Production Management I (Prof. Schuh)
Lecture 1
Production Management I
- Lecture 1 -
Introduction to the Fundamentals of
Production Management
Assistant Lecturer:
Dipl.-Ing. Christoph Klotzbach
c.klotzbach@wzl.rwth-aachen.de
WZL 53b R. 518
Tel.: 80-27379
© WZL
Lecture targets:
• Gain an overview over the contents of the lecture “Production Management“
• Get to know the basic terms and definitions of production management
• Get to know the most important key figures and their use
Introduction in Production Management
L1 page I
Production Management I (Prof. Schuh)
Lecture 1
Table of contents of lecture 1:
1.
Short summary of added value in production
L1 page 2
2.1 Added value in a business enterprise
L1 page 2
2.2 The value chain – an added value analysis deviceL1 page 4
2.3 Production within the value chain
2.
L1 page 6
Management of adding value
- “Production Management“
L1 page 7
2.1 Production management in the “St. Galler
3.
Management Concept”
L1 page 7
2.2 Strategic Management
L1 page 8
2.3 Up-to-date concepts of management
L1 page 10
Key figures – tools for the production management
L1 page 11
3.1 The term key figures and its classification
L1 page 11
3.2 Key figures in practical use
L1 page 13
3.2.1 Key figures referring to results
L1 page 14
3.2.2 Key figures for the management of production
L1 page 16
3.3 Key figures systems
4. Exercise
L1 page 17
E1 page 1
4.1 Definition of basic key figures
E1 page 2
4.2 Determination of ROI and ROCE
E1 page 3
4.2 Cash-flow calculation
E1 page 5
4.3 Calculation of key figures concerning production E1 page 6
Introduction in Production Management
L1 page II
Production Management I (Prof. Schuh)
Lecture 1
References lecture 1:
Brown, M. G.
Kennzahlen - Harte und weiche Faktoren erkennen, messen
und bewerten
Carl Hanser Verlag München, Wien 1997
Dobler, T.
Kennzahlen für die erfolgreiche Unternehmenssteuerung
Schäffer-Poeschel Verlag, Stuttgart 1998
Dyckhoff, H.
Grundzüge der Produktionswirtschaft
3. Auflage
Springer-Verlag, Berlin 2000
Küting, K.
Handbuch der Konzernrechnungslegung
2., grundlegend überarbeitete Auflage
Schäffer-Poeschel Verlag, Stuttgart 1998
Müller-Stewens, G.
Lechner, C.
Strategisches Management - Wie stragegische Initiativen zum
Wandel führen
2., überarbeitete und aktualisierte Auflage
Schäffer-Poeschel Verlag, Stuttgart 2003
Porter, M. E.
Competitive Strategy - Techniques for Analyzing Industries and
Competitors
Free Press, 1998
Porter, M. E.
Competitive Advantage - Creating and Sustaining Superior
Performance
Free Press, 1998
Schuh, G.
Eversheim, W.
Betriebshütte - Produktion und Management
7., völlig neu bearbeitete Auflage
Springer-Verlag, Berlin 1999
Siegwart, H.
Kennzahlen für die Unternehmensführung
5., aktualisierte und erweiterte Auflage
Verlag Paul Haupt, 1998
Introduction in Production Management
L1 page III
Production Management I (Prof. Schuh)
Lecture 1
Short summary of lecture 1
A producing business enterprise has to be managed according to its specific needs. But
that is not enough: in an increasingly difficult competitive environment a strong market
position has to be achieved using smart production management.
The business enterprise as an element of its surroundings interacts in a complex
environment with many other units on various fields such as politics, law or even culture.
In this complex environment the task of the production business enterprise, namely the
value adding transformation from input to output, has to be managed.
Added value is defined as the difference between the value of output and the value of
input. For analysing the added value Porter’s value chain proves itself to be apt, as it
covers all the activities of a business enterprise. In doing so the activities of a business
enterprise are divided into primary and supporting activities, which then are divided again
into direct and indirect activities and quality assurance. It turns out to be quite difficult to
clearly specify the term of “production”.
Production management is an essential element for every producing business enterprise.
The “St. Galler Management Konzept” represents an integrated management concept. It
differentiates between the normative, the strategic and the operational management
level. Each of these levels is again divided into three different management aspects:
activities, structures and behaviour.
For the process of strategic management the strategic initiative is of vital importance. Its
progress is determined by the phases of initiation, positioning, value adding, change and
performance measurement. Their order is variable, depending on occasion and intention.
The use of key figures is one of the most common among the modern management
methods. Küting defines key figures as “highly compressed measurands, showing
numerically ascertainable facts in a concentrated way as related or absolute figures”.
Generally, the related figures are the more significant key figures. Two important ones
are the ROI (“Return On Investment“) and, a more modern variant of it, the ROCE.
Key figures are often used in so-called key figure systems, showing their correlations.
These key figure systems are a useful management aid. A very common system is the
DuPont-System. A new, comprehensive system is the so called “balanced scorecard“ for
strategy oriented controlling of a business enterprise. Vision and strategy of a business
enterprise are transformed into targets, key figures, specifications and measures and
then divided into four different perspectives. By simplifying complex contents to an
understandable level the appropriate measures can be derived systematically.
Introduction in Production Management
L1 page 1
Production Management I (Prof. Schuh)
Lecture 1
Introduction - The Business Enterprise as a Part of the Environment
Economical
environment
Natural
environment
Availability of
resources
Probability of
natural disasters
.....
Input
Sociological and
cultural
environment
Level of education
Working hours
Change in values
Age pattern
...
Output
Output
Business enterprise
Added value
Political
environment
Fiscal policy
Monetary and
credit policy
Import and export
control
...
Economic growth
Inflation
Interest rates
Globalisation
...
Technical
environment
Legal environment
Employees‘ rights
Customers‘ rights
...
New materials
New technologies
New products
...
Business enterprises have to hold their ground in an increasingly complex
environment
© WZL
Introduction - The Business Enterprise as a Part of the Environment
From a macro-economic point of view companies and (private) households are considered to be
the smallest elements (“economic units”) of the economic system. These units interact with each
other and exchange objects of material and immaterial kind. Such objects are, for example,
products, services, rights, information and money. The interactions are caused resp. influenced
on one hand by the individual needs (demand) and abilities (supply) of the economic units, on the
other hand by multi-dimensional influences from the environment. Within the economical
environment the consumer and investment behaviour of the economic units is influenced by the
current interest rates as well as the rate of inflation. If for example the inflation rate is high and the
interest rate is low at the same time, consumption intentions will gain advantage over saving
intentions.
Within the technical environment, advantages over competitors can be gained by inventions resp.
innovations, for example by the development of a new technology. In addition, offering new
products might release yet hidden or even new needs of the economic units, thus creating an
increase in the interaction volume, which means economic growth. Business enterprises today
have to act according to a rising number of national and international laws. The relatively new
regulations concerning the product liability law and the warranty law can be taken as examples.
Here, considering the same transaction, the customer de facto has more rights without being
forced to provide a widened return service (payment).
As there are many influences from other environments and levels too, we have to keep in mind
that business enterprises have to hold their ground in an increasingly complex environment.
Introduction in Production Management
L1 page 2
Production Management I (Prof. Schuh)
Lecture 1
Terms: Added Value in a Business Enterprise
Enterprise
Economical unit
performing value-creating transformation from input to output
to either supply goods or to dispose evils,
thereby serving society.
Business enterprise (Company)
Enterprise
within a market economy
carrying out business for the purpose of profit
free to act autonomously
referring to Gutenberg
Added value
Intermediate
input
Value:
Contribution of
the company
Value added by the
company
Price which the customers are willing to pay for what an enterprise supplies
(monetary consideration)
Question: How do enterprises add value?
© WZL
Terms: Added Value in a Business Enterprise
In order to be able to organise resp. control a business enterprise in a way that it can successfully
cope with its complex environment, it is necessary to understand how success develops in a
business enterprise. Therefore we first need some knowledge about the basic terms.
A business enterprise is a special kind of enterprise. According to this definition a business
enterprise has to maintain itself within a market economy by making profit through value adding
transformation from input to output, thus refinancing itself.
Added value is the difference between the value of the output and the value of the input. The
price that a consumer is willing to pay for the company’s output is called ‘value’.
If one wants to determine or even influence the success of a business enterprise, one question
has to be answered: How do business enterprises add value? This will be exemplarily
demonstrated below with special attention on the characteristics of producing companies.
A producing company is the most complex type of an enterprise. Other types of enterprises such
as service suppliers, banks or trading companies can be considered as simplified producing
business enterprises, because the process of business in these enterprises like e.g. purchasing,
logistics, finance or service are also part of producing business enterprises. The following
explanations can easily be transferred to examine other kinds of enterprises.
Introduction in Production Management
L1 page 3
Production Management I (Prof. Schuh)
Lecture 1
The Value Chain - Added Value Analysis Device
fi
Pro
Infrastructure
tm
Human resource management
supporting
activities
arg
Technology development
Operations
Marketing
& sales
Outbound
logistics
Service
arg
in
Inbound
logistics
in Profit
m
Procurement
primary activities
Value chain model
valid for all types of companies
potential for adding value given at every part of the chain
Value activity: physically und technologically distinguishable activity performed by a company
Profit margin: total value - sum of costs
Source: Porter
© WZL
The Value Chain - Added Value Analysis Device
In order to investigate the question of how business enterprises add value, Michael Porter,
professor at the Harvard School of Business, has developed the device “value chain”. The value
chain structures a business enterprise into strategically relevant activities in order to understand
cost behaviour as well as existing and potential differentiation sources which are causes for
competition advantages.
Porter states that the value chain of every business enterprise consists of nine basic types of
activities that are connected characteristically. He divides these basic activity types into “primary
activities“ and “supporting activities“. The primary activities immediately concern themselves with
the physical product resp. its components. Supporting activities sustain the primary activities and
themselves by taking care of the purchase of inputs, technology, human resources and the
infrastructure of the business enterprise. On one hand procurement, technology development and
human resources management are linked to certain direct activities (e.g. process development:
technology development for operations), on the other hand they can support the whole chain. In
contrast the company infrastructure is not related to any certain primary activity and “only” offers
general support for the whole chain.
The success of a business enterprise can be influenced positively as well as negatively by all
activities. Every activity causes costs, but can also be be the cause for a special customer
benefit. A course of action with the aim of minimising the supporting “not directly value adding“
activities would be fundamentally wrong, because divison of labour and specialisation realised
through the help of supporting activities represent the main characteristics of a modern and
efficient industrial company.
Introduction in Production Management
L1 page 4
Production Management I (Prof. Schuh)
Lecture 1
Value Activities in Detail
Human resource
management
Management of human resources by recruiting, hiring, education and
training, discharging etc.
Technology
development
Efforts to improve products and processes concerning both primary and
support activities. Technology is represented by know-how, processes,
procedural equipment, product attributes
Procurement
Acquisition of inputs or resources.
For both primary and support activities
Inbound
logistics
Operations
Marketing
& sales
Outbound
logistics
KundenService
dienst
activities in order
to make
customers buy
the product
receipt
storage
distribution
of the product
activities
concerning
maintenance or
conservation of
value of the product
argin
transformation of
the material
inputs into their
final product
shape
Prof
it m
Activities involving:
receipt
storage
distribution
of resources for
the product
in
marg
General management, planning, finances, government relations etc.
Supports the whole value chain
it
Prof
Infrastructure
© WZL
Value Activities in Detail
Primary activities:
According to Porter there are five categories of primary activities for every industry. Each of these
categories can be divided into a range of different activities depending on the company’s industry
and strategy (see picture). Each category can be of vital importance for the realisation of a
competitive advantage and therefore for the success of the whole company. For a producer of
photocopying-machines for example service might provide the crucial cause for advantages in
competition. For the automotive industry on the other hand procurement and marketing are of
vital importance, especially against the background of decreasing depth of adding value.
Supporting activities:
Based on Porter the supporting activities, which can be found in every industry, can be divided
into four categories. Technology development means for example component layout, the layout of
the means resp. sites of production as well as the layout of the production process, but also the
development of marketing methods or IT-systems for inbound and outbound logistics. Other
categories can be divided similarly (s.a.).
The category infrastructure represents a special case. It can be divided into “corporate functions“
and “corporate services“. Corporate functions deal with the company management, which among
others consists of the board of management as well as the supporting staff. The corporate
services are service functions that support all parts of the company, e.g. the personnel
department or the in-house consulting.
Introduction in Production Management
L1 page 5
Production Management I (Prof. Schuh)
Lecture 1
“Production” within the Value Chain
Meaning of the term „production“
in the narrowest sense
(i.n.s.)
Production = manufacturing,
in the value chain:
all direct activities in the category
‘operations‘
Legend:
common
definition
All activities enabling the
enterprises‘ output are part of the
production,
in the value chain:
all direct activities
direct activities
indirect aktivities
quality assurance
in the broadest sense
(i.b.s.)
any combination of production factors,
in the value chain:
all operational activities
Source: Betriebshütte
© WZL
“Production“ within the value chain
The legend:
Activities that are part of the accumulation of value for the buyer such as assembly, marketing,
product design etc. are called direct activities. Indirect activities should make the direct activities
possible. These are activities like maintenance, time scheduling, operating the machines, etc..
The quality assurance guarantees the quality of the other activities. These are for example
monitoring, quality inspection, adjusting and reengineering. As a matter of principle direct and
indirect activities as well as quality assurance are part of each of the primary and supporting
activity categories.
The figure:
There are several possible meanings of the term “production“ which literature is disagreeing
about. On one hand production can be seen as pure manufacturing which would be represented
in the value chain by the direct activities of the field operations. It is called “production in the
narrowest sense“.
Yet most common is another meaning of the term which is much wider kept. According to this
meaning production includes all direct activities in the value chain, that means all activities
directly taking part in the accumulation of value for the buyer.
The designation of all operational functions as production tasks as a third meaning of the term,
namely the “production in the broadest sense“. This would imply that everything a producing
business enterprise does is part of the production.
Introduction in Production Management
L1 page 6
Production Management I (Prof. Schuh)
Lecture 1
Production Management in the “St. Galler Management-Konzept“
Management aspects
Structures
Activities
Behaviour
Management levels
Normative Production Management
Normative
Company constitution
Corporate policy
(Corporate goals,
principles and rules)
Corporate culture
Strategic Production Management
Strategic
Structural and procedural
organisation, production
management systems
Programs for the design of
performance systems
and business processes
Awareness of time, costs and
quality, promotion of learning
processes
Operational Production Management
Operational
Production and logistics
processes and systems
Structures
Development and production
orders
Behaviour in terms of
performance and cooperation
Activities
Behaviour
Development of the company
Focus of the lecture: strategic and operational management
© WZL
Production Management in the "St. Galler Management-Konzept“
As has been shown over the course of this lecture, it is not quite trivial to comprehend
“production“ or the term itself systematically. The same problem occurs when dealing with the
term “production management“.
The “St. Galler Management-Konzept” represents an integrated management concept and can be
applied to production companies (as shown above).
It also differentiates between three levels of management: the normative, the strategic and the
operational level. Each of these levels is again divided into three different management aspects:
activities, structures and behaviour, which in the end results into nine fields of view. However, this
lecture concentrates on the strategic and operational levels.
On the normative management level the corporate goals, principles, rules and culture of the
company are determined. They typically aim at keeping the company vital and capable to
develop.
On the strategic management level these goals and principles are supported by suitable
organisation structures, realized through programs for the design of performance systems and
business processes. The aim is the build-up, use and care for so-called success potentials, which
are the requirements for success in competition.
The operational management finally implements the guidelines of the strategic management by
e.g. planning and controlling of the development and production orders.
Introduction in Production Management
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Production Management I (Prof. Schuh)
Lecture 1
The Process of Strategic Management
How do companies position
themselves towards their
stakeholders?
(outer relationship)
Reflection
How are strategic
initiatives generated
within the company?
How do strategic initiatives
within the company become
effective and how do they
change the company?
initiation
positioning
performance
measurement
change
value adding
effectiveness
PM: How do companies watch
and evaluate their strategic
initiatives?
Content (What?)
Process (How?)
Genesis
How do companies
organise their
process of adding value?
(inner relationship)
© WZL
The Process of Strategic Management
The strategic initiative – its course is shown in the picture above – is vitally important for the
process of strategic management.
Initiation is defined as the development of strategic initiatives within the company. Every impulse
that has the potential to essentially influence the company’s development can be seen as a
strategic initiative. These are decisions like entering new fields of business or the forming of
corporations.
Positioning means the determination of the relationship between the company and the
stakeholders of its environment, called the outer relationship. Stakeholders are all groups that
influence the company or are influenced by it. So it is not only about the exchange of money and
goods, but also about political and cultural influences.
The value adding refers to the inner life, which means the skills and value-adding processes of a
company, because they directly affect the course of action towards the environment. Strategic
initiatives dealing with value adding mostly aim at developing and/or improving the organisational
skills, e.g. the model of adding value or the organisation structure.
A change occurs when a strategic initiative has taken effect and the company starts to alter. This
also affects the basic organisational process, i.e. the development of strategic initiatives. So the
circle comes to a close towards initiation.
Finally, the course of the strategic initiative has to be measured and observed by performance
measurement.
Introduction in Production Management
L1 page 8
Production Management I (Prof. Schuh)
Lecture 1
Alternative Paths of Strategic Management
Strategic
orientation
Invention
of the business
Mobilisation
© WZL
Alternative Paths of Strategic Management
Of course the paths of strategic management do not always have to progress the same way. The
sequence of the fields initiation-positioning-value adding-change represents an idealised process.
It is variable, depending on occasion and intention of the initiative.
Also, fields that have already been worked on can be passed through again, or different fields can
be worked on interconnected and at the same time. Yet every path begins with the initiation
phase.
In the picture shown above some alternative paths of strategic initiatives are given ordered by
their intention:
In the case of strategic orientation, the desired position is developed first to then either work on
the inner relationship or to go for a change in the company.
In the case of invention of the business, a new model of added value is developed first to attack a
competitor by e.g. achieving a lead in costs before concentrating on other fields of work.
For mobilisation the first step would be to strive for a change in the company in order to break old
structures and then to search for new strategic programs.
Introduction in Production Management
L1 page 9
Production Management I (Prof. Schuh)
Lecture 1
Actual Management Concepts
4,5
Supply chain
management
Pay-for-Performance
Average Overall Satisfaction
TQM
Mission and
vision
statements
Balanced
scorecard
4,0
Shareholder value
analysis
Strategic
planning
Outsourcing
Scenario planning
Benchmarking
Growth strategies
Activity-based
management
3,5
Strategic alliances
Reengineering
Core competencies
Knowledge
management
3,0
0%
25%
50%
Percent Who Used The Tool
TQM – Total Quality Management
75%
100%
Source: Müller-Stewens/ Lechner
© WZL
Up-to-date Concepts of Management
Regarding the use of modern management concepts in the economy it appears that many of the
latest methods are rarely used. A reason could be that these concepts are not well known. But
there are also company specific differences: some do not want to use these management
concepts at all, others are making comprehensive use of it. One has to take into account that
oftentimes “new“ concepts are put together from already known elements. The “new“ thing about
these concepts is the novel combination of elements in order to deal with a new problem. So the
use of modern management concepts is not a suitable key figures for benchmarking the quality of
a company’s management.
The diagram shown above illustrates a survey for the spread of and the contentedness with
management concepts by the consulting company Bain & Company in 1999. The survey took
place in north America with 214 companies involved.
Using management concepts one always has to be careful, because their use is not in every case
well defined. Also, the results are not always clearly interpretable. So it is important to not only
know their functionality and how to use them but also the limits of their possibilities. Only then
these concepts can be a useful instrument.
In practical use the quality of a concept mainly depends on how good it is worked with and how it
is managed within the company. Compared to that the applicability of the method for the given
problem is less important.
Introduction in Production Management
L1 page 10
Production Management I (Prof. Schuh)
Lecture 1
Key figures – Aid for the Management
The term “Key figure“
Key figures are operationally relevant, numeric information. (Source: Bürkeler)
Key figures are highly-compressed measurands, showing numerically ascertainable facts in a concentrated way
as related or absolute figures. (Source: Küting)
The purpose of key figures
Determination of efficiency
Information
supply
Planning
Targets
Organisation
Controlling devices
Personnel
management
Control
Management tasks
Key figures are an important aid to fulfil management tasks.
© WZL
Key figures – Aid for the management
As a helpful management device so-called key figures are widely and intensively used throughout
all kinds of companies of various industries.
The definitions given above have proven to characterise these key figures. Yet, a better
understanding for what a key figure is good for results from the connections and examples given
on the following pages. Simplified, there are three main purposes of key figures: To determine
efficiency, to specify targets and to serve as controlling means.
Compared with the main management tasks which are information supply, planning, organisation,
personnel management and control it can be seen that these tasks overlap with the purposes of
key figures.
For example, consideration of the management task personnel management shows that in this
case key figures are helpful to specify targets and as controlling means. Thanks to them one can
not only control how (well) the staff currently works, but can also specify targets, possibly even in
comparison to other companies.
Therefore key figures are an important aid to fulfil the management tasks.
Introduction in Production Management
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Production Management I (Prof. Schuh)
Lecture 1
Types of Key figures
Key figures
Absolute figures
Single figures
e.g.:
turnover,
cash-flow
Sums
e.g.:
total assets
Related figures
Differences
Average values
e.g.:
working
capital*
e.g.:
average stock
Ordering figures
=
subset
total amount
e.g.:
Linked key figures
“watched figure“
“related figure“
=
e.g.:
turnover product x
total turnover
*working capital = circulating capital – short-term liabilities
sales area
number of products
Measured figures
a) simple measured figures
e.g. development of
turnover
b) index figures
price, quantity,
value index
Source: Siegwart
© WZL
Types of Key figures
At first key figures are divided into absolute figures which are determined independently from
other figures, and related figures containing two items correlated to each other. Although widely
used in practice the value of absolute figures as key figures is very limited. Their use only makes
sense in a time line in order to show a development (e.g. the development of the turnover), in a
comparison of debits and actuals, or put in a relationship to other senseful items, e.g. in order to
compare to competing companies. Generally, related figures are much more useful.
The first division of the related figures are the ordering figures where subsets are correlated to the
corresponding total amount. Secondly there are the linked key figures, which are the most
important. To calculate them, data of two different kinds is put into proportion. For the value of this
proportion it is very important that the two types of data are factually coherent which also depends
on the industry. For example, while for a department store the relation between turnover per sqm
of sales area is important, the relation between turnover and sqm of production area has no use
for a machine producing company. As a third division there are the measured figures. They are
subdivided into simple ones, for which a base value of 100 is defined as being the benchmark for
the other figures, and index figures, showing the run of several factually related data series.
The actual value of key figures is created by the comparison to other key figures. Key figures can
be compared within the company and/or with other companies. Examples for an intra-company
comparison are the comparison of time for which actuals of different data are compared, the
comparison of debits and actuals, showing the difference between the debits and the actually
reached figures, or the comparison of norm and debit, for which the norms from different
management levels are compared.
Introduction in Production Management
L1 page 12
Production Management I (Prof. Schuh)
Lecture 1
Key figures in Real Life - Overview
Key figures
For the management
of the company
Referring to finances
Structure of
capital and assets
e.g. debt-equity ratio
Liquidity
Referring to results
e.g. market share, success rate for
Referring to earnings
Production (i.n.s)
e.g. ROI, ROE, ROS,
e.g. productivity, efficiency,
ROCE, RONA, ROIC
capacity utilization
Human resource management
Stocks
Referring to cash-flow
e.g. range of coverage
e.g. payout force,
e.g.fixed assets
coverage
Marketing/ Sales
offers, readiness to deliver
e.g. cash liquidity
Cover relation
For the management
of single company processes
e.g. personnel turnover, absenteeism,
age pattern, average wages
self-financing force,
Technology development
free cash-flow
e.g. time to market, age pattern of
turnover, innovation force
ROX – Return on X, I – Investment, E – Equity, S – Sales, CE – Capital Employed, NA – Net Asset, IC – Invested Capital
Source: Siegwart
© WZL
Key figures in Real Life - Overview
Until today a much too complex variety of key figures for almost all kinds of companies and
company processes has been created. For the use of key figures it is not only important to regard
industry-specific differences but also the needs of every management level. Oftentimes, for the top
management a few global key figures with strategic significance such as profit, market share and
productivity are sufficient. For the lower management levels more detailed and department specific
key figures are more important.
Some terms mentioned in the diagram above:
The debt-equity-ratio shows the ratio of loan capital and capital in percent. A debt-equity-ratio too
high can influence the independence of a company in a negative way, but it also shows the
management‘s readiness to take risks.
The ratio between the average stocks of bought resp. self-manufactured supplies and the
consumption of materials of the sold services is called range of coverage. From this ratio can be
seen how long production can last without buying materials resp. how long goods can be sold
without production.
The fixed assets coverage shows the ratio between equity capital and fixed assets and therefore
the long-term coverage of the fixed assets.
For the use of key figures in practice there are some important preconditions such as the existence
of a sophisticated accountancy, the right choice, up-to-dateness or – very important – the correct
determination of data. The best key figures will be of no use if the preconditions are not sufficiently
fulfilled!
Introduction in Production Management
L1 page 13
Production Management I (Prof. Schuh)
Lecture 1
Key figures referring to Results 1/2 - Profit
Profit as an absolute key figure is not meaningful enough
Î definition of linked key figures necessary, linking profit to related figures
common related figures:
a) capital invested (ROI, ROCE, ROIC, RONA)
b) turnover (ROS)
c) equity capital (ROE)
ROI – traditional key figure
=
ROCE – modern key figure
EBIT
=
capital
“return on total investment“
long-term
capital
capital
working
capital
circulation
assets
Profit and loss statement
Liabilities
equity capital
loan capital
capital employed
variant of return on total investment
Balance sheet
Assets
fixed
assets
EBIT
Expenditures
capital
employed
Revenue
taxes
EBIT
interests
profit
EBIT – Earnings before Interest and Taxes
© WZL
Key figures referring to results - profit
As mentioned above the use of the key figure “profit” is limited, because it is an absolute figure.
So the definition of linked key figures, that link profit to related figures, makes much more sense.
Here, the difference between the key figures ROI and ROCE, both referring to the capital
invested, is to be examined. The main difference between them is the definition of what can
exactly be called invested capital. A little trip to the world of balance sheets should be helpful for a
better understanding:
During the profit and loss statement, expenditures and revenue are regarded comparatively. If the
revenue is higher than the expenditures the surplus is called profit. As taxes and interests change
permanently and can not be influenced, for purpose of calculating ROI and ROCE, they are
substacted from the the expenditures and added to the profit. The created surplus is called EBIT,
short for earnings before interests and taxes. In order to calculate key figures the EBIT is related
to the capital invested.
On a balance sheet of a company different amounts of capital can be found. The term capital
itself stands for the whole capital tied-up in a company. It is tied-up to the assets (fixed assets +
circulation assets). It is provided by both equity capital investors such as shareholders and
owners or by debt capital investors who give credits. Another kind of capital amount is the capital
employed. It only stands for the long-term capital, containing the fixed assets (machines,
buildings, etc.) on the one hand, long-term tied-up circulation assets, the so-called working
capital, on the other, e.g. long-term material stocks.
To calculate the ROI the capital itself is used while for the calculation of the ROCE the capital
employed is the important figure.
Introduction in Production Management
L1 page 14
Production Management I (Prof. Schuh)
Lecture 1
Key figures referring to Results 2/2 – Cash-flow
Payment
-
Out payment
Cash-flow
shows the part of the profit for the year that has become effective in terms of liquidity
direct calculation:
revenues effective in terms of liquidity – expenditures effective in terms of liquidity
indirect calculation: taken from profit and loss statement: profit + depreciation (simplified)
Free Cash-flow (Example for a specific, corrected cash-flow calculation)
Capital actually available to the company (after allowance for taxes and interests)
for:
reinvestment in the company
honouring debts
payment of loan capital interests
dividend payout (“equity capital interests“)
© WZL
Key figures referring to Results – Cash-flow
The cash-flow is a key figure of outstanding importance: it is the “actual key figure for the
evaluation of a company‘s financial strength and earning power“, states Siegwart. From the
company’s political point of view the cash-flow is to be preferred over many other key figures.
Due to its functional connection with liquidity, profit and self-financing it shows whether the
intended investment can be funded by equity capital. The cash-flow is calculated from the profit
and loss statement in two different ways: directly or indirectly.
For the direct calculation of the cash-flow, transactions effective in terms of liquidity are regarded.
Contrary to the indirectly calculated cash-flow the directly calculated one complies with its actually
earned size. Therefore the direct calculation can be used for cash-flow planning.
The indirect calculation is used if the cash-flow has already been gained. If a profit and loss
statement is available the indirect method is oftentimes easier to perform. Yet, as for instance the
build-up or liquidation of long-term reserves are not regarded, the indirectly calculated cash-flow
does not comply with its actually earned size.
Introduction in Production Management
L1 page 15
Production Management I (Prof. Schuh)
Lecture 1
Economic and value
based view
Technical and quantity
based view
Key figures for the Management of the Production
Output: production output
Productivity
Output
=
Input
output quantity (e.g. pieces, kg, ...)
Input: input for production
material input or
factor input (e.g. employees, equipment, time)
“true“ productivity: pure consideration of quantities
also: financial evaluation of quantities (especially output); e.g. productivity of employees
Revenue: “value of the output“
Efficiency
=
Revenue (€)
Expenditures (€)
= sales revenue +/- change of inventory
Expenditures: costs of input
Total costs:
costs for material
+ manufacturing wages
+ overheads
© WZL
Key figures for the Management of the Production
In today‘s competitive environment it is vital for every company to keep production as effective as
possible, which means to permanently supervise efficiency and productivity and to improve them
if possible. In order to achieve this, key figures for the management of the production are an
important aid.
The productivity is a key figure for how effectively the given production factors are used. As the
calculation based on quantities is difficult in reality and therefore the calculation of the “true“
productivity, the quantities are often evaluated financially. Oftentimes instead of the overall
productivity, partial productivities are calculated, for example the labour cost productivity.
The efficiency shows the correlation between revenue and expenditures and is influenced by
many factors such as the utilisation of the production equipment, the production processes and
the quality demands.
Introduction in Production Management
L1 page 16
Production Management I (Prof. Schuh)
Lecture 1
Key figure systems – Linking key figures sytematically
Stocks
DuPont-System
+
Turnover
Fixed assets
Asset turnover
:
Total assets
Return on total
investment (ROI)
+
+
Circulation assets
Liquid assets
x
Production costs
Success
Return on sale
(ROS)
Debts receivable
Turnover
:
Cost
Turnover
+
Storage costs
+
Distribution and
administrative costs
Presumption: change in inventory, taxes, interests = 0
© WZL
Key figure systems - Linking key figures systematically
Siegwart states: “Key figure systems can be defined as a logical and/or calculative linking of
several key figures that are related to each other.“ Key figures can be linked systematically so
that they represent the business enterprise in a purpose-oriented way.
The DuPont-system is one of the most common key figure system and was developed by an
american chemical engineering company in 1919. The starting point and the main target of a
company is the return on investment (ROI), i.e. the return on invested assets.
The excellence of the DuPont-system results from dividing the ROI into the asset turnover and
the return on sale: it shows the possibilities to increase the ROI. Another strength is that through
its structure this key figure system shows coherences within a company.
Introduction in Production Management
L1 page 17
Production Management I (Prof. Schuh)
Lecture 1
Balanced Scorecard – Holistic key figure system
cific
atio
ns
Mea
sure
s
figu
res
Spe
Key
Tar
ge
What position
should we
take facing
our investors?
ts
Financial
cific
atio
ns
Mea
sure
s
Spe
ts
What
processes
do we have
to perform
outstandingly?
Key
Vision
and
Strategy
Tar
ge
cific
atio
ns
Mea
sure
s
ts
figu
res
Spe
Key
Tar
ge
Which services
should we
supply
to our
customers?
figu
res
Internal business processes
Customer
cific
atio
ns
Mea
sure
s
figu
res
Spe
Key
Tar
ge
How can
we maintain
our ability
to change and
improve?
ts
Learning and growth
Source: Kaplan/ Norton
© WZL
Balanced Scorecard - Holistic key figure system
The Balanced Scorecard as a holistic key figure system is a device for the strategy based
management of a business enterprise.
Vision and strategy of a business enterprise are transformed into targets, key figures,
specifications and measures and then divided into four different perspectives as shown in the
picture above. By simplifying complex contents to an understandable level the appropriate
measures can be derived systematically.
The financial perspective is about considering the long-term financial aims and then connecting
them with the necessary financial processes, with the customers, the internal processes and
finally with the implementing personnel and systems.
The customer perspective deals with the determination of the customer and market segments in
which the company wants to be competitive and the planning of the offered services in these
segments.
The whole value adding-chain of the company is looked at from the internal business processesperspective.
By taking a look at the perspective of learning and growth a learning and viable organisation shall
be encouraged by increasing the potentials of employees, systems and organisation processes.
It is important to know that the use of the balanced scorecard does not only measure the
advances but also initiates them.
Introduction in Production Management
L1 page 18