5.8 Long-Term Debt 63.9 42.4 29.7 4.2 93.0 Other Noncurrent Liabilities 75.4 66.5 59.6 97.7 98.7 Liabilities 304.3 272.9 254. 242.4 2.4 GM (w/s aab) DaimlerChrysler (w/mercedes) Honda Ford (w/volvo, Jaguar, & Land Rover) Toyota Nissan Preferred Stock Equity Common Stock Equity 9.7 30.2 20.6 5.0 7.5 Equity 9.7 30.2 20.6 5.0 7.5 3 4 Toyota Financials Financial Comparison $ billions Income Statement Mar-02 Mar-02 Mar-00 Mar-99 Mar-98 Revenue 7.4 6.0 9.7 5.8 88.5 Gross Profit Margin 26. 24.9% 27.4% 27.8% 27.0% Operating Margin 7.6% 6.0% 5. 5.9% 6.4% GM TOYOTA Net Income 4.2 5.4 4.5 3.7 3.4 Net Profit Margin 3.9% 5.% 3.8% 3. 3.9% 200 2000 999 200 2000 999 Balance Sheet Mar-02 Mar-02 Mar-00 Mar-99 Mar-98 Current Ratio 3.02 2.32 2.86.2.24.22 Cash 2.4 2.2 4.4. 9.3 Net Receivables 29.9 26.3 26.2 2.8 8.9 Days Receivable 29 98 269 2 9 80 Inventories 7.2 7. 7.4 6.3 5.6 24.6 Asset Turnover 0.57 0.64 0.63 0.76 0.73 0.84 Other Current Assets.0 9.8.2 8.0 Current Assets 60.6 55.4 59.2 47.3 48.3 34.9 Inventory Turnover 6.90 7. 4.65 5.04 4.6 7.35 Net Fixed Assets 38.3 36.0 43.9 4.2 Other Noncurrent Assets 46.0 46.0 5.7 43.0 2.7 Assets 44.9 37.4 54.9 3.5 5.0 ROA 0.2%. 2.2% 2.9% 4.0% 2.9% Accounts Payable.7.4 2.2.3 8.0 ROE 3.0% 4.8% 29.% 7.7% 9. 7.0% Short-Term Debt 22.4 7.6 20.5 4.8.5 Other Current Liabilities 7.0 6.8 5.9 7.4 4.6 Gross Margin 26.% 28.4% 2.0% 26. 24.9% 27.4% Current Liabilities 50. 44.8 48.6 42.5 34. Long-Term Debt 27.9 24.9 27.5 24.9 2. Operating Margin 5.7% 9.% 5.6% 7.6% 6.0% 5. Other Noncurrent Liabilities 6.7 4.6 6.2 5.5 3.5 Liabilities 90.4 80.2 89.8 76.2 59.3 Profit Margin 0.3% 2.4% 3.6% 3.9% 5.% 3.8% Preferred Stock Equity Common Stock Equity Equity 54.5 54.5 57. 57. 65. 65. 55.2 55.2 45.6 45.6 5 6
i 7 Investment Decision Time Value of Money $ today is worth more than $ tomorrow NPV Payback Period Average Return on Book Internal Rate of Return Profitability Index Discount rate: Return foregone by investing in the project rather than in other opportunities 2.008 - Spr ng 2004 8 Cash Flow During Product Cycle Mfg Example Hobbed Gear Percent of P/M Gear Percent of Hobbed : : SAE 45, including 2% setup MPIF FC-0208-S (7.0 g/ cm3 scrap and 46% chips 5. densi ty ) scrap 9.97 NPV Operations: Cash Flow 2 3 4 5 6 7 8 n Bar chuck, cut off and bore Broach keyway Hob teeth 8.49 3.7 47.50 Operations: Compact (0-ton press) Sinter 2.37 2.56 Harden.92 Harden.92 Grind ends perpendicular to pitch diameter 5.93 Grind ends perpendicular to pitch diameter 5.93 Deburr 0.53 Deburr 0.53 Inspect 0.26 Inspect 0.26 Perishable tools and gages, per Perishable tools and gages, piece 7. per piece 8.9 0 3.73 9 Elements of Product Full cost (cont d) Direct = Direct Labor Prime = Full Production ( or Inventory ) = Distribution General & Administrative Full R&D Engineering Admin., sales, marketing 2 Profit Selling Price 40% Plant & machinery, depreciation, energy 2% 40% Indirect Labor 26% Direct Labor 2% s 2 2
i Direct/Indirect vs. Fixed/Variable Production Relative to Volume 00 Traceability: Accountant Volume-dependence: Economist Relat i ve cost per part ($ ) 0 One of Batch Mass a kind production production 2 3 3 4 5 6 Relative Producti on Rate ( parts/time) 3 4 Fixed and Variable How Man, Machine, and Spend Time in the Factory People s Machines u e - Val Value - Value - per un t, $ ( TC) Vari able (VC) Fi xed ( FC) Volume, n TC = FC n VC : waiting for materials, watching machine running, produci ng defects, looking for tools, fixing machine breakdowns, producing unnecessary items, etc. : transportation, storage, inspection and rework : unnecessary movement of machine, setup time, machine breakdown, unproductive maintenance, producing defective products, producing products when not needed, etc. 5 6 Product cost by industry Industry Direct s Direct Labor overhead Aerospace 5.7 9.3 29.0 Allocation Bases of Computers 69.9 7.5 22.5 Electronics Industrial and farm equipment Meta l products 48.6 46.0 52.0 5. 2.8 5.7 36.3 4.2 32.3 Motor vehicles and parts 63.8 7.8 28.4 Labor hours Machine hours direct cost Activity based Scientific and photographic equipment 52.3.3 36.5 Average for seven industries 54.4 2.9 32.6 7 8 3
i 9 ABC: Accuracy Target Allocation Bases of (cont d) Actual Raw material Final product Stat Stat Stat Station 3 ion ion 2 ion 4 Unit Level Activity Driver Quantity of Driver per Unit Driver Tota l Extensive ABC System Value-added Activities: - Assembly Person di rect labor 8 hours per day $64.00 per day Simple ABC System Non-value Added Activities: - Machine setup Person Di rect labor hour per day $8.00 per day - Tool Load/Unload Machine time 2 hours per day $60 / hour $20 per day - Part Load/Unload Person Di rect labor 45 hours per day $6.00 per day - Inspection CMM Time 3 hours per day $35.00 / hour $5.00 per day $303.00 2.008 - Spr ng 2004 20 s Traditional ing Production 600 Machine Classes Support s Pools s Process Oriented ing Production 600 Machine Classes Support Order Processing Special Components DM Direct to date Allocation Bases DM Direct to date Per order # of special components 2 22 Traditional and Activity-Based ing Distribution of Orders $ 000 s Traditiona Transferred Process Oriented ( ) l Mater ial $5,000 $5,000 Mater ial 6,000 6,000 related overhead Labor 36,000 36,000 Production related overhead 20,000 20,000 cost 267,000 (74%) 267,000 (74%) Engineering costs 2,000 6,300 5,700 Tooling costs 22,500 0 22,500 Administrative costs 60,000 27,000 33,000 Support rel ated cost 94,500 (26%) 33,300 ( 9%) 6,200 (7%) Number of motors 630,000 352,800 57,500 4% 3% > 99 Motors 9% 44% 20 99 Motors 3% Order processing cost 3,800 3,800 Spec ial components cost 9,500 9,500 cost 0 $36,500 $36,500 75,600 3,500 48% Motor 26% 2 4 Motors 5 9 Motors 3% 7% Percent of Tota l Number of orders 65,625 23 24 4
Estimate: Example A B C D E Pre-Support Related Base Motor 247.0 247.0 247.0 247.0 247.0 64.4 96.6 6.0 322.0 Components 32.2 3.4 343.6 408.0 569.0 279.2.35 x.35 x.35 x.35 x.35 376.9 420.4 463.9 550.8 768.2 Traditional Systems Distort Product and Customer s Volume High Low Overcosted Complexity Traditional s High Ratio to Traditional.62.69.75.83.96 Low Undercosted Revised per Unit A B C D E unit 63.6 73.2 82.8,02.0,5 units 370.6 46.2 46.8 553.0 78.0 20 units 357. 399.7 442.3 527.5 740.5 0 units 346.3 386.5 426.7 507. 708. Product Complexity Sma ll batch sizes Long set-up times Unique components Special inspection and tests Extensive material handling Special vendors Customer Complexity Customized products Short lead times Unpredictable orders Extensive technical support Extensive post-sales support Special test and requirements 25 26 5