Financial Measures Training for the Annual Self Assessments (ASAs)

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Financial Measures Training for the Annual Self
Assessments (ASAs)

• Office of Business Systems and Finance
• Office of Research Services
• National Institutes of Health
• August 2002

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Agenda

• Training Objectives
• Unit Cost Measures
• Asset Utilization Measures
• Questions

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Training Objectives

• Understand unit cost and asset utilization
  measures
• Discuss calculation of unit cost and asset
  utilization measures

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Financial Perspective in the ASA Template
Common Objectives and Measures
The first common measure for the Financial
Perspective is analyzing and understanding
changes in the unit cost for each Discrete
Service in your Service Group.
The second common measure in the Financial
Perspective is analyzing actual assets utilized
compared to planned asset utilization for each
Discrete Service.
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Unit Cost Measures
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Why Care About Unit Costs?

• Consider this example
• Spent about 14.00 on gas was that good? It
  depends.
• 9 gallons
• 12 gallons
• Require number of gallons to determine whether
  high or low price
• 9 gallons _at_ 1.55 per gallon
• 12 gallons _at_ 1.15 per gallon
• Number of gallons is the unit of output
• Without knowing the unit cost, customer cannot
  evaluate the price they are paying

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Change in Total Cost of Services
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Analysis of Change in Total Cost

• How much will be due to change in demand?
• How much will be due to change in cost each time
  to perform the service?
• ORS will use unit cost to understand why service
  providers total costs are changing
• Due to changes in demand volume?
• Or due to changes in the cost of one unit of
  service delivery?

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Calculating Unit Cost Measures

• Unit Cost Total Cost / Number of Units of
  Output
• Output means product and services generated
  from the consumption of resources
• Total cost is the sum of all resources (direct
  and indirect) consumed
• Use actual cost data if available, or
• Use cost from the ORS Business Plan
• Forecasted costs
• Available for FY01, FY02, FY03, FY04

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Choosing Unit Cost Measures

• Unit of output is
• Single quantity regarded as a whole
• A determinate quantity adopted as a standard or
  basis for comparison
• What constitutes one more unit of output?
• On what dimension is one unit of the product or
  service equivalent to another?
• Number of procedures
• Most procedures are around the same number of
  hours or days
• Number of procedure hours
• Procedures can vary from one hour to one day
• The number of hours drives the cost

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Choosing Unit Cost Measures

• May have multiple unit cost measures
• One unit cost for each product
• One unit cost for a group of products
• One unit cost for all products
• Select unit costs that are strategically
  important
• Focus on the most important aspects of your
  business
• Highlight areas of management focus

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Sample Units of Output
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Sample Units of Output
Number of planning hours
Plan emergency preparedness strategies
Number of personnel hours or event hours
Coordinate and provide security for events
Number of collaborative hours
Conduct collaborative physical science and
bio-engineering research
Number of design hours
Design and fabricate custom instruments
Number of maintenance hours or number of
stations
Maintain scientific equipment and workstations
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Sample Units of Output - A Tiered Approach
Coordinate and provide security for events
Number of press conferences
Press conference
Number of event hours
Employee social event
Number of personnel hours
Special public event
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ExampleCalculating Unit Cost Measures

• Service collect and dispose of hazardous waste
• Unit of output number of metric tons 250,000
  in FY02
• Cost of resources in FY02

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Example (cont.)Calculating Unit Cost Measures

• Service collect and dispose of hazardous waste
• Unit Cost 5,690,520 / 250,000
• Unit Cost 22.76 per metric ton

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Example (cont.)Graphing Unit Cost Measures
250,000
280,000
22.76
23.21
Data might be displayed using bar chart to allow
for comparisons.
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Example (cont.)Graphing Unit Cost Measures
Data might be displayed using a run chart (shown)
or control chart. Refer to the Data Analysis and
Graphing Training for more information on how to
construct this graph.
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Analyzing Unit Cost Measures

• Benchmarking
• Compare unit cost to others in similar
  industry/business
• Are your costs above or below others? Why?
• Trend analysis
• Study unit cost over time
• Are your costs going up or down? Why?
• Cost projection
• Use unit cost data to make cost projections for
  the future
• This years unit cost was 22.76. Assume that
  costs are expected to increase by 2 to 23.21
• Next year will process 280,000 metric tons
• 280,000 x 23.21 6,498,800
• Increase in total cost of 14

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Steps to Prepare Unit Cost Measures

• Step 1 Analyze need for unit cost information
• Step 2 Choose unit cost measures
• Step 3 Complete the unit cost measure portion
  of your data collection plan (see Data Analysis
  and Graphing Training for guidance)
• Step 4 Gather unit cost data
• Step 5 Graph unit cost data and interpret
  findings. Possible techniques include
• Analyzing trends (historical and forecasted)
• Evaluating causes and cost drivers
• Comparing to benchmarks
• Identifying improvements

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Asset Utilization Measures
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Capacity and Asset Utilization

• Who is responsible for capacity management?
• How can we obtain more capacity without buying
  it?
• What are the sources of idle capacity?
• How much unused capacity is assigned to
  product/service cost?
• Where will we find hidden, unused capacity?

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Why Care About Asset Utilization?

• To measure the difference between what an asset
  is capable of producing and what it actually
  produces
• To calculate the opportunity gap

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Causes of Loss in Asset Utilization

• Standard operating procedures
• Planned shutdowns
• Sales demand
• Raw materials shortages
• Product quality
• Equipment failure
• Acts of nature

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Calculating Asset Utilization

• The ratio of actual output to the output that
  could be achieved if an asset operated at maximum
  capacity
• Asset utilization (actual output / maximum
  output capacity)
• Opportunity gap maximum output capacity
  actual output
• ORS is basing maximum output capacity on planned
  utilization

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Determining Planned Utilization

• Planned utilization can be based on
• Theoretical capacity asset at its maximum
  output capacity when operating for 365 days per
  year while producing 100 quality product
• Practical capacity allows for normal downtime
• Historical capacity risks institutionalizing
  inefficiencies

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Determining Planned Utilization (cont.)

• Practical capacity is attainable through
  reasonable, though highly efficient, efforts
• Arbitrary estimate specified percentage of
  theoretical capacity
• Normal volume May be used to approximate until
  evidence is available to obtain a better
  estimate. Only an issue when normal volume is
  substantially below practical capacity.
• Time series analysis review past activity
  levels and adjust for delays, poor quality,
  overtime, or other stresses
• Analytical approach deduct maintenance,
  repairs, startups, shutdowns, and protective (or
  surge) capacity from theoretical capacity

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Example Calculating Asset Utilization

• Service review extramural construction projects
• Actual output 128 reviews
• Maximum output capacity
• Assume each review takes one week (40 hours) when
  operating at maximum capacity with 100 quality
  product
• Assume practical capacity of 1,840 hours per year
  per FTE
• Assume 3 FTE
• Maximum capacity (3 x 1,840) / 40 138 reviews
• Asset utilization 128/138 92.8

Example based on hypothetical data
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Alternate Calculation Method

• Traditional asset utilization ratio requires
  standard output measure
• Some activities are difficult to measure in terms
  of standard outputs
• Use of resources may vary significantly
• May not have single quantity that can be regarded
  as a whole
• Analysis may take place at an aggregated service
  level
• May substitute inputs for outputs when standard
  output is not appropriate
• Must separate productive from nonproductive inputs

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Alternate Calculation Method (cont.)

• Asset utilization (actual productive input /
  maximum input capacity)
• Opportunity gap maximum capacity actual
  productive input

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Example Alternate Calculation

• Service provide technical assistance in
  radiation safety
• Maximum input capacity
• Assume 1,840 hours per FTE and six FTEs
• Maximum input capacity 6 x 1,840 11,040
• Actual nonproductive input
• Assume 160 hours standby
• Assume 192 hours duplication of effort

Example based on hypothetical data
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Example (cont.) Alternate Calculation

• Service provide technical assistance in
  radiation safety
• Asset utilization (11,040 160 192) /
  11,040
• Asset utilization 10,688 / 11,040
• Asset utilization 96.8

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Asset Utilization As Metric

• Focuses improvement efforts on eliminating cause
  of business opportunity gaps
• Minimizes the level of non-productive assets
  within regulatory and risk tolerance constraints
• Measures ability of managers to invest in earning
  assets when measured as ratio of earning assets
  to total assets

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ExampleGraphing Asset Utilization Data
Benchmark
Discrete Service
79
75
January
93
88
February
60
67
March
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Example (cont.)Graphing Asset Utilization Data
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ExampleRun Chart of Asset Utilization
Data might be displayed using a run chart showing
deviation from capacity. Refer to the Data
Analysis and Graphing Training for more
information on how to construct this graph.
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Asset Utilization Hierarchy
Idle capacity
Nonproductive capacity
Productive capacity
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Capacity Model
Excerpted from Consortium of Advanced
Manufacturers-International (CAM-I) Capacity Model
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Steps to Prepare Asset Utilization Measure

• Step 1 Identify appropriate asset base to
  include in measure
• Step 2 Determine planned capacity for FY02 if
  not already established
• Step 3 Complete the asset utilization measure
  portion of your data collection plan (see Data
  Analysis and Graphing Training for guidance)
• Step 4 Gather asset utilization data
• Step 5 Graph asset utilization data and
  interpret findings. Possible techniques include
• Analyzing trends (historical and forecasted)
• Evaluating causes and cost drivers
• Comparing to benchmarks
• Identifying improvements
• Step 6 Determine planned capacity for FY03

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Conclusion

• ASA Teams will determine how to implement the two
  common financial measures
• Unit cost
• Asset utilization
• This data will be used both by ASA Teams and
  ORS-wide to gauge our performance
• Work with the financial people in your area to
  clarify your measures and obtain data
• For more assistance, please contact
• Amy Vandenburg (OBSF)
• [phone]
• vandenba_at_ors.od.nih.gov