Statements On Management Accounting

Statements on
Management Accounting
Statement Number 4MM March 2000
Practices and Techniques: Designing an Integrated Cost Management System for Driving Profit and Organizational Performance
In accordance with the charge to the Management Accounting Committee (MAC) to issue statements on management accounting and financial management principles and practices, Statements on Management Accounting are promulgated to reflect official positions of the Institute of Management Accountants (IMA). The work of the MAC is based on a framework for management accounting, whose principal categories are: 1. 2. 3. 4. 5. Objectives Terminology Concepts Practices and Techniques Management of Accounting Activities
Statement on Management Accounting Statement No. 4MM March 2000
Designing an Integrated Cost Management System for Driving Profit and Organizational Performance
Institute of Management Accountants Arthur Andersen LLP Consortium for Advanced Manufacturing-International
ACKNOWLEDGMENTS
Statement 4MM, Designing an Integrated Cost Management System for Driving Profit and Organizational Performance, was approved for issuance as a Statement on Management Accounting by the Management Accounting Committee (MAC) of the Institute of Management Accountants (IMA). IMA appreciates the collaborative efforts of the Finance Business Solutions Center at Arthur Andersen LLP and the work of Dr. C. J. McNair, CMA, of Babson College, who drafted the manuscript. Special thanks go to Randolf Holst, CMA (Canada), Manager of Knowledge Creation at Arthur Andersen, for his continuing oversight during the development of the Statement. IMA thanks the Consortium for Advanced Manufacturing-International (CAM-I) for their support in the development of this SMA. IMA is also grateful to the members of the Management Accounting Committee for their contributions to this effort.
Published by Institute of Management Accountants 10 Paragon Drive Montvale, NJ 07645-1760 http://www.imanet.org Copyright 2000 in the United States of America by Institute of Management Accountants and Arthur Andersen LLP All rights reserved IMA Publication Number 00351 ISBN 0-86641-287-5
TABLE OF CONTENTS
Paragraph I. II. III. IV. V. VI. VII. Rationale .................................................................. 1 Scope ........................................................................ 6 Key Principles Underlying the ICMS Framework .....10 Defining the ICMS Framework ................................17 Uses and Benefits of the ICMS Framework ..............31 The Role of Management Accounting ......................39 Elements of the ICMS Framework ...........................41 Information and Decision-Making Requirements .....................42 Design of the ICMS ............................................47 Strategic Management Processes .......................59 Decision Domains ..............................................64 Conclusion ............................................................. 170
VIII.
Bibliography
TABLE OF EXHIBITS
Following Paragraph
Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 4:
CAM-I Strategic Management Process Model ............................................... 18 The SMPs and Process Design ....................... 28 The Migration of Information Systems .......... 34 The Decision Domains and the SMPs ............ 38 A. Customer/Market Decision Domain B. Product Decision Domain C. Process Decision Domain D. Resource Decision Domain Decision Flow Analysis .................................. 49 Value-Based Customer Segmentation ............. 68 SMPs and Value Segmentation ...................... 71 Segment Analysis and Choice ........................ 75 Evaluation and Control within the Customer/Market Domain ....................... 87 The Product Design Decision ....................... 100 SMP Information Flows and Strategic Partnering .............................. 115 Abandonment and Creating the Future ........ 124 Ongoing Process Management .................... 147
Exhibit 5: Exhibit 6: Exhibit 7: Exhibit 8: Exhibit 9: Exhibit 10: Exhibit 11: Exhibit 12: Exhibit 13:
I.
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RATIONALE
Over the last 15 years cost management practices have been revolutionized. Spurred on by the criticisms voiced by Thomas Johnson and Robert Kaplan in Relevance Lost: The Rise and Fall of Management Accounting, accounting practitioners and academics have joined forces to create new forms of cost management that provide decision-relevant information. Beginning with activity-based costing in the late 1980s, the list of new cost management techniques has grown to include activity-based management, activity-based budgeting, target cost management, life cycle costing, capacity cost management, investment management, and strategic cost management, to name just a few. Efforts have also been made to link cost management to other key performance metrics, creating integrated performance management systems. At the same time that these changes have taken place in cost management, there have been parallel developments in the structure and focus of organizations. Process, or horizontal, management has emerged as a key to improving the throughput and performance of an organization. The internal benefits of process thinking have been extended to include an organizations key trading partners, resulting in the creation of integrated supply chains that span an industrys value chain. The driving force behind these rapid changes to the information and management structures of the organization is the customer. Demanding better, yet cheaper, products and services delivered faster with ever-increasing levels of customization, customers are forcing companies to reexamine every facet of their operations. Information is the vital ingredient in defining customer requirements and then meeting them better than the competition. The implementation of the new management and information systems that provide these insights has become essential to the survival of an organization seeking to meet the challenges of a global market. As a result of the rapid pace of the implementation of new management systems, though, many organizations today are faced
with fragmented information flows that have created a veritable Tower of Babel. New management and measurement systems are developed in isolation from other initiatives and systems, resulting in redundancy, gaps, and miscommunication. Lacking an integration framework, these initiatives have often failed to provide all of their promised benefits. 5 Integration of information is essential if an organizations resources are to be deployed optimally. Integration provides the basis for robust decision analysis because it supports the incorporation of multiple perspectives. Whether an organization is just beginning its journey toward the implementation of new cost management models or has put many of them in place, the need to integrate information and management systems remains the same. Meeting this need is the objective of the integrated cost management system (ICMS) framework.
II.
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SCOPE
This Statement on Management Accounting (SMA) has been written to help an organization understand how to integrate its cost management system to optimize its investment in information. The methods and principles presented in this SMA summarize the findings of a recent multi-year project completed by the Consortium for Advanced Manufacturing-International (CAM-I). Organizations involved this project include, Arthur Andersen, Daimler-Chrysler, Allied Signal, Boeing, Case, and Kodak. The focus of this publication is on the integration of the cost management techniques that are proving to have the most visibility and applicability to the decisions and actions of financial practitioners and operations managers. It is beyond the scope of this guideline to discuss the details of any specific cost management technique. The focus is, instead, on how these management systems can be combined into an integrated framework to help drive profit and organizational performance. The ICMS concepts discussed here apply to:
large and small organizations; and enterprises in all business sectors.
The information in this SMA will help financial professionals and others: comprehend the underlying principles of the ICMS framework; understand the various elements of an integrated cost management system; determine the uses and benefits of the ICMS framework; understand the relationships between various cost management approaches; design an integrated cost management system; develop a migration path for integration of the various cost management systems; and broaden employee awareness and obtain their buy-in for an integrated cost management system.
III. KEY PRINCIPLES UNDERLYING THE ICMS FRAMEWORK

10 Understanding the relationship among activities, outcomes, and value creation has become the key to achieving profitable performance. To reach this understanding, an organization has to be able to integrate its information flows. Integration creates a knowledge base that can be used to communicate decisions, objectives, results, and opportunities from the top of the organization to the bottom. Integration of information across all functions and processes is an essential ingredient of effective management in the fast-paced global economy. The key principles of the ICMS framework reflect the information and decision-making needs of the managers who use it. Specifically, these principles include: Strategic orientation: A cost management system must incorporate and reflect the strategies of the organization and the core competencies that support the achievement of strategic goals. 3
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Customer driven: Information system design, integration, and use must be centered around defining and meeting customer requirements. Value based: Competitive advantage and profitable growth stem from understanding how and where the organization creates value for its customers. Process/horizontal focus: Integration must incorporate the flows of materials and information across and between organizations, highlighting interdependencies. Decision relevant: Information systems have to be defined around and support the key decisions of the organization. Cost effective: Integration should focus on the essential 20 percent of data that support 80-90 percent of the decisions made within an organization rather than on comprehensive integration of all of the organizations available data. Relationship based: Integrated information systems must be based on and highlight the performance of key transactions and relationships across the value chain.
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These principles combine to define the requirements for an effective integrated cost management system. Specifically, the ICMS should be elegant, minimizing the complexity of its underlying structure and emphasizing the identification and incorporation of data needed to support decision making within a specific decision domain. More data is not betterincorporating the right information required to support the critical decisions of the organization is the key objective. Flexibility is a major concern of the ICMS. The data structure should be relational, allowing for ongoing modifications, additions, and deletions of data from the integrated system. This is not to suggest that data should be removed from the organizations basic operational and strategic systems, but rather that the data pulled into the integrated system should be managed to ensure that it remains a relevant, efficient, and cost-effective source of decisionsupport information.
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User-friendliness is also a concern of an ICMS. Data is transformed into information when users are able to access and deploy it freely and easily. The ICMS is not a system designed by accountants for accountantsit is an integrated source of information supported by efforts throughout the organization. It should be structured to ensure that users both understand and feel comfortable working with it, regardless of their location in the organization or their background. The goal of the system design and maintenance is to ensure that the system is both accessible and relevant to the people who rely on it for decision support. Of equal concern is the ability of the ICMS to capture the interdependencies within the organization among functions and teams and between partners in the supply chain. The data embedded in the ICMS should be compatible with the systems and abilities of both internal users and the organizations key trading partners. Data may be imported from the point-of-sale, using data links with a retail partner. Suppliers both receive and provide information on the progress of key components or products, including the ability to respond to mix and demand shifts identified at the point-of-sale. Integration extends beyond the needs of today to include the efforts in designing and developing new products and services as well as support for products and services that have been abandoned. Linkages are made in the ICMS forward and backward in the value chain and across the life of the organization and its customer relationships. The ICMS seeks to use information as a bridge to cross the communication and activity gaps that naturally occur in organizations. The key components of the ICMS framework reflect these basic tenets and objectives.
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IV.
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DEFINING THE ICMS FRAMEWORK
The ICMS framework emphasizes the relationship between information flows and decision making at various levels of the organization. It seeks to identify those essential data elements that must be shared between individuals, teams, departments, processes,
and entities for effective, coordinated decision making and action to occur. 18 The fundamental thesis of the ICMS framework is that achieving profitable performance and competitive advantage stems from a deeper understanding of the relationships among activities, outcomes, and value creation. A second major thesis is that integration of information flows is an essential element of effective management decision making, serving to clarify communication and strengthen the linkages among interdependent functions, teams, or entities. The ICMS framework, as illustrated in Exhibit 1, consists of the following elements: Strategic management processes. Seven core strategic management processes (SMPs) incorporate current best practicestarget cost management (TCM), asset management (AM), the extended enterprise (EE), capacity cost management (CM), process management (PM), activity-based cost management (ABCM), and integrated performance management (IPM). As depicted in the exhibit, the SMPs serve as the rods that lock the plattersthe decision domainsinto synchronous action. Decision domains. Decisions take place within four primary domainscustomer/market, product, process, and the resource level. The driving force of the organization, the answer why it exists at all, is found at the customer/market level. Products and services are what the company is offering to meet customer needs and deploy its strategy. Processes and their capacity are the how of the management equation. They are the means to the desired endsvalue creation and profits. All of these levels draw on and define the resource requirements of the organization. Integration. Integration takes place at the data level, where common information requirements are identified and core SMPs are linked to these information requirements.
Exhibit 1. CAM-I Strategic Management Process Model
Customer/Market Decision Domains Strategic Management Processes Product 1 2 3 4 5 6 7
Process
Resource Strategic Management Processes 1. 2. 3. 4. 5. 6. 7. Target cost management (TCM) Asset management (AM) Capacity cost management (CM) Process management (PM) The extended enterprise (EE) Integrated performance management (IPM) Activity-based cost management (ABCM)
Source: CAM-I, 2000: 11.
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The four platters (e.g., decision domains), are linked by the information pipelinesthe strategic management processes. As the exhibit suggests, the SMPs extend throughout the four decision domains, providing different types of information to users at different levels of the organization. For instance, target cost management, ,
a system for profit planning and cost management, incorporates profit, cost, and value-based management concepts at the earliest stages of product development and applies them throughout the product life cycle by involving the entire value chain or extended enterprise. The extended enterprise SMP brings trading partners together in order to leverage cross-organizational competencies and knowledge to better meet customer requirements, during both the design and the execution of the strategic plan. 20 Aligning resources to meet specific customer requirements and ensuring that plan execution is not impaired or prevented by inadequate or improper resources are the objectives of asset management and capacity management. The asset management and capacity management SMPs combine to create a life cycle focus on identifying and evaluating technology, equipment, people, systems, and related opportunities that could be used to improve organizational performance. Asset management and capacity cost management are extensions of the capital investment process, which emphasizes decisions that add value to the organization and benefit its stakeholders. They zero in on the capacity of resources to create value, as well as the causes of idle, excess, and ineffective capacity utilization. Defining strategies and planning their execution are necessary but not sufficient management processes. Results depend on the motivation of individuals to achieve the goals and the actions they take to make their plans a reality. By emphasizing the integration and balancing of measures, their use, and the rewards they trigger, integrated performance management is the vital link between plans and results. And finally, the ongoing actions across the many different layers and areas of the organization have to be knit together into a streamlined, seamless whole. It is this arena of integration that process management and activity-based cost management address. Process management emphasizes the horizontal linkage of activities from core workflow management through business and enterprise process integration. It aligns organizational actions with customer values. 8
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In a related manner, activity-based cost management emphasizes the effective combination of resources to create unique organizational capabilities. It analyzes specific actions and their tie to processes, costs, performance, and results. ACBM fills a basic information void by providing cost and operating information that mirrors the process view. Emphasizing opportunity costs and value analysis, ABCM management creates an economically rich basis for supporting decision analysis. The SMPs ensure that decisions and data used at the top, the strategic level of the organization, correlates with those used by process level managers to analyze similar conditions and situations. Coordination and clear communication are built into the ICMS structure through these SMP information pipelines. While the seven SMPs extend through all four of the decision domains, they are not equally important to the decisions made at various levels of the organization. For instance, target cost management is the dominant SMP for most decisions made in the customer/market and product domains. Strategic in nature, these decisions require analysis and identification of the optimal set of products, services, and product attributes to meet the requirements of the target customer groups. On the other end of the spectrum, activity-based cost management plays a dominant role in the resource decision domain. In this domain, the emphasis is placed on identifying and deploying the optimal blend of resources to ensure that the total costs per dollar of value delivered to customers is minimized. Keeping the organization clearly focused on the cost/value tradeoff inherent in the productive process is a key goal of the information provided by the various SMPs in the resource decision domain. The integration of the various SMPs within a specific decision domain is driven by the need for shared data that is developed and maintained in a variety of systems. Each decision domain serves as a form of focused data pool, or subsystem, that brings together the key pieces of information required to support specific decisions. For
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instance, one of the key decisions made within the process domain is the design and management of effective process-based workflows. A number of questions are typically addressed during the process design effort, including: What are the existing processes and what are their capabilities and limitations? What is the maximum demand the system needs to be able to handle on a daily/weekly basis? What level of quality needs to be maintained? When quality problems are likely to occur, how can they be avoided or detected? What resources are currently available? What is the capacity of the process, given planned demand? Where are the bottlenecks? What can be done to reduce their impact or improve their capability? How can gaps in the flow best be managed? Should time, space, or inventory buffers be used to ensure that the bottleneck is never idle? What variety of products and activities will need to be accommodated by this process? What is the optimal way to manage this variety? Does the process represent a core competency? If not, should the activities and output it provides be outsourced? Do needed skills and competencies exist to make the process work smoothly? Are there any major functional, political, or structural impediments to creating the process? What performance metrics will ensure that process objectives are reached?
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As suggested by Exhibit 2, process management is the dominant SMP used to organize information to address these process design questions. It provides the basic structure for process-level decisions as well as the underlying integrating structure that links the customer
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to the organization and its value chain partners. Process management emphasizes the bridging of information and workflow gaps as it looks for the optimal way to route work and output through the organization and its supply chain.
Exhibit 2. The SMPs and Process Design

Process Management
Capabilities and constraints
External EE Capability assessment

ints nstra
Current structure
Required performance
TCM
Internal CM
ab Cap
d co s an ilitie
Capa bil
ities
and co
Prior performance
nstra ints
Optimal process design
AM
Asset analys is and policy
IPM Performance assessment ABCM
st on-co and n ta Cost ce da n a rm perfo

a dat
New needs
t Cos
Interdependent activities and processes
29
While process management serves as the integration mechanism for the process design decision, it does not contain all the requisite information to answer the questions posed above. For instance, capacity cost management is called on to provide bottleneck potential and current capacity utilization information and the cost to create new capacity if needed. In a related way, the extended enterprise scans the entire supply chain to identify idle capacity, waste, or bottlenecks that may impede the overall performance of the supply chain. Target cost management sets the limits on what this performance needs to be, while integrated performance management
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provides the basis for measuring current versus required performance. 30 As suggested by this example, within each decision domain data is linked together to form the foundation for decision analysis. Not all information is pulled together; the integration focuses on the vital few data elements that must be common to all users of the information system. The ICMS framework seeks to sort and refine the shared data requirements of the organization into manageable, definable subgroups that reflect the decision structure of the organization.
V.
31
USES AND BENEFITS OF THE ICMS FRAMEWORK
Why should a company use any or all of the strategic management processes, let alone undertake the effort to integrate them? The ICMS framework has broad applications in organizations. The information provided by the ICMS framework can be used, for example, for the following: identify optimal customer/market segments; improve the profitability of key products; support improved decision making; reduce miscommunication; optimize the organizations profitability; increase process effectiveness; integrate financial and nonfinancial metrics; improve competitive position; facilitate strategic marketing and operational decisions; support rapid response to changing conditions; and provide the means to integrate activities and outcomes across processes and entities in the value chain.
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The ICMS framework has broad applications in manufacturing organizations as well as areas outside of manufacturing, such as marketing and administration. The ICMS framework can be used in conjunction with other management techniques such as total
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quality management, quality function deployment, and electronic commerce. It can also be applied at the supply chain level. 33 The implementation of the ICMS framework can help a company in the following ways: anticipate and react to environmental changes before an organization is affected by them, thus avoiding problems before they occur rather than correcting them after they happen; continually improve the operations and not merely seek a temporary equilibrium; create an external focus on customer requirements and competitive threats so that customer requirements drive the organization; systematically relate all elements, internal and external, so problems are solved holistically rather than incrementally through cross-functional integration; this facilitates the problem being viewed and solved as a whole by building long-term relations with the suppliers and other members of the extended enterprise; optimize profits by ensuring that resources remain focused on value activities, that waste is identified and removed, and that process improvements result in reductions in nonvalue-added efforts; link individual, group, and organizational incentives to ensure that everyone in the organization understands and is motivated to achieve strategic and operational objectives; and communicate across all levels, all processes, and all units the needs of the customer, results achieved, problems encountered and solved, and remaining challenges to be met.
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Not all organizations need to implement all of the various SMPs, nor do they need to integrate at the same level of intensity. As suggested by Exhibit 3, there is a migration path that an organization should expect to follow from early, fragmented cost and performance information systems to the holistic structure of the ICMS framework.
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Exhibit 3. The Migration of Information Systems

Sophistication
Fragmented databases
Development of targeted SMPs
Integration of SMPs
Holistic systems
Time
1980
1990
2000
Source: CAM-I, 2000, 17.
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The migration path that is ultimately chosen should reflect the dominant challenges facing the organization. For instance, Case Corporation had minimal success in its activity-based cost management initiative until the need for data to support decisions in the customer/market and product decision domains arose. The drive to reestablish its position in the farm tractor market placed new demands for information on the company that required data from different parts of the organization and different supporting SMPs. When a specific SMP or its data was lacking, the new product launch team found substitute data sources. The resulting information collage provided Case management with a blueprint and motivation for embarking on an initiative to better integrate its information. Activity-based cost management is now playing a central role in this integration effort. The key to defining an ICMS implementation path is to understand
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what information is provided by each SMP, how this information is shared between SMPs within the various decision domains, and what the optimal set of SMPs is for an organization facing specific competitive and organizational challenges. The ICMS framework facilitates this effort by categorizing decisions and data into logical clusters that help prioritize the sequence and intensity of SMP implementation and linkage. 37 Questions that reflect core decisions within each decision domain provide the first indication of where the integration effort should begin (as illustrated in Exhibit 4). As the exhibit suggests, the seven SMPs are not all needed at the same time or in the same way. For instance, in the customer/market decision domain target cost management dominates as the primary SMP. Even so, at least three common decisions in this domain rely on other SMPs for their core data needschoosing geographic regions for operations, defining and leveraging core competencies, and choosing a distribution strategy. The decisions and issues summarized in Exhibit 4 are not exhaustive, but rather provide a glimpse into the basic nature and structure of the ICMS framework. While the various SMPs all play a role in the overall functioning of the ICMS, it is sometimes necessary to find alternative data sources to fill specific information needs. If a specific SMP is common to most of the key decisions facing an organization, it should become a primary implementation target. On the other hand, if the data requirements of the organization have only minimal ties to one or more SMPs, they should be de-emphasized in the implementation schedule. There is no reason to believe that every firm will fully implement each and every SMPinformation is not a free good. Any SMP should be evaluated to ensure that the costs to implement and maintain it are less than the benefits it will provide to the organization. Making these assessments is a primary responsibility of the financial professional.
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Exhibit 4A. The Decision Domains

Customer/Market Decision Domain and the SMPs 1. What markets do we want to be in? TCM l TCM l TCM TCM l TCM l TCM l TCM l EE l EE EE l EE EE EE o EE CM CM CM CM CM o CM o CM AM o AM AM AM AM AM AM PM PM PM PM PM PM PM IPM IPM IPM IPM IPM IPM IPM l ABCM ABCM ABCM ABCM ABCM o ABCM ABCM
2. What customer segments do we want to be in? 3. What geographic regions?
4. Assessing market size?
5. Profit potential of customer/market segments? 6. Industry/competitive trends?
7. What strategies to address customer needs/value requirements? 8. What are our core competencies?
TCM l TCM l TCM
EE EE EE l
CM l CM o CM o
AM l AM o AM
PM PM PM
IPM IPM IPM
ABCM ABCM ABCM o
9. What time frames/windows of opportunity? 10. What distribution strategies? l
Primary source of information
Supporting information
Minimal information
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Exhibit 4B. The Decision Domains

Product Decision Domain and the SMPs 1. What are the product or service features required by each target market? 2. What are the competitive offerings? TCM l EE o CM AM PM IPM ABCM
TCM l TCM l TCM l TCM l TCM TCM TCM TCM l TCM
EE o EE EE o EE EE l EE EE EE o EE l o
CM CM o CM CM CM CM l CM CM CM
AM AM AM AM AM AM AM AM AM
PM PM PM PM PM PM PM PM PM
IPM IPM IPM IPM IPM IPM IPM l IPM IPM o
ABCM ABCM ABCM ABCM ABCM ABCM o ABCM o ABCM ABCM
3. What is the optional product mix?
4. Quality/functionality requirements?
5a. Pricing strategy vs. core competencies? 5b. Distribution strategy vs. core competencies? 6. Capacity investment requirements?
7. Are we meeting our return on sales objectives? 8. What product technology is available? 9. Supplier capabilities? l
Minimal information
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Exhibit 4C. The Decision Domains

Process Decision Domain and the SMPs 1. Organizational structures? TCM TCM TCM TCM TCM EE EE EE EE o EE CM CM CM o CM l CM AM AM o AM AM o AM PM l PM o PM l PM PM IPM IPM l IPM IPM IPM l ABCM o ABCM ABCM ABCM ABCM
2. How well maintaining c.c.s?
3. Process cost drivers?
4. Capacityinternal/external?
5. How are the processes performing (cycle time, quality, process, yield, flexibility, dependability, downtime, bottlenecks, scheduling)? 6. What process technology?
TCM TCM TCM TCM TCM TCM TCM
EE EE EE EE EE EE EE o
CM CM o CM CM CM CM CM o
AM o AM AM AM AM AM AM o
PM l PM l PM o PM l PM l PM l PM l
IPM IPM IPM l IPM IPM l IPM o IPM
ABCM ABCM ABCM ABCM ABCM l ABCM o ABCM o
7. Process capability assessments?
8. What are the performance gaps?
9. What are the activities in the process? Value/non-value added? 10. What distribution strategies?
11. What are our process improvement targets? 12. What is our shared service strategy? l
Minimal information
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Exhibit 4D. The Decision Domains

Resource Decision Domain and the SMPs 1. What is our resource capability? TCM TCM TCM TCM TCM TCM TCM TCM TCM TCM EE o EE EE o EE o EE EE o EE o EE o EE o EE l o CM CM l CM o CM CM o CM o CM CM l CM o CM AM AM AM AM AM AM l AM o AM AM l AM l PM PM PM l PM PM PM PM l PM l PM o PM o IPM l IPM o IPM IPM IPM IPM IPM IPM IPM IPM ABCM ABCM ABCM ABCM l ABCM l ABCM o ABCM o ABCM ABCM ABCM
2. What is our resource utilization (people, plant, equipment)? 3. Scheduling?
4. Resource mix?
5. Cost of resources utilized?
6. Should we buy or lease, etc.?
7. What resources are needed to support our core competencies? 8. Inventory policies?
9. What would be optimal asset management practices? 10. What R&D investments should be made? l
Minimal information
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VI. THE ROLE OF MANAGEMENT ACCOUNTING

39 Financial professionals play a lead role in the design and implementation of integrated cost management systems. They serve as the source of much of the incorporated data as well as an objective verifier of the reliability of information collected from multiple sources. Specific activities and initiatives that should be undertaken by financial professionals in the ICMS initiative include: identification of the primary decisions that need to be supported by the information system; identification of primary sources of different forms of data within the organization; assessment of the reliability of these information sources; identification of key data gaps based on the primary decisions to be supported; creation of data collection and measurement initiatives to fill information voids; identification and implementation of decision support tools that will ensure that shared data is used appropriately; development of internal control systems and procedures to ensure that data integrity is maintained on an ongoing basis; participation on the implementation team, including choosing integration and reporting software solutions, deciding on education and training requirements, planning the implementation sequence for the various SMPs, given the organizations needs, and scheduling implementation phases with roll-out dates for various aspects of the system; and matching all cost and performance data to ensure that it provides consistent, objective signals to users regarding the status of the organization and the potential impact of decisions on overall performance.
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Financial practitioners are part of the core ICMS implementation team, spearheading when necessary the efforts required to harness the power of the organizations information for decision making. Serving a unique role in the organization, financial practitioners 20
strive to ensure that the integration initiative is conducted effectively and efficiently and that the needs of both internal and external customers and users of the system are met. Achieving these goals requires a working knowledge of the basic elements of the ICMS framework.
VII. ELEMENTS OF THE ICMS FRAMEWORK

41 The development of the ICMS framework reflects its focus on identifying and meeting the information requirements of the organization. Information is a unique goodits use does not reduce the amount of information available to others. It is a inexhaustible resource that increases in value as it is used. The self-multiplying nature of information enables and empowers individuals within the organization, aiding them in coordinating their learning and actions. Yet information is indivisibleit can be used only as a complete data set; missing data eliminates functionality and relevance for the entire information system. Finally, information is cumulative each new observation and data entry adds to the overall body of knowledge contained within the information system. The ICMS builds from and reflects these basic features of information in its design, framework, implementation, and utilization in supporting decision making in an organization. The basic elements of the ICMS framework include: information and decision-making requirements; design of the ICMS; strategic management processes; and decision domains.
Information and Decision-Making Requirements

42 Information and decision making are the essential dimensions of the integration structure of the ICMS. Reflecting the search for knowledge, the ICMS can be defined as cognitive information that has been generalized and abstracted from an understanding of the cause-and-effect relations of a particular phenomenon occurring in the external environment. The cause-and-effect relations emphasized 21
by the ICMS are the transactions that occur within a business between customers, suppliers, and other stakeholders. The amount of value created within an organization depends on the effectiveness with which it captures, measures, responds to, and anticipates the critical business driversits primary cause-and-effect relations. 43 The primary force driving the movement to integrate business processes and information systems is the ever-expanding demand for knowledge about the key requirements of customers and the optimal way to increase the amount of value created for them. An organization that fails to develop a rich, integrated database of economic and noneconomic information and makes it accessible to the entire value chain will not be able to learn fast enough to sustain itself in the global market. Integrated information systems are the fuel that powers the knowledge creation engine that is so essential to optimizing an organizations competitive position. R. J. Chambers, a noted academic and expert in accounting information systems, developed a series of principles that can be used to evaluate and shape the ICMS. An information system is a system for supplying information to users who must take coordinated action. If effective communication is to take place, the language used must be such that all members of the organization would identify the response. If action is to be coordinated, the information system cannot be treated as a group of independent subsystems. The information system must remove all doubt about data; that is, the system must be so reliable that the user will depend on it rather than on his own observations. For example, information will fail to evoke response (decisions) relevant to the pursuit of its ends if it is found by receivers to be inconsistent with their own direct observations. In this case, the system that produces the information will serve to increase rather than decrease doubt; it will cloud rather than clarify issues confronting decision makers. There is a point at which the marginal cost of differentiation of information and comprehensiveness of information exceeds the 22
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marginal utility of information to the receiver. For example, individuals capacity for making sound judgments about a complex situation may be seriously impaired by supplying them with a lot of information that they believe would be relevant but whose influence on the situation is not clear. Thus, the information system is an abstracting system. Its justification lies in the reduction of the information available to the information that is relevant to action. But abstraction should not be carried to the point where differences in the significance of data are obscured. An information system is a device for continually bringing under notice new facts and new knowledge. It must provide not only the premises of decisions but also a feedback so that decisions may be reaffirmed or abandoned in favor of others. The development of an organization and the development of the judgment of its agents alike depend on this feedback. Since both the capacity and the time available for observation are limited, an information system must provide a formal record to guard against misinterpretation of past experiences. The records of an organization are its memory. Therefore, all records and communications at any time serve not only their immediate function but also the function of memory. The information system must be regarded as a continuously developing instrument, in much the same way as an organization is continuously developing. It is a matter of experience that information processing is done according to habitual modes far more commonly than according to deliberate assessments of the users requirements.
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These features of effective information systems can also be used to create a list of the symptoms of a broken information system, such as the following: information exists in separate databases that are difficult to integrate; inconsistent signals and information are given by different parts of the system; 23
users complain of information overload; users complain that while there is lots of data, little usable, relevant information is available; feedback about the impact of decisions is not regularly provided; prior results are not maintained in usable format (e.g., trends, etc.); the information system has not been adjusted as the organization has changed; and the information system does not support what-if analysis, so most decisions are guided by the weve always done it this way theory.
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To avoid these types of problems, the ICMS needs to be designed to support the key decisions made within an organization, facilitate a wide range of analysis, and be the source of reliable, consistent details and information to users both within and outside the organization.
Design of the ICMS

47 It is during the design stage of the ICMS that the relationships between specific data requirements and decisions are established. Five general steps make up the basic approach used to make sure that the ICMS meets the needs of its users: 48 analysis of the decision system; analysis of information requirements; aggregation of decisions; design of information system features; and design of internal control routines to ensure data integrity.
As this list suggests, the driving force in the ICMS design process is the identification and aggregation of the organizations decisions in terms of their information requirements. A failure to catalog the major decisions made within the organization will leave the ICMS unfocused, increasing the risk that the information gathered will
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fail to meet the needs of users. What do each of these specific issues entail in terms of activities and outcomes?
Analysis of the Decision System

49 Decision flow charts can be used to gain an understanding of the ICMS data requirements, as illustrated in Exhibit 5. Detailing the key decisions made, as well as the relationship between decisions, often reveals that some important decisions are made by default (e.g., based on established routines). Other decisions may actually be the result of interdependent effortsa decision made in the purchasing department, for instance, has an effect on the work done on the plant floor.
Exhibit 5. Decision Flow Analysis

Sales Financial analyst Financial analyst Sales Scheduling Logistics
Receive request for special order 1 hour
Prepare cost analysis
Take?
Inform customer
Schedule
Release to production
Make 1 day = (required time = 30 minutes) N Breakdown times 3-5 days Ship
Production
Logistics
Inform customer
Order entry
A/R
Invoice
Order entry A/R Treasurer
Collect
25
50
To be useful in ICMS design, decision flow charts need to detail what decision is being made, who is responsible for it, what other departments, activities, or processes are affected, problems with the decision or its outcome, and related factors. These flow charts should contain sufficient detail to make sure that all key information demands can be identified. It is easier to introduce finer information into an integrated information system than it is to combine fine subsystems into one integrated system.
Analysis of Information Requirements

51 Three unique categories of organizational decisions typically are made: concrete, complex, and unstructured. The first type of decision is easily modeled to identify an optimal solution. Any decision that falls into this category is relatively certain and can be made automatically by routines established within the information system. The decision is reviewed only when problems occur or if periodic updates are completed. For a decision about the need to replenish stock on a low-value inventory item such as toggle bolts or copy paper, the information needed and optimal choice to make are easy to identify (e.g., stock levels, lead times, demand patterns). For these types of decisions, the goal is to minimize the time and resources used to support them by stabilizing the decision rules and analysis undertaken. For some decisions, it is difficult to identify an optimal solution the set of variables that needs to be considered is too complex to be completely defined. For instance, a large factory needs to factor in a large number of issues, such as available capacity, routings, ship dates, raw material inventory levels, and labor availability when completing its run and ship schedules. There may be some theoretical optimum for this complex decision, but it cannot be directly or easily identified. The result is that these decisions are often made using simulation and scenario analysis to identify potential solutions. While defining the optimal solution may be difficult, the information requirements of the decision can be identified and met. For the third class of decisions, models do not exist to structure the analysisnot only do optimal solutions not exist but information
52
53
26
requirements are also difficult to define. When decision makers can identify needed information, it can be incorporated in the information system. While many managers know what output they need, and why, they do not have the requisite knowledge to identify the detailed data requirements these needs represent. In this situation the design and use of information systems becomes the most challenging. 54 If the information is integrated around a framework such as that present in the various SMPs, what data is available, what criterion will be used in the decision process, and how best to capture currently unavailable data bits become more apparent. The ICMS framework creates a structure for data and its analysis that is consistent across key decision settings faced by the organization. It brings a common set of insights and knowledge to the organization, allowing it to minimize its performance and communication gaps.
Aggregation of Decisions
55 Finding a logical structure for defining and analyzing the organizations decisions and the information they require is difficult unless decision models are uniformly defined. The ICMS framework is built around the natural hierarchy of decisions within an organization. Aggregation is not a task that needs to be doneit is built into the models structure. The objective is to identify the major decisions made at the customer/market, product/service, process, and resource levels. These decision clusters are then matched against the information capabilities of the seven SMPs. The result is a table similar to that presented in Exhibit 4.
Design of Information System Features

56 The analysis of the decision structure provides a pattern for the design of the ICMS framework. There are any number of ways to configure the physical assets that support the framework. Relational databases, local area network (LAN) structures, or mainframe-based client/server systems are just a few of the options available. The advantage of the ICMS structure is that it allows for the separation of the supporting databases and techniquesthese sources of data are brought together only as needed. The amount of shared data is
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minimized, reflecting the fact that the more tightly integrated the data sources are in the integrated system, the more costly the system will be to configure and sustain.
Design of Internal Control Routines to Ensure Data Integrity

57 Ensuring the integrity of the underlying data entering the system is critical to its long-term usefulness. If input or output errors are made, the information provided to users will have little value. Internal control procedures need to be designed to address these potential problems. Input errors can occur that are difficult to detect in the ICMS framework. If this data is used across multiple decision domains, SMPs, and analysis, the impact of these errors multiplies. Ensuring the quality of the ICMS data is a primary concern of the financial practitioner. The ICMS framework is superior in many ways to other attempts to integrate the data of the organization because it emphasizes the 20 percent of shared data that supports 80-90 percent of the common decisions. As such, the requisite data and its integration represent 20 percent or less of the total potential cost and activity level normally required by such a system. In addition, the unique nature of each SMP provides an effective infrastructure for organizing the data, all but eliminating redundancy in the database. The complete framework provides a logical, consistent basis for collecting, sharing, and using data to create relevant information and reports. It is to the specifics of the relationship between the SMPs and the various decision domains that attention now turns.
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Strategic Management Processes

59 Creating information conduits from the top of the organization to the bottom, a strategic management process is one of the two primary dimensions of the ICMS framework. Each of the seven core strategic management processes contains unique types of information. Specifically: Target cost management is a system of profit planning and cost management that is price led, customer focused, design centered, and cross functional. TCM emphasizes the relationship between 28
the value embedded in a product/service bundle, customer requirements, and the maximum amount of resources/costs that can be consumed to meet these needs. It identifies the right products, prices, and features to optimize the value created by processes and activities. It is this discipline and its application to the development and management of an organizations product and service offerings, that helps ensure long-term business survival, growth, and prosperity in todays rapidly changing, competitive market. Extended enterprise encapsulates the horizontal flow of products and services that makes up the industry value chain. Identifying core relationships and creating system solutions to performance shortfalls, EE is the primary source of external information about customer satisfaction, changes in buying patterns, supply chain capability, and system performance against customer requirements. The objective of EE is to develop an environment in which all value chain members function as a single entity. Aligning the purpose and strategies of diverse entities into a cooperative whole opens opportunities for cost reduction, investment leveraging, cycle time reductions, and knowledge sharing, all of which can contribute to increased customer satisfaction. Eliminating many of the wasteful transaction costs and removing redundancies, delays, and inefficiencies from the supply chain, companies embracing EE are creating new forms of competitive advantage for themselves and their trading partners. Asset management serves as the organizing system for all asset investment and management efforts and therefore plays a pivotal role in cost management integration. AM details the requirements for and tracks the progress of new resource acquisitions that are often critical if strategic and tactical objectives are to be met. Asset management moves beyond the purchase of new physical resources, though, to examine the competencies of the human resources of the organization. Investments in human and intellectual capital can often spell the difference between success and failure of new programs and 29
strategies. Monitoring investments against their planned results helps pinpoint areas that may become hot spots for performance downstream. It also helps ensure that value creation, not the politics of self-interest, lies behind the request for and use of scarce organizational resources. Capacity cost management provides information about how assets are being used, what resources are being wasted, and where potential improvements may be reaped. The objective of CM therefore is to support the profitable management of the value-generating competencies, processes, and capabilities of an organization. CM is a pivotal support strategic management process. It seldom provides the first type of data needed to make a decision but rather provides information to other SMPs more central to resolving the issues at hand. Every time a cost estimate is used, some judgment of potential capacity has to be made. Whether the capacity estimate is made actively (by observation) or passively (using historical data), it affects the economics of the decision. Process management emphasizes the linkage of activities within an organization into a seamless, coordinated, effective whole that experiences minimal disruption due to errors or miscommunication. Shaped by a clear understanding of the flow of activities that create value for an organizations customers, it serves as a vehicle to set strategy in motion by providing a better understanding of how, where, and why resources are consumed. Creating explicit linkages of individuals and activities across the organization, PM bridges communication gaps gaps that can result in fumbles, errors, and excess costs. Activity-based cost management is based on the belief that accurate and relevant information is critical to any organization that hopes to maintain or improve its competitive position. Providing a cross-functional, integrated view of the organization, its activities, and its business processes, ABCM has been credited with triggering a revolution in management reporting and decision support. ABCM provides the basis for developing economic assessments of products, process, and activity
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performance and targeting opportunities that increase the value creating potential of the organization. Integrated performance management. Measurement lies at the heart of the organization. What is measured becomes visible, what is measured is rewarded and gets done. Defining the playing field for organizational action, signaling the score in the competitive arena, and linking past, present, and future actions into a coordinated system, IPM is the basis for optimizing current and future performance. Driven by customer requirements and stakeholder expectations, IPM serves as the primary means to: 1) link functional areas to synchronize their efforts, 2) communicate strategies, 3) achieve goals, and 4) motivate employees to meet or exceed performance expectations. Linking performance measurements between organizational levels and across processes organizations ensures that resources are being used effectively.
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The information contained within an SMP is interdependent with that stored in others. For instance, capacity cost management provides information on physical asset capabilities and current utilization levels. A financial value is placed on the utilized versus wasted components of capacity by activity-based cost management, while the extended enterprise identifies potential sources for surge or unplanned production. Finally, target cost management defines the total costs the organization can afford to incur to provide specific types of capacity if target profit levels are to be attained by a product/ service bundle. Asset management establishes the baseline measures of performance and defines the hurdles to new investment in concise, consistent terms for use by capacity cost management. In a related way, process management details the impact of capacity problems on organizational throughput. Finally, integrated performance management details the current level of performance in nonfinancial terms, such as quality, throughput time, and first-pass yields. Effective capacity management cannot take place without the support and insights provided by the other SMPs.
61
31
62
Integration of the SMPs is the best way to ensure that all of the required information resides somewhere in the organization. It also makes this data accessible across the various levels and functions within the organization, avoiding duplication in the acquisition, storage, and provision of information. One source of each primary type of data reduces the potential for error, inconsistency, and confusion in the ICMS framework while minimizing the amount of explicit integration that needs to take place. Information sharing is a very different basis for integration of an information system than the pooling and common storage and application of the organizations entire data set in a data warehouse or enterprise resource planning system. The seven SMPs link the levels of the organization, based on a common theme or subsystem of information and analysis. What remains to be identified is the full set of information needed within one level or domain of decision making. The second major dimension of the ICMS framework emphasizes the coordination and integration of data by domain.
63
Decision Domains
64 The ICMS framework comprises four basic decision domains: customer/market, product, process, and resource. Following is a summary of these decision domains in terms of their coverage of issues and analysis.
Customer/Market Domain
65 Within the customer/market decision domain attention revolves around understanding what customers value and delivering the optimal set of products and services to meet these needs. It is within this domain that an organizations competitive strategy is established and executed as it seeks to find a unique niche in the market that will provide it with the optimal return on its investments in core competencies, assets, knowledge, and human resources. The four primary decision bundles include: defining customer value segments;
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developing customer segment strategies; determining competitive positioning within chosen segments; and establishing reporting and control tools.
Defining Customer Value Segments 66 The driving force behind a business is the need to provide customers with the precise set of goods and services they require at a price they are willing to pay. The goal is to understand the set of product/ service value attributes or set of characteristics most desired by the targeted customer and market segments and then to build these features into the offerings of the organization. Specific value attributes desired by different sets of customers differ widely. For instance, one group of customers might place its greatest emphasis on service, product quality, and related features, while another might be most concerned with price and delivery. If an organization does not understand these differences, it may provide one generic product/service bundle that fails to meet either segments requirements. An example of a generic product/service bundle is shown in Exhibit 6. For this small public relations organization, three specific customer value segments were identified: research, publicity, and full marketing services. A customer that falls into the research segment places high value on the research activities of the organization, while one that is seeking public relations support places little or no value on this effort. If the organization does research at the same level for all of its customers, no one will be fully satisfied with the effort made. In a related manner, public relations clients put most of their value on placements in different media (television, magazine, newspaper), an effort not desired or rewarded by research clients. Unless the public relations organization tailors its activities to those issues and outcomes valued by each unique value segment, it will waste its scarce resources doing work that is not valued while leaving other important tasks inadequately addressed. Understanding the customer base from the standpoint of differences in value attributes
67
68
33
and performance requirements is essential to the development of an effective strategy.

Exhibit 6. Value-Based Customer Segmentation
Attributes Research Placements Accounting meeting Meeting support Crisis management Third-party endorsements Develop plans Totals Public Relations 5 60 10 5 0 15 5 100 Research Support 70 0 5 0 10 0 150 100 Marketing 25 15 5 15 0 5 35 100
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The goal in defining the unique value propositions for various segments of customers is to identify those groups that will provide the best match between what the organization does best (its core competencies) and the efforts that will meet the optimal number of customers needs effectively. The resulting value-based strategy is based on the successful completion of the following steps: identifying customer value preferences; determining relative value rankings by customer; benchmarking the organizations performance against customer requirements versus that of key competitors; conducting price and value trade-off analysis for various segments; and developing cost and profit projections for each value segmentation strategy.
70
The target cost management SMP is the primary provider of the information and structure needed to complete the customer value 34
analysis and choice of value segments. Predominantly a tool for strategic and tactical planning, TCM creates a framework for identifying and analyzing the value preferences of existing or potential customers. It provides guidance on specific product/service attributes, price, and value ratings. 71 TCM does not provide all of the information required to complete these analyses. As suggested by Exhibit 7, the extended enterprise, integrated performance management, and activity-based cost management all play key supporting roles in meeting the needs of this class of decisions. The extended enterprise links the entire supply chain, providing a pipeline of information from the final consumer of the product/service bundle back to the originating organizations and suppliersit keeps the organization close to its customers.
Exhibit 7. SMPs and Value Segmentation

TCM Value preferences Market and Customer Value Assessments Price/Profit Set
EE
Value IPM
Cost/value analysis
Segmentation strategy
ABCM Cost
Source: CAM-I, 2000, 312.
72
The benchmarking aspect of value-based segmentation efforts is supported by integrated performance management, which scans the environment comparing organization performance against internal goals, customer needs, and competitors performance. Activity-based cost management, on the other hand, provides basic economic 35
data on the costs and potential profits of various product/service bundles within customer segments. It helps create a segment map that incorporates value preferences, prices, costs, and profitability in order to guide the final choice of segment strategies. Information is shared among these four SMPs within the customer/market decision domain as various customer strategies are developed and analyzed. Developing Segment Strategies 73 Once an organization has obtained the knowledge of what various customer segments value, by how much, and why, attention turns to crafting and executing the optimal blend of segment strategies to optimize profitability. Six primary activities performed during this decision analysis include: 74 documenting the complete value segment array; analyzing organizational requirements for each value segment; assessing organizational abilities, competencies, and constraints for each value segment; evaluating the compatibility of segments and organizational competencies; assessing investment and operational implications of the various segments; and choosing and executing a segmentation strategy.
Three specific forms of information are required to complete the required analysis: 1) the organizations and supply chains core competencies, 2) the array of value-based segments with preferences, and 3) an analysis of the organizations and the supply chains ability to meet requirements of the different customer segments, given the resource and capacity constraints. All seven SMPs are required to fully address the issues raised when choosing a segment strategy, as illustrated in Exhibit 8. For instance, the extended enterprise SMP provides a detailed analysis of current core competencies of the supply chain, its flexibility, and the
75
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constraints facing the organization and its trading partners. This data is fed to target cost management, where it is organized into an economic framework that seeks to identify the optimal match between these competencies and customer requirements.
Exhibit 8. Segment Analysis and Choice

EE
Core com petencie s Flexibili ty/const raints
TCM
CM
Available capacity cost to use idle capacity
Ability to meet customer requirements Trade-offs
Choice of segments
PM
Process capability
ABCM
Cost of various alternatives
Firm performance requirements (price/ profit/share)
Asset analysis/policies
AM
76
Internal assessments are conducted at the same time, relying on information provided by capacity cost management, process management, integrated performance management, and activitybased cost management. When shortfalls in capability are identified, asset management provides information on the preferred way to bridge identified gaps. Pooling data around existing capabilities, the cost to enhance these competencies where needed, and the potential costs and benefits of one segment strategy over another require data gathered in every part of the organization and its supply chain.
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Determining Competitive Positioning within Chosen Segments 77 In TCM, defining a product/customer niche is a primary decision. Emphasizing the how of how a strategy is to be deployed, this decision helps bridge the gap between planning and execution of a plan. Is the organization best off differentiating itself on price, quality, responsiveness, flexibility, or variety of products offered? If price or a low-cost strategic position seems best, analysis of how to best leverage the supply chain needs to be completed. While TCM once again provides the structure for this decision within the customer/market decision domain, it relies heavily on information provided by the other six SMPs to complete its analysis. The various SMPs and the information they add to this decision are described below. EE provides information on trends in the market and the potential of the supply chain to differentiate itself from competitors on core performance dimensions. EE ties together data from the beginning to the end of the supply pipeline on what customers are buying, when, where, and trends in their consumption patterns. IPM assesses the organizations current performance against customer requirements, responsiveness of the organization and its competitors to changes in those needs, and areas where improvements can or could be made. CM identifies internal constraints and capabilities serving to place limits on the position chosen by the organization and its trading partners. If the plant or supply chain is currently running close to capacity, it may not be feasible to choose a strategic position that requires flexibility and responsiveness. AM provides estimates of the costs and return requirements for any new asset purchases to meet the needs of chosen segment strategies. For instance, if electronic data interchange (EDI) is essential to effective positioning in a segment, the organization and its supply chain must be able to purchase this capability and deploy it effectively and rapidly.
78
79
80
81
82
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83
PM defines process capabilities and constraints for each of the potential strategic positions. If a process is not in place to provide consistent product/service quality and availability, these strategic dimensions will not be available to the organization. ABCM assesses the relative costs and profitability of each of the potential segment positions, such as the underlying costs to provide a just-in-time delivery capability. Each potential segment and strategy needs to be evaluated for profit performance for the short and long run, covering the entire life cycle of the affected product/service bundles. The choice of a strategic position incorporates more information than almost any other decision undertaken by the organization. While target cost management provides the organizing framework, data must be collected from multiple SMPs to complete the analysis. The ICMS framework provides the data linkages and structures that will complete the complex compilation of data and analysis required to optimize the organizations strategic position. Establishing Evaluation and Control Tools
84
85
86
Having established a segment strategy and put the activities and structures in place to execute it, attention turns to maintenance, control, and continuous improvement. Management reporting is a key part of the evaluation cycle that keeps an organization on track, constantly improving its performance against customer and stakeholder requirements. As suggested by Exhibit 9, integrated performance management provides the framework for this last set of decisions within the customer/market decision domain. Embedded within the core database of the organization, evaluation and control draws on three supporting SMPs: ABCM, CM, and AM. Each of these SMPs provides a unique perspective on current versus expected performance on key dimensions such as quality, cost, profitability, delivery, and customer satisfaction. These SMPs feed directly to the balanced scorecard structure that lies at the heart of the integrated performance management SMP.
87
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Exhibit 9. Evaluation and Control within the Customer/Market Domain

A sse
AM
t perf orma n
Integrated Performance Management (IPM)

ce re quire men ts
Capacity plan
CM
: bu tes ima est
ts dge
Standards/ objectives/ budget
t Cos
ABCM
Ac tu al ut ca ili pa za Fina t cit ncia io l res n y ults
Evaluation/ learning
PM
Operational results
Actual performance
Back to all SMPs
88
Creating management reports that summarize current performance and related trends against defined critical success factors and key performance indicators is the primary purpose of IPM. ABCM provides detailed cost and resource data to IPM, supporting the analysis of customer and market profitability and the performance. AM, on the other hand, provides data on major asset purchases and performance as well as the defined performance requirements for these assets. CM provides a different type of evaluation and control information, focusing on the actual utilization of resources, planned versus actual idle time, and areas where bottlenecks and constraints are appearing that will impair the ability of the organization to achieve its goals. The three supporting SMPs provide feedback to the organization through IPM on the efficiency and effectiveness of its activities, investments, and operational assets, resulting in an integrated set of management reports. Through these reports organizational
89
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performance is made visible, opportunities for improvement are identified, and remedial actions are made possible when necessary. The result is organizational learning and the ability to improve long-term performance against the expectations of all of the organizations stakeholders. 90 Without the development and implementation of the ICMS framework this entire class of decisions has to rely on intuition, instinct, and incomplete data. When integrated information is available, rigor and repeatability are added to the analysis and choice process within the customer/market and other decision domains. Learning becomes possible because communication is regularized. An organization can perform these decisions without the ICMS framework but with a higher degree of risk and less certainty that optimality will be achieved over the long term. Similar issues motivate the development and integration of information with the product decision domain.
Product Decision Domain

91 The development of a strategy brings, by definition, the need to identify and provide specific product/service bundles to the market. These bundles need to have specific attributes and features that reflect the chosen segmentation strategy. Within the product decision domain, then, market strategies are translated into detailed specifications and requirements for performance that will drive ongoing decision making and activities. For instance, if the stated customer/market strategy is to achieve a dominant market share in the computer printer and peripheral market by offering low cost and high functionality, the decisions at the product domain have to drive toward optimizing the blend of functions per dollar of cost incurred. Achieving these goals may require the use of common parts, such as computer circuits, where all functions are already programmed but specific features are blocked for lower-end models. It may seem illogical to hide the added functionality, but it may provide the lowest-cost solution for the entire product family. The approach used to execute the
92
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strategy needs to reflect the critical success factors of the segmentation approach, minimizing the complexity and variety to the production process while maximizing the variety offered to the customer. 93 The translation of strategy into specific product/service design and development goals and their achievement requires a tremendous amount of information and analysis. Beginning with a detailed mapping of value attributes to specific product/service features, decisions within this domain require the ongoing assessment of the cost/performance trade-offs that are inherent in each potential product or service alternative. As the product moves off the drawing board and into production, attention turns to warranty issues, decisions on how best to leverage the competencies of the supply chain, how to optimize the production and provision of the product/service bundle, and when to abandon a specific offering. All of the major decisions made during the life cycle of a specific product or product family take place within the product decision domain, including: 95 product design; defining the service bundle; strategic partnering; ongoing management of the product/service bundle; and final abandonment and post-production support for the extended life-cycle of the product.
94
Each of these major product-based decisions relies on information from the seven core SMPs, integrated within the ICMS framework. While all SMPs are needed to support the entire range of decisions within this domain, they are not always equal in importance. Product Design
96
It has become common knowledge that the design of a product/ service bundle locks in between 80 and 90 percent of the life cycle costs it will create for the organization and the supply chain. During design, specifications are set, functionality is defined, asset 42
requirements are detailed and met, and key interdependencies in the product, its components, supply system, and service and performance requirements are established. 97 Once these decisions and their resource implications have been made, it is difficult and quite costly to reverse or modify them. While estimates of how much more costly these downstream changes are can vary by author and situation, it is certainly true that the change cost multiplies as it hits each interdependent activity, process, resource, or component part. Millions of dollars are expended in organizations annually developing, implementing, and tracking engineering change notices and other related change-driven activities that could have been avoided with minimal cost and effort during the design stage. Given these issues, quite a number of factors and questions are typically addressed during the design activity in the product decision domain, including: What are the current customer requirements for this type of product or service? How well are the organization and its value chain partners currently meeting these needs? What changes are taking place in technologies, competitive markets, or distribution channels that might influence customer expectations or required product/service capabilities? What are the organization/value chains current core competencies and how can they best be leveraged to create optimal value? What are the internal performance requirements for the product/ service bundle? When will the product/service bundle be launched, and what is the expected duration of its life cycle? How are our major competitors meeting customers requirements? How do we rate relative to our competitors in satisfying these requirements?
98
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99
Each of these questions helps to narrow down the range of potential offerings by the organization as the iterative design process is completed. Target cost management provides the framework for structuring the analysis and decision making inherent in choosing one product/service bundle and set of features over another.
100 As in other situations, TCM requires extensive support from the other six major SMPs to complete the design activity as illustrated in Exhibit 10. The relationship between the SMPs differs slightly in this situation, though, as capacity cost management, asset management, and process management are in the background to help assess the feasibility of a given design or feature set.
Exhibit 10. The Product Design Decision

IPM
Cost an d non-c ost perfor mance requirem ents
Trading alliance
TCM Product attributes
Customer/ market decisions
EE
Cost/ ca p a
Current costs
bilitie
ABCM
Pot
Cost limits by subcomponents/ assemblies

st i m pac t
ent ial co
Final design Current allowable
CM AM PM
Asset and process feasibility
Actual costs
101 IPM, EE, and ABCM play a more active role in narrowing the list of options available to the organization during the design phase. TCM is relied on to identify required volumes, price points, allowable costs, and attributes the product/service bundle needs to incorporate.
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To provide this data, it needs input from IPM to identify current and required functionality. ABCM is the source of current cost estimates used to drive improvement efforts. EE provides supply chain data, including new technologies and methods that can reduce the cost or increase the value embedded in the product. 102 As in many of the decisions supported by the ICMS, one SMP (in this case, target cost management) serves as the organizing structure into which the other SMPs feed data. TCM sets the limits and seeks a solution that minimizes the conflict between customer requirements, design constraints and preferences, and the organizations overall profitability. Mediating conflicting objectives requires data on current and potential capabilities of the entire supply chain as well as estimates of the economic impact of one choice over another. The entire set of SMPs plays at least some role in these analyses as product design choices are made and implemented. Defining the Service Bundle 103 A well-designed product is not the only driver of value in the customers mind. The services bundled with the product itself have become equally important to the market. The types of questions that an organization should ask itself as it defines the services that will be included in its product/service bundle include: What warranty should be provided with the product, if any? What support services should be provided? How should these services be provided? How will spare-part needs be met? How extensive should manuals be? What other information should we provide? What are our competitors doing in terms of service and support?
104 TCM once again provides the structure for the analyses in this situation. Seeking to minimize the total cost of ownership to the customer while ensuring that the organization continues to meet its total profit goals for the product/service bundle, TCM identifies required services, defines current performance and cost levels, and
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identifies the performance and cost gaps. Completing this analysis requires data from each of the remaining SMPs. 105 For example, IPM identifies current versus desired performance on all qualitative aspects of the product/service bundle including responsiveness, quality, flexibility, customer satisfaction, perceived value delivered per dollar of price charged, and related factors. This data is used to identify performance gaps that a service bundle needs to address. 106 EE provides current performance levels and capacity of the entire supply chain as well as potential future capabilities. In addition, data on changing customer requirements, changing technologies, and other events outside the immediate experience of the company are gathered and provided to TCM as the search for innovative service strategies is undertaken. 107 CM defines current machine and system capabilities, setting limits on the solutions that can be implemented with existing resources. CM identifies ways that current constraints can be bridged, including the cost and performance impacts of these potential solutions. 108 AM identifies new resource requirements. This SMP provides the investment hurdles and asset acquisition rules and requirements that ensure attainment of allowable costs and performance levels, with minimal risk and long-term investment. 109 PM identifies current internal process capabilities, bottlenecks, and performance limits, given existing competencies. PM notes where spending to improve workforce or process abilities is needed, as well as where these resources should be focused. PM identifies key interdependencies between the product/service bundle and the processes used to provide them. 110 ABCM details the current costs and projected costs to provide a specific service to the customer. ABCM identifies cost gaps, where the potential exists to eliminate waste, nonvalue-added costs from the design of the product, and service components. ABCM serves as the basis for all economic analysis during the design phase.
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111 Taken in total, these SMPs provide insight into the feasibility of a specific service bundle and what impact on organization performance each alternative is likely to have. The ICMS framework pulls this data together, linking SMPs to target cost management where needed to complete specific analyses. If an integrated system is not in place, each of the required analyses and the data it uses have to be gathered on an ad hoc basis or estimated using the experience of the design team as a guide. 112 The value provided by the ICMS framework is in the creation of a repeatable, reliable process and infrastructure for making design decisions. It helps to add rigor to the design process, moving it away from an unstructured decision toward a complex but rational effort. Removing ambiguity and guesswork, the ICMS framework reduces the risk and increases the range of options that can be considered during the design of the product and its accompanying service bundle in an ever-shortening period of time. Increasing the efficiency and effectiveness of the design process is a major benefit of integrating the cost management system. Strategic Partnering 113 As the design process gives way to implementation and execution, target cost management moves from being the dominant SMP in the ICMS framework to a supporting role. One of the first places that this change is noticed is during the early analyses and decision making surrounding the choice of preferred vendors and strategic supply partners. Strategic partnering, at the heart of the extended enterprise SMP, seeks to identify and secure the support of trading partners in creating and deploying competitive strategy and finalizing design decisions. 114 The transition from design to execution triggers a series of questions and analyses, including defining the optimal sourcing strategy for key components and support services, identifying suppliers best able to provide needed abilities, deciding where to place control for specific activities and outcomes, identifying constraints and solutions, establishing performance rules for strategic partners, and choosing
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enabling technologies, just to name a few. Who is to be responsible for what activity and outcome, how relationships within the supply chain are to be structured, how costs and profits are to be shared among participating organizations, and how changing customer requirements can best be identified are all supply chain design decisions. There is no one right answer but rather a range of alternatives to be considered prior to the final selection of specific strategic partnerships. 115 As suggested by Exhibit 11, TCM is linked to the extended enterprise during the course of making these decisions. TCM defines the limits and performance requirements, directly transferring them to the extended enterprise SMP. Within the extended enterprise SMP answers and alternatives to these needs are explored using information provided by CM, AM, PM, IPM, and ABCM.
Exhibit 11. SMP Information Flows and Strategic Partnering
Sourcing requirements TCM Optimal partnership/value chain structure EE Sourcing capabilities Process/resources decisions Customer/ market decisions
IPM AM
Performance evaluation
Pe rf
orm
an
ce
ev a lu ati on
alysis Asset an y and polic
CM
ABCM
es Design liti abi Cap nts a tr i n s o n i Co at orm inf s os t i ve t c a s rn ces lte a Pro and Process cost information
and alternatives
116 For instance, before a strategic partnership is considered, the organization should ensure that it does not already have the capability to produce the product, component, or service feature. CM and PM provide starting points in the analyses, identifying
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available idle resources. This information helps narrow the number of items that have to be considered during the strategic partnering effort. AM offers information on the potential to purchase needed capability internally as well as the performance requirements if any joint purchase of assets by the trading partners is to be completed. In forming a strategic alliance, it is not uncommon for the organizations to share both their investment and operating resources to leverage the competencies and improve performance of the entire supply chain. 117 As can be seen from the exhibit, ABCM and IPM provide the baseline data and metrics used to make the strategic partnering decisions. Strategic partners share physical and intangible assets, knowledge, technology, machines, and capital. An effective, integrated set of measurements has to be developed that can span organizational boundaries and track the performance of the entire supply chain. 118 Ensuring that the resources of the supply chain are optimally deployed requires ongoing monitoring and evaluation of both economic and noneconomic performance. The ICMS framework increases the ability of the supply chain to communicate, to identify opportunities, and to share learning. The more effectively these efforts are integrated, the greater the degree of competitive advantage that will be created by EE. Ongoing Management of the Product/Service Bundle 119 As the final decisions are made regarding the design of the product, services, and delivery channel that will be used to provide them to the market, attention shifts to the ongoing management of the product/ service bundle for its extended life cycle. If continuous improvement targets have been established as part of the design process, metrics and methods have to be developed to ensure that they are attained. Other issues that can arise include: Are changes taking place in the competitive environment that require a response or change to existing products and services? What warranty and service problems are developing?
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Is existing capacity adequate to continue to meet demand? If not, what options exist to address excess demand? Is there excess capacity and idleness in some areas? What should be done to address this problem? Are quality and performance goals being met? Are any new technologies or processes becoming available? If so, what impact will they have on the market and customer expectations?
120 Answering each of these questions requires adequate data. The source of this information is the integrated performance management SMP, which organizes data from the other SMPs into a comprehensive performance evaluation and control system. TCM is no longer actively used. While it feeds the performance limits to IPM, that is where its involvement in ongoing monitoring ends. In a related way, AM defines the performance requirements for the major resources dedicated to the production and delivery of the product/ service bundle. 121 The remaining SMPs play a more active role in ongoing management of the product/service bundle. For instance, EE and PM provide data on the throughput, efficiency, and effectiveness of the processes used to meet customer requirements. Data from the customer is passed through the supply chain, where it is married with internal data on process performance levels. CM provides similar data on physical asset utilization levels. These three SMPs work in tandem to provide data to IPM on current performance against defined goals and objectives. 122 ABCM provides insight into the economic performance of the supply chain. It rounds out the set of metrics used by IPM by adding cost and profitability to the analyses. Tracking the profitability of the product/service bundle throughout its life cycle, ABCM is also collecting data to support future design efforts. 123 The balanced scorecard embedded in IPM pulls this information together, supporting management in its efforts to improve performance against stakeholder requirements. Using data collected 50
throughout the supply chain and by the complete set of SMPs, IPM organizes these disparate reports and analyses into a comprehensive, logical system that can be used for evaluation and control of the organization. If supporting SMPs are not available, the IPM will either need to define and establish unique data collection abilities or leave key performance indicators unmonitored. Both solutions are inferior to the power of information provided by the ICMS framework. Final Abandonment and Post-Production Support for the Extended Life-Cycle of the Product 124 The final stage in the product life cycle is the development of an abandonment strategy that will ensure that ongoing customer requirements are met and that a seamless transition is made to future products and services. As suggested by Exhibit 12, IPM hands off data, resources, and analyses to TCM during the abandonment effort. Each of the SMPs is used to bridge the gap between one product generation and the next, as freed resources are redeployed to new uses.
Exhibit 12. Abandonment and Creating the Future

Performance Analysis-Alternative Evaluation
IPM Spare parts
CM
AM
TCM Redeploy
Ongoing
services
Capacity freed
up
Product enhancement/ abandon
Learning
EE PM ABCM
Capacity People Competencies Learning
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125 While TCM is redirecting resources, IPM seeks to ensure that ongoing customer requirements for spare parts and service support are met. The end of a life cycle is a poor time to disappoint customers problems here can have a negative impact on future sales and reduce the total profits generated by the product during its entirety. After the physical product is discontinued, it becomes more important than ever to provide services. In fact, some companies have achieved considerable market power by providing lengthy post-purchase support. For example, Andersen Windows guarantees its product for 20 years but has been known to make and ship replacement parts for windows that have been out of production for up to 50 years. In the window market, Andersen is recognized as the market leader in quality and reliability, earning them an ongoing premium in this highly competitive market. 126 A major part of the abandonment decision process is the evaluation of the successes and problems that were experienced during the product life cycle. What resources were used effectively? If idle capacity was experienced, how could asset management policies and requirements be changed to limit this unwanted waste in future products and services? Where did the supply chain function as expected? Did some supply partners exceed expectations? Did others fall short? Did internal processes perform as needed? Finally, did the product achieve and maintain its cost targets? 127 Answering each of these post-life cycle questions requires information from each of the SMPs. Providing unique insights and data, the SMPs serve to bridge the gap between present and future, prior knowledge and new innovations. As resources are phased out of use by the abandonment effort, each SMP provides information on what the capabilities of these freed resources are and how best to redeploy them. For instance, PM provides detail on which parts of the existing service processes need to remain in place to support postabandonment requirements and what elements of the process are no longer needed. AM and CM work in tandem to provide similar information on the physical assets affected by abandonment. CM identifies new uses for existing capacity while AM structures the
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decision to sell existing equipment, mothball it, or charge its remaining life to new uses. 128 EE provides a crucial bridge between the past and the future for the entire supply chain. Downstream and upstream trading partners continue to play a key role in meeting ongoing customer service needs as well as securing future sales of next-generation products and services. The partnerships established during the design and launch of the product/service bundle remain a valuable resource for the organization. 129 Effective management of the abandonment decision requires data about physical and intangible resources, ongoing part and service requirements, and the knowledge gained during prior efforts. Taken in total, the ICMS framework can be used to link the past to the future through information. By coordinating the data and analyses used by the organization and its trading partners during the abandonment decision, the ICMS framework minimizes waste, miscommunication, and errors that can otherwise plague this effort. 130 The product decision domain requires ongoing data from each of the SMPs. In no other decision domain is it so critical to link information on an ongoing basis. The fate of an organization is tied to the success of its product/service bundles. If these are poorly designed, sustained, or abandoned, the long-term viability of the organization will be negatively affected. Without the aid of an integrated information system such as the ICMS framework, these crucial decisions become disjointed rather than linked, ad hoc rather than structured, open to error and judgment rather than analysis. If the information integration is well defined at the product level, it will address the majority of the key strategic and tactical decisions of the organization. It is in this domain that the true benefits of integration are made visible.
Process Decision Domain

131 One of the major changes in organizations that have occurred over the last 10 years is the shift from a vertical to a horizontal focus. Improving responsiveness has become essential; achieving this goal 53
requires rapid deployment of activities across functions and organizational boundaries. Decisions at the process level emphasize the smooth flow of resources through the supply chain to the final consumer through the removal of waste, barriers, redundancy, and errors. The majority of the ongoing decisions of the organization take place at the process level, as activities are linked into seamless delivery channels that are constantly seeking new levels of performance. It is the domain of action, where plans are transformed into reality. Four major issues are dealt with in the process decision domain including: designing processes; developing sourcing strategies; managing ongoing processes; and managing performance gaps.
132 PM and CM dominate in these decisions, providing information and analysis on the physical and human assets and their linkage into a high performance system. Serving needs identified during strategic and tactical planning, the decisions and actions conducted within the process domain direct resources to those efforts that will optimize performance against strategic and tactical objectives. The ultimate goal is to help management identify the best way to leverage core competencies and process capabilities to optimize the value created for customers and the profits they provide. Designing Processes 133 PM is more than a source of data for the ICMS framework or a set of tools to manage the workflows of the organization. It is a way of thinking about the organization and its logical structure, of defining the interdependencies and relationships among people, functions, activities, and outcomes. As such, a process is a shared resource serving many users and many needs. Achieving an effective process design is an essential part of optimizing the value the organization creates for its stakeholders. 134 The design of a process entails trade-offs between man and machine and economies of scale and scope. As such, a large number of 54
questions need to be answered, including: What are the existing processes and process capabilities? What is the maximum demand the system needs to handle? What level of quality needs to be maintained? What resources are currently available? What is the capacity of the process given expected demand? Where are the bottlenecks, and how can they be managed? How can gaps in the flow be managed? Should time, space, or inventory buffers be used to bridge these gaps? What variety of products and services will need to be accommodated by the process? How will this variety affect performance? Does the process represent a core competency? If not, should the needs it serves be met through outsourcing? What performance metrics should be used to evaluate and control the process?
135 Understanding what activities combine to make up the optimal process, what the existing and potential cost and performance constraints are, and how to ensure that the process meets expected demand drive the information requirements of the process design initiative. 136 The dominant SMP for answering these questions and completing the process design is PM. It provides the framework for all of the decisions within the process decision domain, framing them within the context of current competencies, competing process and product demands, established relationships, and inviolate constraints. It provides the underlying structure that links the customer directly to the organization and its supply chain. 137 While PM dominates the process design effort, it draws on information provided by other SMPs. For instance, a detailed analysis of existing versus potential new capabilities and competencies calls on data provided by EE, CM, and AM. In a related way, IPM and ABCM detail existing versus potential new levels of cost and
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performance capabilities. As the optimal design of the process is sought, these five SMPs feed data to process management on constraints, costs, and capabilities. 138 As gaps between activities and functions are bridged, process management drives waste and errors due to miscommunication out of the system. Identifying optimal paths through the maze of activities and resources at the organizations command, process management seeks a design that optimizes the value created for customers while minimizing the resources consumed to provide that value. The ICMS framework provides the means to link the process to the strategy of the organization, provides a basis for downstream evaluation of its performance, and serves to feed information across decision domains, time periods, and market to ensure the availability of consistent, fluid, coordinated analysis and action. Developing Sourcing Strategies 139 The process design decision requires ongoing assessment of internal versus external capabilities and resources. In many cases, PM and EE work together, moving activities and components into and out of the organizations core as conditions change. For instance, a small electronic components supplier feels that early in the development of a product or service it is necessary to complete all of the work in house to ensure that quality and performance goals are met and the design is effectively deployed. As the product moves into production, though, it often becomes more logical to outsource the item to an area where labor costs are low, to gain cost savings in terms of labor and overhead. Once certain demand levels are exceeded, production is brought back in house once again as automation becomes the optimal solution. The optimal process design and sourcing choices shift as the nature of the demand on the company changes. 140 Suppliers and customers are partners in the creation of value. As the product moves through its life cycle, the extended enterprise is constantly working with process management to identify the current optimal means to meet market demand. The extended enterprise
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SMP ensures that sourcing decisions are not made on an ad hoc basis but rather are completed within an overall strategy that provides optimal long-term flexibility and responsiveness for the entire supply chain. It keeps process domain decisions tightly linked to the customers, markets, and future of the organization by creating a shared vision and communication channel across the entire supply chain. 141 Not every component or service used by an organization has strategic import. Many commodity items can be bought as needed from a broad range of suppliers with minimal impact on quality, delivery, or cost. Nonessential resources are analyzed and managed in a much different way than those deemed strategic in nature. This fact has implications for the role of the various SMPs in the ICMS framework. 142 For instance, if a component or service is deemed strategic or critical, the data gathered by process management includes prior delivery, quality, responsiveness, and related performance levels in the organization or its strategic alliance. IPM provides this information. TCM sets the performance parameters for the new component or service, driving customer requirements into the strategic sourcing decision. EE continues to scan and communicate capabilities and emerging technologies to the organization, identifying those areas where a trading partner will provide an alternative source for a needed resource. 143 When the component or service is nonstrategic, emphasis in the sourcing decision turns to cost and performance parameters for potential suppliers. Outsourcing is used if internal capacity does not exist (capacity cost management data) and purchasing this capability does not meet AM performance requirements. ABCM is used to evaluate the bids provided by vendors against internal costs, while IPM is used to evaluate a potential suppliers prior or potential future ability to meet quality, delivery, and cost requirements. The resulting supply relationships are transactional in nature, always open to new alternatives that will provide cost or performance improvements. 57
144 Supply strategy decisions do not cease once the process is designed. Ongoing changes in market demand, internal capabilities, technologies, and tactical options make ongoing analysis essential. While early supply decisions can include areas of core competency or critical success factors, noncore activities and components are the only candidates for ad hoc or opportunistic outsourcing. Whenever customers are indifferent to the activity or component, internal versus external sourcing becomes a purely economic decision. Activity analysis and cost analysis are the key efforts conducted in these situations, drawing predominantly on ABCM and PM for their data. 145 The ICMS framework makes it easy to separate these two types of sourcing analysis in order to ensure that consistent logic and decision criteria are applied to them. For strategic issues, higher-level SMPs such as EE and TCM should be used to frame the analysis, while nonstrategic sourcing decisions should reflect operational concerns captured by process management and activity-based cost management. Using the right data and right decision criteria to make these very different decisions is more likely when the underlying data sources are integrated in a logical manner. Managing Ongoing Processes 146 Not every decision made in an organization requires choice and change. Guidance and reactions to emerging events, unplanned interruptions in the production process, and other operational issues consume much of managements time and attention. PM and EE serve as the source of data and analysis to meet emerging needs and identify optimal solutions, as illustrated in Exhibit 13. 147 Information is an essential ingredient in the ongoing management of a process. Effective response to issues and opportunities as they emerge requires an integrated set of data on key operational and financial dimensions. IPM, CM, and ABCM combine to provide information on how the process is currently operating, improvements against targets, and where modifications are needed.
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Exhibit 13. Ongoing Process Management

IPM
Req uire d pe rfor man ce
perform ance
Extended enterprise
EE
Cost &
non-cost
ABCM
Capabilities and constraints
d po alysis an Asset an
licy
Current vs. desired performance
Process performance, management plans, and execution
CM
data Cost
Process management
PM
148 The extended enterprise is often the source of leading indicators on pending changes in demand, delivery schedules, and performance requirements. Linking the internal process management data to that of the entire supply chain, the organization is able to scan the environment constantly for opportunities and problems. Once identified, the three operational-level SMPs are queried to find optimal solutions and responses. Cost and performance data for the process and the physical assets it uses are pulled together to perform incremental analysis on one-time issues or implement process changes for achieving sustainable improvements. Which options to pursue and which to avoid comes down to a few facts and issues, such as their cost, quality, and delivery impact. 149 Rapid response to unanticipated surges in demand are also analyzed and structured by process management and the extended enterprise SMPs. CM informs the decision by noting if and where internal capacity is available, while ABCM tracks the costs and profitability of meeting the new demand. Unless the surge is expected to become
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a permanent issue, the more strategically oriented SMPs are not drawn into the analysis. 150 TCM and AM serve a minor role in most of the ongoing process management decisions, providing standards to compare current performance against and establishing continuous improvement objectives. These objectives are then used to drive process management decisions, such as the use of electronic data interchange or bar coding to remove time, cost, and complexity from the orderto-payment process. Technology enablers are deployed to remove cost from the process and are evaluated using simple investment criteria provided by AM, supported by cost analysis using data from ABCM that details the resources and activities that can be eliminated through automation of back office transactions. These efforts help identify and eliminate performance gaps. Managing Performance Gaps 151 The final set of decisions made within the process domain reflects the drive for continuous improvement that exists regardless of outside events or changing conditions. PM serves as the framework for guiding improvement efforts, as it ensures that local decisions and changes tie to process gains. IPM and ABCM are intricately tied to these analyses, providing both financial and nonfinancial data on current performance. 152 Once an area has been identified for gap management, IPM provides the basis for defining new metrics and standards to evaluate and track planned improvements. Without a change in measurements it is unlikely that required behavioral and performance modifications will be achieved. Whether the change is to take one day out of the delivery cycle to remove five percent of the costs or reduce the number of defects generated by the process, or many days, these goals must be translated into metrics. The goals must be visible to the persons who are expected to enact the changes, and they must be tracked to provide feedback on the progress of the improvement process. At the same time, ABCM is ensuring that the improvements do not create hidden costs in other parts of the process or organization.
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If waste is removed in one area but then created in another, the net effect can be a reduction in efficiency and effectiveness rather than an enhancement. 153 CM and EE provide feasibility check data for the various options and alternatives for improving performance of the process. EE looks for ways to leverage the supply chain to gain improvements as well as ensuring that changes made internally do not have a negative impact on the supply chain. CM, on the other hand, details the capability, current utilization levels, and availability of resources to meet the requirements of the redesigned process. Emphasizing the change in costs and performance, the ICMS framework combines data on an as-needed basis to evaluate options and make decisions to change existing operations. The impact of all these issues is felt in the resource decision domain.
Resource Decision Domain

154 Resource policies and choices are constantly examined during the life cycle of a product or process. The resource domain is where these detailed analyses are completed and where limits are placed on current actions or alternatives. Plans can be made, but without resources they cannot be transformed into reality. The resource domain is the world of trade-off and compromise, as one choice eliminates other alternative uses of the organizations capabilities and assets. 155 ABCM and IPM are the dominant SMPs in the resource decision domain. Providing detailed information on the impact of operations on the resources of the organization and the supply chain, these two SMPs seek to ensure that optimizing the value created for customers also optimizes the profits and performance of the organization. Value creation is maximized when the optimal match between resources and the requirements of customers is attained. 156 Four primary types of decisions are undertaken within the resource decision domain including: resource requirements;
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sourcing policies and constraints; resource flexibility; and resource costs/performance versus targets.
Resource Requirements 157 What resources are needed, when are they needed, and in what mix are key issues addressed in the resource decision domain. These choices should not be made on an individual basis but rather should reflect a process orientationan optimization of the entire systems performance rather than that of one machine or activity. The choice of resources serves to link the decision domains together, as TCM is used to define the required performance features of a resource, which are then communicated down to the resource domain through EE and PM. These two main policy-setting SMPs transform the resource requirements defined by TCM into detailed resource specifications. 158 Resource choice is also a process of continuous improvement driven by the concerns of the process decision domain. If changes are made to a resource, what impact will it have on the strategic and tactical objectives defined by TCM? How will the existing processes or the supply chain be affected? When integrated information is available to query these impacts, resource choice becomes a more viable avenue for implementing change. Without integration, resource choice decisions can have undesirable effects. 159 For instance, a large fragrance manufacturer decided to change a resource, its propellant, as part of an ongoing drive to reduce costs. While the new propellant was cheaper, it created unanticipated process problems as the new gas eroded the gaskets required to keep a seal during the filling operation. Process problems, including explosions of product during the testing activity, led to the shutdown of the entire systemall due to a resource choice made without taking into account the potential impact on the entire system. Resource choice decisions must be disciplined by PM and TCM, which seek to ensure that the viability of the organization and its strategy are not jeopardized by an isolated decision to make a change to the nature or supply source of a resource.
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Sourcing Policies and Constraints 160 Defining preferred inventory policies for the supply chain as well as for less essential components and resources, these decisions seek to minimize inventories while maximizing flexibility and responsiveness of the value chain. The key investment policies for assets, R&D efforts, and project planning play a part in these decisions. These policies stabilize the organization, as common rules, decision criteria, and assessment methods are created and applied. 161 The constraints embedded in policies are often set outside the boundaries of the ICMS framework. The SMPs provide data to help establish these policies and also give signals when performance is not being optimized because of the policy constraints. PM combines with IPM and ABCM to form the basis for scanning for the impact of policies on the supply chain. When problems arise, these three SMPs provide detailed information on where the problems are, what their cost and performance implications appear to be, and what choices exist for addressing these concerns. 162 The integration of information inherent in the ICMS framework can help overcome some of the inherent risks of policy setting at the resource level by providing insight into options, trends, and alternatives both within and outside the organization to respond to problems created by policies. ABCM, linked with process management, provides the basis for constantly examining the flow of resources through the organization, looking for ways to improve their utilization to create more value for customers and other stakeholders. Resource Flexibility 163 Identifying which resources can be shared to minimize waste and which must be dedicated to one product or service helps define the organizations flexibility. How well various product and service requirements are matched to the affected resources (e.g., can we buy what we need when we need to, or do we have to obtain a large, fixed resource chunk regardless of need) can play a major role in an organizations overall profitability.
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164 Shared resources provide the greatest challenge to managers faced with resource-level decisions. Balancing competing demands for these resources requires targeted cost and capacity information that identifies optimal use for scarce resources and how best to manage any unmet needs. ABCM can identify the costs inherent in these trade-offs, such as the cost of lost production due to setup time on inflexible resources. Supported by CM and IPM, these three SMPs feed data directly into PM as the search for new sources of materials and services, new uses for idle resources, and ways to improve the flexibility of existing processes is undertaken. 165 Poor decisions at the resource level have an impact on both shortand long-term profitability and performance. If a fixed asset is purchased that has far more capacity than the organization needs, a permanent layer of waste will be added to the cost structure. The tight integration of CCM, ABCM, and PM helps to limit these occurrences and the unnecessary costs they create. 166 Unexpected shifts in demand can lead the managers at the resource level to seek out external solutions to short-term capacity shortfalls. Often the best place to turn for support is the supply chain. Trading partners have an incentive to provide short-term support with high quality and low cost because they have a long-term interest in the success of the supply chain. Sharing resources when unexpected demand or unanticipated process problems crop up is one way that the supply chain provides robustness and reliability to the productive process. Data maintained in the EE SMP signals when and where a trading partner can be called on to help solve a short-term throughput problem. Resource Costs/Performance versus Targets 167 Understanding the cost of resources utilized, which resources serve as bottlenecks or process capability constraints, and what the costs are to ease these problems is the basis for making a wide range of resource-level decisions. Ongoing monitoring and reporting of results is a primary objective of the ICMS framework that is supported by the joint efforts of the IPM and ABCM SMPs.
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168 To serve effectively as a guide to making future decisions across the various decision domains, the resource-level management reporting system must meet several basic requirements: incorporate all defined goals and targets, both financial and nonfinancial, in a meaningful way; integrate the wide variety of available information using consistent definitions and treatment of key terms, metrics, and results; support real-time, on-demand reporting and analysis capabilities; provide query capability that will allow further analysis of key details and results; support sensitivity analysis and simulation to project the impact of current trends and assess impact of remedial actions; use common language understandable by all areas of the business; provide a balanced set of metrics to ensure that interdependence and systemic issues remain visible to users, including the use of a one-page dashboard report; present information in ways that highlight improvement initiatives and their results, and identify areas where trends suggest that new advances are needed or possible; and use visual graphics to portray productivity and related results against objectives.
169 These capabilities are built into the structure of the IPM SMP. By linking ABCM to IPM, an organization is able to track, report, and analyze current performance gaps flexibly and find solutions to these problems that do not create problems in other parts of the organization. The ICMS framework can deliver on these requirements more easily and effectively because integration of key data elements is built into its logic and structure.
VIII. CONCLUSION
170 In creating an effective cost management system, the goal has to be the minimization of detail while ensuring the ability of the system 65
to track key trends and identify opportunities for improvement. Not every bit of data available should be included in the integrated system. Rather, those data elements that are common to a majority of the decisions should be identified and integrated. As with all areas of business, achieving the integration of the cost management system is a journey, not a destination. 171 Each time a new element is added to the ICMS framework, the organizations ability to meet customer requirements and build its core knowledge base increases. Each new piece of information fills gaps in the knowledge grid, which leads to improvements in the ability to predict downstream events and ensure that long-term and short-term goals are attained. The integration and sharing of knowledge embedded in the ICMS framework are the keys to creating superior performance in the global market. Information provides an organization with powerthe power to grow, the power to improve, and the power to excel in all of its endeavors.
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BIBLIOGRAPHY
Target Costing
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Asset Management
Arthur Andersen LLP. Shareholder Value Creation Measures Primer. Dallas TX, 1998. Howell, R., and W. Schwartz. Asset Deployment and Investment Justification in Handbook of Cost Management. New York: Warren, Goham and Lamont, 1997, pp. D4-1D4-32. Klammer T. Managing Strategic and Capital Investment Decisions Chicago, IL: Irwin Professional Publishing, 1994. Kroll, K. EVA and Creating Value. Industry Week, April 7, 1997, pp. 102106. Reeve, J., and W. Sullivan. Strategic Evaluation of Interrelated Investment Projects in Manufacturing Companies. Bedford, TX: CMS Research Report, CAM-I, 1988. Society of Management Accountants of Canada. The Management of Intellectual Capital: The Issues and The Practice. Hamilton, Ontario: 1998. World Bank. The Knowledge Management Concept Paper: A Practical Approach. November 1996.
Cost of Capacity Management

Cooper, R., and R. Kaplan. Activity-based Systems: Measuring the Cost of Resource Usage. Accounting Horizons, Spring 1992, pp. 112. Coughlan, P., and T. Darlington. As Fast as the Slowest Operation: The Theory of Constraints. Management Accounting (U. K.), June 1993, pp. 1417. Dilton-Hill, K. G., and E. Glad. Managing Capacity in Handbook of Cost Management. New York: Warren, Gorham and Lamont, 1997, pp. H3-1H3-8. Institute of Management Accountants. Accounting for the Costs of Capacity. Research Report #39. Montvale, NJ, 1963. Klammer, T., and the CAM-I Capacity Interest Group. Capacity Measurement and Improvement. Chicago: Irwin Professional Publishing, 1997. McNair, C. J. The Costs of Capacity. Journal of Cost Management, Vol. 8, No. 1, Spring 1998.
68
Society of Management Accountants of Canada. Measuring the Cost of Capacity. Management Accounting Guideline #42. Hamilton, Ontario, 1996.
Process Management
Ashkenas, R., D. Ulrich, T. Jick, and S. Kerr. The Boundaryless Organization: Breaking the Chains of Organizational Structure. San Francisco: Jossey-Bass Publishing, 1995. Born, G. Process Management to Quality Improvement. New York: John Wiley & Sons, 1995. Daly, D. C., and T. Freeman, eds. The Road to Excellence: Becoming a Process-Based Organization. Bedford, TX: Consortium for Advanced Manufacturing-International, 1997. Majchrazk, A., and Q. Wang. Breaking the Functional Mindset in Process Organizations. Havard Business Review, SeptemberOctober 1996: pp. 9399. Melan, E. Process Management: Methods for Improving Products and Service. New York: McGraw Publishing, 1992. Rummler, G. A., and A. P. Brache. Improving Performance: How to Manage the White Space on the Organization Chart, 2nd edition. San Francisco: Jossey-Bass Publishing, 1995. Society of Management Accountants of Canada. Implementing Process Management: A Framework for Process Thinking. Hamilton, Ontario, 1998.
The Extended Enterprise

Ashkenas, R., D. Ulrich, T. Jick, and S. Kerr. The Boundaryless Organization, San Francisco: Jossey-Bass Publishing, 1995. Fox, M. Integration for the Future. Manufacturing Systems, April 1997, pp. 6986. Institute of Management Accountants and Arthur Andersen LLP. Implementing Integrated Supply Chain Management for Competitive Advantage. Statement on Management Accounting 4II. Montvale, NJ, 1999. _____. Tools and Techniques for Implementing Integrated Supply Chain Management. Statement on Management Accounting 4JJ. Montvale, NJ, 1999.
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Integrated Performance Management

Atkinson, A. Linking Performance Measurement to Strategy: The Roles of Financial and Nonfinancial Information. Journal of Strategic Performance Measurement, August/ September 1997, pp. 513. Gale, B. T. Managing Customer Value. New York: The Free Press, 1994. Kaplan, R. S., and D. P. Norton. The Balanced Scorecard. Boston: Havard Business School Press, 1996. Lynch, R. L., and K. F. Cross. Measure Up! Yardsticks for Continuous Improvement. Cambridge, MA: Basil Blackwell, Inc., 1991. Institute of Management Accountants and Arthur Andersen LLP. Tools and Techniques for Implementing Integrated Performance Management Systems. Statement on Management Accounting 4DD. Montvale, NJ, 1998.
Integrated Cost Management

CAM-I. Value Quest: Driving Profit and Performance by Integrating Strategic Management Processes. Bedford, TX: Consortium for Advanced Manufacturing-International, 2000.
Activity-Based Cost Management

Cokins, G., A. Stratton, and J. Helbling. An ABC Managers Primer. Montvale, NJ: Institute of Management Accountants, 1993. Eiler, R., and C. Ball. Implementing Activity-Based Costing. in Handbook of Cost Management. New York: Warren, Gorham and Lamont, 1997, pp. B2-1B-32. Institute of Management Accountants and Arthur Andersen LLP. Implementing Activity-Based Management: Avoiding the Pitfalls. Statement on Management Accounting 4CC. Montvale, NJ, 1998. Miller, J. Implementing Activity Based Management in Daily Operations. New York: John Wiley & Sons, 1992. Player, S., and D. Keys. Activity-Based Cost Management: Arthur Andersens Lessons from the ABM Battlefield. New York: MasterMedia, Ltd., 1995.
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Management Accounting Committee

1999-2000 ChairBarbara C. Reilly, CPA
Regional Director, Mid-Atlantic Region Defense Contract Audit Agency, Philadelphia, PA Sally A. Claybourn-Evans VP Finance & Administration INC Research Charlottesville, VA Dennis C. Daly, CMA ChairDept. of Accounting Metropolitan State University Minneapolis, MN Dale L. Flesher, CMA, CFM, CPA ProfessorSchool of Accountancy University of Mississippi Oxford, MS Julian M. Freedman, CMA, CFA, CPA, CPIM FMAC Secretariat International Federation of Accountants New York, NY James T. Godfrey Professor of Accounting George Mason University Fairfax, VA Randolf Holst, CMA Knowledge Manager Arthur Andersen LLP Boston, MA Edward J. McCracken, CPA ManagerGroup Accounting ICI Polyurethanes West Depford, NJ Kenneth Merchant, CPA Dean, Leventhal School of Accounting University of Southern California Los Angeles, CA Darrell J. Oyer, CMA, CPA Government Contract Specialist Darrell J. Oyer & Co. Gaithersburg, MD John J. Perrell III, CPA Vice President, Financial Standards American Express Company New York, NY Grover L. Porter, CPA Professor of Accounting University of Alabama Huntsville, AL Thomas J. Reardon, CMA Director of Finance Latino Pastoral Action Center Bronx, NY Douglas Sledge, CMA, CPA Treasurer, Chief Financial Officer Foundry of the Shoals, Inc. Florence, AL James R. Young Manager, Business Development Finance General Electric Company Schenectady, NY Staff Terri L. Funk, CMA, CFM Director, Professional Relations
Statements on Management Accounting in Print

Code 1A 1B 1C 1D 1E 2A 4A 4B 4C 4D 4E 4F 4G 4H 4I 4J 4K 4L 4M 4N 4O 4P 4Q 4R 4S 4T 4U 4V 4W 4X 4Y 4Z 4AA 4BB Title Definition of Management Accounting Objectives of Management Accounting Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management The Common Body of Knowledge for Management Accountants Education for Careers in Management Accounting Management Accounting Glossary Cost of Capital Allocation of Service and Administrative Costs Definition and Measurement of Direct Labor Cost Measuring Entity Performance Definition and Measurement of Direct Material Cost Allocation of Information Systems Costs Accounting for Indirect Production Costs Uses of the Cost of Capital Cost Management for Freight Transportation Accounting for Property, Plant, and Equipment Cost Management for Warehousing Control of Property, Plant, and Equipment Understanding Financial Instruments Management of Working Capital: Cash Resources The Accounting Classification of Real Estate Occupancy Costs Cost Management for Logistics Use and Control of Financial Instruments by Multinational Companies Managing Quality Improvements Internal Accounting and Classification of Risk Management Costs Implementing Activity-Based Costing Developing Comprehensive Performance Indicators Effective Benchmarking Implementing Corporate Environmental Strategies Value Chain Analysis for Assessing Competitive Advantage Measuring the Cost of Capacity Tools and Techniques of Environmental Accounting for Business Decisions Measuring and Managing Shareholder Value Creation The Accounting Classification of Workpoint Costs
4CC 4DD 4EE 4FF 4GG 4HH 4II 4JJ 4KK 4LL 4MM 5A 5B 5C 5D 5E 5F 5G
Implementing Activity-Based Management: Avoiding the Pitfalls Tools and Techniques for Implementing Integrated Performance Management Systems Tools and Techniques for Implementing ABC/ABM Implementing Target Costing Tools and Techniques for Implementing Target Costing Theory of Constraints (TOC) Management System Fundamentals Implementing Integrated Supply Chain Management for Competitive Advantage Tools and Techniques for Implementing Integrated Supply Chain Management Implementing Lean Production Fundamentals Implementing Capacity Cost Management Systems Designing an Integrated Cost Management System for Driving Profit and Organizational Performance Evaluating Controllership Effectiveness Fundamentals of Reporting Information to Managers Managing Cross-Functional Teams Developing Comprehensive Competitive Intelligence Redesigning the Finance Function Tools and Techniques for Redesigning the Finance Function Implementing Shared Services Centers
For information about prices and to order Statements on Management Accounting, contact the Customer Order Department, Institute of Management Accountants, 10 Paragon Dr., Montvale, NJ 076451760 (tel: 201/573-9000 x 278 or 1 800/638-4427 x 278; fax 201/5739507); or website, http://www.imanet.org.
Institute of Management Accountants 10 Paragon Drive Montvale, NJ 07645-1760 http://www.imanet.org
ISBN 0-86641-287-5
SMA 4MM/3-2000

Statements On Management Accounting

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Statement on Management Accounting Statement No. 4MM March 2000

Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 4:

large and small organizations; and enterprises in all business sectors.

III. KEY PRINCIPLES UNDERLYING THE ICMS FRAMEWORK

DEFINING THE ICMS FRAMEWORK

Exhibit 1. CAM-I Strategic Management Process Model

Customer/Market Decision Domains Strategic Management Processes Product 1 2 3 4 5 6 7

Source: CAM-I, 2000: 11.

Exhibit 2. The SMPs and Process Design

External EE Capability assessment

Optimal process design

Asset analys is and policy

IPM Performance assessment ABCM

st on-co and n ta Cost ce da n a rm perfo

Interdependent activities and processes

Source: CAM-I, 2000: 349.

USES AND BENEFITS OF THE ICMS FRAMEWORK

Exhibit 3. The Migration of Information Systems

Development of targeted SMPs

Source: CAM-I, 2000, 17.

Exhibit 4A. The Decision Domains

2. What customer segments do we want to be in? 3. What geographic regions?

4. Assessing market size?

5. Profit potential of customer/market segments? 6. Industry/competitive trends?

TCM l TCM l TCM

IPM IPM IPM

ABCM ABCM ABCM o

9. What time frames/windows of opportunity? 10. What distribution strategies? l

Primary source of information

Source: CAM-I, 2000: 51.

Exhibit 4B. The Decision Domains

TCM l TCM l TCM l TCM l TCM TCM TCM TCM l TCM

IPM IPM IPM IPM IPM IPM IPM l IPM IPM o

ABCM ABCM ABCM ABCM ABCM ABCM o ABCM o ABCM ABCM

3. What is the optional product mix?

Source: CAM-I, 2000: 52.

Exhibit 4C. The Decision Domains

2. How well maintaining c.c.s?

3. Process cost drivers?

TCM TCM TCM TCM TCM TCM TCM

IPM IPM IPM l IPM IPM l IPM o IPM

ABCM ABCM ABCM ABCM ABCM l ABCM o ABCM o

7. Process capability assessments?

8. What are the performance gaps?

Primary source of information

Source: CAM-I, 2000: 53.

Exhibit 4D. The Decision Domains

2. What is our resource utilization (people, plant, equipment)? 3. Scheduling?

5. Cost of resources utilized?

6. Should we buy or lease, etc.?

Source: CAM-I, 2000: 55.

VI. THE ROLE OF MANAGEMENT ACCOUNTING

VII. ELEMENTS OF THE ICMS FRAMEWORK

Information and Decision-Making Requirements

Design of the ICMS

Analysis of the Decision System

Exhibit 5. Decision Flow Analysis

Receive request for special order 1 hour

Prepare cost analysis

Order entry A/R Treasurer

Analysis of Information Requirements

Design of Information System Features