1. QUESTION FROM TG

I have a question on your discussion of Question #1-3 (Pre-emptive product development with little marketing analysis). Your suggestion of a 3rd option of selling the foreign product under the name of the ‘company' (as an OEM relationship, possibly) could have quite a bit of legal ramifications if the ‘company' wishes to later sell a similar product. You mentioned that the ‘company' could use the foreign product to get into the market first, but then release their own product later. Wouldn't selling the foreign product preclude the ‘company' from later selling their own competing product (especially if it replaces the foreign product), unless the ‘company' could produce documentation to prove that the development of their own product was not based on or stolen from the foreign product?

Thank you, TG

P .S. I am enjoying the lectures greatly. The information has been completely relevant to my work position as a technical project leader.

ANSWER BY CMC
Tom asked a very good question. I am happy that he is thinking along. I like to encourage others in the class to think along as well. Because of the generic nature of his question, I like to share my answer with everyone else in the class.

"Selling a foreign product under the company name" does not mean that the company can grab a foreign product and put its own name on it. It requires that the company enters a contractual arrangement with the foreign producer. Typically, such an arrangement includes some of the following elements:

1. The contract is good for 2 years (say) and renewable with mutual consent.

2. The company agrees to pay a unit product cost of $xxx fro at least yyy units per year.The foreign producer agrees to hold the product defect rate at or below zzz/per thousand.

3. The foreign producer remains an exclusive subcontractor to the company for the product types in question during the contract period.

4. The company respects all proprietary design and other know-how of the foreign producer.

5. The company is responsible for marketing, distributing, selling and serving the products in the target markets (e.g., US). The foreign producers agrees to improve product design, based on the marketing inputs of the company.

6. The company strives to invest in the foreign producer for creating the next generation products. The foreign producer has the first-refusal rights to accept such investment (e.g., funds and technology).

7. Others.

The key advantages of such a win-win arrangement are:

1. The company can preemptively explore the market (test marketing, getting valuable feedback from customers regarding useful product features) without spending a lot of own resources.

2. The foreign producer achieves an instant profitability, which is assured for the contract period, plus the potential of additional future investment from the company for the next-generation product design and production.

Note that either party can cancel this win-win arrangement after an initial period of collaboration. The foreign producer can go to someone else for marketing the product in the target market. The company may develop its own products or engage another foreign producer as a subcontractor. Thus, selling the foreign product does not preclude the company from selling a similar product after the contract is expired. Companies change subcontractors all the time.

A well-known practice exists in the food market. Customers find brand name products sitting next to store brand products on the same shelve in a supermarket (e.g., Wegmens). Very often, the store brand goods are made by the same producer, which makes the brand name goods. The producer sees advantages in selling both at the same time, because it achieves a larger shelve space exposure and thus an improved overall sales. Having used a subcontractor to produce store brand goods does not prohibit the supermarket chain from engaging others to produce similar store brand goods in the future.

It is indeed illegal for the company to use any proprietary design of the subcontractor's product for the development of its own product or for use by its new subcontractor.

2. QUESTION FROM SC

You had mentioned in class that being in a line position generally offers better chances of promotion than being in a staff position. I agree with this statement and would like to offer some observations to support this.

Generally, line positions have the opportunity to add value to the product or service. Staff positions do not. If the line is considered the offense then the staff is the defense, the line can advance whereas the staff can keep from going in reverse at best.

Consider these positive offerings from the various line positions:

Engineering: "Look at the new product/process we developed."
Production: "We delivered ahead of schedule."
Marketing: "We've contracted with these new customers boosting sales."
Distribution: "We ship to the customer faster than before."

All these score brownie points with upper management.

With the exception of R&D which works closely with engineering and should probably be included with them, Procurement is about the only group that can also advance.

Procurement: "We've found better pricing on our supplies thereby reducing cost."

All of the rest cannot add value.

Safety & Environment: "Nobody got hurt and we didn't pollute." That is good: it is exactly what we are supposed to do.

Legal: "We won the lawsuit therefore we don't have to pay." Again, this is only holding ground.

Accounting: By their nature they cannot add value without breaking the law, as in cooking the books. They are necessary but provide support only.

Human Resources: The best they can offer is recruiting the best line staff to add the most value.

Also, since the staff groups generally have nothing to offer, any meeting between them and upper management would tend to be negative.
Consider again that Engineering may meet with management to propose a new product line. This sets a positive tone for the meeting. Legal would meet to discuss a lawsuit - generally a negative meeting.

Management, looking to promote from within will more likely remember the positive interactions than the negative.

Just a few thoughts., SC

ANSWER BY CMC

The comments offered by Steve regarding line and staff positions are excellent. I like to share his comments with everyone in class, see his email reproduced below.

Generally speaking, holders of line positions are authorized to make major capital investment decisions in an organization, hence are "powerful." They lead the so-called "profit centers." Holders of staff positions need to "beg" for money to cover the expenses of their organizations, the "cost centers." Being in a line organization allows an individual engineering manager to more easily network with other powerful people (e.g., general managers, vice presidents, president, and CEO, etc.), thus more readily forming alliances which are useful in getting new projects initiated and accomplished.

Staying in staff positions for a while is okay. Staying there for too long may be hazardous to your career life.

3. QUESTION FROM SS

I would like to learn about (1) The concepts of Supply Chain, and (2) How does it work in an organization. I would be glad if you could suggest me some books related to SCM.

Thanking you, yours truly SS

ANSWER BY CMC

It is good that your are trying to learn something about supply chain, which will be the subject of discussion in my class "Principles of Engineering Management II" next semester.

There is a basic procedure you need to become familiar with in getting new information. In the future, you will want to be independent in doing so.

Take the following steps:

1. Reach UB web site www.buffalo.edu

2. Go to libraries

3. Select Bison - UB Libraries Catalog

4. Click "Search the Catalog"

5. Enter "Supply Chain" into the keyword search box and activate search.

You will then get a list of books kept in UB libraries related to supply chains. The following three might be pertinent to your current needs:

1. Manish Govil, Jean-Marie Proth, "Supply Chain Design and Management: Strategic and Tactical Perspectives," Academic (2002).

2. Edward Frazelle, "Supply Chain Strategy: the Logistics of Supply Chain Management," McGraw-Hill (2002).

3. Lawrence D. Fredenfall and Ed. Hill, "Basics of Supply Chain Management," St. Lucie Press (2000).

Out of these three, the last one appears to be a good book for you to start learning about supply chains.

4. QUESTION FROM SI
I have a problem with one of the questions we did in class. Question 6-3 I don't understand why we had to take the discount factor when calculating P2. Could you please explain that?
Thank You. SI

ANSWER BY CMC
SI asked a question related to Problem 6-3. It is very important that all students clearly understand the simple but critically important concept of time line.

To calculate P2, you need to find the present value of all expenses for the resurfacing option. Note that the series of 10 payments of $2000 starts from year 6 on and no expense will be incurred in the first five years after resurfacing. Thus, there is a gap of five year between the starting point of paying $2000 per year for 10 years and the present time. Consequently, you need to first find the total lump-sum value of the 10 payments at the five-year (the beginning of 6th year) time point from the present time and then discount this sum back to the present time by using the discount factor of 1/(1.06)^5.

5. QUESTION FROM

You mentioned that an engineering manager can only contribute to reduce
costs by altering manufacturing parameters etc. this is very true. However,
I have worked in a very large undertaking in India where costs were
curtailed by spending very little on R and D. Depending upon the market,
taxable income can be reduced by not spending too much on R and D. For
example in third world countries companies need not spend too much on R and
D. This is my experience, please comment.

Sincerely, VS

ANSWER BY CMC
VS asked a question related to engineering manager's contributions to corporate profitability. I like to share my answer to his question with everyone.

Engineering managers are those who are responsible for engineering, technology and/or manufacturing activities within a corporation. They contribute to corporate profitability by raising the top line (e.g., new or improved products/service) and reducing the cost of goods sold (e.g., reengineering the processes and controlling quality). The corporate overhead expenses (including R&D) are typically outside of their domain of influence.

Many small- and medium-size US companies do not conduct in-house R&D. Companies with no R&D must build their core competencies in areas such as (1) continuous improvement to become and remain a leading low cost producer, (2) marketing and sales excellence, (3) superior customer service, (4) supply chains proficiency and others to distinguish themselves from the competition.

A large number of companies have succeeded in adopting a "follower strategy." These companies do not conduct in-house R&D but watch the market leaders closely. As soon as the market leaders come out with new products and are able to achieve some initial commercialization success, these "followers" would gear up to create imitation products and sell them at low prices to compete. The key factor for achieving success using such a "follower strategy" is the capability of responding to new market needs quickly by mobilizing resources (e.g., via supply chains) to develop and market imitation products.

Corporate R&D may not be needed or useful for some companies. However, all companies do have to have something the customers are willing to pay for (e.g., convenience, speed, service, quality, price, etc.).

6. QUESTION FROM VS

My doubt is, why does the accumulated depreciation appear in the asset's
column when it actually reduces the fixed assets value. VS

ANSWER BY CMC
The accumulated depreciation is customarily listed under the Fixed Asset line item on the balance sheet for two purposes. It reports the total sum of all declared depreciation charges over the years. It also facilitates the computation and verification of Net Fixed Asset, which is the difference between Fixed Asset (e.g., sum of all original investments in tangible assets) and the accumulated depreciation. The accumulated depreciation charge itself is not an asset.

7. QUESTION FROM SG

I afraid I am a little bit confused with the term best practices. Do I have to describe the best e-transformation techniques that are followed by industries, and describe why they are the best? (if it is the case are there any e-transformation practices that are not best?)
Or do I have to examples of corporations that have made good use of e-
transformation? Please suggest a few reference books for the subject.
Thanking you. SG

ANSWER BY CMC

SG asked about "best practices," and how are they defined. Since I included "best practices" in the term paper assignment sheet, I thought it would be proper to make my answer to his question available to everyone in the class.

Some time ago, a well-known US consulting firm conducted extensive surveys of business/engineering literature and its own company consultation databases and recognized several companies on an annual basis for their successful business/engineering projects who produced outstanding results (e.g., profitability, productivity, speed of innovation, etc.). By publicizing these "Best practices," the consulting firm wanted to highlight these "excellent'' examples as benchmarks for others to follow.

From that point on, the term "best practice" has gained popularity in industry to indicate any identifiable practices which have shown to produce useful results, whether or not these practices have been recognized by someone as "best" or not.

For the EAS 522 term paper at hand, it is not necessary to collect only those practices, which had been designated as "best practices" by certain organization. Any successful applications, preferably by major corporations, will serve a useful purpose for us. It is however important to describe the nature of the "best practice" involved, including, companies which practice them, unique processes followed to implement the practices, special benefits derived, and overall significance perceived. For us, the primary purpose is to have some real-world "benchmarks" as bases for comparison and references related to the topic under discussion.

8. QUESTION FROM KM

I've been working on the Case study assigned for Tuesday and I am having some trouble with question #2. I am having difficulty understanding what finances go into each year depending on the wave. In addition, I am confused on how to set it up in Excel, do you want three different spreadsheets for each improvement?

KM

ANSWER BY CMC

KM asked about the best ways to address Question # 2 related to the Whirlpool Europe case, which we plan to discuss on Tuesday, March 18.

The way I recommend you to proceed is to construct one spreadsheet for each wave to include the following three changes due to the incorporation of ERP.

1. Increased unit sales due to improved availability
2. Increased margin
3. The inventory reduction

These changes are to be defined by comparing the data "before" and "after" ERP.
In addition, it may be helpful to create another (fifth) spreadsheet for properly incorporating depreciation related to capital investment that is to be sequentially activated and other expenses in a timely manner.

After these five spreadsheets are set up, then create another (sixth) spreadsheet for the company's Income Statement, which incorporates all inputs noted above, accounts for corporate tax, and defines the Earning Before Interest After Tax (EBIAT). In this sixth spreadsheet, the annual cash flows are then determined, including its present value.

9. QUESTION FROM SG

Would you clarify my doubts:

1. Can inventory reduction is calculated only from reduction in
warehouse space required or any other calculations also to be done
based on decrease in DSI.

2. I am taking product availability improvement on cumulative basis.
First year in West it increases from 73.5% by 1.25(25%improvement),
next year this improved availability again improved by 1.4 so on. But
product availability is crossing 100% after 2 or 3 years. Am I doing
correct? SG

ANSWER BY CMC

For the West Region, the DSI reduction goal is set for 12 days. This goal is to be achieved 25% the first year, 40% the second year and 35% the third year. With this information on hand, the new reduced inventory levels are determined. A reduced inventory saves working capital expenditure. The savings so realized represent a benefit to the company.

Product availability is to increase for a total of 25% (from 73.5% to 92%). This goal of reaching 92% is again to be achieved 25% the first year, 40% the second year and 35% the third year. It will not exceed 92%.

10. QUESTION FROM SG

I think margin given in the problem would be (Price-Cost of Goods Sold) as it was given in the form of dollar figures, not as a percentage.

Would you please tell me the reduction in working capital/inventory can be done by reducing the cost of goods sold. I could not find any other data for inventory estimation to reduce it in different waves. sorry for asking so many doubts. SG

ANSWER BY CMC

Both of us are right. The margin can have two different units, in $ or in %. Yes, I gave you the margin in % definition. This is what you need to use, as the percentage of margin improvement is specified in the case. For example, in Exhibit 5 of the case material, the margin is to increase by 0.06% in 2000 and 0.25% in 2001 and all subsequent years for the West region. Once you have the margin in %, then you can of course compute margin in $ by multiplying the margin % with price.

The cost of goods sold is assumed to remain constant, as it is not affected by ERP. So the increased margin must be realized by a product price increase.

Inventory estimation is related to DSI (days sales inventory). This number is projected to decrease by 12 days in this case, in steps over a -three-year period. You need to use the formula to define the new inventory levels:

DSI = Inventory / (CGS* 365)

Note that CGS (cost of goods sold) is for the annual product sales.

11. QUESTION FROM PSL

I have been working on my term paper [Contributions of Engineering Managers to Corporate Renewal]. I discovered that Re-engineering is intended to serve as a tool to help managers address the human resources implications of re-engineering activities. Is it possible to narrow the topic only on Re-engineering or make it broader using Information Technology and so on.?

Thank you in advance. PSL

ANSWER BY CMC

Your topic "Contributions of Engineering Managers to Corporate Renewal" needs to be more broadly focused on activities that cause companies to renew themselves (e.g., achieving better profitability, and become more stronger and competitive). Reengineering is only a small part of it.

Generally speaking, we define reengineering as efforts which modify/simplify work processes (e.g., product design, production, marketing, order processing, supply chain management, product delivery, customer service, etc.), so that reduction of cost, improvement of output quality, improvement of customer satisfaction and other such worthwhile corporate goals can be achieved. As Internet-based technologies continue to improve, such reengineering efforts are likely to produce increasingly useful results leading to corporate renewal. Thus, reengineering is not limited to dealing only with the human resources issues.

Besides reengineering, corporate renewal may also be achieved by (1) adopting new/modified business models - ways by which to make money for the company (e.g., use Internet to process orders, create online product catalogs to distribute product information, and speed up services), (2) innovate production strategies (e.g., supply chains, alliances/partnerships, outsourcing non-core activities, etc.), (3) improved operational strategies (e.g., implementing enterprise resource planning tools - Note what we are going to talk about tomorrow, Tuesday, March 18, 2003, the Whirlpool Europe case).

I believe you need to cast a wider net in addressing this topic than limiting yourself to reengineering alone.

12. QUESTION FROM KM

I am still having some trouble understanding the different spreadsheets. Will each spreadsheet for each wave consist of all the years? Or does each wave cash flows just consist of the year that they are implemented? KM

ANSWER BY CMC

Consider each region (e.g., West, South, Central and North) as being operated independently from each other. Therefore, each wave must be modeled in a multiyear format, as the impact of ERP in that region continues during the period of 2000 - 2007 although ERP starts sooner in some, later in other regions. The region-based cash flows are to be estimated for the whole period 2000-2007.

Then the four spreadsheets are to be "rolled up" to create the company-based income statement, also for the period 2000-2007, by aggregating the cash flows of the four regions.

13. QUESTION FROM SG

I got some free best practice case studies related to use of e-technology in business from bestpracticedatabse.com. Is it ok to just analyze the case study. Since I myself can not go through any individual company database to the extent to perform case study my term paper scope would be limited to analysis of best practice. I can not get 2 or 3 best practices on a single topic (as the examples I attached are all are different), so I can not compare between two, but only can come up with analysis. Would that be good or am I limiting my project scope. I wish you advice.
Thanking you, SG

ANSWER BY CMC

Thanks for the attachments. One way you could organize the information you got from the Internet is using a tree-diagram, consisting of trunk (e-transformation), branches (major e-transformation strategies), minor branches (specific techniques applied in each), and so on. Once such a tree is set up, you could then start categorizing information collected from the Internet. Doing so will allow you to have a good overall picture of what you have, before spending time to read each of them closely. Using additional key words to narrow down your search in areas where you need additional data.

14. QUESTION FROM

Would you please tell me do I have to quote references, if I choose to take any definition or text directly from some book or resource. Can I do it?

If I get some thoughts related to my topic, but I have not read them anywhere in books, can I include them, without hesitating, in my paper? Please answer me.
Thank you. sincerely, SG

ANSWER BY CMC

SG asked a couple of good questions regarding the inclusion of published and self-generated information in term papers.

Yes, you can take words, texts, ideas/concepts and information from a published source for use in your term paper. But, you need to offer a reference to the source, either as a footnote or using a reference number. Doing so is a common professional curtesy. If you use sentences from these sources directly (without modification or paraphrasing), then these words must be in quotations.

Of course you are welcome to add your own ideas at any time. You could distinguish your own ideas from those of the published sources by simply adding descriptive terms such as "In my opinion, ....., " "I personally believe, ..." "my assessment is that ..." "I personally regard this to be ......" and others.

15. QUESTION FROM SF

Can you please send me some feedback on my first writeup as to why I got a B+? Am I supposed to focus more on what I learned or what I did, or both?

Thanks, SF

ANSWER BY CMC

You asked for some feedback regarding Case #1 and I am happy to provide you with some comments.

What you have written is a summary of the case. You have essentially repeated the answers to all five questions. These are NOT the lessons one should have learned, as the case details are there to serve a purpose and to offer a takeaway message. If you then ask, what ARE the lessons from this case, perhaps the following will help:

For companies having multiple products and with overhead costs representing a large percentage of total product costs, the ABC system is likely to produce detailed enough cost data potentially useful for strategic decision making, as demonstrated in the Destin Brass Product case. Engineering managers need to become familiar with such a costing system, as companies will benefit from a proactive application of ABC in creating and sustaining competitive advantage in the pricing of products.

16. QUESTION FROM KH

I have an additional question. I have focused mainly on "Best Practices" of Web-Enabled CRM Providers rather than Users . Can I gear my paper toward Best Practices of Companies who are CRM Providers?

Please advise. Thank you, KH

ANSWER BY CMC

I assume that by CRM providers you mean the companies which sell CRM products. In contrast, users are those who buy these CRM products in hope to gain value measured in metrics such as better customer satisfaction, increased percentage of repeated business, expanding market share, etc.

Intuitively, I would think that the CRM best practices defined by CRM providers may be based on criteria which are quite different from those by CRM users.

Many years ago, a well-known consulting firm spent a great deal of efforts to search for company practices in many engineering/business domains which produced significant value (e.g., profitability, productivity, etc.). Those regarded as excellent examples were coined "best practices," so that other companies could imitate and follow. The companies that practice these "best practices" were recognized by this consulting firm with annual awards. From this historical perspective, we should say that "best practices'" are primarily user-centered and results-oriented.

Thus, I would tend to rely more on the users to tell me which CRM products are useful, not on the providers. Both the CRM product features and the ways these products are being used will have an impact on how much value these CRM products can effectively create for their users. Best practices are typically defined based the application results gained by many users, not on what the providers have advertised.

17. QUESTION FROM JK

I just finished listen to the lecture and wanted to make a few comments of my own.

1) I feel the president made a very large mistake, having two teams investigating possible solutions. At worst case if he was looking for different options, he should split the teams along different lines. By having maybe the Director of Planning and VP of manufacturing as one team and the VP Sales and Director of research as another team, they probably would have come up with plans that had more common ground. Using the given scenarios, it will be more difficult to have the two teams come together after giving such divergent approaches. Also I agree with your comment, the fact the president should never had presented two plans to the board. Would not the board question his ability to lead through this important change?

2) I kept thinking that it might be the time to sell the business? At least determine if there was a worthy offer available for the company. The plan B stated they were 5 years behind in regards to the new market, is it already too late? How much of the current companies assets could be directly attributed to the new company? Would it require all new skill sets, equipment , buildings , ect.,? This maybe in the best interest of the shareholders or owner.

Just my thoughts... Regards- JK

ANSWER BY CMC

Thanks for your comments regarding Question # 2-9.

Indeed, the president's leadership role is called into question in that he apparently forgot to specify a vision and some general guidelines (considering both short term and long term benefits for the company) for the four people to develop strategic plans. Allowing two plans to be presented to the board, while adopting the "sitting on the fence" stand himself, is a no-no.

The four managers have honest difference in opinion because of background and experience. What might be the best way for the president to reconcile these differences under the circumstance and come up with a useful company strategy acceptable to all? I prepare an elaborated "answer" to question #2-9 and this answer will be distributed to every one shortly, along with answers to all other questions in the chapter.

Personally, I do not favor selling the company at this time, partly because doing so would appear to be ducking the corporate responsibility and taking the easy way out. The company is not in a "hopeless" state and it is only being threatened by new technologies. Notice, certain corporate assets are of value even to the company when pursuing the computer-centered new strategy, such as brand name, company history and reputation, credit records, network of dealerships, distribution channels, customer loyalty and others. Thus, it is not true that the old company based on mechanical technologies will contribute little to the success of the new company based on computer.

On the other hand, if some people in the old company does not have the abilities or refuse to learn new technologies and the new ways required to do business, then keeping these people on the payroll will prevent the company from achieving success with computer-based strategy. Mental rigidity on part of the company leaders could hurt as well. That is the job of the board to screen them out, such as getting a new president in.

To pursue a balanced strategy of seeking both short-term and long-term values, the company may need to initiate a corporate renewal program by consolidating the current product lines and production facilities on the one hand and creating a new division, with new people and leadership, to pursue aggressively the computer-centered technology and products on the other. Acquisition of selected computer-based products is a fast way of entering this new market. Contract manufacturing is another option, with importing from overseas being the third. Hiring a few knowledgeable consultants to work out a transformational strategy for the company is probably advisable for the board to insist on.

18. QUESTION FROM EM

I am starting on the term paper and would like you to answer a few questions. Is there a particular style or format that you or the university requires? If so, please forward that information to the class. How long would you prefer the paper, and would you proofread the paper if we were to deliver it 1 week in advance?

Thanks. EM

ANSWER BY CMC

Thanks for your email regarding the preparation of the term papers. All of your questions are of generic nature.

There is no specific style format for the term paper to fit. However, students are encouraged to use the "Technical Article" format, which is adopted by all engineering authors publishing articles in technical journals. According to this format, information is organized in sections, each having subsections, if needed. Typical section headings include introduction, method of research, best practices, improvements of best practices, summary and conclusions, literature references and appendices, if applicable. Graphs, tables and footnotes are to be added in the appropriate places. Literature sources and web sites are to be carefully quoted. Please consult one of such journals (e.g., Mechanical Engineering) in the libraries.

One objective of this term paper assignment is for students to practice technical writing, such as using simple sentences to convey ideas clearly and eliminating redundant and circular arguments. It is a good practice to try to convey the maximum amount of information with a minimum number of words, in order to be concise. The other objective is to practice Internet-based search and information organization so that a given topic can be exhaustively studied and logically presented to create instant understanding. Of course, the third objective is for the students to learn something new about a topic of interest.

The length of term paper could vary. I expected it to be in the range of 15 - 20 pages, typewritten, double-spaced, and single-side printed, although there is no rule prohibiting it to be somewhat longer.

I do not proofread the term papers before submission. However, I will offer written feedback to each of the term papers submitted.

19. QUESTION FROM PP

Please review my rough draft of term paper and given me some comments. Thanks. PP

ANSWER BY CMC

One student sent me his rough draft of term paper for review. I like to share my review comments about that draft, as reproduced below, with everyone in fairness to the whole class.

"The term paper is largely unfinished. So far, a lot of technical details have been assembled without a clear delineation of the OLAP (On-Line Analytical Processing) values to managers:

1. Why was OLAP selected by you in the first place as a term paper? Was it because the technical references on OLAP were available to you, or some other reasons?

2. How different is OLAP from other decision support tools available in the marketplace?

3. What is the real value of this difference, if any?

4. Why is OLAP particularly useful to managers?

5. Is OLAP equally useful to non-managers, when they make decisions?

6. As we are not interested in sheep farming, trade, railroad, bank and retail clothing operations, why is OLAP useful to companies in the 21st centuries marketing technology-intensive products?

7. Which companies are using OLAP now? What specific values have they been able to create using OLAP?

These are just a few examples of management questions one must ask when appraising a new decision support tool. You need to think along this line to write a persuading story about OLAP, while minimizing the technological details, which will only confuse the readers - the classical mistakes many engineers are making during their career life.

Think it this way. If you were the CEO of a company and someone comes in to convince you that your company should invest in this OLAP technology. What would you ask as questions and what information you would need to make your investment decision? You will be thinking mostly abut the OLAP values to company in relationship to the cost of acquiring OLAP, not the technical details, which can be readily taken care of by your technical staff or the IT department! Thus, writing about the technical sophistication of OLAP only is the wrong thing for you to do. Your term paper needs to cover these missing materials.

20. QUESTION FROM AH

Can you please send me the file where you added your comments for our term
paper. Sir, I was recently in New York City for the Thanksgiving break and had the
opportunity to attend a guest lecture at Columbia University, where the speaker was speaking about ASP, something on which my term paper was ("Application of Emerging Technologies to achieve business success").

Sir, you were not convinced that this was essential in providing business success, and could serve purposes namely for payroll, accounting. Sir, pls. let me put forward my case.

In any organization information systems forms one of the cores of competitive edges. the ability to have the right information at the right time gives firms the competitive edge.
Any modern technique that we see today, JIT, Supply Chain Management, 24 automated customer service, all rely upon information systems. Another trend that is hot and will become the major feature in the times to come is e-commerce.

Now, all these technologies require the use of extensive information systems, and as shown in my cost analysis the costs of owing these can be very large.

If we consider a manufacturing firm scenario, a large size firm can bear the expense of implementing JIT/SCM and as a result of its strong funds bear the expenses over a period of time. Implementing JIT will further make it more efficient and competitive in the market. And hence it will take a greater market share. But the implementation of JIT involved a huge expenditure in information systems (server, clients software etc).

Now a medium size company will find it hard to implement JIT as the costs can outweigh the forecasted earnings. And hence it can be thrown off competition. To stay in the competition it has to adapt to the trends in the industry. And the only was it can achieve this by using ASP technology.

Sir, ASP technology aims at giving you the information system you need to achieve business success. It maintains the servers at its facility and users at the firms location have remote access to their database.

In time to come when everything will be e-transformed every firm will rely heavily upon information systems. To remain competitive those who cannot afford it will have to use remote servers or ASP technology.

The uses of information server in a firm are various: (1) JIT, (2) SCM, (3) company performance analysis, (4) customer service, (5) operations, (6) e-commerce, (7) order tracking, (8) marketing, etc.

Sir, I don't remember all the comments you made about my term paper. But
pls. let me know what you think about this e-mail. Regards, AH

ANSWER BY CMC

What you have learned at Columbia University is very much consistent with what we teach here. The information you got there is valid. The written comments I had for your term paper were as follows:

"The term paper provides a narrow-scope discussion of the way software products are to be used to achieve business success, namely, by the use of ASP (Application Service Providers). It reads like an advertising piece promoting the ASP business.

Using ASP does have advantages to some companies. It is particularly attractive to small and medium size enterprises, which could access sophisticated and up-to-date software products rather quickly following the "pay-as-you-use" model without having to commit major investment capital. The software products involved are typically related to common administrative/business processes, such as accounting, human resources management, benefits administration, CAD design, payroll and others.

Companies using ASP cannot achieve and sustain any competitive advantages, because their competitors can also readily acquire the same services from ASPs. In order to achieve sustainable business success, companies will most likely need to customize software products in order to incorporate company-specific knowledge and procedures.

This term paper has a total of 25 pages, 16 of which is consumed by a table of company names. This is a "lack-of-being-concise" practice all engineers should definitely avoid. Using a lot of pages to convey such a little information is not useful. The 16-page table could be very easily replaced by a paragraph containing two or three sentences. When communicating in writing, all student should strive to convey "most information with the least number of words."

By the way, the most valuable asset of any company is not information, but people, who collect, interpret, and apply information to gain business benefits.

Now reread your and my comments above. Do you see any difference? Why did you waste 16 pages to include a table of all available ASP vendors in your term paper, out of a total of 25 page write-up?

21. QUESTION FROM DT

I do not know if you will be able to help me out, but I am having a great
deal of trouble with part b of the second problem. I have tried to perform
a funds flow analysis, but my numbers do not add up. If you can help me in
any way, I would really appreciate it.

Thanks. DT

ANSWER BY CMC

In response to DT's inquiry regarding the Problem #2, Part B, I like to state that the funds flow analysis is based on the following simple principle.

An increase in company asset over a one-year period indicates a use of funds by the company and a reduction of company asset provides a source of funds. Conversely, an increase of company liabilities is a source of funds for the company, and a reduction of liabilities represents a use of funds.

Examples - If you buy a new car, you will increase your household asset. Buying a car requires you to take money out from your savings account and give it to the dealership. Hence raising household asset represents a use of your household funds.

If you have bought a house on credit and in the last year you made your monthly payments. A fraction of your monthly payments went to pay down the loan principal, your long-term liabilities. Thus, at the end of the year, you owe the bank less money than at the beginning of the year; thus, you reduced your long-term liabilities. Doing so requires that you use funds to make the 12 monthly payments. Hence, a reduction of liabilities represents a use of funds.

For an actual example, please see Slide #23 of Chapter 3. There, using the data shown on Slide #21 and following the line items indicated, you will be able to understand and reproduce the numbers shown.

22. QUESTION FROM WC

My term paper topic is 'Web-enabled production of technology/engineering product'.
I been researching for the above topic and have a few questions on this topic:

1. Since a production system involves the manufacturing support (front-end
office) and the factory/manufacturing/automation (back-end floor plant), do
I need to cover both respects?

2. Since most of the web-enabled processes are related to manufacturing
support processes( customer order thru web, master scheduling, supply chain
management, product life cycle management, logistics), and this part of the
subject is so much related to BTO system, can I use some of the info. from
my previous term paper done for EAS 521? In fact, I think the BTO system is
a very good example of Web-enabled production of technology/engineering
product.

If I were totally off the track of what you expect from the term paper,
please let me know.

Regards, WC

ANSWER BY CMC

Let me try to answer your questions as best as I can.

Answer to Question 1: Because we are more engineering than business oriented, I suggest that you focus on the backend only, for which more engineering technologies are required

Answer to Question 2: BTO applied primarily to commodity-type of products (e.g., computers, music, cars, cosmetics, books, appliances, etc.) for which there exist many suppliers capable of providing the needed parts or subassemblies. BTO is just only one production system type, which had been successfully applied by Dell computer for PC systems and is being developed by Big Three automakers for cars. Many other manufacturers are not yet involved in BTO.

If you had already done some analyses of BTO last semester, then I suggest you avoid that part, as the term paper assignment should offer you diversified exposure to other issues of importance.

One possible way to write this term paper is to determine first what might the critical issues involved in a non-BTO production systems, say, in a multi-plant environment involving geographically dispersed suppliers for parts and subassemblies (if the company has very thing under one roof, then it is unlikely that any web-enabled tools can add much value)? Because of the distance, supply partnerships and diversified people involved, there will be certain issues which could be more readily resolved by using web-enabled technologies as related to communications, coordination, trust building, document transfer, information (standards, specifications, best practices, know-how) sharing, quality assurance, and others. Then determine what web-enabled tools are available which can help addressing these critical issues. After that, locate some sample companies which are actually applying these tools to achieve well-defined benefits for the production process involved.

23. QUESTION FROM DG

I have started researching for my term paper topic, "Application of Mechanical Engineering Technologies to Create Business Benefits in the New Millennium". I'm not sure if I understand exactly what the topic is about. Does this topic have to do with technologies such as automated robotics used in the automotive industry? Or do you mean technologies such as computer aided design and modeling? Or do you mean
communication technologies like Microsoft Outlook and project management
tools and the internet?

If you could give me some help pointing me in the right direction as to what I am researching, I would greatly appreciate it! DG

ANSWER BY CMC

DG asked for a clarification of his term paper topic: "Application of Mechanical Engineering Technologies to Create Business Benefits in the New Millennium." I am writing to all of you because I thought my answer shown below may be of general interest to everyone in the class.

The mechanical engineering fields include (1) traditional technologies (fluid flow and gas dynamics, heat transfer, solid mechanics, material science, modeling and analysis, testing), (2) related disciplines (biomechanics, robotics, computer-added design), and (3) Others involving mechanical engineering. On the other hand, I believe project management, Microsoft Outlook and Internet are NOT mechanical engineering technologies, although they may enable mechanical engineers and others to do work.

One of the possible ways of tackling the topic shown above is to follow the "Backward-Chaining" method. Let us first understand what is needed to create business benefits in the New Millennium. We know that customers are now more demanding in the New millennium and they are harder than ever to attract, satisfy and retain. Thus, benefits may be created by doing one or more of the following: (1) creating competitive advantages in the marketplace, (2) higher level of product customization, (3) lower product cost, (3) better product quality, (4) easier product maintenance and repair, (5) improved customer acceptance, (6) shorter time to market, (7) superior product reliability, and others. Now ask the question: how can we use mechanical engineering technologies to do any of the above, for what kind of enterprises, and under what circumstances? Suppose you say it would be product design, wherein mechanical engineering technologies (involving Finite Element Analysis, Computational Fluid Mechanics, etc.) would have the most impact, not only for quality, speed, and customization, but also for products intended for the global market (e.g., standard common components plus parts which can be readily customized to fit regional needs). Then do an Internet-based survey to find out who is doing what in this narrowed-down field of mechanical design and how much business benefit is created by these practitioners? Show some best practices as published in the literature. This process can be repeated for other mechanical engineering technologies.

24. QUESTION FROM WC

I am having a hard time finding the 'recognized' best practices for Build-To-Order production system. Could you give me some advice ?

I tried to look thru the Internet, and all I found were companies offering consultation on Build-to-order system, technologies in build-to-order system, software solutions. However, I can't find any practices that were officially recognized as best practices. I guess I just didn't know what should be categorized as 'best practices” Could you give me some guidelines on where and how I could narrow down my research?

Also, there are so many articles about build-to-order system that are somewhat tied to mass customization and supply-chain management. I knew there are other choices in this term paper that are related to these two, and I don't want to deviate from my original topic. It is under my impression that in order to have a good build-to-order system, you can't actually separate build-to-order, mass customization and supply-chain management, please correct and lead me out from my confusion.

One more question, is there some sort of reports/awards that will recognize the best practices and illustrate on what the practices are and what companies have been using them and all we have to do ( for the term paper purpose) is to find these reports and commend on the pros and cons of the practices and offer solutions to make this practices better. If yes, please guide me in finding them.

Or, we have to first find the practices thru research, then find what companies have been using these practices and commend and make recommendation? Coz, some of the articles I found will just tell you the new technologies/software for build-to-order system and that's it (although the introduction does say that it was best practices, there is no
recognition from any associations), no further resources telling you which companies have been using it and what was the results(increase in sales revenue) of using it?

I guess I just don't feel good about this term paper...I am confused...and I guess my problem is reading the articles I found coz there are so many abbreviations, jargons, in the business/production world that I don't understand.

I would appreciate if you could guide me thru this... I have worked so hard on the research( I guess), and I want to make this term paper a success and gain some knowledge out of this paper.

Thank you, WC

ANSWER BY CMC

WC asked for advice regarding best practices on "build-to-order" systems. Let me offer the following comments.

1. When we talk about a "build-to-order" system, we are indeed referring to a production system that combines the scale of economy advantages of mass production with the exciting capability of matching products to individual customer's needs subject to constraints. Although the concept is simple, its practical implementation is extremely difficult.

2. Dell Computer won the industry-wide respect and admiration for having successfully reduced such a concept to practice. Its application has since been extended to sneakers (Nike), cosmetics (Proctor & Gamble), appliance (Maytag), cereal (Genera Mills), blue jeans (Levi Strauss), clothing (Brook Brothers), and music (Napster). The big three auto companies are working very hard on a "build-to-order" system which would deliver custom vehicles in about 12-13 days after order placement by the year 2005.

3. "Mass customization" and "build-to-order" systems do have a similar strategic intent, namely, to reduce production cost, increase customer satisfaction, and cut time to market. You should feel free to use articles on "mass customization" for "build-to-order" systems. A properly designed supply chain network is needed to support both of these production systems. However, supply chain management is useful for other production systems, for example, for rapidly penetrating local markets using a global product without involving "build-to-order" or "mass customization."

4. In the past, "best practices" have been discussed in survey articles or special reports published in technical journals for the purpose of sharing practices, which created improved business results. For newer production practices, such as "build-to-order," there may be only a few practices at the moment that are so recognized "officially." Do not become too concerned about such an official recognition, or a lack of it, as our purpose here with the term paper is to collect those practices which add value and are intuitively beneficial.

5. One option to prepare this term paper is the following: (a) Find the practices in creating "build-to-order" systems, (b) Understand the values these practices create, (c) Know which companies use what practices to achieve positive results, (d) Note performance shortcomings of current "build-to-order" systems (if any) and define improvements opportunities.

6. Your approach of collecting reports describing technologies and software useful for "build to order" system is valid. Doing so will allow you to categorize these technologies/software, based on what value each will create. A comprehensive list of these technologies and software will provide a valuable set of tools to implement "build-to-order" systems.

7. If you can not find other companies implementing the technologies you have defined, try to use the companies listed above. You will be able to define how each of these companies is applying what technologies to enhance their respective "build-to-order" systems. Try the above and see if you are happy with the results. Otherwise, please let me know, I may be able to send you some more articles on the subject.

8. There are some new terminology surrounding the "build-to-order" system which will take a little time for you to get used to. If you have questions, send some over and I will help you.

9. It is not important that you do a very exhaustive job of collecting all relevant data related to the subject. It is more important that you analyze the data you already have, focusing your efforts on explaining:

9.1 What is a "build-to-order" system designed to achieve? Why companies want to use such a system?
9.2 What are the key elements of a "build-to-order" system?
9.3 How can such a system be built?
9.4 What are the "best practices" being applied nowadays to implement such systems?
9.5 What value each of these "best practices" add to the system?
9.6 Are there improved ways of adding value, above and beyond the known "best practices?"
9.7 Is there any performance shortcoming in today's "build-to-order" systems, and how can these shortcomings be eliminated or reduced by new technologies?
9.8 Which company is applying what technique with success? How is success qualified?
9.9 Summary

This is just a list of things I come up with for now. You might be able to improve it further in the way you see fit.

25. QUESTION FROM HW

I am writing my term paper in the following format and would like some additional input. My term paper topic is on mass customization. I am starting with an abstract, a general introduction and then give an overview of several companies which have been identified as successful in this field per your suggestion. Are you looking for a critique on each one of these companies best practices with suggestions for improvements or enhancements at the conclusion of each? Or are you looking for these ideas to be summarized in the conclusions at the end of the report?

Example:
Abstract Page 1
Introduction Page 2
Company 1 ,Page 3-7
Company 2, page 8-12
Company 3 Page 13-18
Company 4 Page 18-22
Search Methods Page 23-24
Conclusions Page 25
Suggestions for Improvements/Enhancements Page 26
Bibliography Page 27

Also, do you have any general guidelines for referencing information in the bibliography. The last time I did a paper was many years ago and I am looking for a brush-up on the rules. I have also read a few books on this topic, how would I incorporate these into both the report and the bibliography?

Thank you very much for your help and feedback. HW

ANSWER BY CMC

The approach HW has elected to write the term paper is fine. Based on the companies you have selected, your final results (conclusion section summarizing all ideas presented by the chosen companies) will be the best set of ideas these companies offer as a combination. If you then comment on how some of them can be improved, that will make a good report. Whether you offer critiques on the techniques used by companies one company at a time or on all the ideas together, it does not really matter that much. I suggest that you choose the way you feel most comfortable.

An alternative way I like you to consider is the following: By having read some books on the subject, you will know what takes to be successful in mass customization. For example:

1. Customer choice: How companies create means for customer to make choices easily?

2. Communication: How to get customer's choices pass on to all suppliers, logistic partners, service people, etc.?

3. Supply chain: Once the order information becomes available, how to get all suppliers line up to ship the required parts to the assembly plant. How to assure design compatibility and component functionality?

4. Product assembly and quality control: How to get the final product assembled and quality checked?.

5. Delivery: How to get logistic partners to pick up and deliver to target customers?

6. Service: How to provide after-sales service effectively?

Drawing upon the knowledge you have gathered from reading the books and literature on selected companies, comment on each of these key steps and list the best practices on each. Then add critiques on how they can be improved. This approach is more systematic and end-results oriented.

Biography can be quoted in text (for example: [12] for reference number 12). All references should be listed in a separated section entitled "References", placed after Conclusion.

26. QUESTION FROM JA

I'm sitting here writing my paper and I think I am writing it wrong. My topic is "Engineering Innovation in the New Century." And I'm writing about what I have read.

How exactly am I suppose to be looking at ?

What if I concentrated my paper on car innovations specifically? Or bio-engineering innovations?

Thank you again, JA

ANSWER BY CMC

JA asked good questions and let me try to offer you some answers, which I hope will be of some help:

1. Engineering Innovation refers to all creative engineering activities which are new, novel and valuable (i.e., adding business values). Some of these activities could involve new application of known engineering principles, techniques, design, and/or materials. Others could be focused on putting new research results into practices. The focal point of engineering innovation is to add value, not to create new knowledge. Creating new knowledge is the domain of research.

2. Since the topic of your term paper is "Engineering Innovation in the New Century," you need to ask how the new century differs from the old, so far as innovation is concerned. In my view, differences may be found in the changes of manufacturing technologies, material technologies, communications channels, design strategies, logistics and others. Of foremost importance is the new marketplace focus on customers. Thus, driven by an increased customer focus, engineering innovation in the new century may need to take on a different approach, compared to the old way of doing things (e.g., getting some people in a room and brain storming new ideas with a primary emphasis on technologies), in order to add value, while accounting for the various changes noted above.

3. Studies have shown that innovation is more likely in situations where motivated people with different background and perspectives are working together effectively. Consequently, it is possible that the following steps could make engineering innovations more successful in the new century:

3.1 Team up with business partners with different expertise and marketplace insights to pursue global businesses.

3.2 Define specific goals for engineering innovation focused on creating added value to customers. Examples include improved product features, production methods, speed to market, design simplification, product customization, customer relations management, logistic practices, and others. Similar to the "Target Pricing" practice I discussed in class, the company could set a specific goal of innovation such as "Reduction of product weight by 10%," as an effective way of focusing the company's innovative energy.

3.3 Encourage all employees of business partners to participate in innovation by aggressively using suggestion boxes, rewards and recognition programs, and by making a firm corporate commitment to evaluate and implement good value-addition ideas.

3.4 Created effective communications tools and maintain conducive environment to facilitate collaboration for pursuing engineering innovation on a global scale.

3.5 Leverage innovative ideas from various regions to maximize value addition.

3.6 Manage the knowledge base of engineering innovation (e.g., documentation, review, update and transfer) to facilitate its continuous improvement and utilization.

I hope the above offers some help to you. It is not important for you to cite many specific innovations in your paper. The focal point should be: If you are in charge, how would you go about promoting and managing engineering innovation in the new century. If you like to focus on car innovations, by all means citing some car innovations as examples. Remember the Japanese innovation I mentioned in class: New cars are now designed separately for women and men because of different needs. This is no big deal, but it does represent an innovation responding to customers needs.

27. QUESTION FROM HW

I have collected some data for my term paper. Would it be possible for you to look it over and offer some advice on how I should go about putting the term paper together? Thanks. HW

ANSWER BY CMC

HW requested for a brief overview of how his collected data should be assorted into a term paper. His term paper topic is "Product Innovation in the New Millennium."

This term paper assignment does indeed require you to exercise judgment on what is important and what is not regarding the topic you have chosen. All graduate students are expected to review literature, analyze results and determine by themselves what are relevant for inclusion in a term paper, beside collect literature and compiling them in some logical fashion. Because you really do not have a lot of time left, I will help you a bit more than I normally should.

1. Your topic has two parts to it, namely "production innovation" and "new millennium." You should first write about how is product innovation defined. Why is it so important andimportant to whom? How did other people in industry do in the past to manage and foster production innovation? What takes to implement an effective product innovation program? Also comment on other related issues, if you feel they are important.

2. Then you should comment on what might be the difference between the "New Millennium" and the "Old Millennium" so far as product innovation is concerned. Does the new millennium impose any additional requirements on product innovation above and beyond what was imposed by the old millennium? How should product innovation be managed in the new millennium in order to produce useful results (note, you need also to know useful to whom?)

4. Make sure you cite the references in the right places within your term papers. The term paper should be prepared in the form of a technical paper (see articles in technical journals for samples). It should include Abstract, Introduction, Main Body (which can be subdivided in several sections, each with section title), Summary and Conclusion, Literature and Appendices (if any).

5. The term paper should be submitted as an email attachment (in Microsoft Word 97 format) to me by the due date.

28. QUESTION FROM FL

I have started doing some basic research with respect to the course project. I cannot believe how much the University Library system has changed in 15 years. I have spent a considerable amount of time this past week searching the topics via the internet, library databases, library catalogue and soliciting help from the reference librarian at the SEL. It has not been easy gaining information on these subjects with respect to best practices.

I would like to be assigned the topic entitled "web-enabled product development". My current job at Company X is leading a product development team. Company X is just beginning to use the Intranet to facilitate product development. Therefore, this assignment will be very useful as I try to decrease the product development cycle at work.

The product development environment at Company X involves interacting with many disciplines. Most of the best practice items below are NOT used at Company X. Based upon my current research, the following are examples of web-enabled product
development best practices:

• CAD Systems: Although this is product design, it is essential to cover this in product development. Web based CAD files allow for real time review of concepts at various locations. In addition it is a key enabler to rapid prototyping. – Company X is not web based.
• Computer aided engineering
• PDM - Development is done with outside contractors and suppliers. This will facilitate product development
• Engineering change control - integrated engineering change control solutions that allow all members of a product development process to collaborate remotely via the Internet
• On-line engineering tools
• Knowledge management: lessons learned, web-cabinets
• On-line services: patent searches, etc.
  

I would then discuss the best practices and show how they can speed up the development process.


Q: Is the above approach what you are looking for?

Q: I have not been able to determine what companies use these best practices. Do you have any suggestions on how I can obtain this type of information?

Q: I am not clear on what you are looking for with respect to "Define in what specific ways the identified best practices may be further improved to achieve even better results.". Do you want me to detail how these tools may be better integrated to the product development process? Or Do you want specific suggestions with respect to changes in the software?

If this project topic is not acceptable, I will provide alternatives prior to the 2/6/01 deadline. This project has already been very interesting.

Thanks for your help! FL

ANSWER BY CMC

Thanks FL for your email with respect to your individual case study topic. What you have been doing is exactly what I expect everyone to do: To define a topic of interest, of practical value to one's own job, and of something new that one can learn new experience from. Since you like to work on "web-based product development," this topic is fine with me.

The examples you mentioned, e.g., CAD, CAE, PDM, Engineering Change control, on-line tools and services, and knowledge management are excellent elements of web-based product development. Perhaps you want to add concurrent engineering to it as well.

The approach you indicated is the right one. I encourage you to continue.

By "improvement of best practices" I do not mean to only include a better way of integrating the tools you already identified into the product development process. In addition, I am looking for innovative ideas based on improved tools and improved methods of operation which might be identified, above and beyond what have been already reported in the literature. The purpose is to hopefully arrive at the "Further improved best practices" in a given subject area. This is partly due to the fact that the best practices reported in the literature may be already a few years old. Some of the reported tools (e.g., software tools, communications speeds and modes, broad band techniques, mobile devices, etc.) might have already been advanced a bit. Furthermore, the authors of the individual case study reports may have some better ideas of doing things, based on personal experience and intuition.

Regarding the question as to where to find companies known to have introduced best practices in product development, I suggest that you conduct an Internet search using key words such as "Product Development" and "Best Practices" Personally, I find the full text database of “ABI/Inform-global” to be quite useful. The “Infotrac” data base available through the Buffalo & Erie county Library is also very good.

To help you get started, I have attached my file "ProductDevelopment.doc," a 49-page compilation of some product development articles. I trust you should be able to find many more.

29. QUESTION FROM FL

I have a couple of questions and would appreciate your response.

Q1: In many annual reports the income statement uses the term Operating income. Is this the same as EBIT?

Q2: A term used by some companies is RONA. What does this mean? I think it mean return on assets. Is this defined by the Net income/Total assets?

Q3: Financial reports often contain cash flow analysis. This seems similar to the funds flow analysis, but different. Please explain the cash flow statement.

Q4: On page 10 of your notes you provide an example of the funds flow analysis. Why does it not include Pre-paid expenses and Deferred credits from the balance sheet?

Q5: In problem 3.1 Why does a decrease in plant and equipment not show up as a source of cash? Why does a decrease in earned surplus not show up as a use?

Thanks, FL

ANSWER BY CMC

FL wrote me and asked a number of excellent questions. I appreciate his diligence and interest devoted to the course materials. I like to make my answers available to everyone in the class:

Q1: In many annual reports the income statement uses the term operating income. Is this the same as EBIT?

Yes, Operating Income is the income due to operations before tax and interest expenses (EBIT), whereas Net Income refers to NOPAT (net operating profit after tax).

Q2: A term used by some companies is RONA. What does this mean? I think it means return on assets. Is this defined by net income/total assets?

No. RONA (Return on Net Assets) is defined as NOPAT divided by total assets less current liabilities. General Motors is known to be a major proponent for this financial measure. NOPAT is equivalent to Net Income. RONOA (Return on Net Operating Assets) is defined as NOPAT divided by total assets less cash, intangibles, accounts payable and other current liabilities. ROE (Return on Equity) is defined as NOPAT divided by owner's equity, which is total assets less total liabilities. Some companies prefer measures such as Return on Mean Investment Asset, Return on Average Assets, or simply Return on Assets (ROA). If you like to know more, you can find additional financial measures in books on "Ratio Analysis." Any one interested can write for an 18-page compilation of RONA articles from me.

Q3. Financial reports often contain cash flow analysis. This seams similar to the funds flow analysis, but different. Please explain the cash flow statement.

Cash flow statement describes the pure cash a company has developed. Cash of a company is defined as (a) Net income (NOPAT), plus (b) Depreciation Charge taken during the year. The depreciation charge is added back, because it is a non-cash expense claimed in the income statement but not actually paid out. Some financial analysts prefer cash flow as a conservative assessment of the company's financial health, as it relates directly to liquidity.

The funds flow analysis studies the creation and use of funds, which include cash and other assets of value. It facilitates an evaluation of how properly the company's funds have been utilized in the past year to create value for the company, and how these funds were generated (from what sources at which percentage each).

Q4: On page 10 of your notes, you provided an example of funds flow analysis. Why does it not include prepaid expenses and deferred credits from the balance sheet?

My table on page 10 should have included the following two line items:

SOURCES
Increase in Deferred Credits 9.30
USES
Increase in Prepaid Expenses 101.40

In fact, if you check the mathematics, you will clearly notice that only with these two line items added back will the total amount equal to $1701.50 for both Uses and Sources of Funds. Their omission is due to a typographic error.

Q5: In problem 3.1, why does a decrease in plant and equipment not show up as a source of cash? Why does a decrease in earned surplus not show up as a use?

In Problem 3.1, the balance sheet lists the "Net Plant and Equipment" assets of $290,000 for 1958 and $275,000 for 1959. The difference between these two numbers, namely $15,000, does not represent a source of fund. The reason for this is because in order for it to become a source or use of funds, we need to define a change in the "Original Capital Investment" which represents rightfully the use or source of funds. Since there was a depreciation of $15,000 taken in 1959, the original capital investment in 1959 and 1958 are in fact of the same amount, thus producing a zero change in the levels of "Fixed Investment" for these two years. To account for another $15,000 as a source of fund due to a reduction of "Net Plant and Equipment" would mean counting depreciation twice.

The change in earned surplus has already been included as follows: When the company has net profit, this net profit will be added in the Funds Flow Statement as a source of cash. When the company has a net loss (as in the Problem 3.1), it must be paid out of the owner's equity account, unless company management sells some valuable assets to cover the amount. Hence the net loss of $36,000 reported by the company on Income Statement must be reflected in a reduction of Earned Surplus of the same amount for the owners. Thus, more correctly, I should have replaced the line item "Net Loss for the Period" by "Decrease in Earned Surplus" of the equal amount.