If you walk into a UPS store and ship a box, you will not fill out a paper form.
ID: 459547 • Letter: I
Question
If you walk into a UPS store and ship a box, you will not fill out a paper form. The associate will type the name and address into the UPS register. If you walk into a FedEx store to ship a similar box, you will complete a form. Operationally, do you see the difference and do you see the costs? What does FedEx do with that form? I am not asking that you answer that specific question, but how many layers of cost does YOUR organization impose? Or, do you see other companies that impose costs on you as their customer? Discuss your observations
Explanation / Answer
To understand the difference we need to determine the the various components pf costs like Direct Labor, Direct Material and Overheads. We may alos use the concept of materiality and classify all non-material costs as overheads.
Let us see the two processes from the above case study and try to analyze the costs:-
UPS: Dedicated resource (employee) that enters your name. Assuming each order takes 2 minutes to be manually entered. Thus a DL of 2 minute goes into the process.
Assuming the packing charges as DM and all other charges as Overheads.
In case of FedEx, the DM and Overheads may more or less remain the same, but instaed of an employee filling in the form the customers fill the form themselves thus saving it of 2 minutes of DL for each order.
The problem may not be as easy as the above explanation is: For an employee to fill in form if it takes 2 minutes, a new customer may however take some 3 or 4 minutesto fill the form.Thus reducing the maximum number of orders that can be processed in a day to a much smaller value. This however assumes that there are infinite number of orders waiting to be processed and the bottleneck is the processing speed in which that happens.
For analyzing any cost structure... We need to divide the same into DM,DL and Overhead. Consider a software company trying to do costing for a product:
Say it requires roughly 10K lines of code to prepare the product. And each coder can code around 400line per day, thus the DL component shall be: 10000/400=25 days. And each coder is paid $5/hour and there are 8 working hours ina day the DL shall come to 25*8*5=$1000.
Say it requires a product liscece for a tool called ABC which costs $500 thus DM shall be $500
Electricity and other infrastructure may also be used, for simplicity we may classify them as over heads. Usually they may be expressed as a percentaage of DL or DM. For a software company it is usually kept as a percentage of DL.
Assuming over head is 50% of the DL. and thus the total cost shall be: DL+DM+Overhead = $1000+$500+(50%of 1000) =$2000.
You may use theabove logic for any other company to determine their cost structure too.
Thanks!