Measuring Manufacturing Value Added ― A New Way to Measure Success

摘要

The MfVA model includes only topics relevant to discuss for management. Attention is not diverted to discussions about non-value-creating accounting issues. The model is simple and tightly linked to the ongoing operations and, therefore, it can be used by managers for understanding and communicating business realities. It is simple because it measures only cash flow and has the focused purpose to show whether strategic investments are profitable or not. Its purpose is to guide managers in everyday business decisions. The MfVA model can cause companies to reassess not only the profitability of products and customers but of entire businesses. A fundamental difference between traditional accounting and the MfVA method is that the MfVA method holds managers responsible for the evaluation of the MfVA information. The index in a specific year could be compared with temperature. The measurement itself is fixed and not relative to changing conditions. It could be argued that most investments should be most profitable in the earlier part of their economic lives. The MfVA index will help managers to understand this business logic since it in real terms represents a fixed benchmark. Most strategic investments will have a MfVA index higher than 1.0 when they are most competitive. Over time the MfVA index is likely to decrease, and when the assets economic life is nearly over, the cash-generating capacity is likely to be very low, resulting in a poor MfVA index. A correctly focused value-based management concept has the organization focusing on the relevant issues. It will be based on the four factors that determine value: strategic investments, the operating cash flow they generate, the strategic investment's operating life, and their capital costs. With today's accounting, some relevant issues are discussed; any irrelevant issues are included while maybe some relevant are excluded because accounting is not focused on the four factors that determine value. The specific results from using this model demonstrated that several manufacturing lines that were generating large profits were, in fact, not as valuable to the company as originally thought. The OCFD for these lines was proportionally higher than those of other lines, resulting in MfVA indexes approaching 1 while other smaller lines had indexes greater than 1.5. The immediate reaction was to analyze the various elements contributing to OCFD. Product pricing was also reviewed to determine if there were unique circumstances or anomalies in the business. While nothing was done immediately, all future manufacturing capital asset requisitions are now required to be reviewed using MfVA. Interestingly, all investments made in equipment are now also tracked against the approving documentation to see if investment value added is as originally planned.