SELF TEST #25: Evaluate the Company’s Advantages or Disadvantages in Visible Costs
Test #1:
How do companies typically achieve a Rate advantage over competition?
Answer:
Companies typically achieve a Rate advantage over competition by changing the source of their purchases, by increasing the size of their purchase, by purchasing at a time when prices are likely to be more favorable and by changing the components of the rate of costs.
Test #2:
How does a company typically get a Rate advantage from the source of its purchases?
Answer:
Four patterns of advantage typically account for rate advantages from the source of purchases. First is the location of the purchase. Second is the quality of the material or worker purchased. Third is the supplier of the purchase and fourth are subsidies offered by the supplier or a government entity associated with the supplier.
Test #3:
What are the typical major functional costs in a manufacturing business?
Answer:
The four typical cost functions for a manufacturing business include Create, Make, Sell and Serve.
Create Cost refers to the cost of designing and developing a product.
Make Cost refers to the cost of manufacturing, assembling and packaging the product.
Sell Cost refers to the cost the Company incurs to sell the product. In a manufactured product, Sell cost includes all the costs of creating customer awareness, differentiating the company and the product from its competitors and making the product available to the customer. These costs would include advertising, marketing, sales and most outbound logistics expenses.
Serve Cost refers to after-sale support of the customer or the product. In a manufactured product, Serve costs include all costs of warranties, part supplies, trained repair employees, service centers, customer hotlines, and so forth.
Test #4:
What are the typical functional costs for retail and distribution businesses?
Answer:
The typical functional costs for retail and distribution businesses include Locate, Present, Sell and Serve.
Locate Cost refers to the cost of finding and acquiring a site and constructing the building to hold the company's products.
Present Cost refers to the costs of creating an ambience on the sales floor through decorations and other amenities, choosing the products to sell, and purchasing and displaying those products.
Sell Cost refers to the cost the Company incurs to sell the product. In a distribution business, Sell costs include the costs the company incurs to make the customer aware of the company and its products, to differentiate the company and its products from the competition and to help the customer find, choose and pay for the product.
Serve Cost refers to after-sale support of the customer or the product. In a wholesale or retail company, Serve costs include after-sale services such as handling returns and crediting the Final Customer for the returned product. These costs may also include the costs of installing the product for the Final Customer and training the customer in the product's use.
Test #5:
Are there patterns in the way companies make choices among alternative approaches to managing functional costs?
Answer:
Yes, there are three major patterns of differences in approaches to managing functional costs. The first is the decision whether to conduct a cost function in-house or to outsource it to another company. The second is the method used to acquire facilities. The third is the decision to use a different technology in the cost function.
Test #6:
What is the major rule in evaluating cost reduction opportunities?
Answer:
The rule is keep control of the customer relationship by not cutting any cost that would damage the relationship between the Company and its customers.
Test #7:
What functional cost is the Company working on in each of the following examples:
Example:
Staples has tweaked the StaplesLink site design to make it easier for clients. New technology lets customers track orders. Other changes let companies track spending accounts and get tips on how to make ordering more efficient. (Year-2003, SIC-5900)
Explanation: The investment Staples made to provide information to its customers after the sale were part of its Serve cost.
Example:
Hibbett prides itself on obtaining advantageous real estate terms, such as ceilings put on common area maintenance charges, as well as percentage rents.
Explanation: Hibbett is managing its Locate costs.
Example:
Viking Office Products has no retail stores. It sells only by catalog.
Explanation: Viking’s approach of selling only by catalog affects both its Locate and Sell cost functions.
Example:
Some bank and mutual companies eliminate the middleman, the insurance agent, in order to offer life insurance plans at discounted prices. These plans are underwritten by an insurance company partner.
Explanation: The banks and mutual companies have approaches to the Present and Sell cost functions that differ from those typical in the insurance industry.
Example:
Comcast's digital cable service offers an assortment of HD channels. It insists on sending out a technician to install HD because of the complexity of choosing the right connections. The setup takes only a few minutes and adds about $7 to the cable bill. (Year-2005, SIC 4841)
Explanation: The cost Comcast incurs to install the product properly is part of its Serve costs.
Example:
Most of Sports Authority suppliers ship their products directly to the stores, eliminating the central distribution that is common in the industry.
Explanation: Sports Authority is using a different approach to the functional cost of Present.
Example:
Dollar General all but eliminated advertising, except for direct mail announcements of new stores.
Explanation: Dollar General is managing the Sell functional cost.
Example:
Large retailers are starting to accept second-hand merchandise for resale on eBay. Circuit City stores have started something called Trading Circuit, which accepts customers’ old gadgets, musical instruments and other goods for eventual resale on eBay. (Year-2004, SIC 5399)
Explanation: The costs that Circuit City incurs to help customers dispose of old product is part of its Serve costs.
Example:
The size of hyper markets and the volume of goods they purchased granted them greater buying power and lower logistical and in-store costs than other formats.
Explanation: The hyper markets had advantages in Locate, Present and Sell functional costs.
Example:
Patrick and Company struggled with selling computers because it couldn’t support the guaranty and the work the guaranty implied. It also struggled in offering printing services because it could not compete with Kinko’s after sale services.
Explanation: Patrick and Company suffered disadvantages in the Serve functional cost.
Example:
Lowe’s is building five new 1 million square foot distribution centers around the country that permit the company to buy larger quantities of products from vendors.
Explanation: Lowe’s is managing the Present functional cost.
Example:
Starbucks calls its employees partners and gives them 24 hours of training. It builds the trust of employees by providing an environment that shows them it values their input.
Explanation: Starbucks is managing the Sell functional cost.
Example:
Some years ago, Pottery Barn decided to stop sending buyers to far corners of the globe to seek out unique products. Instead, it hired a designer to sketch out Pottery Barn’s own merchandise.
Explanation: Pottery Barn is managing the Present functional cost.
Example:
In a move fueled by skyrocketing newsprint prices, the Washington Post plans to publish on slimmer, 50 inch wide web width newsprint by the fall of 1998.
Explanation: The Company is managing its Make functional costs.
Example:
Coca Cola Foods formed Minute Maid Dairy Business Systems, which established production and distribution partnerships with more than eighty dairies across the U.S.
Explanation: The Company is managing its Make functional cost.
Example:
Bay Networks moves products through distributors. Cabletron sells direct.
Explanation: The two companies are following different Approaches to the Sell functional cost.
Example:
Regal-Beloit buys equipment for plants by looking at second hand bargains.
Explanation: The Company is managing its Make functional cost.
Example:
Trying to cut costs, Nabisco had sales people work in teams to oversee accounts. They hired inexperienced merchandises to keep its store displays organized. Then the shelves became messy and unstocked.
Explanation: The Company was trying to reduce its costs of Sell and Serve.
Example:
Graphite bikes had high prices because of carbon fiber’s tendency to break apart, leaving manufacturers exposed to expensive liability suits. But computer design systems, capable of predicting failures, have resulted in more durable bikes.
Explanation: The Company is managing its Make and Serve functional costs.
Example:
P&G usually assigns a packaging engineer to a development group in the earliest stage.
Explanation: The Company is managing its Create functional cost.
Example:
Irvine Company increased its productivity by farming out jobs previously done in house, including supplying security guards and maintenance workers.
Explanation: The Company is managing its Serve functional cost.
Example:
Internet brokers keep their overhead low by having few brokers and fewer offices, with the internet allowing customers to trade on weekends and after work when brokers are not available.
Explanation: The internet brokers employ a different approach to all four functional costs of Locate, Present, Sell and Serve by using automation to replace buildings and human beings.
Example:
Amazon will continue to increase direct buying from publishers to improve its cost structure over time.
Explanation: Amazon is managing the Present cost function.
Example:
Calsouth makes the homes it creates simpler to build, minimizing corners and curves. It also makes nonessential features, like microwaves and fireplaces, optional.
Explanation: The Company is managing its Make functional cost.
Example:
Bell Labs used to set designs at labs and then send them to a plant for assembly. Now engineers at both locations work together from the start. This has made production cheaper and easier.
Explanation: Bell Labs changed its Create and Make functional costs.
Example:
Car makers have globalized to cut costs and have used the build-where-you-sell approached to globalization.
Explanation: The build-where-you-sell approach affects the Make and Sell functional costs.
Example:
In recent years, IBM has created some 18 special groups throughout the Company that link researchers with developers.
Explanation: The Company is managing the Create functional cost.
Example:
Many American companies have outsourced their customer service calls to Electronic Data Systems, who handles these calls from operations in India.
Explanation: The American companies are managing their Serve costs.
Example:
Asea Brown Boveri keeps products flowing swiftly by doing more than 90% of R&D in business units rather than in a central lab.
Explanation: The Company is managing the Create functional cost.