Opportunity Cost

1
Opportunity Cost

• For most methods, the time value of money is
  based on the (present) annual discount rate and
  is the same for cash outflows and cash returns.
• If a company could borrow at one rate and invest
  it elsewhere risk free at some higher rate then
  the opportunity cost of project capital is simply
  the higher rate.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
Cost of Capital

• Projects must be funded at a companys marginal
  rate of cost of capital.
• Not easy to identify in most cases because
  funding can come from a mixture of three sources
• Equity capital
• Fixed interest (debt) capital
• Retained earnings

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
End Note

• Regardless of the assessment method used, there
  are risks with any decision and so, in practice,
  it is worth performing sensitivity analyses

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
4
Competitive Companies

• Get the right product to the right place at the
  right time
• good marketing, good operations
• Produce those products competitively
• good operations
• Necessary, but not sufficient for competitiveness

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
5
Purpose of an Enterprise

• To provide a service or product,
• e.g. government owned utilities, charities
• To make a profit
• To provide dividends
• To provide employment
• .
• BOTTOM LINE - must be financially sound

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
6
Business Fads

• Vertical Integration
• Focus on core business
• Downsizing
• Value Added Manufacture
• Business Process Re-engineering
• Outsourcing
• Total Quality Management
• Six Sigma
• Lean manufacturing/accounting

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
7
Business Strategy

• Need to define a vision that includes purpose of
  operations
• The achievement of the vision will involve three
  major areas (which can be broken down further)
• Marketing
• Manufacturing/operations
• Finance
• All three interact with each other

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
8
Product line
Target markets
Finance and control
Marketing
Business goals profitability, growth, market
share, social responsiveness, etc
Research and Develop-ment
Sales
Distribution
Purchasing
Labour policies
Production
9
Positioning

• Traditionally companies have competed on the
  basis of
• Cost
• Quality
• Functionality
• Innovation
• Dependability
• Service

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
10
Trade-offs

• Traditionally
• cost versus quality
• flexibility versus dependability
• innovation versus dependability
• cost versus service
• cost versus dependability

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
11
Quality

• A recognised major of issue of the 1980s and
  1990s (the Japanese were aware of it in the
  1950s)
• Its meaning has changed from a relatively narrow
  view of conformance to specification and
  fitness for use to ...

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
12
Quality

• Quality is consistently meeting the continuously
  negotiated expectations of customers and other
  stakeholders in a way that represents value for
  money
• Kruithoff and Ryall, The Quality Standards
  Handbook

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
13
Quality

• Clearly, quality now encompasses all of the
  traditional positioning strategies however
  companies still can (and should) place an
  emphasis on one aspect.
• To manage this much broader view of quality, the
  concept of Total Quality Management has evolved.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
14
Total Quality Management

• Product Design
• Product Control
• Process Selection and Control
• Marketing and Servicing Control
• Internal Control and Human Resources
• Purchasing Control
• Financial Control

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
15
Quality Systems

• The complexity of implementing total quality
  management concepts and the desire of customers
  to have a guide to the ability of suppliers to
  provide quality goods or services has led to the
  development of documented quality systems that
  can be audited
• ISO 9000

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
16
Innovation

• is something newly introduced, such as a new
  method or device
• Necessary for organisational survival, because
  all products have a finite life cycle from
  introduction to decline
• Often taken as a large-scale change, but the
  Japanese also strongly promote Kaizen

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
17
Innovation

• Many firms
• attempt to gain advantage by combining product,
  process and systems innovation
• find that new product ideas and applications can
  be stimulated by customer interaction

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
18
Conditions for Innovation

• Managers must expect continuous innovation and
  understand its risky nature
• Flexible working relationships
• Engineers (incl. manufacturing) must get closer
  to the customer
• Time and financial resources must be made
  available to innovation

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
19
And a thought to leave you with ...
20

• "It is unwise to pay too much, but it is worse to
  pay too little. When you pay too much, you lose a
  little money... that's all. When you pay too
  little, you sometimes lose everything, because
  the thing you have bought was incapable of doing
  the things it was bought to do.
• The common law of business balance prohibits
  paying a little and getting a lot it can not be
  done.
• If you deal with the lowest bidder, it is well to
  add something for the risk you run. And if you do
  that, you will have enough money to pay for the
  something better."