Description
Strategic financial management refers to study of finance with a long term view considering the strategic goals of the enterprise. Financial management is nowadays increasingly referred to as "Strategic Financial Management" so as to give it an increased frame of reference
SFCM-introduction © Baba
1
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There is no agreement between academics about what is meant by strategic cost management. The phrase of Strategic Cost Management was first used by Simmonds in 1981 Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management
SFCM-introduction © Baba
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SCM is the use of cost information to – ? help formulate and communicate strategies; ? carry out tactics that implement those strategies; and ? develop and implement controls that monitor success at achieving strategic objectives.
SFCM-introduction © Baba
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Corporate strategy
Business Strategy
Three levels of strategy
Functional strategy
SFCM-introduction © Baba 4
business strategy
an integrated set of actions aimed at securing a sustainable competitive advantage.
strategic management It is an iterative process of analysis, planning and control in order to achieve the long-term strategic aims of the organisation but the organisation has to establish a strategic plan.
SFCM-introduction © Baba 5
?
Managers need to know ? What do the customers want?
? What will they pay for it?
? What will it cost to provide it?
? ?
Costly mistakes can be avoided with this information. Strategic cost management should help in ? Reflecting what competitors are doing. ? Achieving the required strategic position. ? Gaining competitive advantage.
SFCM-introduction © Baba
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Definition A comparison of one entity's cost position to another. Cost analysis compares everything from the price paid for raw materials right to the price customers pay for the finishedproduct. The goal of the analysis is to determine whether or not one company's costs are competitive with another's.
SFCM-introduction © Baba
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SFCM refers to both- the financial implications or aspects of various business strategies, and strategic management of finance & costing ( i.e. strategic approach to cost management, sales & revenue management, funds raising fund deployment & cost benefit analysis of every prime decision of expansion, diversification, downsizing & renovation & restructuring. A firm succeeds by implementing strategy i.e. a set of policies, procedures, approaches to business that produce long term (sustainable) success. Strategic financial & non financial measures of success are called “ Critical Success Factor [CSF]”. SFCM refers to micro level strategic analysis of various cost structure & cost implication. Michale Bromwhich defines SCM as “ the provision & analysis of financial information on the firm’s product, market & competitors costs & cost structure & monitoring enterprises' strategies & those of its competitors.” CIMA , London defines SCM as “ the preparation & presentation of information for decision making, laying particular stress on external factors.” SCM is a term used to describe the provision of accounting information to assist strategic decision making.
SFCM-introduction © Baba 8
SCM-Definition -Competitor Accounting
Simmonds defines SCM as: ? “A form of management accounting in which emphasis is placed information which relates to factors external to the firm, as well as non-financial information & internally generated information.” ? „the provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring the business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm?s total resources.? ? “ collection of management accounting information about a business & its competitors for use in developing & monitoring business strategy.”
SFCM-introduction © Baba 9
?
Prof . Bromwhich : first costs need to be integrated into strategy through strategic cost analysis & thus align costs with strategy and secondly , to ascertain , albeit in a fairly general & ( ethical) way, the cost structure of competitors and monitor the changes over the time. Two approaches
? Costing product attributes provided by the company’s products ? Cost functioning in the value chain which are perceived as giving value to the customer. ? concentrates on the manufacturing & neglects the high cost post-conversion activities ? ignores the impact of other activities ? fails to asses the relative cost position of competitors ? overreliance on existing accounting system.
Traditional management is perceived as inadequate since it
By contrast SCM purports to place emphasis on
? The relative cost position ? The ways in which a company may secure a sustainable cost advantage; ? Cost of differentiation –i.e. what makes the product different & hence more attractive.
SFCM-introduction © Baba 10
1. 2. 3. 4. 5. 6. 7. 8.
9.
10.
Competitors’ costs. Product profitability including profitability of attributes. Pricing decisions for new products. The value of market share. Price reduction & its implications. Future costs & prices. Implications of capacity expansion. Falling prices. Substitute products. New entrants
SFCM-introduction © Baba 11
1. To maintain equilibrium between contradicting interests of various stakeholder 2. To assure steady (sustainable) growth rate in the long run. 3. To attempt & achieve accelerated growth rate. 4. To capture exceptional opportunities of business. 5. To create ability & action plan that will meet global & domestic adversities. 6. To create wide scope in order to find new ventures , new technologies , new markets, new bench marks to boost productivity & profitability. 7. To try to be flexible as possible.
SFCM-introduction © Baba
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Meaning of CI- a tool to alert management to early warning of both threats & opportunities. Types of CI gathering”:? Competitive analysis. ? Competitive intelligence ? Business intelligence- broadest degree of CI gathering which includes competitive intelligence, market research, & analysis & environment scanning.
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Elements of CIa. b. c. d. ? ? ? ? ?
?
Objectives of CI
Focusing on creating profile of competitors & industry. Concentration on competitors action. Conversion of competitors’ data into CI. Organizing evaluating team To provide early warning & threat , especially from competitors. To ensure greater management awareness about changes among the competitors. To provide relevant & timely CI for strategic planning. To enable organization to respond quickly to environment changes. To ensure that organization builds up competitive strength & to plug weakness especially in the areas of competition.
SFCM-introduction © Baba 13
Competitor Accounting
Sales Budget for year ending 2004
Ourselves Competitor A Competitor B Competitor C
Units sold Selling price Total revenue
x x x
x x x
x x x
x x x
SFCM-introduction © Baba
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Competitor Accounting
? ? ?
?
?
MA should help firm evaluate its competitive position relative to the rest of the industry. Managers require information that indicates by whom and by how much they are gaining or being beaten. The management accounting reports should be modified to a strategic format. For example budgets should include extra columns for comparisons with competitors. The key issue in competitor analysis is to identify the relative differences between one’s own business and each significant existing and potential competitor. The identification of these relative competitive strengths and weaknesses can make a major contribution to the development and implementation of a successful competitive strategy.
?
SFCM-introduction © Baba
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Accounting for strategic positioning
Product differentiation
?
Cost leadership
?
?
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Offering products/services that are perceived by customers as being superior and unique relative to those of its competitors. Apple in the IT industry Coca-Cola in the soft drinks industry. Google
SFCM-introduction © Baba 16
Accounting for strategic positioning
Product differentiation
? ?
Cost leadership Cost leadership is achieving low costs relative to competitors. How does a company achieve low costs?
– Productivity and efficiency improvements – Elimination of waste – Tight cost control
SFCM-introduction © Baba
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Accounting for strategic positioning
Evidence suggest that:
business units pursuing a low cost strategy should adopt results measures that emphasise cost reductions and budget achievement. business units competing on the basis of differentiation should require more information than a cost leader about new product innovations, design cycle times and research and development.
SFCM-introduction © Baba
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If traditional management accounting: ? concentrates on manufacturing activities; ? ignores the impact of other activities; ? overlooks linkages between activities by analysing each activity in a discrete way; ? fails to asses the cost positions of competitors in relative terms; ? relies too heavily on existing financial accounting system.
The answer is ‘NO’
The role of Strategic analysis is to overcome these problems because the focus is on: ? looking at external environment as well as internal environment. ? the determinants of relative position compared to competitors; ? the ways in which a firm might secure a sustainable competitive advantage; ? analysis of value chain activities for both one’s own business and competitors’.
SFCM-introduction © Baba
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?
?
Strategic Focus of Cost & Financial management : guided by the strategic thinking , the management accountant focuses on factors that make the company successful rather than costs & other financial matters. Cost management focuses not on measurement per se but on the identification of those measures that are critical to firm’s success. Robert Kaplan’s classification of the phases of development of cost management system (CMS) describes the shift in focus
? Stage 1- CMS as basic transaction reporting system. ? Stage 2- CMS focuses on external reporting. ? Stage 3- CMS tracks key operating data & develop more accurate & relevant cost data. ? Stage 4- Strategic Cost Management Information is integral part of the system, identifying, summarizing & reporting critical success factor (CSF) CSF are measures of those aspects of the firm’s performance essential to its competitive advantage & therefore to its success. Many of the CSFs are financial but many are non-financial.
SFCM-introduction © Baba
21
?
“To manage in the future, executives will need an information
? Information should answer the key question ? What should I do? ? NOT What are the results of what I’ve already done?
system integrated with strategy, rather than individual tools that so far have been used largely to record the past”
?
Must develop an integrated cost / quality / functionality measurement system ? Traditional accounting information is not sufficient ? Backwards looking
? Fails to measure important items
? Much important information is not quantitative ? Designed to meet reporting requirements, not management needs SFCM-introduction © Baba
22
?
?
?
Foundation information ? Basic diagnostics ? May indicate something is wrong, but not why ? Basic financial & cost Ratios Productivity information ? Productivity of key resources ? Concern should be for total productivity ? Benchmarked Competence information ? Indicates where a business has a leadership advantage ? Innovation is the most important core competence
? To win, you have to be the best at something
?
Resource allocation information ? How to best use the resources available ? What if it fails to produce the intended results? ? What if it is more successful than we imagined?
SFCM-introduction © Baba 23
SFCM-introduction © Baba
24
What is the most useful way to analyze costs?
Management Accounting ?In terms of products, customers, and functions ?Strongly internal focus ?Value added is a key concept
Strategic Cost Management ?In terms of the various stages of the overall value chain of which the firm is a part ?Strongly external focus ?Value-added considered a dangerously narrow concept
What is the objective of cost analysis?
Although the three objectives are always Three objectives all apply present, the design of cost management without regard to the systems changes dramatically depending strategic context: score on the basic strategic positioning of the keeping, attention directing, firm, i.e., a cost leadership or product and problem solving. differentiation strategy. Cost is primarily a function of output volume: variable cost, fixed cost, step cost, mixed cost Cost is a function of strategic choice about the structure of how to compete and managerial skill in executing the strategic choices: in terms of structural cost drivers and executional cost drivers
SFCM-introduction © Baba 25
How should we try to understand cost behavior?
Conventional Cost Management Strategic Cost Management Standard cost system with normal allowance No allowance for scrap, waste, rework; zero for scrap, waste, rework; zero defect standard defect is the concept is not practical. Overhead variance analysis; maximize production volume (not quality) to absorb overhead. Overhead absorption is not the key; standard costs and variance analysis are deemphasized, in general
Variance analysis is on raw material price; procedure from multiple suppliers to avoid unfavorable price variance; low price/lowquality raw materials No emphasis on nonfinancial performance measure
No control on raw material price; certify vendors who can deliver right quantity, right quality, and on time
Heavy use of nonfinancial measures(part-per-million defects, percentage yields, scrap, unscheduled machine down-times, first-pass yields, number of employee suggestions)
SFCM-introduction © Baba
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Conventional Cost Management No tracking of customer acceptance
No cost of quality analysis
Strategic Cost Management Systematic tracking of customer acceptance (customer complaints, order lead time, on-time delivery, incidence of failures in customers’ locations) Quality costing as a diagnostic and management control tool
CONTROL PHILOSOPHY The goal is to be in the top tier of the The goal is kaizen reference group
The annual target is to meet the standards Industry norms set the floor The annual target is to beat last year’s performance Standards are to be met, not exceeded Each achievement level sets a new floor for future A regularly exceeded standard is not achievement tough enough
SFCM-introduction © Baba 27
? ABC (Activity Based Costing) ? VCA (Value Chain Analysis) ? Reengineering. ? BSC (Balanced Score Card) ? Target Pricing & Target Costing (TP & TC) ? Life Cycle Costing (LCC)
? The Theory of constraint ? Mass customization ? TQM (Total Quality Management) ? Bench marking
? Kaizen (continuous improvement)
? JIT-Just in time system ? TOC (Theory Of Constraint) ? Automation
? EVA (Economic Value Addition)
SFCM-introduction © Baba
28
doc_763838704.pptx
Strategic financial management refers to study of finance with a long term view considering the strategic goals of the enterprise. Financial management is nowadays increasingly referred to as "Strategic Financial Management" so as to give it an increased frame of reference
SFCM-introduction © Baba
1
?
?
?
There is no agreement between academics about what is meant by strategic cost management. The phrase of Strategic Cost Management was first used by Simmonds in 1981 Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management
SFCM-introduction © Baba
2
?
SCM is the use of cost information to – ? help formulate and communicate strategies; ? carry out tactics that implement those strategies; and ? develop and implement controls that monitor success at achieving strategic objectives.
SFCM-introduction © Baba
3
Corporate strategy
Business Strategy
Three levels of strategy
Functional strategy
SFCM-introduction © Baba 4
business strategy
an integrated set of actions aimed at securing a sustainable competitive advantage.
strategic management It is an iterative process of analysis, planning and control in order to achieve the long-term strategic aims of the organisation but the organisation has to establish a strategic plan.
SFCM-introduction © Baba 5
?
Managers need to know ? What do the customers want?
? What will they pay for it?
? What will it cost to provide it?
? ?
Costly mistakes can be avoided with this information. Strategic cost management should help in ? Reflecting what competitors are doing. ? Achieving the required strategic position. ? Gaining competitive advantage.
SFCM-introduction © Baba
6
? ?
Definition A comparison of one entity's cost position to another. Cost analysis compares everything from the price paid for raw materials right to the price customers pay for the finishedproduct. The goal of the analysis is to determine whether or not one company's costs are competitive with another's.
SFCM-introduction © Baba
7
?
?
?
?
?
?
?
SFCM refers to both- the financial implications or aspects of various business strategies, and strategic management of finance & costing ( i.e. strategic approach to cost management, sales & revenue management, funds raising fund deployment & cost benefit analysis of every prime decision of expansion, diversification, downsizing & renovation & restructuring. A firm succeeds by implementing strategy i.e. a set of policies, procedures, approaches to business that produce long term (sustainable) success. Strategic financial & non financial measures of success are called “ Critical Success Factor [CSF]”. SFCM refers to micro level strategic analysis of various cost structure & cost implication. Michale Bromwhich defines SCM as “ the provision & analysis of financial information on the firm’s product, market & competitors costs & cost structure & monitoring enterprises' strategies & those of its competitors.” CIMA , London defines SCM as “ the preparation & presentation of information for decision making, laying particular stress on external factors.” SCM is a term used to describe the provision of accounting information to assist strategic decision making.
SFCM-introduction © Baba 8
SCM-Definition -Competitor Accounting
Simmonds defines SCM as: ? “A form of management accounting in which emphasis is placed information which relates to factors external to the firm, as well as non-financial information & internally generated information.” ? „the provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring the business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm?s total resources.? ? “ collection of management accounting information about a business & its competitors for use in developing & monitoring business strategy.”
SFCM-introduction © Baba 9
?
Prof . Bromwhich : first costs need to be integrated into strategy through strategic cost analysis & thus align costs with strategy and secondly , to ascertain , albeit in a fairly general & ( ethical) way, the cost structure of competitors and monitor the changes over the time. Two approaches
? Costing product attributes provided by the company’s products ? Cost functioning in the value chain which are perceived as giving value to the customer. ? concentrates on the manufacturing & neglects the high cost post-conversion activities ? ignores the impact of other activities ? fails to asses the relative cost position of competitors ? overreliance on existing accounting system.
Traditional management is perceived as inadequate since it
By contrast SCM purports to place emphasis on
? The relative cost position ? The ways in which a company may secure a sustainable cost advantage; ? Cost of differentiation –i.e. what makes the product different & hence more attractive.
SFCM-introduction © Baba 10
1. 2. 3. 4. 5. 6. 7. 8.
9.
10.
Competitors’ costs. Product profitability including profitability of attributes. Pricing decisions for new products. The value of market share. Price reduction & its implications. Future costs & prices. Implications of capacity expansion. Falling prices. Substitute products. New entrants
SFCM-introduction © Baba 11
1. To maintain equilibrium between contradicting interests of various stakeholder 2. To assure steady (sustainable) growth rate in the long run. 3. To attempt & achieve accelerated growth rate. 4. To capture exceptional opportunities of business. 5. To create ability & action plan that will meet global & domestic adversities. 6. To create wide scope in order to find new ventures , new technologies , new markets, new bench marks to boost productivity & profitability. 7. To try to be flexible as possible.
SFCM-introduction © Baba
12
? ?
Meaning of CI- a tool to alert management to early warning of both threats & opportunities. Types of CI gathering”:? Competitive analysis. ? Competitive intelligence ? Business intelligence- broadest degree of CI gathering which includes competitive intelligence, market research, & analysis & environment scanning.
?
Elements of CIa. b. c. d. ? ? ? ? ?
?
Objectives of CI
Focusing on creating profile of competitors & industry. Concentration on competitors action. Conversion of competitors’ data into CI. Organizing evaluating team To provide early warning & threat , especially from competitors. To ensure greater management awareness about changes among the competitors. To provide relevant & timely CI for strategic planning. To enable organization to respond quickly to environment changes. To ensure that organization builds up competitive strength & to plug weakness especially in the areas of competition.
SFCM-introduction © Baba 13
Competitor Accounting
Sales Budget for year ending 2004
Ourselves Competitor A Competitor B Competitor C
Units sold Selling price Total revenue
x x x
x x x
x x x
x x x
SFCM-introduction © Baba
14
Competitor Accounting
? ? ?
?
?
MA should help firm evaluate its competitive position relative to the rest of the industry. Managers require information that indicates by whom and by how much they are gaining or being beaten. The management accounting reports should be modified to a strategic format. For example budgets should include extra columns for comparisons with competitors. The key issue in competitor analysis is to identify the relative differences between one’s own business and each significant existing and potential competitor. The identification of these relative competitive strengths and weaknesses can make a major contribution to the development and implementation of a successful competitive strategy.
?
SFCM-introduction © Baba
15
Accounting for strategic positioning
Product differentiation
?
Cost leadership
?
?
?
Offering products/services that are perceived by customers as being superior and unique relative to those of its competitors. Apple in the IT industry Coca-Cola in the soft drinks industry. Google
SFCM-introduction © Baba 16
Accounting for strategic positioning
Product differentiation
? ?
Cost leadership Cost leadership is achieving low costs relative to competitors. How does a company achieve low costs?
– Productivity and efficiency improvements – Elimination of waste – Tight cost control
SFCM-introduction © Baba
17
Accounting for strategic positioning
Evidence suggest that:
business units pursuing a low cost strategy should adopt results measures that emphasise cost reductions and budget achievement. business units competing on the basis of differentiation should require more information than a cost leader about new product innovations, design cycle times and research and development.
SFCM-introduction © Baba
18
If traditional management accounting: ? concentrates on manufacturing activities; ? ignores the impact of other activities; ? overlooks linkages between activities by analysing each activity in a discrete way; ? fails to asses the cost positions of competitors in relative terms; ? relies too heavily on existing financial accounting system.
The answer is ‘NO’
The role of Strategic analysis is to overcome these problems because the focus is on: ? looking at external environment as well as internal environment. ? the determinants of relative position compared to competitors; ? the ways in which a firm might secure a sustainable competitive advantage; ? analysis of value chain activities for both one’s own business and competitors’.
SFCM-introduction © Baba
19
?
?
Strategic Focus of Cost & Financial management : guided by the strategic thinking , the management accountant focuses on factors that make the company successful rather than costs & other financial matters. Cost management focuses not on measurement per se but on the identification of those measures that are critical to firm’s success. Robert Kaplan’s classification of the phases of development of cost management system (CMS) describes the shift in focus
? Stage 1- CMS as basic transaction reporting system. ? Stage 2- CMS focuses on external reporting. ? Stage 3- CMS tracks key operating data & develop more accurate & relevant cost data. ? Stage 4- Strategic Cost Management Information is integral part of the system, identifying, summarizing & reporting critical success factor (CSF) CSF are measures of those aspects of the firm’s performance essential to its competitive advantage & therefore to its success. Many of the CSFs are financial but many are non-financial.
SFCM-introduction © Baba
21
?
“To manage in the future, executives will need an information
? Information should answer the key question ? What should I do? ? NOT What are the results of what I’ve already done?
system integrated with strategy, rather than individual tools that so far have been used largely to record the past”
?
Must develop an integrated cost / quality / functionality measurement system ? Traditional accounting information is not sufficient ? Backwards looking
? Fails to measure important items
? Much important information is not quantitative ? Designed to meet reporting requirements, not management needs SFCM-introduction © Baba
22
?
?
?
Foundation information ? Basic diagnostics ? May indicate something is wrong, but not why ? Basic financial & cost Ratios Productivity information ? Productivity of key resources ? Concern should be for total productivity ? Benchmarked Competence information ? Indicates where a business has a leadership advantage ? Innovation is the most important core competence
? To win, you have to be the best at something
?
Resource allocation information ? How to best use the resources available ? What if it fails to produce the intended results? ? What if it is more successful than we imagined?
SFCM-introduction © Baba 23
SFCM-introduction © Baba
24
What is the most useful way to analyze costs?
Management Accounting ?In terms of products, customers, and functions ?Strongly internal focus ?Value added is a key concept
Strategic Cost Management ?In terms of the various stages of the overall value chain of which the firm is a part ?Strongly external focus ?Value-added considered a dangerously narrow concept
What is the objective of cost analysis?
Although the three objectives are always Three objectives all apply present, the design of cost management without regard to the systems changes dramatically depending strategic context: score on the basic strategic positioning of the keeping, attention directing, firm, i.e., a cost leadership or product and problem solving. differentiation strategy. Cost is primarily a function of output volume: variable cost, fixed cost, step cost, mixed cost Cost is a function of strategic choice about the structure of how to compete and managerial skill in executing the strategic choices: in terms of structural cost drivers and executional cost drivers
SFCM-introduction © Baba 25
How should we try to understand cost behavior?
Conventional Cost Management Strategic Cost Management Standard cost system with normal allowance No allowance for scrap, waste, rework; zero for scrap, waste, rework; zero defect standard defect is the concept is not practical. Overhead variance analysis; maximize production volume (not quality) to absorb overhead. Overhead absorption is not the key; standard costs and variance analysis are deemphasized, in general
Variance analysis is on raw material price; procedure from multiple suppliers to avoid unfavorable price variance; low price/lowquality raw materials No emphasis on nonfinancial performance measure
No control on raw material price; certify vendors who can deliver right quantity, right quality, and on time
Heavy use of nonfinancial measures(part-per-million defects, percentage yields, scrap, unscheduled machine down-times, first-pass yields, number of employee suggestions)
SFCM-introduction © Baba
26
Conventional Cost Management No tracking of customer acceptance
No cost of quality analysis
Strategic Cost Management Systematic tracking of customer acceptance (customer complaints, order lead time, on-time delivery, incidence of failures in customers’ locations) Quality costing as a diagnostic and management control tool
CONTROL PHILOSOPHY The goal is to be in the top tier of the The goal is kaizen reference group
The annual target is to meet the standards Industry norms set the floor The annual target is to beat last year’s performance Standards are to be met, not exceeded Each achievement level sets a new floor for future A regularly exceeded standard is not achievement tough enough
SFCM-introduction © Baba 27
? ABC (Activity Based Costing) ? VCA (Value Chain Analysis) ? Reengineering. ? BSC (Balanced Score Card) ? Target Pricing & Target Costing (TP & TC) ? Life Cycle Costing (LCC)
? The Theory of constraint ? Mass customization ? TQM (Total Quality Management) ? Bench marking
? Kaizen (continuous improvement)
? JIT-Just in time system ? TOC (Theory Of Constraint) ? Automation
? EVA (Economic Value Addition)
SFCM-introduction © Baba
28
doc_763838704.pptx