Case Study: After Studying This Chapter, You Will Be Able To

12
CASE STUDY
LEARNING OUTCOMES
After studying this chapter, you will be able to:

❑ Evaluate appropriate cost management and performance management
techniques in case studies and other exercises which simulate real-life
business situations to enhance the quality of decision-making and the
creation of shareholder value
❑ Understand the links between cost management, performance
management and strategic management within the context of an
organisation’s strategy
© The Institute of Chartered Accountants of India

12.2 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
Value Recoginition Value Chain Analysis
Total Quality
Management
Quality Management
Cost of Quality
Tools
Environmental Mgt. EFQM
Accounting Business Excellence
Model
Ethics & Non Financial Baldrige Criteria
Considerations Value Analysis/
Engineering
Business Process Re-
Strategic Cost Value Management
engineering
Management Process Innovation &
Re-engineering
Process Innovation
Target Costing
Cost Management
Life Cycle Costing
Techniques
Throughput Accounting
JIT, Kaizen, 5S, TPM,

Strategic Cost Management and
Lean System
Cellular Mfg., Six Sigma
Product Service &
Performance Evaluation
Delivery
Supply Chain Upstream and
Management Downstream Flow
Decision Making
Decision Making Internal Transfer Pricing
Pricing Decision
External
Linking of CSFs to KPIs
and Strategy
Financial ROI, RI, EVA
Performance Divisional Performance
Management Measures
BSC; TBL; Performance-
Non Financial
Prism, Pyramid etc.
Benchmarking
Standard Costing
Cost Control & Analysis Beyond Budgeting
Budgetary Control
Behavioural Aspects
Profitability Analysis Strategic Analysis;
Analysis Through ABC
Planning and
ABB & ABM
Forecasting Tools

CASE STUDY 12.3
ESSENTIALS FOR CASE STUDY

CS-1: VALUE CHAIN ANALYSIS, BALANCED SCORECARD, KPI
You are the Finance Manager of DP Limited which is in the business of manufacturing wire
rods. A division in the company manufactures copper wire rods from a single manufacturing
plant in Central India. The division purchases raw material (copper cathodes) from various
suppliers across the country. The cathodes are melted and wire rods of various dimensions are
produced. Each batch of wire rods produced are tested for quality and strength.
The wire rods are stored in rolls in the warehouse and dispatched in company owned trucks as
per the requirement of the customers. The customers are required to pay 50% of invoice value
as advance and balance 50% within 30 days of delivery of goods. The company prices its
copper wire rods based on the price prevailing on London Metal Exchange after adjus ting it with
a factor to cover conversion costs and profits.
The company explores newer markets by advertising in national dailies and participating in
various industrial events in India as well as abroad. An annual conference of customers is
conducted by the company to improve customer relationships and attract newer customers. The
customers have right to return the material if quality specifications are not met. There is a
separate team to handle such complaints.
The following email was sent by the Chief Financial Officer of the company to you.
--------------------------------------------------------------------------------------------------------------------- -------
From: Chief Financial Officer
To: Finance Manager
Subject – Commodity Price Fluctuation
The board is quite aware of foreign exchange fluctuation related risks. However, they are not
much aware of risks related to fluctuation in commodity prices. The prices of copper which are
used to manufacture copper wire rods have fallen down by over 20% in the last six months
owing to global factors.
The procurement team of Copper Wire Division has been waiting for the right time to buy these
metals as they expect the prices to fall down further. However, we are at a verge of stock -out of
these metals as no purchase was made in the last one month.
The bonus of procurement team largely depends on the annual savings as compared to the
budgeted cost of purchase. I am not happy with the approach of speculation and making profits
out of price fluctuation in raw materials. Could you highlight the issues related with our
performance measurement mechanism and suggest how it could be improved?
Regards,
Chief Financial Officer
Attachment:

CASE STUDY 12.5
Copper Prices Quoted on LME
-------------------------------------------------------------------------------------------------------------------- -------
Required
(i) EXPLAIN and IDENTIFY the various primary activities of Copper Division.
(ii) DISCUSS the issues with performance measure in force in the company.
(iii) ADVISE an alternate performance measure and Identify Key Performance Indicators (KPI).
Solution
(i) Value chain is defined as “a chain of value added activities; products pass through the
activities in a chain, gaining value at each stage”. Value chain focuses on systems, and
how business inputs are changed into business outputs purchased by customers. The
entire set of activities that a business undertakes to covert inputs to outputs are interlinked
to each other.
Porter’s value chain classifies activities into primary activity and secondary activity.
Primary Activities
Primary activities are those activities that are directly related with creating and delivering a
product to the end customers. The following activities are considered as primary activities:
Inbound Logistics
Inbound logistics involves arranging inbound movement of materials from suppliers to the
manufacturing plants. The activities related to inbound logistics in the case of copper
division of DP limited would involve transporting copper cathodes from multiple suppliers
across the country and storing them in the warehouse. The cathodes stored in warehouse
would be issued to the production facilities depending on the requirement of the production
plants.

Operations
Operations involve those activities which are concerned with conversion of input into
outputs in case of manufacturing companies. The activities under operations would include
those related to melting of copper cathode and converting the copper cathodes into wire
rods. The quality tests carried out for wire rods would also be included as a part of
operations.
Outbound Logistics
These include planning and despatch, distribution management, transpor tation,
warehousing, and order fulfilment. This includes warehousing of finished goods (copper
wire rods) and distribution of copper wire rods to its customers. The company uses its own
trucks to distribute finished goods to its customers. The scheduling o f trucks and dispatch
of material would also be a part of outbound logistics.
Marketing & Sales
Marketing and sales are the means whereby consumers and customers are made aware of
the product which is ultimately sold to them. The activities include selling products to the
end customers covering activities like product management, price management, promotion
and marketing management. DP limited uses advertisement in national dailies and holds
conferences as a part of its marketing and sales efforts. The c ompany also holds annual
customer conference to improve customer relations and attract new customers.
Service
In case of manufacturing industry, service generally refers to the after sales service which
are required to maintain the value of product and includes activities like installation, repair
etc. The service team is also expected to handle customer returns on account of poor
quality of copper wire rods.
(ii) What is the issue?
A procurement team is generally a cost centre and the most appropriate way to evaluate
performance of cost centre is the comparison between actual cost and budgeted cost (also
called variance). A large portion of bonus (performance measurement) is dependent on the
savings in actual purchases.
The company has adopted variance analysis as a measure of performance. If the team is
able to reduce the actual cost of purchase as compared to the budgeted cost, a higher
bonus is paid. The procurement team has stopped purchase of copper cathodes to save
on the purchase budget which ultimately would translate into higher pay-out of bonus.
The commodity prices of copper have fallen by about 20% in the last six months. The
speculation of fall in price has resulted in halting of procurement process. It is ver y difficult
to time the market and such speculation could lead to losses to the company. There could
be a stock-out situation if the procurement is not resumed and the situation could hamper
the production and overall delivery schedules.

CASE STUDY 12.7
The procurement team appears to have taken a short- term view of price movement. The
team is focused on earning higher bonus and hence is waiting to buy at lower prices.
There is a larger impact of not being able to deliver product on time which could damage
the reputation of the company. This has been ignored by the procurement team. Managers
must be encouraged to consider the impact on the company as a whole and not on just the
own department.
The company is using just a financial measure to measure performance. This ca n result in
lopsided view of the goals and objectives of the company. Managers tend to look at short
term profits and ignore the long- term growth.
Optimum Performance Measurement
A performance measurement is most effective when the goals of the respective
departments are aligned with that of the company. This ensures that each employee within
the company works towards the overall objective of the company. The company
manufactures wire rods and the objective of the copper division is to manufacture copper
wire rods as per the requirement of the customers.
The profit flows from the main business of the company. If a department focusses on an
objective which is not aligned with the main goal, the company as a whole suffers. A stock-
out like situation would hamper the image of a company, if wire rods are not delivered as
per schedule to the customers.
Another aspect to be considered is that managers and employees are evaluated only on
those parameters which are controlled by them. If for example, the procurement team is
able to purchase copper at a discount to market price because of their efforts, it could be
considered as saving.
The prices of copper are determined by the prices on commodity exchanges and are not in
the control of procurement managers. The performance of managers and employees
should not be impacted by global change in prices of commodities as they are not
controlled by the concerned employees.
(iii) Alternate Performance Measure
The issue with financial performance measures alone is that managers tend to have a
short- term view as can be seen in our case. In order overcome possible short-termism of
financial measures Kaplan and Norton developed the Balanced Scorecard which outlined
four key areas in which company and divisional performance should be measured to focus
on both the short and long term needs of the organisation.
The key idea is that managers are to be appraised on a variety of measures which include
non-financial measures so that their focus is both long and short term. The four
perspectives used to measure performance measure in a Balanced Scorecard is given
below:
Financial Perspective: This measures the financial performance which is linked to the
overall objective of maximising shareholder’s wealth. We already use financial measures
to measure performance. The weightage could be reduced to include other measures.
Also, factors beyond the control of managers like commodity prices should be excluded.

Customer Perspective: This includes focussing on customers and meeting their needs.
Measures could include quality of material produced, optimum levels of inventory
maintained, number of stock-out instances, etc.
Internal Business Perspective: This includes measures to evaluate the performance of
business processes with particular emphasis on productivity and efficiency. Measures
could include procurement lead time, number of defective purchases etc. The company
could use measures like JIT to reduce the procurement lead time.
Training and Growth: This includes focusing on innovating in processes and developing
and learning for the future. Trainings could be given to procurement managers to identify
best quality of copper cathodes, aspects related to purity etc.
CS-2: VALUE CHAIN ANALYSIS
S-Mart was founded in 1990 as a departmental store catering to the entire household
requirements (from grocery to clothing) of middle income groups. The company since has grown
leaps and bounds and inaugurated its 100th store in 2019. S-Mart is known for high quality
products which are available at discount to the market price at its store. The company claims to
give at least 5% discount on listed price across product segments. The sales of company have
grown 30% on Y-o-Y basis. The company has highest net profit margin and highest return on
equity in the industry.
S-Mart has tie-ups with more than 500 vendors across India who provide high quality products
on demand. S-Mart pays all its suppliers in advance and hence enjoys preferential pricing as
compared to its competitors. The company procures products using the Just-In-Time (JIT)
philosophy which helps it to keep low level of inventories and thereby freeing up significant
amount of working capital. The products are directly delivered to the stores by company o wned
trucks and mini-vans and hence, there is no requirement of warehouses to store products.
The company sells products which are required by households on a day to day basis and is not
keen to sell premium products which have higher margin but lower dem and. This ensures that
inventory is moved out of the stores faster and increases the inventory turnover ratio. The
company owns all the stores which it operates under its brand name.
There is no third-party franchisee appointed to operate the stores. Since the products are
directly procured from the manufactures and sold to customers, there are no intermediaries in
between.
S-Mart invests in superior quality products and high level of customer services than aggressive
marketing. The company believes that it can attract more customers by offering quality products
at reasonable prices rather than spend huge amount on marketing. However, need based
marketing activities are carried out by the company. S-Mart aims to build customer loyalty
through high level of customer service at its store.
S-Mart is one of the few companies which has witnessed a low employee turnover in the
industry in which it operates. The motivation level of employees are very high which results in
excellent performance across all levels. Company rewards its employees generously through

CASE STUDY 12.9
employee stock options plan. The company conducts training sessions for its employees
periodically to equip them with latest techniques in areas of procurement, sales, marketing, and
customer service. The result of these efforts is clearly visible in the company’s growth.
The company has a solid Information Technology infrastructure for all its activities. The
company has leveraged technology across all departments - be it procurement, logistics or
sales. It has implemented SAP-R3 which is one of the leading Enterprise Resource Planning
system globally. Various reports relating to inventory levels, sales, liquidity position etc. are
available on a real-time basis to the senior management.
Required
Map the various activities performed at S-mart to the Porter’s Value Chain model.
Solution
Introduction
Value chain is defined as “a chain of value added activities; products pass through the activities
in a chain, gaining value at each stage”. Value chain focuses on systems, and how business
inputs are changed into business outputs purchased by customers. The entire set of activities
that a business undertakes to covert inputs to outputs are interlinked to each other. A business
carries out these activities to earn a profit or margin.
A business should undertake only those activities which add value to the end product being
delivered to the customer. A value chain analysis helps business identify those activities which
are not adding value (in other words wasteful activities). An example of a wasteful activity could
be unnecessary storage of products which increases the inventory and working capital
requirement. Such activities must be removed to ensure that the margin of business improves.
Value Chain Analysis is one way of identifying which activities are best undertaken by a
business and which are best outsourced.
Porter’s value chain classifies activities into primary activity and secondary activity.
Primary Activities
Primary activities are those activities that are directly related with creating and delivering a
product to the end customers. The following activities are considered as primary activities -
Inbound Logistics
Inbound logistics involves arranging inbound movement of materials or finished goods from
suppliers to the manufacturing plants or retail stores. Since S-Mart is not involved in
manufacturing, all the activities that it undertakes to deliver the products to its retail stores
would form part of Inbound Logistics. The company has its own transport fleet to ensure timely
delivery of products to the retail stores. The company also has a JIT system in place which
ensures minimum inventory level. A reason why the company uses its own fleet of trucks is to
ensure that there are no failures on the supply side. In JIT systems and especially in retail
business, it is very important that stock outs are avoided.

Operations
Operations involve those activities which are concerned with conversion of input into outputs in
case of manufacturing companies. In retail business, it comprises of those activities which are
concerned with running of stores, planning of inventory levels of various products, deciding the
layout of various stores etc. The company operates through 100 stores which are owned by
itself. The company does not have franchisee or agent model for operation of its stores. The
ownership of the stores ensure that the quality standards are maintained across various stores
and customer get the best value. Since the stores are owned, the company does not face any
risk of closing the stores due to expiry of lease arrangements. The company can also invest to
build the best layout for the stores.
Outbound Logistics
These include planning and dispatch, distribution management, transportation, warehousing,
and order fulfilment. In case of a retail business, this includes activities carried out to deliver the
product to the customer. S-Mart operates through its own stores and there are no outsourcing or
franchisee arrangements. The company does not have any warehousing requirement as the
product are directly delivered to the retail stores. The customers directly pick up the prod ucts
from the stores and there is no transport requirement in this case. The company must however
ensure that the customer waiting time is low at the time of invoicing and checkout from the
store.
Marketing & Sales
Marketing and sales are the means whereby consumers and customers are made aware of the
product which is ultimately sold to them. The activities include selling products to the end
customers covering activities like product management, price management, promotion, and
marketing management. S-Mart builds customer loyalty by offering high quality products at
affordable pricing. The company does not spend a huge amount on marketing.
Service
In case of manufacturing industry, service generally refers to the after sales service which are
required to maintain the value of product and includes activities like installation, repair etc. In
case of retail stores, service would encompass a superior experience at the stores and
managing return of products by the customers. S-Mart aims to build customer loyalty through
high level of customer service at its store.
Secondary Activities
Secondary activities are those activities which support the primary activities in their function.
The following are the broad classification of secondary activities:
Procurement
Procurement refers to the processes of acquiring various products and include activities like
identifying sources of these products, vendor selection, placing an order, purchase of products
etc.

CASE STUDY 12.11
The company deals with over 500 vendors across India on advance payment terms to procure
high quality products at preferential pricing. This helps the company get better discounts which
it can pass it onto the customers. This ensures that the company does not carry the burden of
discounts being offered to the customers.
Technology Development
Technology spans across all the primary activities of an organisation. It includes activities like
process automation, an Enterprise Resource Planning (ERP) system, inventory management
systems etc. The company has implemented SAP R/3 - an ERP package which helps in the
management of various functions of procurement, logistics and sales. A robust system is always
necessary to ensure that the JIT systems work effectively. Such systems assist in real -time
monitoring of inventory levels and triggering purchase orders when inventory levels are low. The
entire flow of products from an order placement till the delivery to customer can be tracked
seamlessly.
Human Resource Management
This involves areas of recruiting, managing, training, developing and rewarding people within an
organisation. S- Mart has a very low employee turnover and a very high level of employee
motivation. The company rewards all its employees generously and conducts periodic training
and development programmes for its employees. This ensures that the employees are highly
motivated which translates into a consistently high performance.
Infrastructure
This includes not only the physical infrastructure but also all departments of management,
finance, legal which are required to keep the company’s store operational. All these are
important for organisation’s performance in primary activities.
CS-3: VALUE CHAIN ANALYSIS
Audio Tech is a company that designs, develops and sells audio equipment. Audio Tech is best
known for its home audio systems and speakers, noise cancelling headphones, professional audio
systems and automobile audio systems.
Audio Tech sells audio equipment to consumers through its large network of retail outlets in its
home country and via the company's website.
Audio Tech purchases the materials and components that it needs to manufacture audio
equipment from a number of different suppliers. All of the purchases are delivered to a company's
godown at its factory and are held there until they are needed for production and assembling.
Finished products are transported from the factory to Audio Tech's retail outlets by company's own
trucks. The trucks follow the same schedule each week irrespective of the load they are carrying.
Audio equipment that are required for sale via the company's website are transported to Audio
Tech's distribution centre.

The company believes that it can attract more customers by offering quality products at
reasonable prices. Each unit is tested for quality with a real time analyzer ipad app and a
calibrated microphone to measure how consistently each sound system reproduced various
frequencies. A bass-test sweep tone allows checking how well the subwoofer managed low-end
frequencies.
Finally, they drive each in cars briefly to see how sound quality changes while on the move.
The company aims to build customer loyalty also through high level of customer services and
value chain analysis. The customers can return the product if quality specifications are not met.
There is a separate department to handle such complaints.
Audio Tech had implemented Balanced Scorecard as a performance measurement and
management system. Company has been doing great on financial parameters and customer
satisfaction parameters. Market capitalization of the company has been increased considerably
over the years.
Of late, the company has witnessed high employee turnover ratio. Though the company has a
formal exit interview process for the resigning employees, the input received from these interviews
is rarely considered in improving HR practices. One of the common feedbacks from employees
was that working hours are too long and they have to frequently work on weekends also and there
is so much pressure to improve customer service without adequate support of system and
processes. Also the truck drivers have been on strike thrice in the last one year demanding better
pay, retirement benefits and good working conditions.
Audio Tech is keen to address the above issues and recently held a meeting to discuss the
performance of the company. The Management Accountant suggested to the Managing Director
to use an alternative performance measurement mechanism which considers all the
stakeholders instead of just shareholders and customers. The Managing Director is s uspicious
of the Management Accountant's suggestions and is unclear as to whether they are suitable for
the company or not. Therefore, the company seeks your assistance.
Required
(i) IDENTIFY and EXPLAIN the various primary activities of Audio Tech in its value chain.
Also SUGGEST, if there is any scope for cost reduction in these activities.
(ii) RECOMMEND an alternative performance measurement mechanism which considers
all stakeholders instead of just shareholders and customers. Also INDICATE the
performance measures as applicable to the situations of Audio Tech in the alternative
mechanism suggested by you.
Solution
(i) The Various Primary Activities of Audio Tech in its Value Chain Analysis
Michael Porter describes the value chain as “internal processes or activities a company
performs to design, produce, market, deliver and support its product.” Rather than looking
at costs as per accounting cost pools, the value chain model focuses on the w ork flow of

CASE STUDY 12.13
an organization in the form of discrete set of activities that are linked to each other. The
value chain model is a generic model that examines activities as Primary Activities and
Secondary Activities. Passing through each activity, the product or service gains some
value. The idea is to (a) eliminate non-value adding activities and (b) identify product
differentiating or cost leadership opportunities among the value adding activities.
Individual activities reflect the company’s strategy, implementation of its strategy and
underlying economics of the activities themselves.
Profit margin for the company = Value created less the cost of creating that value
Primary activities are those activities that enable inputs (raw material) to be transf ormed
into output (finished goods) or in the provision of service. Primary activities as per Porter’s
model are:
Inbound Logistics
Activities related to receiving, storing and distributing the inputs (raw materials) to the
production process.
Audio Tech has its materials and components needed to manufacture audio equipment
delivered to its godown at the factory premises. These materials are stored until needed
for production and assembling at the factory. These are the inbound logistics related
activities.
Operations
Activities involved in transforming raw materials into final products. These would include
machining, packaging, testing and equipment maintenance.
Audio Tech’s work flow activities related to manufacturing of the audio equipment and
components need to be considered here. In addition, the testing of equipment using ipad
application, bass sweep test as also sound quality check after assembly into the car, are
operations related activities.
Outbound Logistics
Activities involved in collecting, storing and distributing the products from the assembly line
to the end user customers. This includes finished goods warehousing, delivery vehicle
operation, order processing and scheduling.
Some of the activities that would be classified here are:
(a) Storage of Audio Tech’s finished goods within factory premises and at its distribution
centre.
(b) Scheduling and dispatch of goods using trucks to retail outlets and distribution centres.
(c) Activities related to order taking from retail outlets as well as direct orders on the
company’s website.
Marketing and Sales
Activities such as advertising, promotion, distribution channel selection, sales force
management, pricing policy and such other activities that make the customer aware of the
product would be listed here.

All of Audio Tech’s activities that relate to the above list of activities whereby it aim s to
spread customer awareness would be classified here. It aims to build customer loyalty by
offering quality products.
Service
Activities related to after sales service such as installation, repair and part replacement
would be classified here.
Audio Tech has a separate department to handle customer complaints. Customers can
return the product if quality specifications are not met. Also, any activity relating to after
sale service would be classified here.
Below are certain measures that Audio Tech can implement to Reduce Costs
(a) Just in Time raw material procurement system: Procure input materials and
components only when needed for production and handling. This would reduce
inventory holding costs. Less inventory on hand could also result in savings in
storage and material insurance costs. Before implementation, the company needs to
consider the risk of loss incurred on account of stock-outs. It needs to develop close
relationships with its suppliers to ensure streamlined delivery of inputs . At the same
time inputs should meet the required quality standards.
(b) Company’s trucks deliver the finished goods to retail outlets as per a fixed schedule
each week, irrespective of the load they carry. This indicates that there may be
possibilities of dis-economies of cost. If there is a pile up of inventory due to lesser
number of truck delivery runs, it could lead to high inventory holding cost.
Conversely, if delivery runs are scheduled even if the trucks are not loaded to full
capacity, dis-economies of delivery cost would creep in. Therefore, the production
and truck delivery schedule should be streamlined efficiently and economically .
(c) Audio Tech lays importance in the quality of the product to ensure customer
satisfaction. Lower the defects higher the customer satisfaction. It has extensive
testing and inspection processes in place. This preventive step should be assessed
to find out if it is effective in reducing the cost of poor quality – internal failure cost as
well as external failure costs. Internal failure costs (repair, scrap, rework) are
associated with defects found after the production but before delivery to the
customer. This can be avoided, if quality inspection is done throughout the
production work-flow rather than just at the end of production. External failure costs
(repairs and servicing, sale returns, warranty claims, complaints) are incurred when
the customer finds the product defective and returns it. External failure costs can
severely impact customer loyalty and should be minimized.
Therefore, Audio Tech should invest in preventive and appraisal costs to ensure good
quality in order to balance out the cost of poor quality. Preventive costs would include
quality planning and assurance, error proofing quality improvements, educati on and
training. Appraisal costs could be inspection, quality audits, supplier rating etc. Total
Quality Management (TQM) and Six Sigma could be effective tools to ensure efficient
good quality production that would minimize cost of poor quality.

CASE STUDY 12.15
(ii) Alternate Performance Measurement Mechanism considering all Stakeholders

Audio Tech uses Balanced Scorecard to measure performance. Balanced Scorecard
focuses on the financial, customer, business, and innovation perspectives. It is given that
the company is doing well on financial and customer satisfaction parameters. Market
capitalization has also increased over the years, the company is on a growth trajectory.
However, the company is facing issues in the form of high employee turnover and
dissatisfaction among truck drivers who deliver the goods.
An alternate performance measurement mechanism can be Performance Prism. This is a
second-generation performance management framework conceptualized by Andy Neely
and Chris Adams. The reasons why it would be an effective replacement for models like
Balanced Scorecard are:
(a) Balanced scorecard focuses on just two of the stakeholders – Investors and
Customers. Performance measurement of other stakeholders like employees,
suppliers, government etc. have not been considered. The other stakeholders play an
important role in the growth of the company’s business. Hence, performance
measures are needed to monitor both their contribution to the company as well as
their overall satisfaction with the company.
(b) Most of the performance measurement models do not focus on the changes that
need to be made to strategies and processes. Balanced Scorecard assumes that
once the strategies are implemented, measuring a relevant set of metrics of
performance will ensure that the rest of the business also functions properly.
However, this is not true. In the case of Audio Tech, both customers and
shareholders are happy with the company’s performance. Yet even in a growing
business, the drivers of growth, namely other stakeholders like employees and
suppliers are not satisfied. Neither is their contribution nor their satisfaction is
captured under the Balanced Scorecard performance measurement.
(c) A company has a “Quid Pro Quo” relationship with all its stakeholders. Stakeholders
contribute to the company’s business while they also derive benefits from it. For
example, employees perform their functions well, this is their contribution to Audio
Tech’s growth. In return, employees would want good working condition and pay to
remain motivated and loyal to the company.
Therefore, Performance Prism can be an alternate performance measurement mechanism
that considers metrics related to a broader set of stakeholders of an organization, not
limited to just customers and shareholders alone.
Five “Interrelated Facets” of the Performance Prism
Stakeholder Satisfaction
“Identify the organizations set of stakeholders and their needs”
Unlike a balanced scorecard, the performance prism focuses on all the stakeholders of a
company. Audio Tech has satisfied investors and customers, but dissatisfied employees
and truck operators. The company must likewise identify all its stakeholders and d etermine

the relative importance of each of the stakeholders. It can use Mendelow’s Matrix to
identify key shareholders in terms of power and interest of stakeholders. A stakeholder
group with higher power and high interest (say a trade union) must be kept satisfied.
The main stakeholders of a company are:
▪ Investors - They want return on investment.
▪ Customers - They want good quality products at reasonable prices.
▪ Suppliers - They want better price for procurements or service.
▪ Government - They want revenues and development.
▪ Society at large - They want employment opportunities.
After identification of the stakeholders, the company must identify the requirement of each
of the stakeholder group. What must the company do to ensure stakeholder satisfaction?
Audio Tech has to ensure that it improves employee satisfaction in order to reduce its
employee turnover. It should also address the issues faced by truck drivers and involve
them in a dialogue. If they are not satisfied, the company might suffer financi ally in the
longer run.
Performance Measure: Employee turnover ratio, average employment duration of
employees, number of strikes by truck drivers etc.
Stakeholder Contribution
“What the organization expect the stakeholders to contribute and deliver?”
In this facet, the company has to identify the contribution required from each stakeholder
group and must define ways to measure contribution of stakeholders. In turn the company
will have something to offer the stakeholders. This is the “Quid Pro Quo” relationship. For
example, Audio Tech provides quality products to its customers. The customers in turn
contribute towards the profits of the company, they pay a price for the value Audio Tech
offers.
Audio Tech should provide for better working conditions to its employees. Motivated
employees will perform better and remain loyal to the company. They would drive the
growth of the company. Similarly, dialogue with truck drivers would be needed to provide
better pay, retirement benefits and good working conditions. Truck drivers in turn need to
ensure timely and safe delivery of goods to retail outlets.
Performance Measure: Efficiency of employees, productivity, on time delivery by truck drivers.
Strategies
“What strategies should an organization adopt that derives stakeholder contribution while
reciprocating by ensuring their satisfaction?”
The organization should identify strategies that ensure that:
▪ The wants and needs of the stakeholders are satisfied.
▪ Stakeholders contribute to the organization’s objectives.

CASE STUDY 12.17
Performance measures must be put in place to confirm that the strategies are working.
Effective implementation depends on appropriate communication of strategies,
implementation by managers and continuous evaluation of appropriateness of strategies.
Audio Tech has to roll out strategies to retain employees by means of better pay, working
conditions and growth opportunities within the company. The strategy will be effective
when the employee turnover is reduced following these initiatives. Similarly, the issues
faced by truck drivers need to be addressed by taking appropriate strategic decisions. The
absence of strikes will indicate that these decisions have been effective.
Performance Measures: Employee turnover after implementation of new strategy,
efficiency of deliveries after issues with truck drivers have been resolved.
Processes
“What are the necessary processes to satisfy the above strategies?”
Processes ensure successful implementation of strategies. Each process could have sub-
process. Process owners have to be identified to assign responsibility of functioning of the
process.
Processes require continuous evaluation. Instead of evaluating all at once, the company
has to identify important processes that are critical to the business. Porter’s Value Chain
Analysis can be used to identify and evaluate various processes in the organization.
Audio Tech should have well defined processes to hire appropriately skilled personnel for
the job, transparent pay structure etc. This process may be owned by the Human
Resource Manager. The working condition of truck drivers can be improved by providing
sufficient training and better working conditions.
Performance Measures: Number of personnel hired at various skill levels, ave rage payout
for each of these skilled groups, hours of employee training, maintenance log of trucks etc.
Capabilities
“What resources should an organization need to effectively operate these processes?”
The company must have the right capabilities in order to support the process. Capabilities
could include resources, technology, and infrastructure for a particular process to work.
Audio Tech may decide to increase pay/salaries, however it should have sufficient
financial resources to make these payments.
Performance Measures: Amount spent of new recruitments and training etc.
Conclusion
“Manage these interlinked facets to cater to all stakeholders”
While meeting targets as defined by performance measures should be emphasized, the
performance measurement system should be dynamic and flexible to allow the
stakeholders to voice their opinions and expectations as well. Taking their requirements
into consideration, along with managing capabilities and processes, Audio Tech can
implement effective strategies that will cater to the needs of all stakeholders.

CS-4: PORTER’S FIVE FORCES & DIVISIONAL TRANSFER PRICING
In the ‘Five Forces Model’, one of the crux is that companies or divisions compete with their
buyers and suppliers. The same model can be used to evaluate the competitive environment of
the divisions of large, complex companies. In such companies, some of the divisions may be
buyer and supplier to one another. This leads to management accountants becoming involved in
negotiations leading to the agreement of suitable transfer prices between these divisions.
Required
(i) EXPLAIN, how the forces applied in a relationship between supplier and buyer led
Michael Porter to reach a conclusion that companies compete with their buyers and
suppliers.
(ii) DISCUSS, the issues of negotiating and agreeing transfer prices between divisions
within a large, complex organization. Make references to Michael Porter’s model, and
your arguments in part (i) where appropriate.
Solution
(i) Michael Porter concluded that companies or divisions compete with their buyers and sup -
pliers because they exercise bargaining power over one another. The relative competitive
advantage is determined by the degree of bargaining power of each of the parties. Porter
viewed competition as activity that affects margins where buyers and suppliers struggle to
steal margin from each other.
The competitive forces between buyer and supplier affect price and quality. A large order
or powerful buyer will exercise force by trying to encourage the supplier to improve
quality, either of the product or service being provided, or of the services supporting the
product. As another option, a powerful buyer might be willing to accept the standard
product, but demands a discount, thus increasing its own margin at the expense of the
supplier.
Relative size of the parties also determines the bargaining power, or it also depend on
the degree of reliance on one another. A large buyer or supplier, for whom the other party
is a small or unimportant portion of business, is more likely to exercise power to get a
"good deal". It is clear that a buyer placing a small order is in a worse position to ask for a
discount than one placing a very large order. In the same way, if a buyer represents a
major portion of turnover, a supplier will work hard to keep such a buyer happy, thus may
increase the service package to support the product by incurring costs.
A buyer or supplier also has greater bargaining power if switching costs in doing
business elsewhere is incurred by other party. This cost would, if incurred, reduce margins.
This will lead to the party being less likely to break up the relationship with other party.

CASE STUDY 12.19
Some elements of the bargaining power are also determined by the availability of
alternative suppliers or buyers. A large supplier will give no concessions to a very small
buyer if it is confident that another buyer will be available to replace it. Similarly, a buyer
looking for a very special material or service may find that it has no alternative than to
accept the terms offered by a single supplier.
Thus, companies and divisions “compete" with their buyers and suppliers. However, this
depends on how broad the definition of “competition” is. Michael Porter started from the
premise of a very broad definition, consequently could prove his hypothesis.
(ii) In a large and complex company, divisions may have been developed or acquired along a
supply chain. This means that, within the company, there are divisions that are buyers and
suppliers for each other. The logic behind establishing this structure is that it reduces
transaction costs, cuts out supplier margins and secures reliable supply of raw materials or
components. In this situation, the company faces the risk of sacrificing any saving in
transaction costs if management needed to invest considerable time in transfer pricing
negotiation.
In effect, the divisions concerned will be competing with one another like buyer and
supplier during the negotiation, in the same way as described in Part (i). The transfer price
agreed will affect, to some extent, the profitability of each of the divisions. If bonuses are
paid to managers as per divisional performance, the transfer price will determine the level
of bonus paid. Thus, managers may have a personal interest in enduring negotiations that
will destroy value in the company.
The parent company must determine whether the transfer price is in the best interests of
the company. If it is, it should simply be imposed. This finish off competition but may
discourage managers, especially when divisional bonuses are paid. In most companies,
some level of negotiation is allowed, but this may be not realistic if transfer is necessary. In
this case, the bargaining power of the supplier division is vastly increased, thus destroy the
balance of the negotiation.
The opposite is the case if the supplier division is not allowed to make external sales, or if
there is no external market (for example, for a special component). In this situ ation, the
bargaining power clearly lies with the buyer division, as the supplier has no choice but to
make the transfer. However, if the special component or supply is not available from
elsewhere, the bargaining power may shift to the supplier division as its product is of
different nature.
The outcome of any transfer price negotiation must be ended in a transfer at a fair price. In
this case, fair means that the price must be comprehended as fair by the division con -
cerned. Any other outcome may lead to loss of motivation in one or both of the divisions. A
fair price can be easily determined if there is a free market of the product, component or
service being transferred (in other words, it can be both sold and bought outside). If this
case does not exist, the range of transfer prices may fall between marginal cost of a unit
and full cost plus normal margin.

In corporate terms, the most important transfer pricing issue is that while consolidating the
accounts, the transfer price cease to exist. While consolidating the supplier and buyer
division accounts, the revenue from the transfer price cancels out the cost of purchase, so
the net result is that the transfer disappears. In entire development, most of time and
efforts are wasted and simply rise in internal transaction costs. Accordingly, any
competition between the divisions is worthless. If the management accountants
comprehend this, and the relative bargaining power of the divisions concerned, it is
possible to determine negotiations quickly, thus distorting as little value as possible.
CS-5: SUPPLY CHAIN MANAGEMENT
Sun Electronics manufactures and sells various electronic goods like mobile phones, laptops,
televisions, refrigerator etc. The company sells these goods through the 30 stores situated in
different parts of the country. The store managers place a request to the centralis ed team
situated in Mumbai on a monthly basis. One store can send only one requisition per month.
The requirements of the stores are forwarded to the production planning team which is
responsible for scheduling the manufacturing of these products. Once th e goods are
manufactured, the goods are sent to a central warehouse in Mumbai and are dispatched to
different stores according to the store requirements. The time taken from placing a request from
store to the delivery of product to the store takes about 30-40 days on an average. In the
process the company procures parts from more than 100 vendors. The company has faced
quality related issues with many vendors leading to delay in production.
The average holding period of inventory in Sun Electronics is very high at 45 days as against an
industry average of 15 days. Since the order to delivery time at a store is very high, the
company has traditionally allowed high inventory holding to reduce the stock outs at store level.
The company is under severe pressure to improve its working capital cycle.
A high amount of inventory held at each store also means that the products become obsolete
quickly. In case of products like mobile phones, new and upgraded versions are available in the
market as early as six months from the date of initial launch of a particular model. A significant
portion of inventory of mobile phones becomes obsolete every year. The company generally
resorts to a discounted sale to liquidate such obsolete models.
The management at Sun Electronics has identified e-commerce as an opportunity for faster
growth, both in terms of revenues and profitability. The company is considering launch of its
own e-commerce website to sell all products which are currently being sold in physical stores.
Depending upon the success of online sales, the company might choose to optimize and close
certain physical stores in the next couple of years.
The management of the company is cognizant of the fact that existing inventory procurement
and management system will not fit in the new e-commerce business. E-commerce works on a
inventory light model and quick as well as on time delivery of products of the customers. The
fact that customers could be from a location other than those where Sun Electronics has
physical presence makes the matter complex.

CASE STUDY 12.21
Required
The company is considering implementation of a supply chain management system. Will a

supply chain management system be of use to Sun Electronics in light of the e -commerce
venture? You are required to EXPLAIN the concept of Supply Chain Management and
EVALUATE the applicability of in the current case.
Solution
Issue
Sun electronics manufactures and sells various electronic products through its physical stores.
The existing manufacturing system does not take into consider the demand of products in the
market. Store managers are allowed to submit only one order per month. A high level of
inventory can be seen at Sun Electronics as compared to the industry average. The store
managers tend to keep high level of inventories as a safeguard against stock -outs. Whereas,
keeping inventory to meet customer requirement is good, high level of inventories due to
inefficient processes is not advisable.
The company also has a longer working cycle because of a long order to deliver time and
excess holding of inventory. A significant amount of working capital is blocked due to this
practice. Technology changes rapidly and the company is expected to roll out latest products in
the market. A product like mobile gets outdated very soon and the company has to resort to
discounted sales. This results in financial losses to the company.
The company has identified an opportunity in e-commerce. E-commerce businesses require
leaner models and faster response time. The production must be based on the demand from the
customer and not on an ad-hoc basis. In the following paragraphs, the importance of supply
chain management (SCM) and its applicability in the current case is discussed.
Supply Chain Management (SCM)
Supply Chain Management can be defined as the management of flow of products, services and
information, which begins from the origin of products and ends at the product’s consumption at
consumer’s end. SCM also involves movement and storage of raw material, work -in-progress
and finished goods. In other words, supply chain management involves management of all
activities associated with moving goods from the raw materials stage to the end user. An
important objective of SCM is to correlate the production and distribution of goods and services
with demand of the product.
The following are the various activities which an organisation carries out to meet the customer
requirements (Primary activities under value chain model) -
▪ Inbound Logistics covering procurement and related activities.
▪ Operations covering conversion of raw materials into finished products
▪ Outbound Logistics covering movement of products from plants to end users
▪ Marketing and Sales
▪ Service

Supply Chain Management looks each of the above activities as integrated and interrelated to
each other. None of the activities can be looked in silos. In the case of Sun El ectronics, there is
a restriction on number of orders which a store manager can place. This would lead to excess
ordering because of the fear of stock-outs.
The customer demand is completely ignored and hence the production is not in sync with the
market demand. This could lead to excess production, higher inventory holding and longer
working capital cycles.
The facts presented in the case indicate the following problems at Sun Electronics:
▪ Production planning is not based on customer demand & is done on a n ad-hoc basis.
▪ Inventory Holding period is very high (45 days against an industry average of 15 days).
▪ The working capital cycle is longer.
▪ The time take to fulfil an order from the store is very high.
▪ The production is dispatched to a central warehouse for further deliveries to the stores.
This could be an inefficient process.
▪ Liquidation of products at discount for products with low shelf life.
SCM Process and applicability to Sun Electronics
The SCM process is explained below:
▪ Plan - The first step in SCM process is to develop a plan to address the requirements of
the customer. Sun Electronics must shift its focus from ad hoc and predetermined
production planning to understanding the requirements of customers. Production must be
planned based on the demand of products. The focus must be on producing what the
customer wants.
▪ Develop (procure) - In this step, the materials required for production is sourced from
various suppliers. A good relationship with supplier is required to ensure that the
parts/materials are received as and when required by the production team. It is also
important that the vendors supply quality material which is not the case in Sun Electronics.
The company must select suppliers which are dependable and can deliver quality products
in the stipulated time. The company must focus in reducing the lead time required for
sourcing materials which will reduce the inventory holding period.
▪ Make - The third step is making or manufacturing the products required by the custom er.
This is quite different from the existing practice in Sun Electronics where store managers
are allowed to place only one order. This would mean that the company is not considering
the ever changing demands and tastes of the customers.
▪ Deliver - The fourth stage is to deliver the products manufactured for the customers. This
stage is concerned with logistics. The time required to deliver to the store in case of Sun
Electronics is very high. The company must evaluate if the centralised warehouse is
causing delay in delivery of products to the stores.
Logistics is one of the important component of the entire supply chain process. Right from
procurement of material, movement of raw material in the plants and final delivery of

CASE STUDY 12.23
products of customers, logistics play a critical role. An excellent system must be in place to
ensure that the movement of materials and final product are uninterrupted.
Warehousing also plays an important role in today’s business environment. The company
has a centralised warehouse to meet the needs of all its stores. This would not be the most
efficient way. The company must evaluate creation of additional storage facility which would
ensure timely delivery of goods to the stores. Newer products can reach the market faster.
Benefits of SCM to Sun Electronics
SCM looks at the entire value chain process as an integrated process. There is a seamless flow
of information and products between suppliers and customers. The customer’s requirements
would be captured to plan the production. The suppliers would be intimated to supply the
materials according the production plan. An effective logistics system ensures that movement of
materials is seamless. Sun Electronics can also consider implementing an integrated ERP which
would also interact with vendors on real time basis.
The following benefits of SCM can be envisaged for Sun Electronics -
▪ Better Customer Service as customer is supplied with what he/she wants in the minimum time.
▪ Better delivery mechanism for goods.
▪ Improves productivity across various functions and departments.
▪ Minimises cost (both direct and indirect).
▪ Reduces the inventory holding time and improves the working capital cycle.
▪ Enhances inventory management and assists in implementation of JIT systems.
▪ Assists companies in minimising wastes and reduce costs.
▪ Improves supplier relationship.
E-Commerce and SCM
The SCM is the backbone of E-commerce industry. Customers buying products online want
deliveries to be faster. Another distinct feature of e-commerce is that buyers could be located in
any corner of the country and not just restricted to the cities where S un Electronics has physical
presence. This definitely means that the company must have an effective Supply Chain
Management in place which could meet the customer’s requirement.
The existing practice of one order per month from each store would not work i n the e-commerce
space. Orders can come at any time and from anywhere. Supply Chain Management would be
required for success of e-commerce business.
Customer Orders
The company must have an effective mechanism to capture customer orders and feed it into t he
production planning on a real time basis. An integrated ERP system would be required for this
purpose. Any delay in intimating the production team would mean delay in production and
delivery which would not be taken positively by the customers. The exis ting system of one order
per month from a store would not fit the purpose. A real time flow of information would mean
lower inventory holding.

Procurement
The material requirements must be communicated to suppliers seamlessly. The company must
identify those vendors who can deliver quality materials in the required time frame. A delay in
supplies would delay the production process. A company cannot afford this in e-commerce
business. Automatic exchange of information using EDI (Electronic Data Interchange) or
Integrated ERP systems would ensure that the vendors receive material requirements in a
timely manner.
Production
As discussed earlier, the production must be in accordance with the customer order. This
requires a shift in approach of the production team. Business environments have shifted from
“Customer will buy what we produce” to “We have to produce what the customers require”. The
company would ideally not produce products to store them and sell later.
Logistics
Logistics would be the backbone of entire e-commerce set up. Right from sourcing of materials
to delivery of products at the customer’s door step, logistics would play an important role. If the
company has an in-house logistics facility, the logistics team must be trained with the
requirement of the new business. If the company has outsourced the logistics, vendors must be
briefed about the requirements of the e-commerce. The company might have to tie up with new
logistic vendors to avoid any delay in deliveries.
CS-6: SUPPLY CHAIN MANAGEMENT
Memorable Travels is a tour operator offering holiday packages

to a variety of customers. They advertise and promote their
packages using print advertising in newspapers and colourful
brochures. A basic holiday package would include transport from
the city to the destination, stay, food, attractions, or activities.
Memorable Travels has been in business for the past 15 years. It
has standard agreements with its suppliers based on which it has
been offering standard holiday packages to its customers. Profitable business over these years
has resulted in surplus cash that the company intends to reinvest in its business. Recently, the
management has noticed increase in the number of complaints regarding these packages. This
has resulted in lesser number of customers opting for these tours.
A study of these complaints has indicated that customer expectations from a holiday trip vary
depending on their age group. Accordingly, Memorable Travels wants to offer customized
holiday package trips that would suit the travellers’ expectations. It wants to increase the
number of packages offered to customers in addition to adding variety to them. This would
provide customers the choices from which they can customize their holidays with the help of
Memorable Travels.
The management wants to understand the need and importance of supplier chain management
in a service organization such as itself.

CASE STUDY 12.25
Required
(i) DEFINE the objective of Memorable Travels should have when considers incorporating
the supply chain management framework into its business model.
(ii) IDENTIFY possible components of Memorable Travels’ upstream supply chain.
(iii) SUGGEST the key processes in the business model of Memorable Travels.
Solution
(i) Memorable Travels is providing a service wherein it uses its assets, staff, and resources to
provide customized travel packages to its customers. It should consider how to utilize its
assets and staff to design and manage its supply chain such that it meet s the customers’
demand in a cost-effective manner. Customers’ demand is uncertain due to (a)
customization of holiday packages to suit their individual expectations and (b) sensitivity of
travel to factors like economic prosperity, law, and order etc.
Business processes must be effectively coordinated across organizations and functions to
meet the customers’ expectation in the best possible manner. The ability of Memorable
Travels to respond to its customers’ demand defines its operational capacity. Havin g more
capacity (capability) to meet customers’ demand helps it be more responsive and flexible.
However, this has to be balanced with its ability to maintain an effective supply chain
management. A supply chain is effective only when Memorable Travels and consequently
the ultimate customer, is able to get the required level of service from its suppliers.
(ii) As mentioned in the problem, a basic holiday package would include transport from the
city to the destination, stay, food, attractions, or activities. Ac cordingly, possible
components of Memorable Travels upstream supply chain would include partnerships
with:
(a) Transport providers – road, rail, and air travel providers. This includes travel to the
holiday destination as well as the local transport within that location.
(b) Lodging and accommodation providers – hotels, bed, and breakfast providers etc.
(c) Local food producers and restaurants.
(d) Providers of tourist attractions and activities.
(iii) Key processes in the business model of Memorable Travels would be:
Information Flow
Information flow is critical at various stages:
- to understand expectations of customers
- to share this information with the suppliers of service with whom Memorable Travels
has partnership
- to establish clear service level agreements with these suppliers and to clearly define
the scope of work

- to be able to monitor the performance of these suppliers. Performance has to be

monitored because it will impact payment settlements with these suppliers
- to collect constructive feedback from customers about the performance of these
suppliers
Capacity and Skills Management
Memorable Travels has to develop the ability to cater to various expectations of its
customers. It has to develop assets and skilled staff who can attract customers and help
them customize their holiday packages. To enable this, the company has to invest in its
organization, processes, assets and staff. As mentioned above in point (a), information
flow is a key process in this business model. The company has to invest in its processes to
ensure that information flow is smooth and accurate. Similarly, it has to invest in assets
like IT infrastructure, offices and also develop a skilled staff who can provide quality
service. Memorable Travels should also have the ability to develop pool of suppliers who
provide good quality service. Better capacity to cater to customers’ demand better will
ensure that Memorable Travel can develop and maintain its business efficiently. However,
since building capacity and developing skills comes with a cost, that has to be balanced
out with the revenue it generates.
Demand Management
Memorable Travels will have to focus on how to generate demand for its products. In tune
with changing times, Memorable Travels will have to change its marketing from print based
advertising to online advertising in order to have a larger outreach to attract customers.
The company should be able to manage variation in customers’ expectations in a cost-
effective way. As explained in point (b) above, this will be determined by the capacity of its
operations and skills of its employees. Higher the capacity more the flexibility in its
operations.
Customer Relationship Management
Customer segmentation and monitoring help in understanding customer’s needs in a better
way and to focus on efforts to meet those needs through proper and timely communication
of information with its service suppliers. However, the cost of maintaining this framework
should not exceed the revenue that each customer segment generates. Accordingly,
customer account profitability analysis should be prepared for each customer segment.
Supplier Relationship Management
As part of the customer relationship management, specific needs of customers would be
identified. Based on these needs, potential suppliers who provide services of the requisite
quality need to be identified. Service level agreements need to be drawn up after
comprehensive rounds of negotiations. It is imperative to have a clear understanding with
these suppliers regarding the quality service expected.

CASE STUDY 12.27
Service Delivery Management

Agreements with suppliers will help to ensure that expectations of customers of Memorable
Travels are being met. Service performance must be monitored, checked continuously for
compliance. Any deviation from scope may have an impact on the payment settlement to
be made with the supplier.
Cash Flow
As mentioned above, service delivery should be monitored to ensure that payment is made
only to the extent the agreed quality of service is delivered. Periodic payments to suppliers
should be made based on service level agreements. Similarly, cash inflow from custom ers
should be monitored to avoid any bad debts. Pricing for packages should be based on the
level of service offered. Again, clear understanding of the terms of contract is essential to
avoid uncertainties.
All processes within the company are linked to each other. Understanding the customers’
expectations have a direct impact on the supply chain. Therefore, proper co -ordination is
required for smooth functioning of the organization and its supply chain.
CS-7: OUTSOURCING
Staywell Hotels was established 10 years ago as a budget hotel in the

vicinity of Mumbai airport. It provides accommodation for cost-conscious
travellers visiting the city for short stay lasting a day or two. Typically, a
room would provide comfortable beds, high speed internet connection,
air conditioning facility, coffee machine, fridge and free television
service. Food service based on a limited menu is provided on the
premises. It has few conference rooms that provide space for guests to
hold business meetings. This saves their precious time otherwise wasted in travelling on
congested city roads. The hotel provides free shuttle service to and from the airport at specific
times during the entire day. Hotel’s proximity to the airport, the free shuttle service and
convenience of conducting work at the conference rooms have been marketed to attract guests
to stay here. The guests also comprise of people who are in transit between airports. Also, when
there are long-duration delays in flight operations due to which passengers need to be provided
overnight accommodation, few airline operators host their guests here. Like all other guests,
these airline operators are also interested in Staywell for its location and low-cost room rental.
Over the past decade, management of Staywell has ploughed in profits from this establishment to
acquire similar properties in other major cities. They function based on business model similar to
the original establishment in Mumbai. All of them are now functioning as well-established budget
hotels near city airports for cost-conscious business travellers. In all, Staywell hotels have 18
properties spread over 15 cities. To keep its costs of operations within control, Staywell hotels
has outsourced its cleaning and food service to specialized vendors. Cleaning service includes
cleaning of kitchen crockery, bedding, laundry and housekeeping of premises. The entire set of
activities related to preparation of food has been outsourced. Vendor service has been
satisfactory, barring few instances where guests have complained of unhygienic rooms or non-

palatable food service. However, due to high guest volume and quick turnover of guests due to
short stay periods, this has never been a hindrance to business.
This business model has been profitable since its establishment. Staywell Hotels has a sizeable
market share in this segment. Competition has increased in the recent past. Price wars have put
pressure on profit margins in this segment. The management plans to continue to operate in this
segment to maintain its market presence. At the same time, to sustain business in the long
term, the management of Staywell Hotels now wants to foray into developing properties for luxury
resorts. Target guest segment are vacationing tourists interested in enjoying a lai d-back time in
scenic places. These guests would not mind paying premium for availing good quality service.
Required
(i) IDENTIFY and EXPLAIN the various primary activities of Staywell in its value chain.
(ii) IDENTIFY and EXPLAIN the stage of product life-cycle.
(iii) EVALUATE the risks of outsourcing cleaning and food services for the luxury resort
properties.
Solution
(i) The five Primary Activities of Michael Porter’s Value Chain Model
Inbound Logistics
Activities related to receiving, handling of materials from the supplier and their storage until
further use later in operations. In the case of Staywell Hotels, materials would include food
service received from the vendor. This needs to be stored and maintained properly until
the item is ordered by the guest. Similarly, the vendor delivering freshly laundered
crockery, bedding and laundry would be materials that need to be stored until their use to
serve the guests. These are inbound logistics for the hotel.
Operations
Activities related to converting inputs into production of output or service. In the case of
Staywell Hotels, operations would include maintenance of hotel premises including guest
rooms, conference rooms and common area. Activities related to ensuring cle anliness and
safety of rooms, working order of facilities offered like TV and internet service, coffee
machines, shuttle service are part of hotels operations.
Outbound Logistics
Storage and movement of the end product from the production line to the customer. In the case
of Staywell Hotels, it includes activities such as maintaining “non-smoking” rooms as such, so
that when the customer finally uses it comes across as a “non-smoking” room. Likewise, the
food should be prepared in a professional manner, stored in such a way that it ensures
customer satisfaction and safety. Therefore, the review of food items to remove the ones past
expiry would be part of Outbound Logistics. Therefore, any activity relating to making sure that
the guests get what they have ordered for, would be part of outbound logistics.

CASE STUDY 12.29
Marketing and Sales

The activities related to communicating, selling, and delivering the product or service to the
customer. In the case of Staywell Hotels, advertising its properties to the cost and time
conscious traveller would be a marketing activity. Free shuttle service is a promotional
activity to attract guests. Any agreement with airline companies to accommodate guests
would also form part of this activity.
Service
All types of service such as after sale service, handling customer complaints, customer
support, training etc. In the case of Staywell, service is one of the most important activities
in their value chain model. Good service ensures happy guests. Therefore, all activities
from front-desk, room service, catering, repair services, shuttle service would be included
here. All employees have to trained to handle needs of the guests in an effective and
efficient manner.
(ii) Product Life-cycle Stage of Staywell Hotels
“Budget Accommodation” to the cost and time conscious traveller is the current product
offering of Staywell Hotels. Starting out with a single establishment, Staywell Hotels
ploughed in profits to expand its business offering to other cities as well. The product has
been well established in the past decade. Competition is intense indicating similar offering
by rivals. Price wars have put pressure on profit margins. Staywell Ho tels plans to continue
in this segment due to its sizeable market share. This information indicates that Staywell
Hotels is in the maturity stage of its product lifecycle. It has a well-established product,
with a sizeable market share at the same time it is now facing competition. Business has
hit a plateau. Hence, Staywell Hotels needs to improve its product offering to beat
competition. The management's plans to foray into luxury resort business is an indication
of its future plans to sustain business.
(iii) Risks of Outsourcing Cleaning and Food Service under the Luxury Resort Model
Staywell Hotels is a budget accommodation provider to the cost and time conscious traveller.
Primary feature of this model is "value for money". To remain profitable the cleaning and food
service has been outsourced, which enables Staywell Hotels to keep the costs of operation
low. There have been instances of dis-satisfaction among guests as regards quality of
cleaning and food service. However, since the turnover of guests is quick due to high volume
and short stay period, it has not negatively impacted business.
In the luxury resort business, the target guests are travellers on leisure. The primary feature
of this model would be "good quality of service". Maintaining cleanliness of premises and
food service are critical activities in the operation of luxury hotels. Therefore, customer
satisfaction on these metrics is paramount to sustain and grow business. With the ability to
post reviews online on booking portals, any negative review (whether justified or not) can
reach very easily to a large number of potential guests. This can negatively impact future
business. Hence, Staywell Hotels has to ensure that the quality of service that it provides in
terms of cleanliness and food should meet and beat the guest’s expectation.

Outsourcing these services to well established vendors is advantageous since the focus
can remain on improving guest experience. It may also be cost advantageous in many
cases. However, there are a number of risks in this model. Detailed service level
agreements need to be drawn up to ensure that the required quality of service is being
provided. Staywell Hotels should be able to monitor the performance of these vendors. In
cases of non-delivery of the required level of service, the agreement should provide for
means of redressal. This could vary from compensation for any loss in business to
immediate termination of service. Staywell Hotels should ensure that it can easily and
economically switch service providers if required. For this it has to identify alternate
vendors who can provide the same level of service as the current ones. The other risk in
outsourcing could be of instances where well performing vendors could go bankrupt and
shut shop. In such cases, Staywell Hotel’s operations could be immediately impacted since
such services can no longer be availed from these vendors. Again, list of alternate service
providers is a necessary back-up that the hotel should have.
Alternatively, since these are very critical activities to business operations, Staywell Hotels
may choose to have complete control over them. This can be achieved by having in-house
departments that cater to cleanliness and food service. Control over factors such as input
material used, the performance of service, equipment used, training of staff and other
essential activities can ensure that the required service quality can be achieved. Better
service enhances guest experience. Compared to outsourcing, this might be a costlier
option. However, since the guests are ready to pay a premium for service quality, within
reasonable limits cost need not be a primary concern for Staywell Hotels for this business
model.
CS-8: KAIZEN COSTING
Zen Limited is a leading mobile manufacturing company and sells its mobile phone across the
world. In a fast-changing technological environment, Zen has been able to maintain its leadership
in smartphones segment for third year in a row now. Though the revenues have grown year on
year, the costs have increased at a higher rate in the mobile phone industry as a whole.
“We have been leaders in revenue. We must lead in cost reduction front as well. I believe we
can achieve this with improvements overtime, however minor they might be!”
– This is what the CEO of Zen has told its directors in a recently concluded board meeting.
The net profit margins of the company has fallen from 10% in 2019 to 8% in 2020 owing to rise
in raw material & repair cost. Another significant rise in the cost was on account of repairs of
mobiles which are under warranty. There was an increase in these repair costs by `1.5 crores
which represents 1% of the total turnover of the company.
The process of repairs/ replacement of under warranty product is outlined below:

CASE STUDY 12.31
▪ The company own 200 repair centres in various cities in India.

▪ A customer whose phone is under warranty and requires replacement/ repair visits any of
the 200 centres to deposit the faulty mobile phone.
▪ The technician at service centres examines the phone and the service centre sends the
phone to a centralised repair centre at Mumbai. The phones are sent to Mumbai even for
minor repairs which can be done locally if requisite infrastructure is provided to the service
centres.
▪ The phones are sent in batches. Each service centre creates 3-4 batches of mobile
phones in a day. (A recent study showed that the batches could be combined into a single
batch per day)
▪ The phones are repaired in Mumbai’s centralised centres and sent back to the respective
service centres for handing them back to the customer. The phones which are repaired are
sent in separate batches and those which are replaced are sent in separate batches.
Required
You are working as a Finance Manager in Zen. The finance director has approached you to
understand whether the minor improvement would be useful given the size of the company.
The Finance Director has asked you to examine the process of warranty repairs and
replacement and submit a report covering the following aspects:
(i) What is the CEO referring to when he says “minor improvements”? EXPLAIN.
(ii) LIST the benefits of such minor improvements.
(iii) APPLY the above process to the warranty claim process and explain how the process
can be improved.
(iv) Any other matter which you consider relevant.
Solution
Issue
Zen limited is a leader in manufacturing of mobiles and is concerned about increasing costs.
The increase in warranty related costs has been significant in the current year as compared to
previous year. This has reduced the net profit of the company by 1% of sales.
Applicability of Kaizen Costing
“Kaizen” is a Japanese word which means “Change for Better”. In business parlance, Kaizen is
used to refer to small and continuous improvement across all functions, processes and
employees. Kaizen costing is a cost reduction system. Yashihuro Moden defines Kaizen Costing
as "the maintenance of present cost levels for products currently being manufactured via
systematic efforts to achieve the desired cost level.
Toyota Production System is considered as a pioneer in Kaizen Costing. Though the model was
used for eliminating wastage from production at factory initially, the concept can be applied in
any of the processes in a business. Since Kaizen is a continuous improvement process, a
radical change or disruptive innovation is not expected in Kaizen costing.

The following are the key features of Kaizen -

− Kaizen processes focus on eliminating waste in the systems and processes of an
organisation, improving productivity and achieving sustained continual improvement.
− Application of small, incremental changes routinely applied and sustained over a long period
can lead to significant improvements.
− It aims to involve workers from multiple functions and levels in the organisation.
− A value chain analysis helps to quickly identify opportunities to eliminate wastage
− Although incremental changes can often be too small to be seen, Kaizen can be very
effective in the long run. For example, an airline which identified that 75% of its flyers would
leave the olive from salad, the airline decided to remove it from its servings. This saved the
airline costs by $ 40,000 per year. Another example is where an airline stopped printing its
logo in the rubbish bags as it did not add value saved over $ 300,000 per year.
The CEO is referring to Kaizen costing when he mentions minor improvements to save costs
over time. Kaizen costing takes into consideration various costs such as costs of supply chain,
manufacturing costs, marketing, sales, distribution costs etc.
Benefits of Kaizen Costing
− Kaizen reduces waste in areas such as employees waiting time, transportation, excess
inventory etc., which leads to improved efficiency in overall business processes and
systems.
− A company applying Kaizen philosophy can achieve cost reduction through smal l
incremental improvements and cost savings.
− Kaizen looks at functions and processes at all levels of organisation and requires
participation of all employees and massive as well as open communication system. This
participative approach improves teamwork across the organisation.
− Product improvement using Kaizen is likely to result in less number of defective products
leading to customer satisfaction and reduction in warranty related costs.
− The reduction in wastage, improved efficiency and cost reduction improves the overall
profitability of the company.
Implementation of Kaizen in the Current Case
The implementation of Kaizen as a cost reduction techniques can take several forms. The key
question to ask for implementation is - “Can we eliminate waste?”. The waste can take several
forms like -
− Unnecessary movement of material and men - Travelling for meeting in cases where a video
conferencing could help.
− Unwanted part in a product which if removed is not likely to impact the performance of the
product. (Nano sim card has reduced a significant portion of use fibre boards as compared
to the traditional sim cards.)
− Defects which involve extra cost in terms of reworks.
− Waiting time - A simple example could be locating for files in your computer which has not
be arranged properly. This leads to waste of time.

CASE STUDY 12.33
The above is just an indicative list where improvements can be made. However, an important
point to note is that reduction of waste should not be done by compromising the quality of
product. Apple launched iPhone 5c as a budget phone by using plastic material instead of
Aluminium. The market did not like the product as it was considered to be an inferior product as
compared to iPhone 5s.
Another way of looking at Kaizen is asking following questions -
− Can we eliminate functions from the production process without compromising the quality
and utility of end products? - Removing unnecessary movements of material and men.
− Can we eliminate some durability? - Use of unbreakable plastic for producing disposable
glasses would be waste of resources
− Can we minimise design? - e.g. use of Nano Sims.
− Can we substitute parts of the product being manufactured?
− Can we take supplier’s assistance to get better quality parts?
− Is there a better way? - This is a question which must be asked continuously to ensure that
the improvement is not a one-time exercise.
(The above questions also form a part of the Value Engineering Process)
Application of Kaizen at Zen Limited
The current warranty claim process at Zen involves movement of mobile phones from various
service centres across the country to a centralised centre in Mumbai. The possible
improvements in the claim process is explained below -
− The company needs to analyse whether it requires to own 200 centres by itself across the
country. The company can evaluate closing down centres with less customer footfalls or
outsource the ones which are not located at the strategic location. This would save some
cost to the company.
− The current process requires each service centre to send the faulty mobile phones back to
Mumbai for repair or replacement. This is done even in case of minor repairs which can be
handled locally. The company can provide necessary infrastructure to the service centres to
carry out minor repairs locally. This would save logistics cost of sending the phones to
Mumbai and back to service centre. The company should analyse the past data to
understand the proportion of phones which require minor repair. Repairin g the phones
locally would also reduce the turnaround time and the customer will get back the phone
faster.
− The current process is to send phones in 3-4 batches in a day. This effectively means
creating 3-4 consignments, documents for dispatches and incurring extra costs for
transportation. Combining the phones in a single batch would reduce the cost of
transportation and administrative cost as well.
− The phones can be sent back from Mumbai in single batch instead of creating multiple
batches to save transportation costs.
The above improvements must be revisited continuously to derive required benefit from Kaizen
process.

Apart from eliminating waste in the warranty claim process, the company must also identify root
causes of increase in warranty claims in the current year as compared to previous year. Every
phone being sent back for repair/replacement involves avoidable cost. The company must also
revisit the manufacturing process and quality control processes to eliminate wastage in
production process and improve quality.
− Zen can consider producing better quality mobiles at the manufacturing process to reduce
the warranty claims.
− The pattern of warranty claim must be analysed to understand whether there is certain
common problem related to repair claims. If the issue has some relation with parts used in
mobile, the issue can be taken up with supplier of such parts.
CS-9: 5S
Gold-Star Limited deals in manufacturing of

traditional cycles. Recently apart from
manufacturing old style cycles, GSL starts
assembly of electronic cycles.
Since GSL didn’t expand the factory area, post
starting assembly of electronic cycles; hence
production floor largely remains over-occupied
with all sort of material, jigs, and tools; some of
them are frequently useful, some are often and other are less often; even some are quite rare.
Workers usually complaint that all categories of jigs and tools are not available, tools which are
available also of those belongs to those product design which are outdated (majority of such
product are not further manufactured by GSL) accessible. Although floor manager is of opinion
instead saying tools are not available, it can be said they are not accessible; because workers
pick the tool from tool kit or tool board; but not place it back after use; hence it become difficult
to locate such tool later or identify worker; with whom these may available.
On name of maintenance department, there are only two staff members, who are responsible
for ensuring that every machine or equipment must be in running order and effective. Due to
shortage of staff in maintenance department, requests for repairs of plant or machines are not
handled within reasonable time frame and same will result in sharp deterioration of utility/
effectiveness of such plant or machine. Even in some of circumstances, replacements become/
remain only alternative.
GSL has reasonable standardise operating procedure for manufacturing of cycles business, but
scenario is worse in case of assembly of electronic cycles. Since GSL is recently entered into
assembly of electronic cycles, hence KPIs are not established for all factors which are part of
assembly process including critical success factors.
At GSL, the attrition rate at senior management positions is quite high and no formal hierarchy
tree is established, which result in drastic shifts in workplace culture (due to frequently changing
role & responsibility).

CASE STUDY 12.35
Regarding safety of man and material, GSL is on front foot, taking all reasonable care; which is
essential for purpose of eliminating any possibility of workplace accident. But assembly line of
electronic cycles witness an incident recently, where one of model “x -2” during assembly caught
fire because wires set of “x-2” come into exposure of sparking from the light point near to such
assembly line. Such fire causes burn of some of other material too, which are lying near to such
assembly line.
Post such incident, CEO call for meeting with all the top tier executives, majorly including
production and operation manager, safety staff, maintenance staff and store manager apart
from management accountant. During the meeting while production and operation manager
highlights some of problem areas, management accountant quoted 5S as solutions to problems
faced by GSL.
CEO asked Management Accountant to be ready with report and presentation on 5S, which can
highlight the operational aspect of 5S.
Required
You are deputy to management accountant and asked by him to prepare a case, in form of
report; in favour of implementing/ APPLYING 5S at GSL and EXPLAINING the expected
benefit from implementation of 5S.
Solution
Report
Addressed to;
Office of CEO,
Gold Star Limited (GSL).
Dated – 07th Jan 2020
Report on operational aspect of 5S and expected advantage
5S represent scientific way of workplace management so that work can be performed
effectively, efficiently, and safely. 5S was come into practice as part of Toyota Production
System in early of mid- 20th century. 5S is usually considered as essential component of lean
manufacturing, and foundation of eight pillars of TPM. The 5S refer to five Japanese words- seiri
(sort), seiton (set in order), seiso (shine), seiketsu (standardize), and shitsuke (sustain). They
define a system for workplace organization and standardization. Sort means to separate needed
and unneeded materials and to remove latter. Set in Order means to arrange materials and
equipment so that they are easy to find and use. Shine means to conduct a clean-up campaign.
Standardize means to formalize procedures and practices to ensure that all steps are performed
correctly. Finally, sustain means to form habit of always following first four Ss through training,
communication etc.
Note - Later 6th S was also introduced and i.e. safety.
S1 - Sorting
In order to over-come the problem of ‘idle laying over material’ all across production floor area,
sorting of material is need to be done in following categories:

▪ Not needed at all – to be moved to red tag area.

▪ Needed but not now – need to be moved to store with yellow tag.
▪ Needed but not here – to be moved to red tag area.
▪ Needed but not so much quantity.
For purpose of doing sorting GSL need to be answered following questions:
▪ What is required?
▪ How much required?
▪ When it is required?
▪ Where it is required?
Sorted material depending upon category can be separated and made ready for movement/
shift, in order to segregate the sorted material; visual aid technique can be used by attaching
coloured tags to each category of material (called visual sorting). Following two categories of
tag can be used:
Red tag – A card containing detailed information of ‘unwanted things’ with a given time limit for
further action to be taken.
Yellow tag – A card containing detailed information of ‘needed things’, but not now with a given
time limit for further action to be taken – usually kept in store.
Sorting can help GSL to identify:
a) Obsolete material; parts (jigs/tooling) not required as the design has become obsolete.
b) Defective material; part can’t be used as it is.
c) Scrap material.
d) Material which not in place – kept at wrong place.
e) Unnecessary/extra/not useful material.
Sorting can also help GSL in reduction of material lying vacant on production floor, by
segregating them into different categories and ensure that rarely used ma terial either removed
or tagged in red tape area. If material were sorted than ‘loss of material’ which was lying vacant
near to assembly line during fire incident could be saved.
S2 - Set in order
Systemic arrangement by ensuring ‘place for everything and everything in its place’. Purpose is
to save search time and eliminate motion waste, through visual management; with search-free
and count free arrangement.
Colour can be best visual aid – RYGB
R – Red – Critical
Y – Yellow – Reorder
G – Green – Design
B – Blue – Excess

CASE STUDY 12.37
Note – Mapping of RYGB to feature is purely illustrative.

In order to implement systematic arrangement, GSL need to consider and answer;
▪ Analyse status.
▪ Decide – Which things will belong where?
▪ Decide – How they should be put away?
▪ Get everybody to follow rules through indexing, labelling etc.
Expected benefits of set in order to GSL
a) Faster retrieval of things results in elimination of search time.
b) Opportunity to correct the abnormalities faster as visibility improve by system itself.
c) Space saving by systematic arrangement.
d) Efficiency of work improves as things are available when they are actually needed.
Thus, S can solve the specifically problem of non-accessibility of tools.
S3 – Shine
Ensure there must be cleanliness ‘in and of’ everything. Obviously, if there less number of
items, then there is less to clean.
▪ Cleaning should be with meaning.
▪ Cleaning is inspection (from all aspects – front, rear, left right, top and bottom).
Shine will help GSL to keep things in order with regular cleaning and upkeep, so that
maintenance become ‘preventive function’ rather corrective and any incident, likewise fire
occurrence on assembly-line; must be avoided. This will ensure larger utility out of Machine and
Plants which will increase replacement cycle and save investment by lowering down
maintenance and replacement cost.
S4 – Standardization
Establishing the ‘standards’ and make ‘operating procedure’ to create consistency and
ensure that all steps are performed correctly. There are;
▪ Fix responsibilities for implementing & evaluating system.
▪ Integrate these responsibilities into routine work.
▪ Check how well the system is working and sustaining itself.
In order to ensure TPM all 5S are essential, but standardisation is key, GSL is facing large set
of problem in assembly of electronic cycles and reason being absence of SOPs. Hence, by
establishing the standardised process GSL can identify Critical Success Factors (CSFs) and
benchmark the Key Performance Indicator (KPIs) against each CSFs.
S5 – Sustain
In order to sustain with the established standard, it is required to do;

▪ Daily monitoring
▪ Improving ownership by allocating areas
▪ Using ‘red tag campaign’
▪ Communicating visually through fixed point photography
▪ Structured communication
▪ Continuous training of all employees
▪ Periodic audits at all level
▪ Motivating staff through recognition
Since 5S is not a onetime exercise, it is continuous process, hence, it is essential to sustain
the practices followed during earlier 5Ss. GSL witness the high attrition rate at top
management level, hence, it is important that GSL must inculcate practice of 5S in the system
and work culture and sustain them on continuous basis, irrespective of attrition.
Sixth S is ‘safety’ which was added later on, in order to ensure safety while performing all the
remaining 5S.
Further details can be tabled on requisition basis.
Closure of Report
Management Accountant
(For Management Accounting Division)
Gold Star Limited
CS-10: TOTAL PRODUCTIVE MAINTENANCE

Super Refineries Limited is a leading oil refining company operating
in India. The company has three plants - one each situated in North,
South and West. The company has a refining capacity of 30 million
barrels. The company currently enjoys a 40% share of the domestic
market. The plants run on all 365 days in a year and operate at 100%
of the capacity. The company currently does not have any
maintenance schedule in place for its plant and machinery. Any repair
requirement of plant and machinery is carried out on ad-hoc basis.
The company has implemented Total Quality Management (TQM) to
ensure that the company rolls out top quality products. The company did not receive any
complaints from its customers regarding poor quality of products or products not meeting the
specifications. The entire production team is quite excited with superior quality of products.
However, in the last three months, about 30% of the dispatches to customers were delayed.
This comes at a time when the entire plant had to be shut for maintenance activity due to
breakdown in the machineries for a week. The company also witnessed 20% rejection of the
final products. The customers claimed that the products did not meet the specification agreed by
them with the company. The Director of Refineries is worried about the worsening situation of
production at plants. Another concern for the director is the increase in number of accidents and
loss of productive time due to this.

CASE STUDY 12.39
The chairman of the company convened an urgent meeting of the Board of Directors to
understand the impact and reasons of the situation at production plants. A key issue hig hlighted
by plant supervisors is that the scheduled maintenance activity for plants was never carried out.
The underlying assumption for not carrying out such maintenance activity was - “Since the plant
is running smoothly, there is no requirement of preventive maintenance activity. Such activities
cost a lot in terms of money and also cause loss of productive time which could otherwise be
used for production”. The maintenance departments and production department functioned in
silos with almost no co-ordination amongst themselves. The most critical parts of the plant were
not maintained for a long time.
The chairman called you after the meeting and asked you to help him understand the current
issue at the plant. “We had Total Quality Management (TQM) in place at all our plants. I
understand from the production director that TQM is working as intended. Why are we facing the
breakdown problem inspite of having a TQM in place”- said the Chairman?
Required
The Chairman has asked you to quickly prepare a note highlighting the following points -
(i) LIST the likely losses arising due to breakdown of machinery due to non-maintenance.
(ii) EXPLAIN the key features of such programme.
(iii) COMPARE the programme identified above and TQM.
(iv) ADVISE the various types of maintenance practices that the company can implement .
Solution
Issue
Super Refineries Limited has implemented a Total Quality Management and is known for
producing top quality products. The company enjoys 40% market share in the domestic market.
The plants operate at 100% capacity and on all days of the year. This indicates that the
company does not carry out preventive and corrective maintenance. The company has not
received any complaints with respect to quality from its customers. This can be attributed a solid
TQM in place. However, in the last three months, the company has faced delayed in supplies
and customer rejections. The delay in supplies could be attributed to the breakdown in the
machineries. The production could have been of an inferior quality if the production managers
would have rushed to meet the production deadlines due to loss of production time owing to
breakdown.
The discussions at the board meeting indicate that the company has not prioritized preventive
maintenance. Maintenance is being carried out on an ad-hoc basis with a proper preventive
maintenance schedule. The company is concerned about costs of maintenance and hence no
preventive maintenance was carried out. Further, there is no co-ordination between the
production team and maintenance team.
Losses Arising Due to Breakdown
The following are the losses which can be associated with the breakdown of machinery at Super
Refineries Limited -

− Equipment failure leading to unexpected loss of time - The production at plants was
interrupted and the supplies to customers were delay in case of Super Refinery Limited.
− Idle waits and stoppages due to ad hoc maintenance requirements. Since the interrup tion
is unplanned, the productive labour time is wasted.
− Production of inferior quality products causes financial losses. The company would also
incur additional costs to remake the product without any additional revenues.
− The company would also incur losses in terms of additional set up costs. Every time a
machine breaks down, a significant amount of time would be wasted in setting up the
production processes again.
Total Productive Maintenance (TPM)
Based on the facts of the case, it is very clear that the company has not prioritised
maintenance. The company can use TPM philosophy to address the issue.
TPM is a maintenance philosophy aimed at eliminating production losses due to faulty
equipment. The objective of TPM is to keep equipment (plant, machinery etc.) in such a position
to produce expected quality products at the maximum capacity with no unscheduled stops. This
also includes attaining:
− Zero breakdowns.
− Zero downtimes.
− Zero failures attributed to poor condition of equipment.
− No loss of efficiency or production capacity due to the equipment.
The concept was initially applied to equipment i.e., plant and machinery. Of late, the concept
has also been extended to processes and employees. TPM focusses in keeping equipment and
employees in top working condition to avoid any breakdowns and delays in manufacturing
process.
Traditionally, maintenance work has been considered as a responsibility of the Maintenance
Team which is different from the production team. Total Productive Maintenance seeks to
involve workers in all departments and levels in ensuring the effective operations of the plant.
When both the teams work in alignment, learnings can be shared with each other. The
production team also takes ownership of maintenance requirement. A sole focus o n higher
production without taking care of maintenance requirement can hamper the long -term
production requirements, as could be seen in the case of Super Refinery Limited.
Features
− Traditional maintenance is centred in the maintenance department. However, TPM seeks
to involve workers at all departments and levels. There is a great amount of co -ordination
between the production and maintenance team in TPM.
− Autonomous maintenance focusses on training operators to be able to take care of minor
maintenance tasks. This relieves specialised maintenance staff to focus on critical issues.
− TPM focusses on achieving and sustaining zero loses with respect to minor stops,
measurement and adjustments, defects, and unavoidable downtimes.

CASE STUDY 12.41
− Planned Maintenance is aimed to have trouble free machines and equipment producing
defect free products for total customer satisfaction. The approach here is proactive
maintenance instead of reactive maintenance. Super Refinery limited had a reactive
approach to maintenance where maintenance was carried out on an ad hoc basis.
− TPM emphasises on training of workers across all levels and departments. The ultimate
objective is to have a factory full of skilled workers.
The issues faced by Super Refinery Limited due to unplanned shutdowns can be addressed
using a Total Productive Maintenance philosophy.
The following are the Eight Pillars or Principles of TPM -
− Autonomous Maintenance
− Focused Improvement
− Planned Maintenance
− Early Equipment Management
− Quality Maintenance
− Education and Training
− Office TPM
− Safety, Health and Environment
TQM and TPM
Total Quality Management (TQM) and Total Productive Maintenance are often used
interchangeably. However, TQM and TPM are considered as two different approaches. TQM
attempts to increase the quality of goods, services and concomitant customer satisfaction by
raising awareness of quality concerns across the organisation. In other words, TQM focuses on
the quality of the product, while TPM focuses on the equipment used to produce the products.
By preventing equipment break-down, improving the quality of the equipment and by
standardising the equipment, the quality of the products increases. TQM and TPM can both
result in an increase of quality. However, the approach of each is different. TPM can be seen as
a way to help achieving the goal of TQM.
Super Refinery Limited has implemented TQM and is delivering high quality products to its
customers. TQM focusses on the end product being supplied to the customer. In the process of
producing high quality and volumes of products, the maintenance aspect of plant and machinery
was ignored by all. This led to breakdowns and unplanned shutdown of the plant and
machineries. The TPM philosophy would focus on the equipment which support production of
high quality products under TQM.
Types of Maintenance under TPM
The following are the types of Maintenance Programmes which Super Refineries Limited can
implement-
Breakdown Maintenance
No maintenance is carried out unless the equipment actually fails. This is the approach taken by
Super Refineries Limited currently. This type of maintenance is used when the equipment failure

does not impact the operations and production significantly and the only cost incurred is th e
cost of repair. This is not advisable in case of Super Refineries as breakdown of machineries
have led to significant delays in deliveries and poor quality of production.
Preventive Maintenance
It is a daily maintenance (cleaning, inspection, oiling and re-tightening), designed to retain the
healthy condition of equipment and prevent failure through the prevention of deterioration,
periodic inspection or equipment condition diagnosis, to measure deterioration. This can be
compared with a routine and periodic maintenance activity of a vehicle.
Corrective Maintenance
Corrective maintenance focusses on making machines easier to clean and maintain. There
could be reconfiguration of certain parts of the machines (say, a lubricating pipe) to ensure that
the maintenance staff can carry out maintenance effectively and easily.
Maintenance Prevention
Through the analysis of maintenance data, the maintenance technicians can work with the
designers of our machines to create machines that are more reliable. Maintenan ce and repairs
that are required can be made as simple and as easy as possible to reduce time, save money
and improve safety.
Autonomous Maintenance
In case of autonomous maintenance, minor and day to day repairs are carried out by the
operators of plant themselves instead of waiting for technicians. Activities like lubricating, bolt
tightening etc. are done along with minor repairs by the floor workers or operators. Maintenance
team is called only when sophisticated and highly technical maintenance work is required. You
may change the tires of your car on your own but to repair a puncture or wheel alignment, you
visit a technician.
Conclusion
Super Refinery Limited should implement a TPM which would complement and support the TQM
philosophy. This would also address the issue of the production team and maintenance team
not working in co-ordination. Down time for maintenance should not be considered as a cost or
unproductive activity. This should be an integral part of the overall manufacturing plan. This
would ensure that emergency and unplanned downtime are kept to a minimum.
CS-11: SIX SIGMA AND COST OF QUALITY

Absolute Singapore Pte Ltd. (ASPL) manufactures electronic components for washing
machines in an assembly line. Recent market survey reports indicate erosion of its clientele.
Feedback taken from customers suggest that the company’s products were not of good quality.
ASPL is concerned because its competitors have been able to achieve zero defect performance
in terms of nil sale returns on account of quality and nil subsequent warranty cost. Therefore,
the competitors enjoy huge customer loyalty.

CASE STUDY 12.43
To satisfy its customers, the company ASPL wants to improve its product quality. Consequently,
it has decided to undertake Six Sigma study of its operations.
Below is the additional information given about ASPL’s operations:
Yearly sales of electronic components are 25,000 units at `20,000 each. Of these, 1% sales are
returned due to quality issues. These are scrapped and a replacement is made by the company.
In addition, each product is under warranty for one year after sale. If a claim is accepted under
warranty, service and replacement of parts is done free of cost. Current yearly warranty claims
(these are separate from sales returns), which is also representative of the average yearly
warranty claims, amount to `30,00,000 per annum.
Quality control check and inspection is carried out directly at the assembly line. There is no quality
check done at any other point in the entire work flow. Total time spent on inspection is 2,000 hours
in a year which costs the company `10,00,000 per annum. Inspection leads to 10% rejection i.e.
2,525 units. These units require only one cycle of rework, after which they are ready for sale. Rate
of rework in the units rejected on inspection at the assembly line is 5 units in 1 hour. Cost of
rework is `6,250 per hour.
The variable cost of electronic component is `12,500.
The Six Sigma team as part of its study found that rework on products was mainly due to the
following reasons:
(1) Assembly line workers, including new hires, learnt on the job as to how to assemble the input
material to produce the final electronic component. This lead to many errors due to lack of
proper standardized training. Therefore, on account of these errors, the entire electronic
component has to assembled again.
(2) Sub-standard quality of raw material is detected on inspection only at the assembly line. By
this time, the defective material is already fitted into the final electronic component.
Therefore, entire component has to be reworked upon to replace the defective raw material
input.
(3) Machines are outdated and are not entirely suitable for the current production methodology.
Proposed solutions to tackle these issues are as follows:
(1) Provide training to assembly line workers to train them on the production methodology. This
training is expected to standardize work flow, thereby reducing errors. Such training
programs will be held regularly to update the workers on new methodologies. These
programs can also serve as employee feedback sessions about the actual working
conditions at the assembly line. This two-way communication can improve and streamline
the production process. Brainstorming can help detect or give heads up about potential
problems in the production process. Total training hours in a year are expected to be 5,000
hours, costing `1,000 each hour.
(2) Currently poor quality of raw material input is detected only on inspection at the assembly
line. This results in wastage of resources in terms of material, time and capacity. In addition
to the existing inspection at the assembly line, a new functional area for quality planning and
improvement is proposed to be set up. At the time of procurement, the department will
determine the appropriate quality of raw material input, ensure that suppliers supply material
as per these requirements as well as suggest alternatives that can help improve product

quality. By ensuring quality of raw materials at the beginning of the production process,
wastage of resources is reduced, if not can be eliminated. Cost of setting up such a facility
will be `1,50,00,000. In addition to this facility, inspection will continue at the assembly line.
This ensures complete quality check during the entire production cycle. At the same time,
due to the introduction of this new functionality for quality control, the pressure on resources
for inspection at the assembly line would reduce.
(3) Current machines should be replaced entirely with new machines. Old machines can be sold
for negligible amount as scrap. New machines would cost `3,60,00,000 having a life of three
years.
Implementation of the above three solutions can have the following impact:
• Rework of products can be entirely eliminated.
• Sale returns will reduce from 1% to 0% due to better quality of products.
• Yearly warranty claims will reduce from `30,00,000 to nil per annum.
• With the introduction of the new facility, time required for inspection at the assembly line
would reduce from 2,000 hours to 1,200 hours. Cost of inspection to do quality check at
the assembly line would reduce from `10,00,000 per annum to `600,000 per annum.
• Due to better quality, ASPL can build better reputation with the customers which can
further yield additional sales of 5,000 units per year.
Required
You are the management accountant at ASPL. As part of the Six Sigma project
implementation team, you are requested to EVALUATE proposals suggested by the Six
Sigma team. The team has used the DMAIC technique to assess quality improvements.
Solution
DMAIC technique analyses operational problems by assessing them in the following phases (1)
Define; (2) Measure; (3) Analyze; (4) Improve and (6) Control.
(1) Define the problem, project goals and customer requirements: Poor quality leading to
erosion of clientele.
Customers feedback indicates that product quality requires improvement. Dis-satisfaction
is reflected in the form of sale returns and warranty claims. Competitors have no sale
returns on account of poor quality as well as no warranty claims on its products. Hence, in
an environment where 100% quality can be achieved, ASPL is facing quality issues.
This is the problem to be addressed. Failure to do so would result in loss of clientele,
leading to a possibility of going out of business. The goal of the project is to identify what
is the sigma level at which the company is operating and to suggest improvements to the
production process it achieve 6σ level of operations.
(2) Measure current performance: Indicators of poor quality to find out what is the sigma level
of the current operations?

CASE STUDY 12.45
Current performance focusing on quality can be determined based on the cost incurred in
the following phases:
(a) Sale returns: Sale returns are 1% of total sales. Gross sales are 25,000 units per
annum at selling price of `20,000 each, therefore having a value of `50,00,00,000.
Sales returns @1% amount to `50,00,000 that represent the return of 250 units per
annum. The cost of poor quality on account of these sale returns is the variable cost
of the product ` 12,500 per unit. This is an avoidable cost amounting to `31,25,000
per annum that is 0.63% of sales (`31,25,000/`50,00,00,000).
(b) Warranty claims: Warranty is an undertaking given by the company to repair the
electronic component free of cost if defect occurs within a specific period of time.
Hence, when the customer files a claim that is accepted by the company, it means
that there has been an issue with the quality of the product. This is a liability / cost
that should ideally be kept minimum, if not nil like ASPL’s competitors.
Warranty for the product is for one year from the date of sale. Warranty claims this
year is `30,00,000, which is given to be representative of the average yearly warranty
cost. Therefore, currently this cost amount to 0.60% of sales (`30,00,000/
`50,00,00,000).
Summarizing sale returns and warranty claims alone represent 1.23% of current sales.
Considering the current percentage of deficiency, the company is operating between 3σ
and 4σ level. The rest of the industry is able to achieve 6 σ level of operations. At zero
defective production, there are no sale returns on account of quality and no warranty claim
costs. Therefore, is tremendous scope for improvement in ASPL’s operations.
(3) Analyze: What is the cause of poor quality? What is the cost of resources focused on
quality?
Six sigma team studied the production process in detail. Replicating the issues detailed in
the given problem:
(a) Problem 1: Assembly line workers, including new hires, learnt on the job as to how to
assemble the input material to produce the final electronic component. This lead to
many errors due to lack of proper standardized training. Therefore, on account of
these errors, the entire electronic component has to assembled again.
(b) Problem 2: Sub-standard quality of raw material is detected on inspection only at the
assembly line. Inspection leads to 10% rejection of units. By this time, the defective
material is already fitted into the final electronic component. Therefore, to entir e
component has to be reworked upon to replace the defective raw material input.
(c) Problem 3: Machines are outdated and are not entirely suitable for the current
production methodology.
The above factors result in rework on products, an internal fail ure cost, that lead to
wastage of material, resources, and capacity.

Two costs incurred to focus on quality are cost of inspection and cost of rework, 2,525
units are reworked upon. Time required to rework 2,525 units per year = 2,525 units / 5
units per hour = 505 hours per year. Cost of rework is given to be `6,250 per hour.
Therefore, total cost of rework per year = `31,56,250.
Inspection cost for 2,000 hours at the assembly line is given to be `10,00,000 per annum.
Therefore, total cost of resources currently incurred for quality = `41,56,250 per annum.
(4) Improve: Reduce errors and improve quality of the product
While cost of resources currently incurred for quality is only 0.83% of sales ( `41,56,250/
`50,00,00,000), a detailed analysis brings forth many qualitative aspects that ASPL needs
to be address. If its competitors are able to achieve excellence in quality, so must ASPL, in
order to remain in business. Therefore, following are the proposals that can provide
solutions to the problems referred to above:
(a) Solution to Problem 1: Periodic training sessions to educate new hires and update
workers in the assembly line on the latest techniques in production. Standardized and
informed working will lead to lower errors and thereby improving product quality. Cost
per year = 5,000 hours yearly training × `1,000 per hour = `50,00,000.
(b) Solution to Problem 2: Delay in detection of poor quality input can be resolved by
streamlining the work flow. New function for quality planning and improvement, at the
beginning of the process helps in early detection, without wastage of resources. Cost
per year for introducing this functionality = `1,50,00,000.
(c) Solution to Problem 3: Replace old machines with newer ones. Machine upgrade will
align the resource with the production requirements. This reduce chances of errors in
the production process.
Cost of procurement: `3,60,00,000 has a life of 3 years. Therefore, annual
depreciation is `1,20,00,000.
(d) Consequences of implementing these proposals, as given in the problem, can result
in the following improvements:
(i) Rework of products can be entirely eliminated.
(ii) Sale returns will reduce from 1% to 0% due to better quality of products.
(iii) Yearly Warranty claims will reduce from `30,00,000 to nil per annum.
(iv) With the introduction of the new facility, time required for inspection at the
assembly line would reduce from 2,000 hours to 1,200 hours. Cost of inspection
at the assembly line would reduce from `10,00,000 per annum to `6,00,000 per
annum.
(v) Due to better quality, ASPL can build better reputation with the customers which
can further yield additional sales of 5,000 units per year.

CASE STUDY 12.47
When the company is capable to achieve points (i), (ii) and (iii) milestones, it would
have achieved 6 σ operational level. The cost of quality report summarizes the above
discussion:
Cost of Quality Report
Cost of Quality Component Before Improvements After Improvements
Current Cost % Projected %
` of Cost of
Sales ` Sales
Preventive Cost
Training
(5,000 hrs. × `1,000 per hour) ××× ××× 50,00,000 0.83%
Quality Planning and Improvement ××× ××× 1,50,00,000 2.50%
Appraisal Cost
Inspection Cost 10,00,000 0.20% 6,00,000 0.10%
Internal Failure Cost
Rework 31,56,250 0.63% ××× 0.00%
External Failure Cost
Sale Returns 31,25,000 0.63% ××× 0.00%
Warranty Claims 30,00,000 0.60% ××× 0.00%
Total Cost of Quality 1,02,81,250 2.06% 2,06,00,000 3.43%
Yearly Sales 50,00,00,000 60,00,00,000
Total Cost of Quality / Sales (%) 2.06% 3.43%
(e) Cost of quality is 2.06% of sales of which 1.23% alone is external failure cost. This
has an impact on the customer experience and can erode customer base. By
implementing the six-sigma team’s proposal, this external failure cost on account of
sale returns and warranty costs, can completely eliminated. Internal failure cost can
also be eliminated. The increase in cost of quality proposed to be made would be a
preventive cost to avoid failure of quality. The company should focus on preventing
the error such that it ensures that product is of good quality when it reaches the
customer at the very first instance. This enhances the customer experience and
therefore eliminating the scope for external failures like sales returns and warranty
claims. Better quality can yield further sales of 5,000 units per year. Therefore, an
increase in spending on quality measures is justified since it not only yields significant
improvements to quality but also brings in more sales orders.
Improvement to the financial position of the firm is summarized below:

Particulars Amount `
Improved Contribution Margin (Ref. note 1) 3,75,00,000
Elimination of Goods Replacement 31,25,000
Elimination of Warranty Claims 30,00,000
Elimination of Rework 31,56,250
Savings in Inspection Cost 4,00,000
Total Benefit …(A) 4,71,81,250
Additional Costs Incurred
Training 50,00,000
Quality Planning and Improvement 1,50,00,000
Increase in Fixed Cost
(Yearly Depreciation of Upgraded Machines) 1,20,00,000
Total Additional Cost …(B) 3,20,00,000
Net Benefit …(A) - (B) 1,51,81,250
Note 1: Incremental Contribution:

Sales have increased by 5,000 units. Selling Price is `20,000 per unit while variable
cost is `12,500 per unit. Contribution is `7,500 per unit.
Conclusion: Six Sigma team’s proposals are focused on preventing the error
from occurring. Consequently, quality improves, sale improves and thereby can
yield a net benefit of `1,51,81,250 per year to the company.
(5) Control: Maintain quality at 6σ level and keep the production facilities updated.
(i) Training sessions with workers can serve as two-way communication platform to
detect other problems that can be resolved in more timely manner. Inputs received
can also be used to improve the production work flow as well.
(ii) New function of quality planning and improvement can help the company be better
informed about the latest production methodologies.
(iii) Updated machines are better equipped to handled changes in the production process
since they are built with the latest technology. ASPL should do a continuous
assessment of the state of its machines and upgrade them when necessary.

CASE STUDY 12.49
CS-12: ENVIRONMENTAL MANAGEMENT ACCOUNTING
Shandaar Bangle Ltd (SBL) have been recognized as a manufacturers and exporters of high
quality Bangles, designed, and manufactured using optimum quality raw material, sourced from
trustworthy vendors of the market.
Manufacturing Process
The process of manufacture of glass bangles is highly skilled labour oriented one comprising of
the following main operations:
Glass Melting Parison Making Spiral/Coil

Phase Phase Forming Phase
In first phase, glass batch materials like sand, soda ash, lime stone feldspar, borax etc. with
other additives and colouring materials in a suitable proportion are mixed manually and fed into
the pot places in pot furnace. The raw material is melted in the furnace at a temperature of
about 1,300 – 1,400 (°C) to obtain molten glass.
In second phase, molten glass is drawn from the pot of the furnace with the help of the iron pipe
and formed into gob to gather required quantity of glass for formation into parison s on iron
plates. The parisons of different colours are joined together and reheated in an auxiliary furnace
to obtain required designs.
In third phase, the reheated parison is then transferred to ‘Belan Furnace’ from which the glass
is further drawn into spiral/ coil of bangles on the spindle counted and rotated manually at
uniform rate of revaluation synchronizing with the manually at the other end of the furnace.
Spiral are then taken out from the spindle and cut with the help of a pencil cutter to separate out
the single pieces of bangles from spiral. These cut or un-joined bangles are then sent for joining
of end, finishing cutting & polishing, decoration etc. The finished products are then neatly
packed for sale.
Environmental Impact
But unfortunately, these processes have environmental impact at all stages of the process,
including emissions of airborne pollution in the form of ashes, gases, noise and vibration.
Conditions of the Workplace
Due to limitations of maintaining appropriate temperature for melting and moulding of the glass,
furnaces are kept burning. Therefore, workers have to work with such working conditions
continuously without proper leisure time.
The above-mentioned factors become more harmful while working in immense heat and sound which
is normally higher than permissible levels.
Health Impact
A recent study has revealed adverse impact of pollution over workers and people who are living
in nearby area.

Management Initiatives
The management of company is worried about environmental impact and health impact and has
taken certain initiatives in taking care of environment like- batch house cyclonic dust collector,
noise absorbing device, natural gas fired furnace, better refractory materials, training for waste
minimization, treatment of solid waste, research and development activities aimed at reducing
pollution level, planting trees, treatment of nitrogen oxide and other harmful gases.
Management desires to adopt environmental management accounting as a part of strategic
decision making process.
Required
(i) EXPLAIN the requirement to have environmental management accounting and IDENTIFY
the SBL’s environmental prevention, appraisal, and failure costs.
(ii) ANALYZE the appropriateness of SBL incorporating the following in implementing
Environmental Management Accounting:
− Activity Based Costing
− Life Cycle Costing
− Input Output Analysis
(iii) EXPLAIN the need of non-financial consideration in decision making and suggest safety
measures that can be taken into consideration for workers.
Solution
Environmental management accounting (EMA) is the generation and analysis of both financial
and non-financial information in order to support internal environmental management processes
i.e. identification, prioritization, quantification and recording of environmental cost into business
decision.
By adopting EMA, SBL will have following benefits:
▪ Product Pricing.
▪ Budgeting.
▪ Investment Appraisal.
▪ Calculating Investing Options.
▪ Designing, Calculating Costs, Savings and Benefits of Environment Projects.
▪ Setting Quantified Performance Targets.
▪ Assessment of Annual Environmental Costs.
▪ Environmental Performance Evaluation, Indicators and Benchmarking.
▪ External Reporting- Disclosure of Environmental Expenditures, Investments and
Liabilities.

CASE STUDY 12.51
Environmental Costs of SBL

▪ Environmental Prevention Cost: These costs are basically incurred in relation to activities
undertaken to prevent the production of waste that could harm the environment.
Company’s efforts to minimize the effect of its activities on the environment like installing
batch house cyclonic dust collector, natural gas fired furnace, better refractory materials,
training for waste minimization, research and development activities, noise absorbing
device and planting trees can be classified as Environmental Preventive Cost.
▪ Environmental Appraisal Costs: It means costs incurred in relation to activities undertaken
to determine whether product processes and other activities within fi rm are complying
with environment standards.
SBL may perform ‘Contamination Test’ to observe the environment compatibility of its
processes can be categorized under environmental appraisal cost.
▪ Environmental Failure Cost: It means cost incurred in relation to activities dealing with
pollution arising from the activities of entity includes costs related to treatment of harmful
gases and solid waste.
Appropriateness of Techniques for Identification and Allocation
Activity Based Costing
This costing technique would help the SBL to separate environmental costs from the general
overheads and allocate them to glass bangles by identifying appropriate drivers of these
environmental cost. Possible environment activities for environmental costs and their drivers are:
Activity Cost Drivers

▪ Planting of trees ▪ Number of trees planted
▪ Treatment of nitrogen oxide (in the same ▪ Volume of nitrogen oxide treated
way, activity and related cost driver for
other gases would be determined)
▪ Solid waste removal ▪ Volume of such waste
▪ Research and development activities ▪ Man hours worked for such activities
Life Cycle Costing
By using this costing in EMA, SBL would be able to identify, record and control the
environmental costs relating to various stages in the life of glass bangles. At each of following
stage environmental cost would be incurred:
− In raw material stage, some natural product would be purchased.
− In manufacturing stage, emission and treatment of nitrogen oxide & other gases and
treatment of solid waste.
− In marketing and distribution stage, environmental cost relating to transportation of glass
bangles to various customers.

Input /Output Analysis

Here detail analysis of input and output of a system is done for the purpose of assessment of
ecological wellbeing of entity’s products, processes and other activities. This technique is based
on the fact that whatever goes into the system has to come out of it.
In case of SBL, it can evaluate the volume of sand, soda ash, lime stone feldspar, borax etc.
and the resulting volume of output i.e. glass bangles. Through such evaluation, the SBL would
be able to allocate and analyses environmental cost attributable to input and output of glass
bangles.
Non-Financial Considerations
Entities generally give emphasis on financial measures such as earnings and accounting
returns but little emphasis on drivers of value such as customer and employee satisfaction,
innovation and quality. Due to which mostly companies could not continue in long term. So for
the purpose of achieving long-term organizational strategies, non-financial consideration should
be taken into account. Without this it may be that company achieve short term goal but would be
difficult to achieve long term goal.
In SBL, it can be clearly seen that there is great impact on health of workers. By creating a safe
and healthy environment for employees, SBL can improve productivity, business performance, staff
morale and employee engagement. Further, SBL will also be able to reduce – accidents/ work
related ill health/ sick pay costs as well as insurance costs. A healthy workforce can demonstrate
corporate responsibility. If SBL look after employees, business is likely to have a more positive public
image.
To create safe and healthy environment following measures can be taken into consideration:
− Safety monitoring system.
− Workers must be trained.
− Recruitment of more workers.
− First aid kit should be available.
− Protective glasses, clothes, gloves should be provided.
Regular health check-up camps and awareness programs.
CS-13: ETHICAL AND NON-FINANCIAL CONSIDERATIONS
Star Limited is in the business of manufacturing copper rods. The copper rods are sold to
various cable wires manufacturers across the country. The growth in economy, especially the
power sector, has led to a sharp increase in demand of cable wires and copper rods. Th e
company is considering an opportunity to set up its own copper wire manufacturing plant and
gain a share of cable wire’s market. A detailed study was carried out to understand the market
of cable wires, market growth, competitive landscape, financial feasibility etc. The Chairman has
asked the Director of Finance to review the financial feasibility study and highlight concerns, if
any.

CASE STUDY 12.53
The following paragraphs contain summarised information of financial study carried out:
− The project of setting up a new cable wire manufacturing plant is expected to yield a Net
Present Value of `200 crores considering a project life of 20 years. The initial cost of
setting up the plant is `500 crores which is readily available with the company. The project
would yield an IRR of 17.5% which is higher than the IRR of other plants under operation.
− The plant would employ about 70% of labour on contractual basis. These labours would
mostly comprise immigrants from neighbouring countries. The feasibility study has
assumed that the immigrants labours would be paid 15% less wage than that paid to other
workers. However, the wage paid to immigrants would still be higher than the minimum
wage requirements. The contribution to retirement funds is also not considered in the
project evaluation. The company feels that immigrant workers would not stay beyond a
period of a year and thus there is no requirement to contribute to retirement funds.
− The existing plants of the company do not have free space available and hence the
company will need to buy land adjacent to its existing plant. A part of the proposed land to
be acquired falls under the forest reserve area where no commercial activity is allowed.
The company officials are in liaison with the government officials to get the land parcel
approved. A certain amount of the value of land would be paid to certain government
officials through a consultant. This cost is not a part of the project evaluation report.
− The new plant would also produce certain chemically harmful waste which would be
disposed off into a nearby river after treatment. The company however does not have any
technology to treat the waste fully. A new treatment plant would cost about `100 crores.
The finance director has forwarded the entire report to you for comments.
Required
(i) LIST Various non-financial and ethical consideration in decision making.

(ii) EVALUATE the impact of the various issues in the financial study and give your
RECOMMENDATION.
Solution
Issue
Star Limited manufactures copper rods and is considering commencing a new plant for
manufacturing of cable wire. A financial evaluation has been carried out and the project appears
to be financially viable. The project has a positive NPV of `200 crores and an IRR of 17.5%.
Though the project is financial viable, there are certain concerns relating to the project.
Non-Financial and Ethical Consideration in Decision Making
Capital Budgeting or Investments decisions are generally made based on the various financial
evaluation like Net Present Value, Internal Rate of Return, Payback Period etc. The financial

considerations in capital budgeting decisions are important because the end objective of every
for-profit business is maximisation of shareholder’s wealth. However, an important aspect of
capital budgeting is that investment decisions cannot be purely based on financial analysis;
there are other soft non-financial aspects of the investment appraisal that need to be thoroughly
looked into. Some of the non-financial considerations that a company factors for capital
budgeting or investment decisions are listed below:
Environmental Factors
Environmental factors like pollution, deforestation, impact on climate and weather, greenhouse
effects etc. must be considered by companies while selecting a project for implementation. Any
project which adversely affects the environment is not taken positively by common public and
environmentalists. A lot of projects have been stalled or delayed due to the protests by pro -
environment groups leading to cost and time overrun. The government through ministry of
environment could impose penalties on projects which are violating environmental norms or
green norms.
Staff Motivation
Staff motivation and satisfaction is another important factor which companies might consider
while choosing projects. If, for example, a company decides to implement automation in its
plants for operations which would result in redundancy in labour, the overall staff motivation
would come down. Staff and workers would resort to strikes and lockouts to protest against such
decisions. The company should adopt a participative approach while taking such decisions
considering the impact it would have on the labours.
Government Regulations
The companies must comply with relevant government regulations while implementing projects.
Some projects might be profitable and yield excellent returns. Howe ver, if the profits and
cashflows are generated by violating government regulations, it could be harmful in the longer
run for the company and its brand. The companies must ensure that all relevant laws and
regulations are complied with.
Availability of Resources
The evaluation of any project must also consider availability of key resources like raw material,
manpower, logistics infrastructure, electricity etc. If there is any constraint on any of the key
resources at a future date, a financially viable and excellent project could well turn into a failed
project. It is thus important that the requirements and availability of key resources are analysed
in advance.
Availability of Project Site
Site selection involves measuring the needs of a new project against the m erits of potential
locations. This indicates the practice of new facility location, keeping in mind project
requirements. A wrong or unsuitable project location may mar the very benefits of a financially
lucrative investment proposal.

CASE STUDY 12.55
Corporate Social Responsibility

Corporate social responsibility refers to "the ethical principle that an organisation should be
responsible for how its behaviour might affect society and the environment”. The companies do
not function in silos but are a part of the larger society and environment. They have a
responsibility towards the society and environment to use the various resources judiciously and
ensure a sustainable development. Companies are expected to uplift the well being of the
society at large and to not harm the environment through operations. The aspects of corporate
social responsibility must also be considered while deciding the project to be implemented.
Ethics
Ethics are a set of guiding moral principles for individuals and corporates. Every company has a
duty of care to various stakeholders (shareholders, employees, suppliers, customers etc.). A
company is expected to act in a fair and transparent manner and be honest in all its dealings
with stakeholders.
Issues in the Financial Study
As discussed earlier, the project is financial viable with a very good NPV and IRR. The amount
required to build the plant is also available with the company. Financially, the pr oject must be
accepted. However, there are certain non-financial issues which must be addressed before a
decision to build the plant is taken.
Payment to Labour and Ethics
As explained earlier, every company has a duty of care to all its stakeholders and the
stakeholders must be treated fairly. Labours are a key stakeholder for the construction and
running of the plant. The company has chosen to pay 15% lower wage to immigrant workers
and not contribute anything towards their retirement benefits.
The company is paying a higher wage to the labours than required by law and hence there is
nothing illegal in such payments. However, the company must not discriminate between workers
who are doing same nature of work just because the workers are immigrants. The reputation of
the company might be affected because of the lower wages paid to immigrants. There is a
possibility that these labours go on protests and strikes or decide not to work for the company.
The company has also decided not to contribute to retirement funds for these workers. This
could have a legal implication as well. The financial impact of paying wages at par with other
workers and contributing to the retirement fund for immigrant workers is not known. However,
the company should reconsider this decision and pay all the workers the same level of wages.
The company should also contribute to the retirement fund of employees.
Availability of land and bribery
The existing plant does not have sufficient space to build a new plant and hence the compan y is
planning to acquire additional land which falls under the forest reserve area where no
commercial activity is allowed. The company is in liaison with government officials to get the
land acquisition approved. The company would also be paying bribes indirectly to the
government officials to get the land allotment approved.

The payment of bribes to government officials, whether directly or indirectly would be unethical.
The company could face litigation for acquiring land by unfair means and in future, there is a
possibility of such allotments being cancelled. The company’s reputation would also be dented if
news of bribery is published by the media. The company also has a responsibility towards the
environment and must contribute towards a sustainable development. The society at large
would not take acquisition of forest land by unfair means positively. This impact the overall
goodwill and brand image of the company.
The company must evaluate if land at other sites can be acquired for construction of th e plant.
Such acquisition would be at a higher cost but would be beneficial to the company in the longer
run.
Chemical waste and technology
The proposed plant is likely to emit chemically harmful waste which would pollute the
environment. The technology available with the company can treat such waste partially. The
company has to incur an additional cost of `100 crores to build a new treatment plant. This
means that the NPV of the project would be reduced by `100 crores and IRR would also be
lesser if the new treatment plant is built.
As discussed earlier, the company must operate in a socially responsible manner and consider
implication of its action on the environment. The pollution caused by plants affects the
surrounding environment and might lead to protests by local residents. Sometimes such
protests are backed by NGOs as well. The commissioning of environmentally sensitive projects
is difficult at times and can cause project delays as well.
The company should consider acquiring a new chemical waste treatment plant to ensure that
there is no discharge of harmful waste from the company’s plant. Though, there is an additional
cost involved in building a new plant, it is important that the society at large perceives that the
company is operating in a socially responsible manner. The company operates in a society and
is an integral part of it and hence, it has certain responsibilities towards t he society as well.
Conclusion
The ultimate objective of a company is to maximise shareholder’s wealth. The company must,
however, operate in a socially responsible manner in achieving the objective of wealth
maximisation. The company has a duty of care to other stakeholders like employees, society at
large etc. In some cases, there may be conflict between different stakeholder’s objectives. For
instance, a new waste treatment plant would be good for the environment and society at large
but would be adverse for shareholders as an additional cost of `100 crores would be incurred.
The company must definitely consider non-financial factors along with financial factors while
deciding on whether to build a new plant or not.

CASE STUDY 12.57
CS-14: ETHICAL AND NON-FINANCIAL CONSIDERATIONS
Nutty Bites produces many edible snacks that are very popular
especially among children. Peanuts, Peanut oil are essential ingredients
in many of its products. They are currently facing this ethical issue –
“Medical studies have indicated peanut allergic reactions are on the rise.
The prevalence is more profound among children. Reactions can range
from hives around the mouth to potentially life threatening reactions
when exposed even to the slightest trace of peanuts. There is growing
media campaign to force companies like Nutty Bites to make disclosure about the presence of
peanut on its package labelling”
Nutty Bites is a mid-size company that has a growing market. Risk to peanut exposure can
come not just from the presence of peanuts in its products. Some of its bought -in ingredients
(raw material input) are cooked in peanut oil. There are risks of “cross-contamination” amongst
products. Let us say, an equipment has been used to produce cookies that has peanuts. Next,
the equipment is used, without being cleaned, to produce chips that does not have peanuts as
an ingredient. Some portion of the peanuts / peanut oil could contaminate that specific batch of
chips produced. Since labels of chips would not mention “peanuts” as an ingredient, it poses a
potential risk of causing allergic reaction to a customer unaware of this contamination.
Management of Nutty Bites has called for a meeting to discuss this issue. “The issue need not
be addressed at all. After-all Nutty Bites is doing nothing against the law” is the opinion of many
members on the board of the company.
Required
(i) EXPLAIN why Nutty Bites should attempt to address this issue.
(ii) STATE potential benefits that business can garner by addressing this issue.
(iii) RECOMMEND, with reasons, the avenues available to Nutty Bites to address this
ethical issue.
(iv) EVALUATE the recommended solutions.
Solution
(i) Modern organizations have a moral duty of care to a wider range of stakeholders not just
its owners / investors. In this case, it owes a duty of care to anybody who consumes its
products. The presence of peanuts or peanut oil makes it a potential “health hazard” to
some consumers. Food safety is a fiduciary duty that Nutty Bites owes to the society.
Corporate Social Responsibility (CSR) is the duty an organization has towards a wider
community.
(ii) Addressing this ethical issue will help Nutty Bites to become a morally responsible
organization. The long- term benefits to its business could be as follows:
(a) Avoid bad publicity that could potentially damage its reputation and brand image.
(b) Avoid potential legal action for tort, committing a civil wrong.

(c) Operating environment within the business is more ethical, giving a sense of well-
being to its employees.
(iii) Following could be some of the responses that Nutty Bites could take to address the issue:
(a) A clear warning in the ingredients box that the factory uses peanuts while
manufacturing some of its products. This should be included even in products that do
not contain peanuts, to avoid any harm due to risk of cross-contamination. Customers
who suffer this allergy, would then be aware of the potential risk of consuming
products of Nutty Bites. Protection from potential lawsuits counters any loss of
business for Nutty Bites.
(b) Segregate areas to have separate processing lines for products with peanuts / peanut
oil and those without it. If possible, have segregated staff for the two production lines
in order to avoid the risk of cross-contamination. If this is not possible, staff have to
be well trained on the risks of cross-contamination. Gloves need to be provided while
handling material during production of food products. This should be changed each
time staff handle production changes from “peanut variety” to the “non -peanut
variety”.
(c) Equipment should be thoroughly cleaned while switching production from one variety
to another. Fewer changeovers in the production cycle, that is producing products in
larger batches, reduces the number of switches during production of different
varieties of food products.
(d) Storage of peanut material should be well segregated and monitored to avoid
contamination.
(e) If Nutty Bites has the resources, it could invest in pharma companies that are finding
a medical solution to this problem. The food industry could benefit from research and
development of treatments to address this life-threatening allergy. A break-through
would address a societal problem, while also having a positive impact for growth of
Nutty Bites.
(iv) Risk of product safety is an important issue that needs constant review. Review would be
of the production process, storage, material handling as well as ingredient of purchased
raw materials. The benefit of constant review is that Nutty Bites can immediately identify
danger of contamination. For example, is a supplier of raw material changes the
production of the ingredients to include peanut / peanut oil, then Nutty Bites can be
immediately aware of the change due to its review process. In case of any future litigation,
Nutty Bites could defend itself by proving that it had a robust review process in place.
On the other hand, constant review requires time and money, with an ever-present
possibility of contamination. It is not feasible to ensure complete safety. Reviewers /
quality inspectors could become negligent once the process is well established. This could
lead to instances of contamination, even with a review process in place.
To conclude, Nutty Bites is morally responsible to spread awareness that some of its
products may contain allergy causing peanuts / peanut oil. It should streamline its storage
and production process to avoid risk of cross-contamination.

CASE STUDY 12.59
CS-15: BALANCED SCORECARD
Fair Limited manufactures and sells motor vehicles in India and different parts of the world. The
company has its head office in New Delhi and three regional offices. The manufacturing plants
are situated in Pune and Bhubaneshwar. The company has over 10,000 employees who are
paid a fixed salary and a performance related pay (PRP).
The PRP is determined using the financial performance as a measure. The performance of
departments which are profit centers is based upon the revenues and profits the departments
generate. The performance of cost centers is based upon the cost savings against the budget.
Of late, the company has identified critical issues with the motor vehicles manufactured and sold
in the market. In the last one year, itself, the company has recalled more than 2 lakh vehicles
owing to quality issues like faulty gearbox, issues with axle, braking systems etc. The company
was also penalized for selling vehicles which does not meet the emission norms.
The board of directors carried out an internal review of these frequent recalls and issues with
the vehicles. In most of the cases, it appeared that the recall of vehicles was on account of
lower quality of material and parts used. A couple of critical quality and emission checks were
ignored to dispatch more vehicles in the limited time, leading to higher sales and profits.
The board is concerned with the reputational risk with the issue related with recalls. The
company was consumer’s most trusted brand for last three years in a row. It is unlikely to win
the award this year due to negative feedback from customers. The board wants to win the trust
of the customers back and be profitable as well.
Required
You are the advisor to the board. The board seeks your advice on the following aspects:
(i) STATE advantages and disadvantages of using financial measure as a performance
measure.
(ii) ADVISE an alternative performance measure which includes non-financial measures as
well.
(iii) IDENTIFY 2 critical success factors and 2 Key Performance Indicators for the
performance measure chosen in (ii).
Solution
What is the issue?
Fair limited is into manufacturing of motor vehicles. The company has used financial measures
for performance. Of late, the company has faced quality related issues leading to vehicle
recalls. The company has also been penalized for violating emission norms. Since the company
has been using financial measures only, it appears that non-financial aspects related to quality
have been ignored. The company has adopted the principle of profit at any cost which can be
seen from use of low quality materials and parts as well as skipping key quality checks.

Financial Performance Measure

Financial performance measures focus on financial results or aspects. These measures focus
on the profits made by a business or a unit of business. They also include costs saved agai nst
budgets. Various financial performance indicators include – growth in revenue, profitability,
variance from budget, Return on Capital Employed etc.
In the case of Fair limited, the performance of employees is done on the basis of financial
performance indicator. When performance is evaluated on financial parameters, the employees
and managers tend to focus only on profitability in anticipation of higher bonuses and pays.
The problems related to quality issues in vehicles produced by Fair limited might be linked to
the use of financial performance measure. Low quality parts are used to save costs and improve
profitability. The quality checks prior to sales were also skipped to sell more vehicles with
limited resources. This is an apparent case of compromise in quality for seeking higher profits
and revenues. In light of above, the advantages and disadvantages of financial performance
measures are given below.
Advantages
− Focus on financial objectives and is linked to the overall objective of wealth creat ion of
shareholders.
− Such measures are objective.
− Quantification of results is possible.
− The measures are comparable across companies of a particular industry.
− The framework to measure financial performance is established in most of the cases.
Disadvantages
− Focus on short term profits and Ignores long term sustainable growth. As can be seen in
the case of fair limited, the company has compromised quality for short term profits. This is
harmful to the company in the longer run.
− This measure can be distorted by inflation. A 5% growth in sales might be good but if the
inflation is 6%, the real growth is negative.
− Financial information might be manipulated to show a better performance.
Non-financial performance measures use measures other than financial to measure
performance of employees and departments. The advantages of non-financial measures are
− Non-financial measures help business to measures every area whether financial or non -
financial. Financial measure would not be able to suitably measure areas like performance
of IT department.
− It focuses on qualitative aspects as well.
− These measures take a long-term view unlike financial measures where employees tend to
take a short term view.

CASE STUDY 12.61
The disadvantages of Non-Financial measures are:

− These require huge amount of information to measure each area of performance and might
lead to shift of focus from core goals and values.
− These can be subjective as non-financial measures cannot be generally quantified.
− Non-financial measures like measures of quality are difficult to measure.
Balanced Scorecard
An alternative performance measure which focuses on both financial and non-financial
measures is the Balanced Scorecard. It outlines four key areas in which company and divisional
performance should be measured to focus on both the short and long term needs of the
organisation. The key idea is that managers are to be appraised on a variety of measures which
include non-financial measures so that their focus is both long and short term.
As discussed earlier, it appears that managers at Fair limited have ignored long term
sustainable growth and qualitative factors and focused on short term profits and sales. This is
one of the key disadvantages of a financial measure of performance. The company can start
measuring performance both on financial as well as non-financial aspects. This would ensure
that employees are not short sighted on profits alone.
The four areas or perspectives in a Balanced Scorecard are –
− Financial Perspective
Financial perspective focuses on financial performance of the business and divisions. The
various financial measures used by companies are profitability, revenue growth, cost
control etc. This is currently being used in Fair limited to measure performance.
− Customer Perspective
This perspective views organizational performance from the point of view the customer or
other key stakeholders that the organization is designed to serve. These could include
measures like customer satisfaction index, percentage of returns, percentage of goods
delivered on time etc.
− Internal Business Perspective
This perspective views organizational performance through the lenses of the quality and
efficiency related to product or services or other key business processes. The measures
under internal business perspective could be number of defective products produc ed,
production performance per unit of time etc.
− Training and Development/ Learning and Growth Perspective
This perspective views organizational performance through the lenses of human capital,
infrastructure, technology, culture and other capacities that are key to breakthrough
performance. The key measures could be number of new products produced, amount
invested in training and development etc.

In each category/Perspective, the organisation must follow through from the business strategy, to
ensure they are focused on the long-term direction of the business. Clear objectives should be set
under each category according the SMART criteria (Specific, Measurable, Achievable, Relevant and
Time-bound), measured at the end of the period, and lessons learnt from actual results to help to
improve performance in future periods and keep the organisation on track to achieve its strategic
goals.
Applying Balanced Scorecard to Fair Limited
The issues related to quality have arisen at Fair Limited as the managers and divisions focused on
profits at the cost of quality. The recall of vehicles was primarily on account of use of sub-standard
parts. The company should consider using non-financial measures as well as a performance
measure. Balance scorecard can be effective tool to apply financial and non-financial measure.
The company must take steps to put focus on quality related aspects as well as financial aspects. A
proper application of various Key Performance Indicators under the respective Critical Success
Factors can help the company overcome the current issue.
Critical success factor (CSF) is a management term for an element that is necessary for an
organization or project to achieve its mission. It is a critical factor or activity required for ensuring the
success of a company or an organization. These are the key areas in which the organisation has to
do well if they are to remain competitive and profitable. The critical success factors have to be linked
with the overall strategy of the organisation.
Key Performance Indicators (KPIs) are the ways in which the organisation’s performance for the CSF
can be measured. It is a measurable value that demonstrates how effectively a company is achieving
key business objectives. Organizations use KPIs to evaluate their success at reaching targets.
The Critical Success Factors and Corresponding KPIs for Fair limited for each of the perspective in
the balanced scorecard is given below:
Perspective Critical Success Factors Key Performance Indicator
Financial ▪ Be the Most Profitable Company in ▪ Profitability ratios.
Motor Vehicle Industry. ▪ Revenue growth.
▪ Become the No.1 Company by in ▪ Variance to budget.
terms of Market Share in five years. ▪ Number of vehicles sold.
Customer ▪ Be No.1 Choice of Customers. ▪ Number of vehicles sold vis-à-vis those
▪ Implement Zero Recall Policy. sold by competitors.
▪ Number of recalls of vehicles.
▪ On time delivery of vehicles.
Internal ▪ Total Quality Management. ▪ Number of defective cars produced.
Business ▪ Zero Idle Time at Factory. ▪ Number of cars returned by customers as
faulty.
▪ Number of hours spent in waiting by
labours at assembly line.
Training and ▪ Upto Date Technology used in ▪ Amount spent in research and
Development Manufacturing Facilities. development year on year.
▪ Skill Development for Labour and ▪ Number of training hours undergone by
Supervisors. workers and supervisor.
▪ Number of new model of vehicles
launched.

CASE STUDY 12.63
CS-16: TRADITIONAL ACCOUNTING FRAMEWORK VS. TBL

FRAMEWORK
Paper Solutions Ltd. (PSL) is a paper mill producing excellent quality writing and printing
paper. It is located in a small town where eucalyptus, acacia and casuarina trees grow in plenty,
which are required in the paper production process. It sources its raw material from pulp-wood
plantations that grow the above-mentioned trees. These plantations are located in degraded
agrarian land surrounding the factory site, which was previously wasteland. Their owners are
subsistence farmers, who have been encouraged to grow these trees to source raw material for
the paper mill. The mill’s local procurement policy has thus provided a source of livelihood for
this community. Moreover, almost 40% of the staff working at the mill are from the local
community. Most of the mill’s labour force lives in residential areas near the factory site.
Catering to the mill employees’ livelihood needs like food, clothing, education etc. has given the
town alternate sources of income and thus has benefited the town. The plant managers at the
mill have been working on various projects in order to build a sustainable business. This
includes, reducing waste during the manufacturing process, imparting knowledge to local
farmers at the pulp-wood plantations to improve the quality of wood through breeding and seed
improvement techniques. Operations at the mill have yielded substantial profits over the last 15
years since inception.
You are the chief accounting officer of PSL taking care of all the re porting (internal and external)
needs of the company. Recently, you read about the Triple Bottom Line (TBL) reporting that
many other companies are following. You feel the need to introduce TBL reporting because:
The vital role played by the mill towards the development of the town. This can be highlighted in
the TBL report. This will enhance the company’s goodwill. At the same time, you feel the need
for transparency of operations and balancing the need of various stakeholders involved. All this
can be addressed by publishing the TBL report periodically.
The mill’s operations are driven by the resources available in the environment. What the mill
takes should be returned in equal if not in a higher measure. TBL reporting can help identify
opportunities of giving back to the environment.
You have an appointment with the Chief Executive Officer to discuss this reporting framework.
During a preliminary discussion, the CEO was skeptical of the need for additional reporting. “We
are here to do business, profit should be the sole parameter for measuring our success.
Shareholders are our only stakeholders. Annual reports would provide sufficient information to
others who are interested in our operations.”
Required
To convince the CEO, you need bring out the differences traditional accounting framework
and the triple bottom line framework. Draft an e-mail on this subject that you need to send to
the CEO for discussion at the meeting.

Solution
To: CEO
From: Chief Accounting Officer
Date: 22/06/20XX
Subject: Traditional Accounting Framework vs. Triple Bottom Line Framework
Please find below comprehensive study on both frameworks in context of the PSL.
Best Regards,
Chief Accounting Officer
------------------------Attachment-----------------------------
Difference between traditional accounting framework and triple bottom line framework.
(i) Traditional accounting framework has a “single bottom line” that focuses on the profit that our
company has made during the financial year. This is calculated by reducing costs, including
the cost of capital, from revenues earned during the period, to arrive at the net profit that is
available to the shareholders. This reporting framework has its focus on meeting the
informational needs of mainly one category of stakeholder within the company, namely its
shareholders. It satisfies the information needs of those interested in the financial aspects of
business. It does not provide much insight on the social, environmental and economic
implications of its operations.
Albeit, some information about its operations is available in various parts of its annual report,
like the management discussion and analysis section or the chairman’s letter to
shareholders. However, this is generally not sufficient to satisfy the information needs of
other stakeholders, some of whom can be our company’s employees, customers, suppliers,
communities living near our factory site or even the government. Transactions that do not
directly impact our company are ignored. Recognition of an expense partly depends on
utilization of assets. For example, costs incurred to operate machines used in the pulping
process would include labor expense, repairs, depreciation, utility etc. These get captured as
part of cost of goods manufactured in our financial reports. Therefore, assets and their
related expense, that are owned and within the control of the company will be reported in the
financial reports.
However, certain assets are neither owned nor controlled by the organization, yet it utilizes
these resources in its operations. For example, the waste water from our company is
discharged in the river nearby. The waste water contains solids, chemicals and metal
compounds that were used during production. This pollutes the river water, which is the
primary source of water for our town. This poses both an environmental and health risk to the
citizens. Although we have taken sustainability initiatives to reduce this waste, we do not pay
to clean up the river water. It is the government that undertakes the onerous task of cleaning
up the river water and also bears the clean-up cost. This aspect of our company’s operations
and the associated cost will not get captured in our financial reports. Hence, the true cost of
operations of our company is greater than the costs reported in the financial reports.

CASE STUDY 12.65
Moreover, the market price that we charge our customer for our paper product does not
factor this cost. Consequently, both our company and our customers who use our product
end up under-pricing the cost to the environment and society.
It can be concluded that under traditional financial reporting, sustainability and our
company’s performance are mutually exclusive. At the same time, information about
sustainability is extremely important to other stakeholders like the community living next to
the factory site since it affects their lifestyle, the local government that may be incurring
substantial expense to nurture back the environment or environmentalists that seek to protect
the habitat of other species. It might be critical for our company. Healthy environment and
society are key drivers to sustain our operations. “Can we do business in a world fraught with
sickness due to pollution?”
On the other hand, triple bottom line reporting framework focuses on a more broader view of
the company addressing the interests of various other stakeholders. These stakeholders
could our company’s employees, creditors, customers, communities near the factory site,
government etc. The objective is to force ourselves to identify areas within our operations to
create sustainable initiatives that would, in the long run, be beneficial to its current and future
stakeholders as well as to our company itself. It focuses on the impact of the decisions and
operations of our company on the society, environment, and economy. Known as 3Ps,
people, planet and profit, hence the name “triple bottom line”. Triple bottom line goes beyond
the financial aspects of an organization’s performance. This helps stakeholders make more
informed assessments of the opportunities and risks that the company faces.
(ii) Traditional accounting framework uses the reporting currency as the unit of measurement. It
follows the accounting and reporting principles generally accepted in the country it operates.
Materiality under this framework, is measured in monetary terms, that could impact the
decisions of a rational investor. On the other hand, there is no uniform standard or measure
for the TBL framework. Measurement of an aspect, therefore its materiality, could either be
financial or non-financial. Organizations could follow the metrics suggested in the Global
Reporting Initiative (GRI) framework. In India, efforts are underway to align the GRI with the
Business Responsibility Report (BRR) mandated by SEBI for some of the public companies.
The TBL report focuses on both the positive and negative impact of the organization’s
performance on the society, environment and economy. TBL reporting may be (i) core
reporting, report selective metrics or (ii) comprehensive reporting, a detailed report based on
the GRI standards.
In summary, while financial reports provide information about the profitability of our company,
TBL enhances the information available to various stakeholders who may hold different
perspectives of the company’s business operations. TBL will work well to supplement
information in the financial statements.
Overall business strategy should be linked to the TBL reporting to work towards a
sustainable future. Our company has already been working sustainability initiatives. Waste
generation is being tackled by our plant managers. Metrics for this report has to come from

various departments. Awareness about sustainability and its impact may open up
opportunities that are currently being overlooked. Our company has been a lifeline for this
town for the past 15 years. Why not use the TBL to highlight these positive aspects and
garner goodwill for our company? TBL reporting need not remain another administrative task
requiring just data gathering. It might vitalize our company to achieve greater heights of
success.
CS-17: PERFORMANCE MEASUREMENT IN NOT FOR PROFIT

SECTOR
The town of Silver Sands is located along the coast of the Caribbean
Sea. Known for its beautiful coastline and pleasant weather, the town
attracts a lot of tourists from all around the world. The town has two
beaches that are maintained by the local government and can be
used by the general public. In order to preserve the natural
ecosystem, other beaches on the coastline are not accessible to the
general public. Tourism is the main source of livelihood for its
residents. Consequently, cleanliness of beaches is of paramount impor tance in order to sustain
and develop this industry.
The local government has recently employed a contractor to clean up the beaches using beach
cleaning machines. The contractor has been selected through a competitive tendering / bidding
process. The contractor uses sand cleaning machines that are pulled by tractors. Sand is
scooped onto a conveyor or screening belt. It is either raked through (combed using prongs) or
sifted through (filtered), in order to separate the waste from the sand. The cleaned san d is left
behind on the beach while the waste is removed. Majority of the litter comprises of plastic waste
(bags, bottles etc.) while some portion also includes sea weed, glass, aluminum cans, paper,
timber, and cardboard. A detailed log is kept by the contractor about the stretch of beach that
has been cleaned, time taken for the clean-up, number of tractors used etc. This log is also
checked and signed by a local government official. This record is used to process payments at
the end of the month.
In addition to contracting with the vendor to clean machines, the local government has also
placed bins at various locations on the beach for the public to dispose their waste. The town’s
municipality workers clean these bins every morning. Again, detailed logs of the man power and
other resources employed is kept by the responsible department. In addition, the government
has opened a mobile messaging system, whereby the public can message the government
department if they find litter anywhere in the beach. Depending on whether it is from overflowing
bins or buried debris in the sand, the municipality workers or the contractor will take action to
clear it within 24 hours. A detailed log of these operations is also maintained. Patrons can also
suggest measures for improving cleanliness on the beaches.
Due to its importance to the economy, the local government has allotted substantial budget for
these operations. At the same time, it is essential to know if this is sufficient for the purpose of
keeping the beaches clean. Therefore, the government wants to assess whether the town is

CASE STUDY 12.67
getting “good value for money” from this expenditure. The “value for money” concept can be
looked at from three perspectives: (i) economy, (ii) efficiency and (iii) effectiveness. The Int ernal
Audit (IA) department that has been requested to undertake this study, has requested for
guidelines on whether the audit should focus on economy and efficiency of the beach cleaning
operations or on effectiveness of the same. Economy and efficiency audit assess whether the
same level of service can be procured at lower cost or resources while effectiveness audit
assess whether better service can be procured at same cost.
Depending on the outcome of the audits, if required, policy decisions like reque sting for
additional funding from the state government, alternate policy measures like levying penalty for
littering etc. can be taken.
Required
Prepare a letter addressed to the IA department.

(i) RECOMMEND guidelines to assess economy and efficiency of beach cleaning
operations.
(ii) RECOMMEND guidelines to assess effectiveness of beach cleaning operations.
(iii) IDENTIFY challenges involved in assessment of effectiveness?
(iv) RECOMMEND general guidelines, how the audit team may conclude the audit based
on the combined outcomes of economy, efficiency, and effectiveness?
Solution
Date 07- July -2020
Dear Sirs,
Re: The economy, efficiency and effectiveness of beach cleaning activities
(i) Economy and efficiency audit of an operation focuses on the consumption of resources
and the output achieved. Economy assesses the financial aspects of the activity i.e. are
the objectives of the activity being achieved at reasonable cost? Efficiency assesses the
volume of input consumed to derive the desired output i.e. are the resources and funds
being consumed to get maximum output?
To look at Economy of Operations, cleaning expenses need to be bifurcated into
payments made to the contractor and the expenses of emptying waste from bins. Any
further subcategories of these expenses, like labour, material, disposal van expenses etc.
also need to be collated from the accounting or cost records. These then have to be
compared to the budgets that were approved by the government of Silver Sands. The
competitive tendering process can be reviewed to ensure that the contractor getting the
order is offering the required quality of service at the lowest price. If the quality of cleaning
has been achieved, by staying within budget, the operation is economical. However, if the
actuals exceed the budget, the government has to compare them with cost of similar
cleaning activities carried by neighbouring towns. On comparison, if Silver Sands
operations are expensive compared to other towns, it indicates that not only are the
operations uneconomical they may not be efficient either.

Efficiency of Operations can be determined by checking the log records maintained for
beach cleaning by the contractor and municipality workers. These would have detailed of
activities carried out and the resources utilized for each of them. For each of these
services (beach cleaning and emptying out bins), the cost drivers can be identified and
certain metrics can be developed for analysis. For example, the cost of running the
tractors can be divided by the total number of tractors operated to get the cost of
operations per tractor or alternatively, by the kilometres of beach cleaned to arrive at a
tractor-kilometre rate. While analysing these activities, certain operational considerations
have to be given. For example, certain stretches of the beaches may take more time or
resources to clean due to issues like rocks or soft sand. Therefore, if resources for
operations disproportionate for certain parts of the beaches, the cost of maintaining those
stretches need to be worked out. Data to get this information will depend on the extent of
detailed maintained in the logs. This information has to be tracked over some period of
time in order to understand trends in operations and related expenses.
The data collected from the mobile messaging system should also be investigated. How
often and in what stretches of the beach are complaints frequent or maximum? Reasons
for these lapses need to be taken from the contractor (for beach cleaning operation) and
the concerned department (for emptying bins) in order to find out whether resources are
being employed properly.
On this basis, deviations and exceptions should be investigated. The loc al government can
then decide if there can be alternate sites along the coastline that may be more
economical and efficient to operate.
(ii) An audit about Effectiveness of Operations would focus how the actual cleanliness of
beaches compares with the desired level as laid out in the policy initiative. To assess
whether performance has been met, clear guidelines and metrics have to be defined
during policy implementation.
To begin with, it should be clear as to what constitutes litter. From an operationa l angle, it
would be difficult to clean out every bit of paper lying on the beach. However, it is possible
to pick up every soft drink aluminum can. Hence, the government authorities must be clear
on what constitutes litter? Which are the refuse that must be cleared within exception
(example food refuse, animal droppings, glass bottles, tin cans, trash bins etc.) and
tolerance level for certain other types of litter (e.g. Paper, seaweed etc.) that may get left
behind even after cleaning. Quantity of waste collected would be the indicator to make the
above assessment.
Certain other parameters like safety standards can also be defined. Safety problems could
be cuts from sharp objects like glass, incidents of vector borne diseases in the area or
health problems from polluted sea water. Assessment has to be made whether these
standards have been met.
For this, the primary source of information about cleanliness would be feedback from the
beach patrons. These could be in the form of complaints received directly or those through
the mobile messaging system would provide data to work out the metrics. This would be
an indicator of “customer satisfaction”. Other inputs could also be the suggestions given by
the patrons about ways to improve cleanliness on the beach.

CASE STUDY 12.69
Observation by making surprise visits to inspect the beaches immediately after the
cleaning operations would also provide sufficient evidence about the effectiveness of
operations.
(iii) Challenges Involved in assessment of effectiveness would be:
(a) Defining standards about what constitutes litter and acceptable level of cleanliness?
These are subjective guidelines, the perception of which may differ from person to
person.
(b) Beach patrons also play an important role in making this initiative effective. There has
to be a conscious civic sense of duty not to litter, failing which this initiative will most
likely be ineffective. Therefore, while measuring performance for effectiveness,
collection of more litter does not necessarily indicate effective operations. More litter
requires more cleaning and more resources, therefore is actually not a positive
indicator of effectiveness. On the contrary, in the long run, lesser litter collected to
maintain desired level of cleanliness would be a good indicator of effectiveness.
(iv) The outcome of the audits can indicate achievement any or none of the three parameters
of economy, efficiency and effectiveness of the beach cleaning operation. To form an
integrated conclusion based on the different outcomes of individual audits, the audit
team may consider the following guidelines:
(a) Has the objective of the cleaning operation been achieved as per the guidelines in
the relevant policy? i.e. have the operations been effective?
(b) If the answer to (a) is yes, are the expenses within budget. If so, then the operations
are economical and efficient. Given that the operations have been effective at the
same time economy and efficiency have been achieved, the team can conclude that
the cleaning operations policy has been a success.
A cost-over run can also be justified if the operations have been effective. In that
case, the audit team has to conclude whether all expenses incurred are indeed
justified and that the resources have been put to the best possible use. If not, can the
operations be made more economical or efficient?
(c) If the answer to (a) is no, the operation has not been effective, then is the difference
from the target is marginal or huge? If the operations have not been entirely effective,
but only by a marginal gap say 95% success, then analysis of expenses can be made
similar to the point (b) mentioned above. However, if the operations have been
ineffective to a larger extent, then the cleaning drive initiative has been ineffective.
The government has to look at alternate solutions of tackling the problem. These
could include imposing heavy penalty for littering, requesting for more funding from
the state government to employ better resources etc.
Therefore, it can be seen that achievement of one objective does not automatically lead to
achievement of other objectives. A holistic approach would be needed to draw conclusions
about the performance of the cleaning operations.
Should you have any further queries, please do not hesitate to ask.
Yours Faithfully
Management Accountant

CS-18: PERFORMANCE MEASUREMENT IN NOT FOR PROFIT

SECTOR
Cure Hospital is running under private-public-partnership (PPP) model - providing treatment for
non-communicable diseases. ABCO Hospitals Limited is the private partner which runs a chain
of hospitals on profit basis in major cities in India. The public partner is the State Government.
Cure Hospital is a "not- for-profit" hospital.
Private partner is to invest in Upgrading and equipping the facility and responsible for
operational management and service delivery. Government to provide physical space and other
infrastructure in “as is where is” condition, provide support facilities and hospital amenities.
Private partner assumes the entire responsibility, for a full range of investment operation and
maintenance functions. Private partner has the authority to make daily m anagement decisions.
The hospital is funded to a great extent by the State Government and a fixed level of funding is
received from the government each year out of the State budgetary allocation. It is up to the
hospital to allocate this fund to different areas such as doctors' and other staff salaries,
medicines and all other costs required to run a hospital.
Cure Hospital's objectives are:
▪ to give prompt access to high quality medical treatment for patients.
▪ to provide free treatment to poor patients in line with government policy of inclusive
development.
▪ to provide value for money for the taxpayer-measured by the 3 Es framework of Economy,
Efficiency and Effectiveness.
▪ to contribute to medical science by developing innovative ways to deliver treatment to
patients.
Except select surgeries, all services are free for poor patients that are below poverty line (BPL)
card holders. 40% beds are reserved for poor patients. Free out patient department (OPD)
services to poor. CT Scan and MRI diagnostics are free for poor patients, subsidised rates for
others. Cure Hospital also runs a generic medicine shop inside the hospital premises which
sells medicines to all patients at discount ranging from 40% to 56% - the only shop of this kind
in the city.
WHO has agreed to provide financial and technical support to the neonatal care unit. The
hospital enabled it to obtain five accreditation certificates from various leading authorities on
different aspects of hospital management.
Feedback is taken from each in-patient about the quality of service provided by the hospital and
the satisfaction level is taken in 1 to 10 point scale. 1 being the least satisfied and 10 represents
totally satisfied.
In a recent meeting of the managing committee of the hospital, discussions were held about
inadequate performance measurement systems in place to assess whether the hospital is
achieving its objectives and that insufficient attention is given to the importance of non -financial
performance indicators.

CASE STUDY 12.71
A four member team consisting of a performance management expert and three senior doctors
was created to give their advice in these aspects.
The four member team met with doctors, staff and other stakeholders at length and breadth.
Some of the conversations were as below:
Doctor A: I think the hospital always deliver value for money. We have always achieved our total
financial budgets.
Doctor B: We work here much longer hours than doctors in other hospitals, often without being
paid for working overtime.
Doctor C: There is not enough government and private partner funding to recruit more doctors
and paramedic staff.
Doctor D: Number of out-patients has increased considerably. Earlier an out-patient had to wait
for an average period of 2 hours 20 minutes and now the same has increased to 3 hours.
Senior Doctor K: I do not know how much time we spend developing innovative ways to deliver
treatment to patients though, as most of the performance data we doctors receive relates to
financial targets.
In-patient H: Incompetent paramedic staff, poor quality of food and bed linen.
Staff M: Management undermines our role in running the hospital.
Recent performance data of the hospital vis-a-vis national average are as follows:
Cure National average
Hospital of other PPP run
hospitals
Number of doctors 80 76
Average doctors' salaries per month including overtime `1,20,000 `1,60,000
Average doctors' salaries including overtime as per budget `1,20,000 `1,25 000
Number of in-patients treated 8,360 6,369
Average satisfaction rating of in- patients 6 9
Number of patients readmitted for treatment of the same 627 128
ailment within short period of time after discharge from the
hospital
Average staff satisfaction rating (0% represents totally 16% 86%
dissatisfied and 100% represents totally satisfied)
Number of out-patients treated 76,212 63,318
Required
(i) EXPLAIN why non-financial performance indicators are particularly important to
measure the performance of "not-for-profit" organisations such as Cure Hospitals.

(ii) EVALUATE whether Cure Hospital is delivering value for money for each of the
components of the value for money framework.
(iii) The CEO of the hospital intends to introduce a nominal fee for out -patient treatment
given to poor patients and remove subsidised rate of CT Scan and MRI diagnostic for
other patients in order to achieve its objectives in a better way. EVALUATE the proposal
of the CEO.
Solution
(i) Cure Hospital has been formed in a public-private partnership to provide quality healthcare
to the public, with focus on the poorer sections of the society. Healthcare service is
provided for free, except for select surgeries. A sufficient portion of its c apacity (hospital
beds) is reserved entirely for Below Poverty Line (BPL) patients. Generic medicines are
provided at a discounted price, to make them more affordable. World Health Organization
(WHO) has decided to fund its neo-natal unit. With all this information, it can be
summarized that Cure Hospital has been formed “not-for-profit” objective, attending to a
social cause of providing quality healthcare to the economically poorer sections of the
society.
Cure Hospital has been formed in partnership with ABCO Hospitals Ltd. and the State
Government. The State Government has provided physical space, infrastructure, other
support facilities and hospital amenities. ABCO Hospital, the private partner has the entire
responsibility of taking care of allocation of funds, investment, operations, and
maintenance functions. Daily management decisions are also handled by the private
partner.
Since the Government has provided substantial funding and facilities to Cure Hospital, it
owes a fiduciary responsibility of reporting the financial measures to its stakeholders, the
government in this case. At the same time, financial measures alone are not enough to
assess the performance of not-for-profit organizations. Due to its objective of public
service, measurement of appropriate non-financial metrics are equally important. The
reasons are:
(a) Benefits cannot be quantified: Cure Hospital essentially provides public healthcare
service to the economically weaker sections of the society. Due to political, legal, and
social reasons, not-for-profit organizations like Cure Hospital cannot be shut down
merely for not being economically / financially viable. Therefore, financial measures
are less relevant. Due to its non-financial objective, appropriate non-financial
measures become more important. For example, the benefits of saving lives cannot
be quantified in financial terms.
(b) Benefits may accrue over long term: The expenditure incurred in one year may
yield benefits over several years. For example, the investment in an In tensive Care
Unit (ICU) facility may accrue of multiple years. Neonatal care unit have been given
financial and technical support from WHO which will give long term benefits to
hospital.

CASE STUDY 12.73
(c) Measurement of utilization of funds and expenditure: In the case of Cure

Hospitals, many hospital services are free, allocation of capacity is aimed at
providing free service to the BPL section of the society, medicines are provided at
discounted rates. Therefore, Cure Hospital does not have a substantial revenue
stream to earn from its patients. It gets a fixed budget allocation from the State
Government, while ADCO Hospital allocates these funds for various investments and
expenditures. The assessment whether the spending have been appropriate is a key
challenge. Defining cost per unit would be subjective since it could be cost of patients
arriving at the hospital or cost of patients successfully treated at the hospital. Either
figure could be tweaked to make it seem that the objectives are being met. The
management may resort to rampant spending simply to meet the expenditure targets.
Therefore, non-financial measure need to be put in place help stakeholders scrutinize
whether the objectives for which funds have been given are being met.
(d) Multiple objectives: Not-for-profit organizations have multiple objectives. It may be
unclear which are the most important. Cure Hospital aims at providing high quality
treatment to its patients while also developing innovative ways to deliver treatment to
its patients. Both objectives are equally important and inter-related. Non-financial
measures provide better information about how each of these objectives have been
met.
The benefits of organizations like Cure Hospital are non-financial in nature. Except for
providing fiduciary information to the stakeholders, all other objectives of Cure Hospital can
be measure only using non-financial measures.
(ii) Value for money for Cure Hospital would comprise of the 3Es: Economy, Efficiency and
Effectiveness.
(a) Economy: Has the desired output (and quality of service) been achieved at the lowest
cost?
The medical resource at Cure Hospital in terms of doctors is 80, higher than the
national average of 76 at other centers. Doctor’s salaries would be a significant
expenditure for Cure Hospital. The average doctor’s salary at Cure Hospital
(including overtime) is `120,000 per month, this is within the budget figure as
pointed out by Doctor A. The salary is lower than the national average at other
PPP run hospitals, where doctors earn `160,000 per month. Therefore, economy
of money is being achieved at Cure Hospital.
The relatively lower levels of salary could be due to differences in levels of
experience or that the doctors at Cure Hospital work overtime without getting paid (as
pointed out by Doctor B). This may be one of the reasons why staff satisfaction is
only 16% compared to 86% in other centers.
(b) Efficiency: Has maximum output been achieved with the minimum resources?
Treating patients is the key objective of Cure Hospitals, while doctors are the main
resource to deliver it. The number of patients treated per year is a good measure of
efficiency achieved.

Cure Hospital treats 84,572 patients (in house patient 8,360 + outpatient 76,212)
while the national average at other centers is only 69,687 (in house patient
6,369 + outpatient 63,318). Cure Hospital has 80 doctors as compared to 76
national average. Therefore, each doctor at Cure Hospital treats 1,057 patients
(84,572 patients/ 80 doctors) as compared to 917 patients (69,687 patients / 67
doctors) at other centers. Resource utilization of its pool of doctors is higher in Cure
Hospital.
Doctor C mentions that there is not enough funding to hire more doctors and para -
medic staff. Therefore, there is a constraint on the limited resources of doctors and
support staff. This might be the reason, why each doctor at Cure Hospital works
longer than colleagues at other centers.
Therefore, while efficiency in terms of number of patients treated by each doctor is
high, there are other hidden costs that need to be taken into account. Few such
costs could be low employee morale, higher waiting time of patients to receive
treatment. This impacts the effectiveness of service provided.
(c) Effectiveness: Has Cure Hospital achieved its mission or objective?
Cure Hospital has the objective of providing high quality medical service to its
patients. Better quality of treatment would ensure that re-admission for treatment of
the same ailment within a short span of time would be minimal. Number of such re-
admitted patients in much higher at 627 at Cure Hospital as compared to 128 at
other centers. Assuming all such re-admissions to be in-house patients, this return
of patients for medical care for the same ailment within a short span of time is 7.50%
compared to the national average of 2.01%.
Prompt medical treatment can also be questioned since the waiting time of patients
to receive treatment has increased from 2 hours 20 minutes to 3 hours.
Senior Doctor K points out the time spent on delivering innovative care to patients
may be limited due to financial constraints and overwork staff.
All this would have resulted in dissatisfaction among patients, whose survey
indicates a score of 6 against a national average of 9. This shows that objective
of Cure Hospital is not being met effectively.
To summarize, Cure Hospital is achieving economy by maintaining lower salaries for
doctors. Out-reach to patients is also high as compared to national average. However, due
to limited availability of resources, doctors and staff are overworked. While it does well on
the efficiency aspect, it comes with a hidden cost in terms of dissatisfaction among
patients and employees and low quality of medical care. Therefore, medical treatment
is not effective, which is an important aspect in the value for money framework.
(iii) Proposal to introduce nominal fee for out-patient treatment given to poor people and
remove subsidized rate of CT scan and MRI for other patients.
Cure Hospital is a not-for-profit organization that aims at providing quality health
care to the economically weaker sections of the society. It gets its primary funding
from the State Government. It does not generate and is not aimed at generating
substantial revenue from its patients. The CEO has proposed to introduce nominal fee

CASE STUDY 12.75
for out-patient treatment given to poor people and remove subsidized rate of CT scan and
MRI for other patients. However, this would not help Cure Hospital achieve its objective.
The given problem seems to suggest severe constraint in the resources available to meet
its objectives thus impacting effectiveness of treatment. Each doctor treats 1,057 patients
in a month as compared to the national average of 917 in a month. Number of patients,
especially the out-patients is much more than national average. Overworked doctors
combined with limited staff resources is the main hurdle that Cure Hospital faces in
effectively achieving its objectives.
Cure Hospital is a not-for-profit organization. Therefore, generating nominal fees to
achieve its objectives would not help its purpose. Instead, it can apply for higher
budget allocation from the government. This can help it procure good quality resources
such as experienced doctors by paying them higher salaries including overtime. Better
qualified doctors can help provide not just better treatment but also innovative ways of
treatment to patients. Improved / enhanced facilities could reduce the waiting time for
medical care, enabling prompt medical service.
Improved service would result in better treatment, lowering the cases for re -admissions for
same ailment within a short span of time. This improves the effectiveness of medical care
provided at Cure Hospital. Better service would improve patient satisfaction. Quality
medical care would provide a better case for Cure Hospital to sustain its operations in the
long- run. The State Government may also more favorably consider any justifiable future
budgetary increments.
Overall, the management of the hospital seems to be indifferent to the opinions and needs
of the staff. The CEO’s decision has a very short term outlook that does not co-relate
with the organization’s objectives. By trying to off-set a limited revenue stream to
achieve its objectives shows that the management’s style of working needs improvement.
CS-19: COMPETITIVE ADVANTAGE AND CONTROL SYSTEM
Wings International is a major airline operating from India. It is the

biggest airline operator within the domestic airline segment and is a
well-established player in the international airline segment. Except for
a period of few years as outlined below, Wings International has been
operating for the last 3 decades in a segment that caters primarily to
the business and premium segment travellers. On its international
routes and certain long distance, yet busy domestic routes, the airline offers full service on -
board. The ticket price includes on board entertainment, transfer of baggage between flights,
more leg room, option to upgrade from economy to business class seats, meals, and beverages
etc. Baggage allowance is liberal with each flyer being allowed 2 checked in baggage and a
cabin baggage. A tag line in its advertising goes “GRAB YOUR BAGS, THEY FLY FREE”. In the
domestic segment, the airline operates across major metro cities and certain other tier -2 cities.
International flights operate only from these major metro cities.

Indian aviation industry has been growing exponentially in the recent years due to a thriving
economy. Consequently, there have been many new entrants in the domestic segment, offering
low-cost fares to customers. These airlines have been offering tickets at huge discounts,
thereby attracting a sizable chunk of customers away from Wings In ternational. To counter this
and maintain its market share, Wings International also followed suit. For a period of five years,
tickets on various domestic routes were offered at low competitive price. At the same time, low
fares can be offered only if it is profitable to do so. Therefore, certain cost management
measures were undertaken. Wings International converted to a “no -frills” airline on most of the
domestic routes. Now a ticket covered only the cost of the seat and 1 checked in baggage and 1
cabin baggage. Going further, baggage allowance was reduced to economize on space and fuel
requirements. To avail any other facility, the flyer had to purchase extra. Another measure
taken was to offer last-minute deals of tickets at a heavy discount if the flight is not fully
occupied. Vacant seats are “perishable”, therefore instead of letting them go empty, the flight
can be filled at cheaper rates. This yield management measure based on capacity utilization
was expected to increase market share and subsequently the airline’s revenue. Tickets could be
booked online using the internet rather than through ticket kiosks maintained by the airline at
various locations in selected cities.
In order to quickly respond to a competitor’s move, the pricing and marketing s taff were given
sufficient autonomy to make this price war work. Therefore, in many situations, decisions could
be taken even without the prior approval of the top management. Meanwhile adding to the stiff
competition, fuel prices have been soaring in the last few years. Maintenance of aircrafts, staff
compensation and other overheads have also been increasing. Landing fees in major airports
have increased manifold due to congestion and limited slots on account of multiple airline
operators vying for limited slots.
Given this scenario, after 5 years of operations, the management at Wings International found
that they were not able to generate sufficient profits on many of the domestic routes. A price
discount by a competitor had to be matched with a similar price discount by Wings International
and vice versa. Offering last minute deals to fill up capacity did not generate additional revenue.
The volume of last minute flyers was low. It was found that most flyers booking at the last
minute were anyway “price indifferent”. Had the deals not been offered, the flyer would have
been willing to pay more money anyway to use the airline. Therefore, neither did these deals
generate extra customers nor extra revenue.
Wings International has always been perceived to cater the premium segment traveller,
therefore participating in this price war had been contrary to its image of a premium quality
airline. This left a section of the customers confused about the product off ering. Therefore, the
management of Wings International decided to discontinue its discount pricing strategy and exit
the "low cost" airline business. The tickets are now being offered at its usual “full service” rates.
This strategy is proposed to be followed for both current and prospective projects and
operations.

CASE STUDY 12.77
The government has been formulating policies that are aimed at changing the landscape of the
aviation sector. Airports are being built in smaller cities and towns that until date did not have
one. This will improve connectivity within the country. It will increase air traffic as the public now
has an alternate means to travel other than road and rail transport. Instead of flying between
two small airports directly, Wings International proposes to develop a model where flyers from
smaller towns are connected to one of the major metro cities which will serve as a main hub.
For Wings International, the cost of operations will be lower as compared to flying point to point
between the two small airports. For the passengers, better connectivity and more route options
will be available. For example, a flyer from a smaller city, wanting to go to a destination abroad
can now reach the nearest hub by flying with Wings. From the hub, Wings International can fly
the passenger further to the desired destination abroad in its international fleet. For the flyer,
this is a better alternative as compared to reaching the hub by say road transport. For Wings
International, the proposition broadens its customer base. To this effect, Wings International is
already scouting the market for smaller aircrafts that can be operated more economically on the
hub-spoke route. Also, it is in talks with for partnership with other airlines, hotels, car rentals in
order to offer attractive holiday packages to customers. Since most of the other airlines do not
have the scale of operations to achieve the “hub-spoke” model or the ability to offer holiday
packages, Wings International identifies this as a unique proposition that it can offer its
customers. This time the proposed tag line for its advertisement would be “WINGS TO FLY
ANYWHERE, ANYTIME”. Also, Wings International proposed to increase the turnaround time of
flights for better capacity utilization.
Ticket booking is still offered over the internet. In the past, customers like this option due to the
convenience it offered. Dedicated customer service lines available 24 ×7 to resolve issues is
proposed.
The management of Wings International wants to have a seamless implementation of this
project. This could be a game changer for the company that will help it consolidate its position in
the aviation industry. Therefore, a meeting has been called to discuss critical reporting that
needs to be in place that ensures a successful launch.
Required
(i) EVALUATE the strategy adopted by Wings International in becoming a “no frills” airline.
(ii) IDENTIFY the strategy adopted by Wings International for the proposed project.
(iii) The entire strategy of Wings International for the proposed project depends on
information available about the future outlook in the industry. RECOMMEND guidelines
to the management to put in place a control reporting mechanism that can enable Wings
International to take preventive measures to avoid errors in its strategy.
(iv) In its previous venture, it took 5 years for Wings International to decide to exit the “no
frills” airline operations. To avoid a delay in taking such decisions, RECOMMEND
guidelines to the management to put in place a control reporting mechanism that can
enable Wings International to correct its errors and make changes in its operations in a
more timely manner.

Solution
(i) Wings International is a premium segment airline charging “full service” rates for its ticket.
However, due to intense competition in the domestic market, it adopted a “low-cost
advantage” strategy. Low-cost advantage or cost leadership was achieved through
following measures:
(a) Becoming a “no-frills” airline, where the ticket included only the seat and 1 each of
cabin and checked in baggage. All other facilities had to be purchased extra.
(b) Baggage allowance reduced to economize of space within the flight and save on fuel
costs.
(c) Online ticket booking facilitated so that the number of ticket kiosks maintained by the
airline were reduced.”
Cost leadership enabled it to offer “low cost” fares to the customers that was generated
through (a) giving huge discounts on ticket prices and (b) yield management of ticket price
based on capacity utilization of the flight. Although, due to its long-standing image as a
premium airline, the transformation to a “no frills” airline could have caused confusion
about the product offering in the minds of discerning traveller, who expect higher service
quality. This could have eroded the customer base in this segment.
This “Low-cost advantage” strategy did not work due to the following reasons:
(a) Price war from competitors reduced the ticket prices to levels that were unviable to
Wings International.
(b) Variable prices to fill up flight capacity worked against the airline, since it was found
that these flyers, due to their immediate need, may have willing to pay a higher price
for the ticket than what was offered as part of the deal. These flyers were “price
indifferent” which should have been used to Wings International’s advantage and not
against it.
(c) Costs of operations including fuel prices, aircraft maintenance, staff compensation,
overheads such as landing fees had been rising in the recent years.
Due to the above reasons, Wings International’s venture as a low-cost airline became
unviable.
(ii) Wings International plans to foray into offering its service to flyer from smaller cities. This
time it has adopted a “differentiation advantage” strategy. It is marketing in the following
ways as being different from its competitors:
(a) Offering a “full service” price where high quality facilities are provided to the traveller.
Facilities offered ranging from on flight meals and entertainment, better seating
options, liberal baggage allowance and transfer facility etc. differentiate Wings’
airlines from its “low cost, no frills” competitors.
(b) Ability to offer more connectivity to flyers as compared to other airlines using its
unique “hub-spoke” model. “Wings to fly anywhere, anytime” is a catchy line to
present this concept to potential customers.

CASE STUDY 12.79
(c) Ability to offer vacation packages due to strategic tie-ups with other airlines and
hospitality providers like hotels, car rentals etc.
(d) Product differentiation can also be made between the road and rail transport
providers. It can be based on relative facilities offered and better connectivity, if not
based on relative cost of travel.
(e) Dedicated customer service lines providing support to customers to resolve issues.
Superior quality, customer responsiveness and innovation will enable Wings
International to consolidate its position in the industry in the long run.
(iii) Management Control Report – Feed-forward Control Report
Management control is required to set performance measure to determine if the desired
objectives of the company are being achieved or not. Control is required at every stage
before the activity commences, while the activity is being performed and after the activity
has been completed. Accordingly, control reports generated could be Feed-forward reports
(prior), concurrent reports (during) and feedback reports (after).
When the management of Wings International wants to have a reporting system that
enables to take preventive measures, it would need to have a “Feed-forward” control. This
control will help measure the error before it actually takes places. Preventive measure can
then be taken to change the operational variables to achieve the desired result. G uidelines
to implement a “Feed-forward” control are as follows:
(a) Thorough planning and analysis are required. In the case of Wings International, the
proposal should be planned and analysed at various levels. The strategy of selection
of appropriate routes, “full service” pricing, strategic partnerships, financing the
proposal need to be taken at a higher level of management. Decisions relating to
flight operations, procurement of supplies like fuel, marketing, human resource
planning etc. can be done by the management in charge of operations.
(b) Careful discrimination must be applied in selecting input variables. Planning and
analysis should be done in an integrated fashion. There should be synergy in the
thinking at an operational level and top management strategic level.
(c) Feed forward mechanism should be kept dynamic. Wings International should keep a
close watch on the government policies and its implementation in the civil aviation
sector. Reporting may be done in pre-determined intervals say a monthly feedforward
reporting can be decided upon. Changes to plans should be made in a timely fashion
to make them relevant.
(d) A model control system should be developed. Authority and responsibility for various
functions need to be determined and clearly defined while developing this model.
(e) Data on input variables should be collected regularly. For example, Changes in fuel
prices, which form a large share of expenses, have to be tracked continuously. If the
prices are expected to fluctuate widely, hedging options or long term price
agreements with suppliers can be considered.

(f) Feed-forward control requires action. At the time of implementation, the control model
developed should be followed in order to establish a systematic course of o perations.
(iv) Management Control Report – Feedback Control Report
These are control reports that provide feedback about the operations. It tracks the actual
results with the budgeted / forecasted results. These reports in themselves do not cause a
change in performance. The management has to take timely action to correct the errors
and change its operations, if required.
Guideline to implement this reporting system are as follows:
(a) Feedback report should disclose both accomplishment and responsibility. As
discussed in the feed forward report, Wings International would have already put in
place an organizational structure defining individual authority and responsibility.
Performance should be tracked accordingly, so that individual performance c an be
assessed.
(b) Feedback reports should be extracted promptly. The management has to decide the
interval at which these reports need to be generated. The interval should be such,
that changes required can be assessed and action can be taken in a tim ely manner.
In the previous instance, Wings International had given autonomy to the marketing
and pricing division to take decisions to meet the competitor’s actions. It took five
years to determine that the project was unviable. However, a timely reportin g
mechanism such as a feedback report should have been in place to appraise the top
management about the decisions taken. This information would have enabled the top
management to make an earlier assessment as to the viability of “no frills” airline.
(c) Feedback reports should disclose trends and relationships. Trends could be customer
travelling preferences, deals offered by competitors or other changes in flight
operations. Relationships could be supplier relationships, customer relationships,
strategic partner relationships etc. Information generated from all these areas should
be collated in order to provide proper feedback to the management.
(d) Feedback reports should disclose variations from standards. These standards could be
from financial budgets or from non-financial metrics identified as key performance
indicators. For example, delay in flight operations could be a non-financial metric that
can be tracked against an expected standard set in the planning stage. The information
metric for actual operations should be assessed in the same manner with which the
standard was set. For example, a flight delay in operations could be a delay in arrival
beyond 15 mins. This same standard should be used to assess actual performance.
(e) Feedback reports should be in a standardized format. It should be easily understood
and well presented to the management. Facts should be stated without ambiguity and
in a standard manner.

CASE STUDY 12.81
CS-20: BEYOND BUDGETING

Magical Stay is a hotel chain that has properties in popular tourist destinations. Each hotel is at
least a 50 rooms establishment that has standard, elite and luxury size suites. Currently, the
chain has 9 properties spread across World. Magical Stay has its corporat e headquarters in
Singapore, from where the senior management operate. Operations management executives
are based out of each specific property that they cater to. Magical Stay is a public listed
company, with majority of its shareholders being institutional investors like mutual funds, banks
and insurance companies. Since these investors had a high stake in the company, they had
representatives of the board of directors to govern strategic decisions. One of the strategic
goals of the company for 2020, was to earn a profit of ₹1,500 million and keep increasing this
target by 10% each year. Due to recessionary conditions, business has been volatile.
Consequently, senior management is under pressure to meet the targets.
In order to have a defined plan for operations, Magical Stay prepares an annual budget for each
of the properties as well as one master budget that consolidates at a company level. There is a
separate financial and business analysis team that is in charge of this exercise. Key
assumptions and future expected trends are discussed at with the operations management of
each property. After incorporating the corporate headquarters numbers, the consolidated budget
is presented to the senior management for approval. In order to have a uniform policy ac ross
locations, key metrics like room rent per day, material procurement for kitchen and rooms,
employee hiring, capital investments at each property, advertising and promotional activities are
handled directly by the corporate headquarters.
The management at each location is responsible to ensure smooth operations of the hotel chain
by implementing these policies. The manager of each hotel property is given a target in terms of
revenue to be generated, room occupancy and profit to be achieved. Therefore, the
management at each location is also under pressure to perform and meet the target set by the
senior management. In the past, if the target had not been met for couple of years, the senior
management had closed down the hotel and exited the property. At the same time, best
performers are given more liberal budgets to operate on. Hence, competition between various
locations has always been fierce. There are constant negotiations for been given a “reasonable
/ practical target” that has to be achieved.
Monthly meetings are scheduled with the corporate office to explain variance of results from the
budget. The recent monthly results have shown that 7 of the 9 properties have consistently not
been able to meet the targets in the past six months. The situatio n is confounded because the
tourism industry has been affected greatly by recessionary trends in the global economy.
Therefore, the footfalls at the regular tourist places, where the hotel has properties, have
reduced considerably. In some places occupancy during peak season has only been 60%.
Therefore, operations are bleak and uncertain. At these meetings, the operations management
argue that due to this dynamic scenario, the budgeted targets set become obscure since they
are not based on the current circumstances.
The corporate office has met with the operations management at each of these properties in
order to understand the situation better. Discussions have taken place about how the business
can be improved. Few of the suggestions to improve performance are:

(1) When the hotel is not fully booked, especially during off-season, give manager at each
property the authority to rent out rooms at an attractive discount. These opportunities have
to encased quickly, therefore the decision about the rate would be better handled by the
personnel at the hotel. A guideline on the discount policy can be worked out with the
corporate office. This will ensure that room occupancy rates increase, while earning
reasonable return.
(2) Allow for procurement of kitchen supplies locally, rather than buying it only from specified
authorized vendors. Not only will this be cheaper, it also allows for moderate flexibility with
the kitchen menu that can cater to customer demands based on current availability of
supplies. Prior approvals can be taken by the management from the quality control
department to ensure that customer satisfaction does not suffer.
(3) A monthly reward and recognition program for employees, based on their service record
for the month. Recommendations can be from fellow employees or the location manager.
(4) Allow the location management autonomy, with a reasonable budget to cater to purchasing
equipment. In order to address certain urgent requirements or repairs, quick response from
the operations management is needed. The current process of getting approval the
corporate office is cumbersome since it takes a longer time. Autonomy can help address
these issues quickly without much damage done to customer satisfaction. Funding can be
quickly procured from banks if required.
Based on these discussions, the senior management has decided to decentralize all of the
above decisions. As a pilot project, they have decided against preparing a line -wise detailed
budget (sales budgets, operations cost budgets, advertising etc.) for eac h location. Instead the
operations management will be given clear targets at each of the locations regarding the key
profitability ratios, liquidity ratios and leverage ratios, as also guidelines on market share, quality
and customer satisfaction. These benchmarks have been finalized based on industry research
of peer group companies. However, the managers have the autonomy to achieve the expected
target based on their individual business scenarios at each location. The focus is therefore not
on achieving budget numbers that have been finalized. Instead management gets growth
targets to achieve.
One year after implementing this decision, it was found that company was able to meet the
shareholders’ expectations, have a robust growth and an energetic employee morale.
Required
(i) DISCUSS the traditional budgeting process had a negative impact on Magical Stay’s
operations.
(ii) EXPLAIN the philosophy behind “growth based targets” instead of “budget based
targets”.
Solution
(i) Magical Stay is operating in a business scenario that is highly competitive and dynamic.
Focus of the traditional budget was driven towards achievement of the company’s strategic

CASE STUDY 12.83
goal, which was profit target of `1,500 million for the year 2020. Accordingly, the senior
management followed a top-down approach to budgeting. Most important policy decisions
like room rent per day, material procurement, employee hiring, capital investments at each
property, advertising and promotional activities are handled directly by the corporate
headquarters. Management in charge of operations at each location only implement it. In a
changing business scenario, this budgeting methodology has the following shortcomings:
(a) Budgets based on these policies may not be flexible enough in a fast-changing
business environment. Although it is based on assumptions and expectations of the
management has made about the business growth, in a dynamic scenario, it is very
difficult to predict the future accurately. Therefore, targets or benchmarks set by the
traditional budgets may become outdated quickly.
(b) These budgets were based on business functions like sales, advertising, operations
etc. While a strategy for these functions is important, they are based on internal
benchmarks and assumptions made by the management. However, for the company
to be flexible in a changing environment, the focus should also be on external factors.
(c) The management aims to make a yearly profit that is 10% more than the previous
year’s profit. If previous year profit alone is the benchmark for growth, certain
decisions may be shelved because they may decrease current year’s profits below
target. However, had these decisions been implemented they may have generated
value in the long term and ultimately may have been better for earning profits in
future years. For example, certain capital expenditures that may need to be
undertaken quickly in order to improve customer satisfaction, may not be incurred at
all simply because there is no budget for it.
(d) Operations management did not have much autonomy since policies were controlled
at the corporate headquarters. At the same time, they were responsible for achieving
the targets set out as per the budget. Responsibility without authority creates a
negative working environment. Consequently, it might be difficult to retain talented
personnel.
(e) In order to meet budget targets, managers may try to negotiate for lower sales targets
to achieve, more budget allocations to meet costs etc. This does not fost er positive
business growth. Managers are more intent in meeting targets rather than focusing on
business growth. It leads to lower sales than can otherwise be achieved and leads to
protection of costs rather than working towards lowering operational costs .
It can be concluded that the traditional budgeting process was more inward looking.
Focus is on achieving budget target rather than implementing strategies that can
create more value to the company.
(ii) Following feedback from operations managers, the management given them targets based
on growth instead those based on the budget alone. This is the philosophy of “beyond
budgeting”. Below are features of this philosophy that has enabled Magical Stay to
achieve better results:

(a) It is a more decentralized and participative way of operating a business. Rather than
being made responsible for business decisions, which were not in their control, the
employees delegated responsibility, combined with the necessary authority to
execute decisions.
(b) Operations management and the personnel at each location are capable of quickly
adapting to changing market scenarios. Likewise, since they interact with the
customers directly, it enables them to make quicker decisions to ensure customer
satisfaction or identify opportunities to generate more revenue.
(c) Targets are based on performance of peer group companies. Benchmarks based on
peer group performance will be unbiased and reflects the current business scenario
better. Due to this, customer’s needs and satisfaction automatically gets priority. It is
the customers who ultimately drive business growth. Therefore, rather than having an
inward-looking outlook, focus is shifted to the external market conditions. Due to
autonomy, managers at various locations need not compete with each other for
budget allocation. This channelizes the operational focus to meet challenges from
outside competitors rather than having detrimental competition within the
organization. At the same time, the targets for the company are also based on
guidelines from the corporate office. Therefore, there is congregation of goals with
the shareholders’ expectations.
(d) Employee morale is also boosted due to the monthly reward and recognition system.
It fosters healthy competition among employees.
Since the focus is on growth, beyond budgeting can be a way of achieving better results in
challenging business environment.
CS-21: CONTROL THROUGH STANDARD COSTING SYSTEM
‘HAL’ is a manufacturer, retailer, and installer of Cassette Type Split AC for industrial buyers. It
started business in 2001 and its market segment has been low to medium level groups. Until
recently, its business model has been based on selling high volumes o f a standard AC, brand
name ‘Summer', with a very limited degree of customer choice, at low profit margins. ‘HAL’’s
current control system is focused exclusively on the efficiency of its manufacturing process and
it reports monthly on the following variances: material price, material usage and manufacturing
labour efficiency. ‘HAL’ uses standard costing for its manufacturing operations. In 20 20, ‘HAL’
employs 20 teams, each of which is required to install one of its ‘Summer’ AC per day for 350
days a year. The average revenue per ‘Summer’ AC installed is `36,000. ‘HAL’ would like to
maintain this side of its business at the current level. The ‘Summer’ installation teams are paid
a basic wage which is supplemented by a bonus for every AC they install over the yearly target
of 350. The teams make their own arrangements for each installation and some teams work

CASE STUDY 12.85
seven days a week, and up to 12 hours a day, to increase their earnings. ‘HAL’ usually receives
one minor complaint each time a ‘Summer’ AC is installed and a major complaint for 10% of the
‘Summer’ AC installations.
In 2018, ‘HAL’ had launched a new AC, brand name ‘Summer-Cool’. This AC is aimed at high
level corporates and it offers a very large degree of choice for the customer and the use of the
highest standards of materials, appliances, and installation. ‘HAL’ would lik e to grow this side of
its business. A ‘Summer-Cool’ AC retails for a minimum of `1,00,000 to a maximum of
`5,00,000. The retail price includes installation. In 2019 the average revenue for each
‘Summer-Cool’ AC installed was `3,00,000. Currently, ‘HAL’ has 7 teams of ‘Summer-Cool’ AC
installers and they can install up to 240 AC a year per team. These teams are paid salaries
without a bonus element. ‘HAL’ has never received a complaint about a ‘Summer-Cool’ AC
installation. ‘HAL’’s business is generated from repeat orders, recommendations, and local
press advertising. It employs three sales executives who earn an annual salary of `3,00,000
each. It offers a six-month money back guarantee and this has to be fulfilled for 1% of its
installations. ‘HAL’ has always been in profits but was shocked to see that in its results in 2019
it only earned 0.2% net profit on its turnover.
Required
(i) EVALUATE the appropriateness of ‘HAL’'s current control system.

(ii) RECOMMEND four Critical Success Factors (CSFs) which could assist ‘HAL’ in
achieving future success.
(iii) ADVISE ‘HAL’ about the changes it could implement in its standard costing and
reporting system to achieve improved control.
Solution
(i) HAL’s Control System HAL’s current control system is ‘focused exclusively’ on the
manufacturing process and its efficiency even though HAL is also a retailer and installer of
industrial ACs. It is suitable for HAL’s control system to monitor manufacturing efficiency
with the help of the three variances: material usage, material price and manufacturing
labour efficiency. No reasons have been given for focusing on these three variances
and there may be other variances which can provide useful control information that are not
currently computed for example, labour rate and material yield. Although HAL uses
standard costing, it is unclear whether it calculates product costs. A lack of product costs
computation may be the reason that it was shocked about its 2019 profit margin. Standard
costing could be in criticism for misdirecting management’s attention. Thus, in the case of
a ‘Summer-Cool’ AC where the highest standards of materials are used, it is pertinent that
the quality of the finished product is not compromised. Therefore, it might be proper to
accept an unfavorable material price variance to maintain the product’s
standards. Variance analysis should not be done in isolation but a holistic view needs to

be taken about HAL’s operations and the current control system may not lead to this. HAL
is not currently controlling and monitoring aspects which are important for competitive
success. HAL’s Critical Success Factors have not been identified yet. There is monthly
reporting of variances but in addition to this, there should also be follow-up actions for
outcome resulting from these reports. However, a month is not inevitably the relevant
reporting period for all aspects of HAL’s business. If there is a production problem leading
to excessive materials wastages, a month is too long time to wait before remedial ac tion
are taken. Therefore, real-time or coexistent reporting may be more relevant for
manufacturing operations. A major deficiency of HAL’s control systems is that they do not
extend to retailing and installation activities. The ‘Summer’ installation teams are
incentivized to complete ACs which could be good for their productivity. However, there is
a high level of complaints associated with their work. As there is no evident means of
monitoring the installation team’s work, the reasons of the complaints cannot be identified.
(ii) Critical Success Factors (CSF) are elements tied to the strategy of business and they
represent objectives that business is trying to achieve, as a corporation, as a department
or as a business unit. Critical success factors may vary over time and may include items
like employee attitudes, manufacturing flexibility etc. There are a range of CSF’s which
could be appropriate for HAL. They include:
CSF: Installations Quality There are different quality expectations for the two ACs and
there have been different levels of quality achieved, can be seen in the historic pattern of
complaints. This strongly implies that the quality of installation should be tracked as a
separate CSF for each AC. This CSF is important for HAL due to cost implications of
rectifications and guarantee claims. It is also important to consider that because of the
effect that poor quality will have on HAL’s future business.
CSF: Customer Satisfaction Like quality, this CSF will need to be monitored separately
for each AC. Customer satisfaction encompass the complete life of a transaction beginning
with the initial enquiry about a purchase and continuing after installation for the life of the
AC. Customer satisfaction will have an influence on HAL’s future business which is
dependent, in part, on repeat orders and recommendations. This CSF will also show the
market’s view of HAL’s brand.
CSF: Brand Performance HAL has two distinct brands. They are directed at different
market segments and have different associated attributes. ‘Summer’ ACs offer limited
choice to the customer and retail, on average, for `36,000. HAL would like to maintain this
business at its present level (7,000 ACs a year minimum) `252 million revenue. HAL
needs to ascertain where this brand is situated in its life-cycle and what marketing
activities may be required to support it. The ‘Summer-Cool’ brand is aimed at a different
market segment and HAL would like to grow this aspect of its business which produces
revenue of `504 million. The success of both brands is important for the continual success
of HAL and this CSF indicate a complete view of performance.

CASE STUDY 12.87
CSF: Manufacturing Excellence HAL manufactures all the ACs which it sells and installs.
Manufacturing must be a substantial part of HAL’s total costs and a significant contributor
to profitability. Currently, HAL monitors some limited aspects of manufacturing through its
control system. However, there are many other aspects which have not been reported
upon, for example- innovation, labour absenteeism, manufacturing flexibility and
investment in technology. This CSF is much broader than the current control system. It
also assists in searching for competitiveness.
(iii) Standard Costing and Reporting System HAL may be required to abandon or modify its
standard costing and reporting system. The rationale behind this is that the current control
system might lead to an inappropriate emphasis being placed on certain aspects of
performance. It is noteworthy that the installations for ‘Summer’ AC is causing a
substantial level of complaints whereas there has never been a complaint made about a
‘Summer Cool’ AC. It could be that the different remuneration arrangements for the ACs’
installation teams have led to this and as the complaint level is an important aspect of the
CSF i.e. Customer Satisfaction, HAL may need to modify its remuneration arrangements. It
should also reckon whether it would be benefited from a broader range of variance
reporting, for example, it may find reporting useful to report on labour rates and material
yield. For all CSFs, HAL will need to determine the appropriate reporting intervals.
Although it is useful to synchronize this with the accounting reporting cycle, CSFs and
KPIs do not necessarily coexist with accounting period ends. Some KPI’s may require to
be reported in real-time, for example, material wastage, others may be of a longer duration
like Customer Satisfaction. There is a strong argument for disassociation of the CSFs
reporting from the financial reporting cycles.

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Value Recoginition Value Chain Analysis

JIT, Kaizen, 5S, TPM,

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ESSENTIALS FOR CASE STUDY

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CS-1: VALUE CHAIN ANALYSIS, BALANCED SCORECARD, KPI

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Copper Prices Quoted on LME

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CS-2: VALUE CHAIN ANALYSIS

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CS-3: VALUE CHAIN ANALYSIS

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(ii) Alternate Performance Measurement Mechanism considering all Stakeholders

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CS-4: PORTER’S FIVE FORCES & DIVISIONAL TRANSFER PRICING

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CS-5: SUPPLY CHAIN MANAGEMENT

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The company is considering implementation of a supply chain management system. Will a

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CS-6: SUPPLY CHAIN MANAGEMENT

Memorable Travels is a tour operator offering holiday packages

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- to be able to monitor the performance of these suppliers. Performance has to be

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Service Delivery Management

Staywell Hotels was established 10 years ago as a budget hotel in the

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Marketing and Sales

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CS-8: KAIZEN COSTING

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▪ The company own 200 repair centres in various cities in India.

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The following are the key features of Kaizen -

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Gold-Star Limited deals in manufacturing of

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▪ Not needed at all – to be moved to red tag area.