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Part 3

Chapters 11-15
La,)co Pharmaceutrca's IS an iltflltilH'~ or the German-based Heisenberg COl'porarion. which employs
40.000 ,..:orldw,dc. Zando's SI. t.ouis fac;li,yhouses the Il.S. cOtpor.te headq"arters and Research and
Development (~&O), lt produces 30 products, uSlOg 28 differenl batch prOCM"'" The facility nos 2.000
employees on-Site. In rcccn, yeo,... lando'S profitability has ..,ffered, •...-h'en ca" be auoboted to
increased compennon, CU$10f1'\&( drssatis(act'jor..a'ld regulatory pres..~u(es. LUIS Alvarado, president of
Zando, ca?:e<ia ,neet'''9 to conSIder ways to improve profitability.He labeled the "-""Dng a strategic
planning session and Invited the tollOwing offICers: Kathy Shorts, cnv ron~u.1 manager; froy Lewis•.
head of ~&D. Joh,"I'''Iy MIl,v<dwa. vice president of production i)lld qva11ly: lorry Sower. vee prC-SJder;t
oi iu)a:nc:;e;and Doreen Savara. mal"kclJf'lg vice pf~sident
Luis: "You ail have received Ihe quarterly financial reports for the In911\'''0}'lissrs. Ihe trends are ne9')-
rive. \'V{<! are fosifl~l fnarket ~hare, profits arc dccreasinq, and O\,I( CO$lSseem to be increa~iI.,g. \Ve need
to take actions to increase ::.a!cs,'I'1d red~Jce costs, cll)d '.'Ie need to do so 3!f qUIckly ill' poss.ble. Given
our research strenqrhs, ,t SQ$I'I'lSto 1'I)ethat Our best oet is to grov,' (OV~()\le$ b)' j,'ltfoducing ne-....prod-
ucts v·..tth proprietary rights, /\'3 far as COStSarc concerned, 'Ne need to improve our performance on that
dir))eflsio:) as'Nell. Lower pel'~unit GOS1~ jelrl)e\',' and ~xisting products arc needed. Any $ungestions?"
Troy: "For OUf product», our ability to control costs resides il) dev~l<Jpfnent-my area-ratrer than
m,")l,Jf(lcturing, '-JVeprobably need to p,a)' more at\.entiO'l to product and process design lssues to
e:)$LHe a reason.ably level pcr~unl~ cost. Revenues are also affected In rh.s StOlge.Once ••• r e patent d
orug. the clock.bcgl.."\:Sto tick, dod we need to reduce "me to market. $19",(.<.:antly. redvc~g t;me to
market will aUow us to generate revenues fO( a longer peood or ti~ne tha ....we are currendy cxpeneoc
~ It .....'O:J'd also oe t'lc,pruI1r we covld redoes the cycle time for prod""l dcve-J()pman\:_ Both a~ions
\'fotdd Increase revenues I-u'uilly. we can inc"ease rCVCf1ues oy nQ'eaSing the volume 01 new
pe-oCUCIS ."

Johnny: "There is a lot 0; f'!'lent 10 the observation that cost reduct-on OPf)()f\lJl'l't,eS (eside mosuy il"
product development. Once ~ dn..g is approved, its approval l()clvdes the manufacturing process. Any
future changes in th~ Inanufactur,ng process rcqulI'e approval If{),(1the U,S. Food and Drug Adrninistra-
tion. 13e<.;aU513
of thrs. 'NC hllve been (~llJctant:, hiSlorically, to engage .n process improvarnent or recn-
gineering, However, 1 wo"der if 'Nfl snouldn't reconsider this longs.t:'1r'1<iiI'lO policy. Some of the ql.laJity
problen1$ v.'e have could be corrected by changing some of OUf e~il;)ling processes, and tho C05tSsaved
{nay easili' exceed any C051 il'lc"rfed rrorn seeking FDJ\ appro ..... al. I think ou- qUlllity costs are er least
'15 percent ot sales, lh,at'$ a lOt of opportunity for improvement.'
Kathy: "I a~Vtt~that cost reduction-both In r:'l~ product development stage and the manufacturing
slage-should be a key S1filteg c t,).p.me. ll)e environrne-rtal area also offcr'$ somP. VAry go3'Sdopportu-
nltl€,'S,;..\recent pollution o-eveouco act passec by the 1C'9lslature requires thot ','Ie calculate ~ costs
of ~'lera~,n9 h3l.'<ttdov$SUbSt8f'KCS for each process...Thisact "'/(IS the incentive !;'Ii!: needed to beg;n
oeveloping an envlronmc"'lUlI cost manc'l9ement syste-n The results SO far v\Olcate th."!tenv."ool"'1ental
costs a-e much more than we realized They are estimated to be In l'\e (A"ge of 20 to 30 pe«"CMt of
rota o~ot)ting costs, t:'lVironmental costs can oe red,lCe<) by sud' tlllngs as cOfnpt..tcnzit)9 che':~ic.al
;(\ve")lory. efj~inabng tne use of chlorinated $ONet'lls and other "azareoi,;$ m.('ltoria'~.feduCing OJ" \;'$C:
of ·...irgin fccdstotks, and redesigning processes and prod"UC.iS so l....<)t v"a (,;(\(\ reduce tOXIC resadve .'"
(elease. \;\le cel"l Ie-ally have a posItive el"'....lfonmC'('It,a1·mpact whilt! sirn""ltaneous'y redUCing cOStS if "
more atlention is paid to env'fonmen1,a1 tS$ues durinfJ product development." _
:~

818
s 1~J

Doreen: '" like what , am hearing oect"lI,.IseI lhlnk that It also affects our ability to mcrease matkel
Share and revenues. For exarnplc, C:-1'Ivironmc:-ntal«npnct is one or our major concerns. Some retail
pharmacy chains pay p8rtiC\llar an&r'ltl(')n Ie') 9:'"eA'f'Iproducts. and right 1"10'.'1,,'Ie are n01 competing ·rr ell.
Our environmental Image is negative and needs to be irnorovcd. I am convinced that do;ng so \"'111
allow us to It)c(aa~e rnilr'kel sbare. Quality IS anotJ')(l( 1f'l1po11an1matter. \,'t,/ehave had to recall two
betches of procucts du,ing the past tWOyaMs due to poor qv.lit)" and th,. has h~rt our image more
t~n the cnviroomental -ssue. Improving t"'e processes to avod ;he-se kirds of problems '.'lit! save us .a
k)t o~ 9(~f.Product imi'lge ~r'\d rcpuuu,on arC' C'Sscnthll to mcreas ng customer satisfaction and market
snare ~

Luis: "'\Ve started v r th the need to I'"pr~ flndfW;;lal performan(;e 'O'f i:~reasin9 (e'lenues aoc (OOUC.-
ing COS!s.So :.1(;,••», have some very good suggC'StlOns to hc;p achieve t'leSe two objectives« bot I have
some concerns First. do ,../(ft have the talent Md capabilities, to «noeove quality and C''''Iovifonmc-ntalocr-
formance? Troy, do YO"' profcssional1 really undernand wna. they neeo to do to imp<O'oIe process aoo
product desigr.$ so that we t;;)'" seQ the des red qUillity and environmental improvements? AJso. hOON
can vw: reduce the cycle nme rOf Pf()dVCISand the, me to ma~<.et ooce fkltented?'"
Troy: ...Let me ans-...'Cf those questIons 1'1order Fitst. we prooaoly ace la(;kl'~ toe understandinq ()('I
the deSt9rl issues VVe wdl need to do some traIning to help our research scientists and chernical
eng-neers understaod the consequences \tVAfn.ay need to hire a couple of profess.onals wno have
expene~ce t'l dealing ,v"th thC'$c issues Second. "ve f'Oay need to make cycle ~ifYleand time to markel
s;gnifiCClflt performance rr1eaSI,JrFjS;'Jnd ((~'N('lrd cur people for actions that reduce t"'ose measc-es. Our
employees need to ali9'" their .t1teresls V~IV' those of lh~ COfflP<tfly If ·....e can achip.ve this, '....e should
see J'I"'tOfP.(evenll@," t)(oduced pcr employee."
Luis: "Good. No\-'I, Joh(l(ly; tell us about p"oduCtinn Oll)d qdality. 00 ocr manufeccurinq ergineers and
oroduction workers need help '.'11th ellvirorlfflenlal ~rld q ua1ly issues')"

Johnny: "\A/lth(Jut quesuoo, ulli''1il''l9 will be needed. Moreover. I really need to hire a couple oi q\J(ility
e~'9ineers ..

Kathy: "I also think that VJC need an cnvircnrnentel engioeer 'Nlth eXf>~rt~nce In pharmaceuucal maru»
r(lcturif)g processes ."

Luis: "Good. VVe certainly shouldn't ifJ')OfEt the r)f)ceS$(:IIYinirastrucrure ,0 bring about the needed
(.hilOgCr.. L~rry, 'Iou have been relaljvely quiet. what do you think aboot all this? Do you have any
s...·9gesticns?"
Larry: "Infrastructure .s irTlporte")l. If lhl~ IS ;)11gl,,')lng 10 work, timely afi.d accurate information will be
ncodec. It is hard to dcsrqn pfod';Cl~ and processes \'''1tt') cost being a $ig()ifiCI)f)l J$$ue without provrd-
11'9 tn~ right kind of cost niotm;uion VV.;:oro In the process 0: rcvampinq the cost rnsnagernen, inior-
rr-at on sys:em so that il is actIvity basad and $0 that v..e C(lf) provsce q.Jalit1 and on...nrorr-iernel cos:
!nto:m...111(1).Aft€et Ilstenll)9 to the comments made here. I ml9h;. also S1.,..99est tha: o,veneed iJ Stt,1tegtC
1"leasurenlent ~YSlam lhAl cat"l be used to o'1l(gnthe Interests of our empto~{ees ,'(ith our imorovel1".ef'lt
strategy People reed to knO"'1 W'\&~1\ .moof1ant, thaI 11)9:Importart factOtS arc being measured. and
lrat they arc SO'ng to be evaluated ""d r"warde<! bit,ed Qn d,,,,,,, factors. !'mally. I would cncO'..>-age
" ... use of targel costmg 10 ",,10 manage COSISdunng product devecprnent To he,p you all "nde'-
s~and tire Importance of good infOfmi'Ulon. I h~ assembK=!C some acmlTt"1data refati:'"lg :0 tv.'O new
:Yoduc:s. c..J:,,!"entiy
under dcvc.opment. These t\·10 prodvc:ts .,..;11use the same Pfocess .. using dr.crent
'S(!(IlOS The data .careQ(9at"lAd InlO rcsource. ('ICtl....ty. and c.ost objCCt :Tlocules ....;tr. an aoce'Y!panying
I s. of ac:ivi:y drive""Sto facT tate trw U54:fof an ABC sorlW(I;fe pilckQge recentiy acquired by Zal1Oo."

Reso\lrce Module (Projected General Ledgor Costs of Manufacturing Process Associated with
the Two Products)
----
- M(\te(l~115
S.al.:l(i~sand w6gC5
Energy
52.000,000
1,000,000
500,000
License fee (envifOI)!'n(lt'lI('lI; 200,000
EAvlro''ll)'U'H''ltlllfines '<00,000
Dcp!'l~ciatior'\. poll....
tiQr' conlrol eq ...iprnellt 100,000
$4,200,000
Activity Module
Resource Driver (Percentage Usage)

Material. Labor Energy Fees Fines


-----
Supcl'\Ilsing process: 0% 10% 0% 0% 0%
Setting up 3 20 14 0 a
I3len(jj"9 chemicals 80 40 30 0 0
Producing "vaSle 10 8 10 a 0
Disposil"l9 of hazardous w<>,sle 6 12 • 15 40 70
InspeCI'''9 products o 7 6 0 0
Rej~aStn9 air contamlnants o 0 0 60 30
Operating pollouon co....
trol
equipmcili 1 3 2S 0 0
100% 100% 100%

,..,
100%
~
-
100%

Cost Object Module (Products and Projected ActivityUsage)


Cost Objet" Antibiotic XKl Antibiotic XKS
Expected output (p0L;nds; 50,000 50,000
Setoo !')()tJ(S 12,000 7.000
Direct tabor hours (blancf ng) 24,000 16.000
POIJ"'ICS of \','CI$te 8,000 2,000
Pounds of hll/i)rdous waste 5,000 1.000
HOll'S of lnspcctio-i 3,000 500
1ons ot <lir ccntarrnna-its 4.5 OS
Machi"'" hO\;'$ (poll"!,,,n control) 2.000 ~OO

List of Activity Orivers


Activity Drivers Activity Capacity
-'----
Setup hours 20,000
Direct labor hours (blending) 4O,()()J"
PCM.;nds 0' YI'3$te 10.000'
PO,.f'''ICS of htl/f)rdou'S '....
aste 8,000
Hours of inspection 4.000
Tons of air cCJnl<uninants 5'
lv1.c~:ne oours (pollu"o~ control) 3.000

~Cl~t)'"' i .I(ibk-'i f: ,~<p.i..-e-c as. M"xl. <OldaftN-,'S'TlrMC'W':"'I>...~j.


Cepec .(>/ £0, 011....-' <Kt ""tJ~ IS ac'"C,.I,tod n Ao...a:....c~of~.
For c;xilm~ £:. '.~ps are "CX;.JI(6-d 111ur'litl (iteps) (If 950 houl't
p(ojeci.~d"S"~I' '01 sei.sps ~quajs .o.'U"l I lH:<lpachy

Required
1. use tl-e COfJlmA'I'lStfom t.he execunve meeting to identity strategic objectives and possible per-
iOtmi'locc measures (or ead- of we persoocuves: fin,anCini• customer. ef'\vlfonmcntal. process. and
• learn"'9 and 9ro·..Ith. Wo"ld you -ccommeod the aalanced Sco-ecard for Zando? Why?
2. S....opose that Doree', St..;ggestcd gaiflsh;')fl'lg 1:1 response to Troy's suggestio!" to re·....erd prcouc;

I .develcpment en"lployees fur improving cycle tin1e and time to fl,.'fket. \,\Pnflt II) ~~~in5hanng? How
could It be used in the product development sattinq?
i\'faIHug she Connccnou

3. Delerrnine the cost of all acuviucs for the proposed new process. No·», assign t'ie cost of the sec-
ondary activity 10 the p/ilJ}(IIY (lctivitlElS
~
4. Cjassiy the prln1acy acrvtnes tf'ltO ihree categories: cov.ronmeotal, quality. a'1O other (neither
qual ty nor e~vironmel1lat), Old some activIties end up In more chan one category? Expla'n.

5 Cakvtete the cos: per un t fo" each of I(\~ proposed products. using primary a::tivicy rates. Now,
calcula;;e ihp. entJlrOt'u1'1en:d'cost (Jet vn:t and the quailry COSt per unit. VJhat does, thiS tell yoo
aooot the rel~tivede .. ,ab,ltly of the ",'10 prcducts?

6. Following Larry·5o~9gestl()f'. luis ceoded to use :argcl C.OStlng:to help impr-ove new orocuct
proiilabilily Besed on a·..,Iy>es by lUIS .nd Doreen, ,I>"
targer prices ior XKl <oneXK5 a'e $50 oer
pound and S3S pcr oou'ld. respectively l",. l>itsindica,ed that a~y new product should cam a
gross p,ol1l equal 10;>Qpercem of $8 es. Based on thIS ,nforma""", aMWerthe lollowing:
3. \,AJhatISthe :arga-I c.OSIfor 9.'ch prodvtl' Given thiS in~onnano". ,.'mat sholJJd be cone?
b. Suppose 00<""" InO'C<lte$ that sa!..s ior each product can be ,ocfeased by SOpercent if the
selling pnce IS lowered by 10 pcrccor, Ass,umlng: lhe seroe target ptofit (Luis ·.·rants. t.~ original
target profit per pound O\C)intnl(loo)~calculate the new target COSts. If all nOf\·valuc·acided
costs v..fife eiirl'lill(flf;!d. covlo the target be rnet? (Calculate toe Jl"ul COSt at the 50.000-unit
level) No,.....calculate the effect on total prof,1~under d sce(\ario wnete non- ....
ah...e-added costs
arc not chmlf\<l:QO v ersus tJ $CRfH')fIOwhere ~II non-value-added costs a-e enrnineted. (lnc.lude
in lJ'lisanalysis cH'Y possible inr:re~$o 11'1 SI'!I!C-Svo.uma.)