In 2009, Maravilla Auto's Motor Division hired a consulting firm to help identify and define the processes used within the division. Megan Dorr, the divisional manager, also asked the consulting firm to make recommendations concerning the reengineering of the processes to improve overall efficiency. Six major processes were defined. The consulting firm prepared six documents'one for each process. The following memo from Bill Gray, the consulting partner in charge, summarizes the major points for the procurement process. (The procurement process is one of the six major processes.)

MEMO

To: Megan Dorr, Divisional Manager

From: Bill Gray, Partner, Jackson Consulting

Subject: Procurement Process

Date: April 15, 2009

The procurement process consists of three major activities: purchasing, receiving, and paying bills. Currently, the procurement process begins with the purchasing department sending a purchase order to a supplier. When the goods are received from the supplier, the receiving department fills out a receiving document and sends it to accounts payable. Accounts payable also receives an invoice from the supplier (through the mail). Clerks in accounts payable compare the three documents and issue a check if all three match. At times, there are discrepancies, and accounts payable clerks are responsible for resolving these discrepancies before payment is made. Resolution of discrepancies may take weeks and often consumes considerable clerical resources. This resolution activity is non-value-added, and a process redesign can eliminate it and save significant resources. We estimate that about 80 percent of clerical time is spent dealing with these discrepancies.

We recommend that payment authorization be changed from accounts payable to receiving. This change requires the acquisition of several terminals that will be used to access purchase information in the company's database. It also requires new software that will permit the following: (1) When the goods arrive from a supplier, the receiving clerk will check to see if the shipment is supported with an outstanding purchase order; (2) If there is a corresponding purchase order indicating the type and quantity of goods received, then the clerk can signal acceptance using the keyboard, and the computer will issue a check at the appropriate time for payment; (3) If there is no supporting documentation or if the type and quantity of goods received differ from the purchase order, then the goods are simply shipped back to the supplier.

After reviewing the memo, Megan Dorr set in motion the necessary actions to implement the consultant's recommendations. The terminals were purchased, and the required supporting software was developed. Since suppliers often shipped partial orders, the software was modified to allow for this possibility. Now, two years later, Megan wants an analysis of the productivity gains or losses that have resulted from the process changes that have been implemented. Output for the procurement process is defined as the number of units purchased and paid for (of all types). Data for 2009 and 2011 for the procurement process and its activities are as follows:

Required:
1. Compute the profit-linked measure of productivity for each of the three activities. This is the first component of procurement process productivity analysis.
2. Calculate the profit-linked measure for the activity output efficiency component of process productivity analysis.
3. Now, add the two profit-linked measures of Requirements 1 and 2. Explain the meaning of this measure. Was the company successful in increasing the productivity of the procurementprocess?

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Process Output, Activity Demands, and Input Prices 2009 2011 3,000,000 100,000 150,000 150,000 Units purchased and paid for Purchase orders 3,600,000 120,000 180,000 180,000 ceiving orders Bills paid Input prices: Supplies (per Ib.) Clerks (salary per person) Capital (interest rate) $1.80 S30,000 10% $2 $40,000 10% Activity Information Purchasing Receiving Paying Bills 2009: Supplies (Ibs.) Clerks (no.) Capital (dollars) 50,000 25 $1,000,000 40,000 50 $800,000 75,000 100 $500,000 2011 Supplies (Ibs.) Clerks (no.) Capital (dollars) Activity rates 60,000 25 $1,200,000 $12.00 30,000 50 $3,000,000 $14.40 5,000 10 $1,000,000 $28.00